The Biden administration is granting the IRS an extra $80 billion under the newly passed Inflation Reduction Act
I have seen some of my competitors use it to fuel their fear tactics like the example below published by Moody’s and I must address it.
“Overall with the 87,000 new agents the IRS will become larger in numbers than the Pentagon, State Department, FBI, and Border Patrol combined. Many are arguing the US could certainly use 87,000 more teachers, nurses, mental health workers or border agents who are stretched thin right now at the Southern Border – before IRS Agents. But let’s remember that those much needed hires wouldn’t result in the return on investment that 87,000 IRS Agents will. And they get to carry a gun.
This move allows the IRS to go into what the Wall Street Journal calls “beast mode”. They will be focused on bill enforcement and collection like never before, and someone is going to have to foot the bill for this extravagant spending. So, who do you think the IRS will target with future audits to help recoup the costs? You and the other 9+ Million U.S. Citizens living abroad?”
Gregory v. Comm’r, T.C. Memo. 2021-115 | September 29, 2021 | Jones, J. | Dkt. No. 10336-18
Short Summary: During tax years 2014 and 2015, Petitioners Carl and Leila Gregory operated CLC Ventures, Ltd. (“CLC”), which generated income and incurred expenses from boat chartering activities. The Gregorys reported CLC’s activities on Schedule C for each tax year. The IRS audited the Gregorys’ tax returns and issued a Notifce of Defiency, assessing deficiencies and certain accuracy-related penalties. The IRS determined that the CLC activities lacked a profit motive and recharacterized (1) the Schedule C income as non-Schedule C “other income,” and (2) the Schedule C expenses as miscellaneous itemized deductions to the extent allowable under Section 183 (with certain exceptions).
Section 965 audits are on the rise. Taxpayers under section 965 transition tax audits often face significant potential liability exposure. The IRS previously announced an active “campaign” specifically targeting unpaid section 965 transition tax liability resulting from amendments to section 965 under the Tax Cuts & Jobs Act. For taxpayers with ownership in foreign corporations, that could mean increased exposure to an IRS audit.
On December 22, 2017, Congress amended the Internal Revenue Code (“IRC”) Section 965 through the Tax Cuts & Jobs Act (“TCJA”). As amended, Section 965 required that certain taxpayers include a “Section 965 inclusion” in income as part and parcel of the transition to a participation-exemption tax system (or, at least, a quasi participation-exemption system). The Section 965 inclusion is an amount based on the accumulated post-1986 deferred foreign income of certain foreign corporations directly or indirectly owned by the taxpayer. Notably, taxpayers can have Section 965 inclusions due to ownership of deferred foreign income corporations (“DFICs”) indirectly held through pass-through entities that are themselves U.S. shareholders of DFICs.
Bailey v. Commissioner, T.C. Memo. 2021-55 | May 10, 2021, | Pugh, J. | Dkt. No. 5477-14
Mr. Bailey working as an unenrolled tax return preparer assisted clients (Uwe Zink and Gary Skuro) in creating a new entity, Interradiology, Inc. (Interradiology) organized under the laws of Arizona and elected to be treated as an S corporation for Federal tax purposes in 2017. Therefore, Mr. Bailey prepared and filed Forms 1120S, U.S. Income Tax Return for an S Corporation, for Interradiology for tax years 2007 through 2012. Also, he held 10% of the shares of Interradiology during the tax year 2008 and 20% during tax years 2009 through 2012.
Mr. Bailey prepared and filed petitioners’ Forms 1040, U.S. Individual Income Tax Return, for the years in issue. He timely filed their 2008 and 2012 Forms 1040, but he untimely filed their 2009, 2010, and 2011 Forms 1040 on March 9, 2011, November 29, 2011, and February 19, 2013, respectively. The 2010 and 2011 returns both reported tax due, which the IRS assessed before the issuance of the notices of deficiency for those years.
The Commissioner of the Internal Revenue Service, Charles Rettig, testified before the Senate Finance Committee. His message was a clear one: He is an enforcement-minded commissioner and “the IRS is committed to pursuing those who . . . intentionally evade their tax obligations.” Mr. Rettig did not mince words. His IRS will “aggressively pursue non-compliant taxpayers . . . [with] visible civil and criminal enforcement efforts.” But the message, though a stern one, is also one of fairness: Honest taxpayers need to believe—to feel confident—that others are paying their fair share, whether voluntarily or through enforcement efforts.
Most of the time, the IRS accepts tax returns as you file them. However, it selects some for an additional review or audit to determine if you reported your income, expenses, and credits accurately.
If the IRS selects your return for audit (also called examination), it doesn’t automatically mean something is wrong. Once the IRS completes the examination, it may accept your return as filed or propose changes. These changes may affect the amount of tax you owe (a proposed deficiency) or your refund amount.
There are two ways to be audited – by mail, or in person. This article deals with an in-person audit.
When the IRS selects your tax return for audit, it will notify you by mail. Sometimes the IRS will follow-up with you by phone about the notice it previously sent. The notice will tell you:
The Internal Revenue Service has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.
“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS Commissioner Chuck Rettig. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”
The IRS started sending the educational letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.
The percentage of tax returns being audited each year has steadily declined, due in part to dwindling government resources. Still, if you’ve been notified of a pending audit, those percentages don’t mean much. The only thing that matters is the situation that you’re now in. There are two kinds of audits; in person and by mail. It’s disconcerting to receive an audit notification, no matter what kind. If you find yourself in this situation, here’s how to handle it.
Notify Your Accountant
The first phone call you should make is to your tax accountant. Your accountant will be an invaluable resource as the audit progresses, so you need to give them the pertinent date(s) of the audit to ensure the accountant’s availability. In addition, numerous financial documents will need to be provided to the auditor, and your accountant will have many of these records. They’ll need some time to get everything together and organized. The sooner you notify your accountant, the better prepared they—and you—can be.