The IRS has recently made several changes which set the stage for more aggressive enforcement of our ‘voluntary’ tax system.  One step has been to extend the Voluntary reporting and compliance ‘catch up’ program for US taxpayers who have hidden funds in foreign accounts and avoided the tax thereon.  Surprisingly, 000’s of people have/are applying for the reduced penalties that are offered under the program!  Second, IRS has begun hiring 00’s of additional auditors and has also begun regulating professional tax preparers. The intention is to crack down on the bad ones and provide additional oversight of the good ones.  Ultimately, the oversight program will likely result in the preparer community doing the legwork for the IRS by limiting the amount of creative assistance preparers can provide! But for peace of mind, so long as documents exist to support all amounts reported in filed returns, ‘bring ‘em on.’  The government is under budgetary pressure to increase revenues, and taxes are one of its main sources. So the IRS is seeking cooperation from states in their efforts to identify nonfilers and under reporters. While there have long been file sharing arrangements following completion of audits, now the sharing is occurring on a more current basis to allow IRS to compare state records with federal returns filed. And file sharing is not limited to just state income tax files!!

Based on internal studies and estimates, IRS is working on a major compliance initiative to identify gift tax cheats. Apparently about ¾ of inter-family transfers of real estate never get reported on a gift tax return!  The potential for underpaid gift tax is significant with that kind of volume.  So, not all those new auditors will be looking at income tax filings.  Considering the vast amount of wealth that is set to be transferred to the next generation within the next few years, IRS seems to be positioning itself to ensure that the $1million lifetime gift tax exclusion amount has been exhausted before the estate tax return has to be filed!

A word of advice – consult with a professional on any tax authority correspondence, and definitely in the event you are selected for an audit. Someone familiar with auditing procedures can make a big difference.