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Tag Archive for tax audit

Please Advise Donald Trump On This Tax Matter – We Want Your Comments

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CALLING ALL TAX EXPERTS TO ANSWER THIS QUESTION!

IF MR. TRUMP WERE YOUR CLIENT…WOULD YOU ADVISE MR. TRUMP TO RELEASE HIS TAX RETURNS PUBLICLY WHILE HE IS UNDER AUDIT?

Dear Mr. Trump,

As the CEO of www.taxconnections.com I want to ask tax professionals of every political affiliation how they would
advise you… if you were their client. The media is giving you a Read more

What Are The Chances You Will Face An IRS Audit?

Ronald Marini

After much worry and angst you successfully met the filing deadline for your tax return. Now you are obsessing about a new worry: Will that return be audited by the IRS?

Almost everyone dreads the thought of an IRS audit but thanks to continuing Congressional cuts in the IRS budget, fewer and fewer Americans will face an audit of their return. For the 83% of Read more

5 Common Myths About The Dreaded Tax Audit

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Filing taxes is punishment enough without the vague threat of an IRS audit looming over our heads. For understandable reasons, the IRS insists on keeping the ins and outs of its auditing process on the murky side. How will you catch the bad guys if you give them the rule book first? But because of the sense of mystery around the process, it’s an area of regulation often misunderstood by taxpayers.

Here are a few common myths about the dreaded tax audit:

Myth #1: Only the wealthy get audited.

While it’s true that big businesses and the uber-rich are often targets of IRS tax probes, that doesn’t necessarily mean low- and middle-income workers are free and clear. The Read more

How To Appeal An IRS Tax Audit

3d person watching a word "aduit" with a magnifying glass

An IRS tax audit brings in its wake discontent and anger into the lives of taxpayers. The amount auditors impose may always seem wrongful or excessive. But believe me, there is a way out – appealing the IRS tax audit. For appealing, all you need is to approach the IRS Office of Appeals that has been created just for this purpose.

Take my word for it; most employees at the appeals office are former auditors with a good deal of either accounting or legal experience. They review the completed examination reports and then provide the opportunity for taxpayers to plead for a more favorable deal. They appeal to a power with greater authority in the IRS. The Office of Appeals avoids litigation since it resolves the tax disputes internally, which encourages taxpayers to stay compliant with the tax laws in the future. Read more

Australian Tax Office Targets Online Merchants

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The Australian Tax Office (ATO) has announced that it will gather information from eBay Australia & New Zealand Pty Ltd about online sales transactions totaling $10,000 or more during the 2011-2012 and 2012-2013 tax years.

This data will be compared with the tax returns lodged by online traders as part of a new “online selling data matching program”. ATO Commissioner Chris Jordan says: “Our online selling data matching program helps us keep a level playing field for honest businesses. ”

Taxpayers whose returns do not reflect the income from their online trading may face penalty tax and interest charges. The harvesting of data is likely to be extended to other online auction and sales sites for 2013-2014 and later years. Read more

Pay Your Tax Or Get A Credit Rating Downgrade!

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According to Nassim Kadem’s article in today’s Australian Review (13 March 2014), the Australian Taxation Office (ATO) has floated the idea of having outstanding tax debts listed by the personal credit rating agencies. This would require a change to the secrecy provisions of relevant taxation statutes.

However, in the last several decades, these provisions have been considerably watered down to accommodate information exchange between the ATO and various Australian and international government agencies. Accordingly, it might be expected that Australia’s Parliament will not be averse to the ATO suggestion.

ATO Second Commissioner Geoff Lepper was appearing before a Parliamentary hearing Read more

IDR Enforcement Procedures Date of January 2 Postponed to March 3, 2014

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Four days after we posted “Ready or Not… 2014 LB&I Information Document Request (IDR) Enforcement Process“, the Internal Revenue Service postponed the effective date to March 3, 2014.

The IRS Large Business and International (LB&I) Division announced that it will be extending the effective date of the enforcement procedures as outlined in the November 4, 2013 LB&I Directive on Information Document Requests Enforcement Process to March 3, 2014, to provide the clarification that is necessary to ensure that the procedures governing IDR issuance and enforcement are easily and clearly understood.

Kudos to the IRS for recognizing that the implementation of this procedure has issues Read more

Australian Tax Office Information Gathering Guide

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The Australian Tax Office (ATO) recently released a guide on their approach to information gathering. The quite comprehensive 53 page guide provides an insight to both the principles adopted by the ATO in exercising their powers and the considerable extent of those powers.

Australia’s Income Tax Assessment Act 1936 (ITAA 36) confers many of the relevant information gathering powers. These powers include both the power to give formal notices requiring information to be provided and formal access powers.

For example, §263 of ITAA 36 allows an authorized ATO officer to “…at all times have full and free access to all buildings, places, books, documents and other papers” and to Read more

Australian Tax Office Issues Cash And Hidden Economy Audit Guide

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The Austrailian Tax Office (ATO) today issued a new guide for advisers and their clients regarding the way in which the ATO conducts audits in the cash and hidden economy area. The guide discusses “…risk indicators to identify businesses for review or audit” that “…include results from data matching, comparisons of business information against our small business benchmarks and reports from the community”. In this connection, the ATO has an on-line evasion reporting facility that is in the Australian vernacular, known as the “dob-in line”.

In the guide the ATO reveals that much of the data they rely upon is received from third parties such as on-line auction houses. Much of this data is likely to have been gathered by bot programs that use appropriate search terms. Accordingly, it is likely they will have data Read more

Say it Ain’t So: The MN Audit Guarantee

Audits by a taxing authority are not generally a pleasant experience.  Avoiding an audit is always a priority for taxpayers.  Generally there is a small chance you will be audited on any return and there is nothing you can do about it.  The State of MN came out saying they intended to audit all companies on sales tax once every three years and so far it seems they are following through with that.  But a one in three chance is still only 33%, so how do we get to a 100% audit rate?  Estate tax returns.

Estate tax returns are being looked at by agents.  In our experience, every single estate tax return is being looked at by a MN agent.  That’s the 100% audit rate that sounds like no fun.  So what happens in a MN estate tax audit?

The agents are looking to confirm the information that is on the estate tax return and they are checking against other information available on your possible assets.  Forget to report a car that has been registered with the State of MN?  They are going to ask you about it.  Fail to include an investment account that you received a 1099 for the year before?  They are going to ask you about it.  They are also going to ask for confirmation of some of the values you listed on the estate tax return like the bank accounts, the real estate values, the investment accounts, etc.  Having that documentation before you file the estate tax return is critical to making the process go more smoothly.  Calling the broker to find out the account value was $42,256.88 is great, but if you don’t have paper documentation of that, you aren’t going to get past the audit which is coming.  Not every post has a happy ending, but if you have all the documentation before you file the return and then reply promptly to the audit, it shouldn’t be too bad.

IRS High-Tech Tools Track Your Digital Footprints

The Internal Revenue Service is collecting a lot more than taxes this year — it’s also acquiring a huge volume of personal information on taxpayers’ digital activities, from e-bay auctions to Facebook posts and, for the first time ever, credit card and e-payment transaction records, as it expands its search for tax cheats to places it’s never gone before.

The IRS, under heavy pressure to help Washington out of its budget quagmire by chasing down an estimated  $300 billion in revenue lost to evasions and errors each year, will start using “robo-audits” of tax forms and third-party data the IRS hopes will help close this so-called “tax gap.” But the agency reveals little about how it will employ its vast, new network scanning powers.

Tax lawyers and watchdogs are concerned about the sweeping changes being implemented with little public discussion or clear guidelines, and Congressional staff sources say the IRS use of “big data” will be a key issue when the next IRS chief comes to the Senate for approval. Acting commissioner Steven T. Miller replaced Douglas Shulman last November.

“It’s well-known in the tax community, but not many people outside of it are aware of this big expansion of data and computer use,” says Edward Zelinsky, a tax law expert and professor at Benjamin N. Cardozo School of Law and Yale Law School. “I am sure people will be concerned about the use of personal information on databases in government, and those concerns are well taken. It’s appropriate to watch it carefully. There should be safeguards.” He adds that taxpayers should know that whatever people do and say electronically can and will be used against them in IRS enforcement.

IRS’s Big Data Tracking

Consumers are already familiar with Internet “cookies” that track their movements and send them targeted ads that follow them to different websites. The IRS has brought in private industry experts to employ similar digital tracking — but with the added advantage of access to Social Security numbers, health records, credit card transactions and many other privileged forms of information that marketers don’t see.

“Private industry would be envious if they knew what our models are,” boasted Dean Silverman, the agency’s high-tech top gun who heads a group recruited from the private sector to update the IRS, in a comment reported in trade publications. The IRS did not respond to a request for an interview.

In trade presentations and public documents, the agency has said it will use a massively parallel computer system that can analyze data from different networks to find irregularities and suspicious activities.

Much of the work already has been automated to process and analyze electronic tax returns in current “robo-audits” that flag unusual behavior patterns. With IRS audit staff reduced by budget cuts this year, the agency will be forced to rely on computer-generated audits more than ever.

The agency declined to comment on how it will use its new technology. But agency officials have been outlining plans at industry conferences, working with IBM, EMC and other private-sector specialists. In presentations, officials have said they may use the big data for:

•  Charting and analyzing social media such as Facebook
•  Targeting audits by matching tax filings to social media or electronic payments
•  Tracking individual Internet addresses and emailing patterns
•  Sorting data in 32,000 categories of metadata and one million unique “attributes”
•  Machine learning across “neural” networks
•  Statistical and agent-based modeling
•  Relationship analysis based on Social Security numbers and other personal identifiers

Officials have said much of the data will be used only for research. The agency’s economic forecasts and data are a key part of Washington’s budget infrastructure.  Former commissioner Douglas Shulman said in an IRS statement that the technology will employ “billions of pieces of data” to target enforcement and to “detect and combat noncompliance.”

U.S. Tax Court records show that information gathered from Facebook and ebay postings have been used by the IRS in defending tax challenges. Under a Freedom of Information Act disclosure obtained by privacy advocates at the Electronic Frontier Foundation, the group published the IRS’s 38-page manual used to train auditors to search Internet addresses, Facebook postings and other social media to back audit enforcements.

In practice, the third-party data has been used only if the irregular returns merit more attention. In one much cited example, IRS officials talk about prisoners who were filing false claims for energy tax credits for window replacements.

The agency, wary of public opinion about invasive audit practices, has pulled back from using so-called “social audits,” which, for example, might single out horseracing enthusiasts or sailboaters for special attention. But by screening existing data for one million unique attributes, the agency can quietly create a DNA like code to understand the economic behavior of any individual.

The IRS last year used a profiling test model to study 1,500 tax preparers with histories of reporting deficiencies and managed to recover $200 million. It cited the experience as proof that its data analysis works. Early this year, however, a new set of rules it developed for tax preparers was thrown out by a federal court who said the agency had overstepped its mandate. The IRS would not comment on whether the rules were based on its new screening tools.

Lots of computing power, for what? The agency’s computers can now load all U.S. tax returns in just 10 hours, compared with the four months it took just eight years ago, Jeff Butler, IRS director of research databases  told the IBM Tech America conference last November. That leaves a lot of time for other uses. The IRS says it expects 80 percent of its tax returns to be filed electronically this year. That makes a total of 250 million returns filed, with $2 trillion in revenue.

But processing those returns uses only a fraction of the agency’s computing power. An entire year of tax returns amounts to 15 terabytes, or just 1.5 percent of the IRS storage of 1.2 petabytes (one quadrillion bits of information), based on public data from IRS presentations. The agency has expanded its data capacity by 1,000 percent in the past six years.

It also recently assembled  $350 million in high-tech tools to do a lot of auditing, tracking and analyzing what people do on the Internet. The agency has used social media and other third-party sources in the past, but it has now increased its capability to so from its own growing database of networks.

Congressional staffers on the House Ways and Means Committee and the Joint Committee on Taxation, both of which oversee the IRS, say they have been occupied by more pressing issues related to the budget crisis, and Congress gave the tax officials leeway to use technology to solve the growing problem of identity theft. But they said they will look at the possibility of errors in robo-audits as well as the storage of data on millions of taxpayers.

The IRS is guarded about how its audits are triggered, tax experts say, because too much information on what they do might help tax cheats. Major accounting firms have been given little information on the changes and were reluctant to comment, although some said privately that they are aware of the new IRS tools but it is too early to tell how they will be used. Taxpayer advocacy groups also say they are waiting to see how the IRS manages its technology upgrade, and are holding out hope that it will make taxes more fair and efficient and force tax evaders to pay their share of the overall burden.

While many applaud the effort to update government technology with private-sector tools, they say the agency needs to conform to higher standards. “I don’t really see strong legal regulation in place to manage something of this magnitude,” says Paul Schwartz, University of California law professor and co-director of the Berkeley Center for Law & Technology. The IRS is working with the same kind of oversight and rules that were developed in the paper tax-return era, says Schwartz. But with the technology it now has, the agency can “see into people’s lives” as never before.

Tax returns are like narratives of how people spent their money, and tax audits have been guided by “reasonable” interpretations of allowable credits and deductions by the IRS agents who manage audits. “Social media can make people testify against themselves,” Schwartz says. “They provide a counter narrative.” He cites as an example a businessperson going to Florida for five meetings over a week who also visits family in Miami. A casual Google+ posting to friends online about “visiting my mother in Florida” could paint a different picture than the deduction taken on the tax form.

“It will be interesting to see what the IRS does with all of their new tools. They will have to be very careful,” says Schwartz.  So, too, will taxpayers.

By Richard Satran  U.S.News & World Report LP,   April 4, 2013
Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)
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