The IRS is turning up the heat on taxpayers. Some of them, anyway.
The number of audits conducted by the Internal Revenue Service has dropped as it continues to reel from years of budget cuts. But even as its workforce shrinks, the agency must keep the money flowing into the U.S. Treasury. The solution in 2017? Focus on target-rich environments, and squeeze more dollars out of each audit.
That means more scrutiny of people and companies who are likeliest to hide money or under-report their tax burden. Tax specialists are warning clients, especially if they’re wealthy or have complicated tax situations, to be ready to hand over a lot more information. “My clients are concerned,” said Debra Estrem, managing director of the tax controversy group at Deloitte LLP.
The IRS has revealed only a few details about its plan of attack—too much information can give tax evaders clues, after all. But as head of the Deloitte division overseeing responses to hundreds of large, complex audits every year, Estrem has a better idea than most about what the IRS is up to.
While the IRS launches fewer full-blown audits, she noticed the agency sending out more “mass notices” addressing specific issues. For example, if you reported an especially large charitable contribution on your 1040 form, IRS computers may send you an automated notice asking for proof.
Her list of the IRS’s “favorite issues” is a long one: In addition to charitable contributions, she’s seen more notices about large losses, mortgage interest deductions, and 529 college savings plans. So-called “hobby losses” are a frequent IRS target. That’s when people claim “losses” for business ventures that, in the IRS’s eyes, were never meant to make a profit. Think of otherwise wealthy people claiming losses for musical groups, raising horses, racing cars or yachts, and even dog grooming, and you’ll get the picture.
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