It has almost become cliché to write an article discussing “these difficult economic times” and projecting a grim business climate. Certainly, budgets are smaller and belts are tightening. The federal and state governments need money too. Across the nation, we hear stories of politicians recommending tax increases and government employees facing pay reductions, pay freezes or even mandatory furlough days.
The tax authorities are facing these issues as well. But in the long run, “these difficult times” will make the Internal Revenue Service stronger and clients should be cautioned that now is not the time to try and get away with anything clever tax-wise.
It is never good advice to tell a client to take a questionable tax position based on the likelihood that they will not get caught up in an audit. In fact, the ethical rules governing practice before the IRS (contained in Treasury Circular 230) strictly prohibit advising a client to play the so-called “audit lottery.”
In the current environment, however, clients would be particularly well advised to steer clear of such positions.
I note the following:
- 12 years have now passed since the IRS Restructuring and Reform Act of 1998.
- The current private sector job market continues to struggle.
- The IRS has continued to hire new and younger auditors and collection agents.
- The IRS has increased the overall number of audits and focused on certain areas that they believe are prone to abuse (for example, audits of taxpayers earning more than $200,000 and S corporations have increased).
- It regularly takes many years before a tax return is audited.
Mix these together and we can expect to see a continued increase in aggressive audits and tax collection techniques. Most veteran IRS agents, particularly in the collection division, will tell you that the 1998 Restructuring Act emasculated the IRS and was perceived to have stripped its agents of both their power and autonomy. At the time, it was said that a kinder, gentler IRS emerged.
The trend is now a return to the type of behaviors that preceded the restructuring. Do not misunderstand me — I am not suggesting that the IRS is acting inappropriately. But I will say that agents have overcome the fear of acting aggressively and the sense of impotence that existed in the years following the Restructuring Act.
This change of heart is in part due to the retirement of the old guard that had experienced the restructuring and the hiring of new talent needed to replace the dwindling ranks. For years the IRS hired very few new agents and now has to catch up.
For the government, this is a good time to be hiring. A practical reality is that an entry level position in government work does not typically have the same pay scale as in the private sector. This fact regularly drives those with the highest GPAs and academic credentials away from government work. However, when the private sector is not hiring, the government can pick from the proverbial “cream of the crop.”
One interesting statistic is that nationwide approximately 70 percent of all IRS auditors have six or fewer years of experience. This means that in the coming years these younger workers will be reaching professional maturity and will conduct very thorough audits.
The significance of this becomes clear when we note the amount of time that typically elapses between filing a tax return and the audit of that return. A tax return that is filed today will likely not be audited for a number of years. When it is, it will face a younger, more aggressive, well-credentialed and mature team of auditors. As a result, even though economic pressures may cause your clients to consider an extra questionable deduction or two in order to save a few dollars, you may want to advise them that in a few years a skilled team of auditors may be asking them what they were up to in the tough days of 2010.
Robert Teuber is a tax attorney with Weiss Berzowski Brady LLP in Milwaukee. He works with individuals and businesses in resolving tax audits, appeals, litigation and collection actions brought by the IRS and Departments of Revenue. Rob can be reached at 414/270-2538 or email@example.com.