Meet the new IRS — the kinder, gentler IRS. It’s an agency
with processes that are fast becoming structured, streamlined
— and strangely quiet.
Quiet, that is, except on paper.
The notice boom
BY JIM BUTTONOW
New IRS compliance practices mean big changes for tax pracs
taxnews
More Internal Revenue Service notices are
going out to taxpayers than ever before. In
fact, since 2001, notice volume has increased
670 percent, to 201 million sent in 2009. This
is the IRS being smarter about tackling what
it considers to be a big problem.
In 2001, the IRS conducted a study to identify the amount of taxes that goes unpaid
each year. The result: a $345 billion tax gap
— stemming mainly from a complicated and
changing Tax Code, often vulnerable to fraud.
The IRS quickly made plans to close this gap
while maintaining itself as a customer service
organization. The result: improved technology and information systems that isolate
compliance areas — and a dramatic increase
in IRS notices.
For accounting firms, this means more
work and more contact with the IRS, because two thirds of taxpayers rely on their
accountant each year for compliance. While
this sounds like a potential problem, it can
represent a tremendous opportunity to enhance client service and further strengthen
the client-accountant relationship.
reduced the number of preparers. There were
more than 1. 2 million registered preparers
before IRS regulation; now there are less than
700,000. The IRS will continue to work with
tax professionals so that preparers will assist
with compliance.
In the 1990s, the IRS approached compli-
ance through traditional methods such as
audits and in-person tax collection. During
the past 10 years, however, the IRS has im-
proved its ability to target potential noncom-
pliance through technology. The rate of e-
filed returns is fast approaching the IRS target
of 80 percent, and improved information sys-
tems have automated matching techniques
and specialized, issue-focused notices — all
aimed at narrowing the tax gap. The IRS re-
ported the following results:
For the more than 4. 3 million informa-
tion-matching notice discrepancy audits, the
average return on investment for the IRS is
$1,670 per return, with little involvement by
IRS personnel.
The IRS mail audit program, responsible
for 78 percent of all IRS audits in 2010, averages almost $6,600 in additional taxes owed
per audit.
With enhancements in notice and information systems, the IRS also improved its
compliance practices and reduced personnel
by 6 percent during the past 10 years.
In a recent speech, IRS Commissioner
Doug Shulman indicated that the IRS is also
looking ahead, analyzing taxpayer compliance data to recognize trends and improve
compliance practices. He explained that the
agency created an office of compliance data
analytics that helps create hypotheses for
compliance improvement, launches pilots
to test hypotheses, and then implements enhancements if pilots are successful. The ultimate goal, Shulman said, is to take advantage
of technology to modernize IRS processes.
Shulman also described an upgrade to its
Customer Account Data Engine to take effect
for the 2012 tax filing season. The agency’s
core account database, which holds basic
taxpayer information such as current account
balance and payments, will move its batch
processing cycle from a weekly or bi-weekly
basis to a daily basis, he said. For practitio-
ners, the upgrade means faster refunds for
clients, and dealing with IRS agents who have
up-to-date information, he explained.
JACKSON HEWITT FILES CH. 11
PARSIPPANY, N.J. — Jackson Hewitt Tax
Service filed for Chapter 11 bankruptcy,
but said that it has reached a definitive
agreement with its secured lenders on a
restructuring plan. The plan is expected
to reduce the company’s outstanding
debt and interest expense, the company
said, while putting the tax prep chain on
a solid financial footing with an appropriate capital structure to support its business plan going forward. The company
also filed a pre-packaged plan of re-org-anization that contains the terms of the
restructuring. The company was hit hard
the past two tax seasons by problems
with its refund anticipation loan business
after banking regulators told its main RAL
provider, Santa Barbara Bank & Trust, to
exit the RAL business.
A SHIFT IN STRATEGY
While the IRS still conducts audits and face-to-face meetings, its compliance strategy for
the 21st century is shifting. The agency has
realized that it must leverage its channels,
such as tax preparers and IRS information
systems, to close the tax gap.
This year, the IRS started regulating tax preparers by requiring registration and competency standards, a strategy that may have also
IRS STRUGGLES TO CONTROL
TAXPAYER ID THEFT
WASHINGTON, D.C. — The Internal Revenue Service found over 245,000 identity
theft incidents last year, according to a
new government report that assessed the
IRS’s efforts to stem the growing problem. Since 2008, the IRS has identified
470,000 incidents of identity theft affecting more than 390,000 taxpayers.
In its report, the Government Accountability Office acknowledged that the
hundreds of thousands of taxpayers with
tax problems caused by identity theft
represent a relatively small percentage
of the expected 140 million individual
returns filed, but for those affected, the
problems can be extremely serious.
Jim Buttonow, CPA, is a 19-year IRS veteran
and co-founder and vice president of product development at New River Innovation,
as well as chief architect of Beyond415,
a Web-based application that enables tax
professionals to manage their clients’ post-filing compliance. Reach him at jbuttonow@
newriverinnovation.com.
NOTICES FOR EVERY SEASON
Where the IRS is concerned, there is no defined busy season. IRS compliance systems
and staff work year-round on tax compliance
issues, consistently monitoring activity and
issuing notices.
The IRS sends certain types of notices
throughout the year. For example, in May and
June, practitioners can expect notices related
to the tax returns they filed for their clients
before the April 18, 2011, deadline. The following is a sampling of such notices.
CP23/24, Estimated Tax Discrepancies.
Retirees, small-business owners, or investors who make estimated tax payments may
receive this notice when estimated payments
reported on their return were incorrect. Practitioners should review payments their clients
made to the IRS to see whether the payments
were posted correctly. If so, practitioners can
facilitate payment of the balance or help dispute the account discrepancy.
CP14, Balance Due. Clients who did not
pay an outstanding balance when they filed
their return will receive this notice. Practitioners can help their clients make arrangements to satisfy the balance with the IRS.
CP2000, Underreported Income Ad-
See NotICe Boom on
19
FIELD CONVICTED OF TAX FRAUD
NEW YORK — Denis Field, the former
chairman and CEO of accounting firm
BDO Seidman, was convicted along with
three co-defendants — two lawyers and
a banker — of participating in a $7 billion
tax shelter scheme that lasted a decade.
A fifth co-defendant was acquitted.
According to prosecutors, the defendants, all of whom are CPAs, netted $130
million from the scheme. Field, 53, was
not only the chairman and CEO of BDO
Seidman at the time, but also the head of
its national tax practice, and one of three
heads of BDO’s Tax Solutions Group.
