I just returned from a 3-day course about Advanced Representation Techniques before IRS, and want to share what I learned.

The speaker was a nationally-known attorney with all the credentialshe has published books on this topic, and has argued many cases before IRS, the Federal Tax Court, and in the U.S. Circuit Court of Appeals.  He has represented many types of taxpayers, including Governors and other high Government officials, professional athletes, and some Mafiosi.

Here is the heart of what he said.

In the United States we use a voluntary tax compliance system.  In other words, we self-report our income, calculate our deductions and credits, and ultimately determine our tax, which we then pay.  Really, that is what happenswe do our own taxes.

The alternative is to have the Governmentwhat some people would call Big Brothercalculate our taxes for us, and then have us pay, based on their calculations.

While there are merits to both sides of this issue, my purpose is to report what I learned about what is happening and what is about to happen in our current voluntary self-reporting system.

Lets begin with The Tax Gap.  Thats the difference between what we as taxpayers should have paid, and what we actually paid.  This year, the Tax Gap is predicted to hit $345 billion.  Thats billion with a B, and it happens each year!

The folks in Washington who try to balance the budget know that even a 1% change in the Tax Gap brings in billions of dollars.  A 10% improvement generates $34 billion.  With a B.

Doesnt matter whether the administration in power is Republican or Democratic.  They are losing $345 billion in taxes due to taxpayer behavior in our voluntary tax compliance system.

How do they know the Tax Gap is this much?  IRS commissioned a study of 46,000 taxpayers, with the emphasis focused on

• Who Cheats?
• Where Do They Cheat?

The study concluded the following:

• 8% of taxpayers have a Schedule C (reporting business self-employment)
• These 8% of taxpayers account for 64% of total cheating.
• The group that cheats the most are farmers, who report on a Schedule F.  According to the study, 72% of the Schedule Fs that were examined contained serious inaccuracies.

It should come as no surprise that compliance ratesreporting of incomeis highest when there is third-party reporting.  If you know that someone else is going to tell the Government, youre more likely to report that amount accurately.

Thus, we as taxpayers fully report our income as reported on W-2, K-1, 1099-INT, and 1099-DIV.  Most of us report income received from 1099-MISC.  After all, we say to ourselves, Big Brother already knows about this income.  And hes got Withholding that I might get back on a refund if I fully report my income.

So we do the right thing and self-report any income that has been reported by a third party.

Shockingly, if income is not reported to IRS by a third party, many of us seem to forget to report that income.

AUDITS WILL INCREASE

Its all about money, and the IRS is one of the few major profit centers the Federal Government has.

Theyve got a fat targetthe Tax Gap.  Just whittling that Gap down by a few percentage points reduces the annual budget deficit, and it helps treat the honest and compliant taxpayer more fairly.

They are hiring more auditors.  Lots and lots of new, well-educated bright people.  They have attrition problems, tooa number of experienced auditors retire or otherwise leave the Service each year, so IRS is hiring to replace the veterans as well as to increase the overall number.

These new auditors are coming out of training, and are hitting the field.  So look for the number of audits to increase.

FEDERAL/STATE INFO SHARING

In the past, if you had to pay more tax as a result of a Federal audit, you really should have amended your State return and voluntarily paid more tax at the State level.  If you didnt voluntarily amend, you just might have gotten away with not reporting and not paying.

No more.  The States automatically receive a report of all Federal audits.  Their computers will pick up your increased Federal liability, and youll end up paying more state tax.

But thats what the voluntary system of tax compliance is all aboutkeeping Big Brotherand his cousins--at bay.

Author: Bill Belchee, MBA, EA, ATP

Beacon Small Business Solutions

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