The IRS is always evolving, remaking itself about once a decade.
At the end of the 1990s, the IRS underwent severe Congressional scrutiny that resulted in the Revenue Reconciliation Act of 1997 and two Taxpayer Bill of Rights to reign in the agency. The IRS lost the power to seize property without due notice and had to start sending out annual statements to both spouses.
Now, over the past four or five years, the pendulum has started to swing the other way — the IRS is perceived as not doing its job fairly or appropriately, so the agency is taking a more heavy-handed approach.
“The new IRS is dealing with a budget that was slashed by a half-billion dollars. It’s technology challenged and fraught with scandal including resignations and a new commissioner, John Koskinen. He made several early appearances in 2014, and the message is clear that resources will be put to the task at hand — combatting offshore tax evasion and tax cheats,” says Douglas Klein, CPA, EA, associate director of tax at SS&G.
Smart Business spoke with Klein, a former IRS agent, about the current state of the IRS and how business owners need to react.
What signs do you see that the pendulum is swinging the other way?
As the tax gap widens, there’s a tremendous push to collect offshore income with reporting changes and amnesty programs for offenders. For example, the Foreign Account Tax Compliance Act, which could be implemented in 2014 or 2015, requires foreign banks doing business in the U.S. to report on U.S. customers.
Also, there’s a need for tax reform. The U.S. has one of the world’s highest corporate income tax rates, around 35 percent. It’s so punitive to keep foreign assets abroad that some companies have moved to tax-friendlier foreign jurisdictions.
So, Congress, the IRS and the president are looking at how to make the U.S. tax system more competitive. Some have suggested lowering the corporate tax rate, moving to a territorial tax system, which only taxes assets under that country’s jurisdiction, and/or creating a tax holiday to allow foreign funds to return to U.S. shores.
What does this mean for business owners?
Even with the problems it faces, a heavy-handed IRS can be aggressive with better tools. In this e-filing age, information matching has improved dramatically. IRS agents are encouraged to look at your website to see where you do business, which better equips them for audits.
Business owners need to stay on their toes. ‘The IRS will never figure this out’ might have been true eight or 10 years ago — but no longer.
How can companies keep in good standing with the IRS?
Some compliance tips are:
- Never ignore a notice. Even if you’re dealing with a personal crisis or family matter, which should come first, an IRS notice won’t go away if you put it in a drawer. Contact your accountant or tax adviser right away.
- Use the best tax accounting system you can afford. Don’t skimp on recordkeeping — software and personnel. QuickBooks is wonderful, but it’s only as good as the people working it.
- Be as educated as possible about all of the taxes that may apply to your business, such as sales, use, payroll, etc.
- Consider a payroll-processing firm to handle payroll processing. The laws are ever changing in regards to employee benefits and many companies don’t have the expertise to handle this properly. Business owners may not see the benefit of administrative spending, but officers can be personally responsible for unpaid payroll taxes. In terms of the risk, outside payroll companies are inexpensive.
- Take responsibility for the tax positions on all returns. For example, public companies require the president and/or board chairman to sign off on knowledge of the tax information. Make sure you talk with accountants, external or internal, so you can be comfortable with decisions. The most defendable tax positions come from a dialog and mutual agreement between the tax expert and taxpayer.
To find more about a changing IRS, visit the Taxpayer Advocate Service, the IRS’ independent watchdog, at
www.taxpayeradvocate.irs.gov. ●
Douglas Klein, CPA, EA IS Associate director of Tax at SS&G. Reach him at (330) 668-9696 or [email protected].
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