Expect Heightened IRS Activity in 2004
Profit Ability Article Highlight

The last few years have been pretty lean ones for the IRS as far as collections are concerned. Shrinking compliance budgets, smaller staffs and ongoing cultural changes stemming from its push to become a more "user-friendly" entity have put a damper on collection levels. Under pressure from Congress to step up revenue levels, the IRS has begun ramping up to ensure a higher level of taxpayer compliance.

In 2004, the result of this pressure will be evident as a greater number of taxpayers will be audited, purported "loopholes" will be closed and alleged "shelters" disallowed. How serious is the IRS about collections? Well, the IRS has announced that it will be vigorously reviewing and auditing the compliance of its own employees. According to CCHTax News Direct, under a 1998 provision, the IRS must fire any employee who has "willfully understated their tax liability or willfully failed to file a tax return." Around 800 IRS employees have been identified for further review and examination of Schedule C issues.

On the taxpayer side, the heightened IRS compliance activity will be visible in many ways. First, the IRS will scrutinize your deductions, corresponding documentation and income reporting more than it has in recent years. Also, the IRS will continue to weed out illegal tax shelters. Not only will taxpayers using such shelters be targeted, but accounting and legal professionals who assist in such activity will be subject to harsher penalties.

On a side note, the IRS has passed a blanket provision disallowing any shelter based on the claim that a particular tax law is invalid. What does this mean to taxpayers? In short, it means that more than ever, it is critical to maintain proper documentation supporting your tax positions. Also, for the sake of your tax preparer and yourself, think twice before using some tax shelter that is clearly based on a "gray area" of the tax law.