After coming under sharp criticism in Congress over its lagging audit numbers, the Internal Revenue Service is taking steps to increase its audit rates of higher-income taxpayers. The IRS released their Data Book for 2021, which contains a wealth of statistics on examination rates, the response to the COVID-19 pandemic, the provision of advance Child Tax Credits and Economic Impact Payments, along with the usual information on the number of returns processed, revenue collected, and tax refunds issued. In conjunction with the release of its annual data book, the IRS released a separate statement providing an update on its latest audit numbers, pointing to the approach on increasing its audits of higher-income taxpayers.

The move comes after recent reports from the Treasury Inspector General for Tax Administration (TIGTA), and Syracuse University’s Transactional Records Access Clearinghouse (TRAC) found audit rates plummeting for wealthier taxpayers. For lower-income taxpayers, the IRS can often use technology to spot discrepancies between the tax returns filed by individual taxpayers and the information returns filed by their employers and other businesses to target them for examination. In the statement, the IRS highlighted recent data showing an uptick in audit rates. While the audit rates for EITC recipients and those earning less than $50,000 remained stable, the audit rate for those with over $10 million in positive income jumped from 2.0% in the fiscal year ending Sept. 30, 2021, to 8.7% in recent months. However, the IRS acknowledged that it is facing resource constraints, with fewer employees meeting the necessary expertise to conduct audits of high-income taxpayers who may have sophisticated, complex tax strategies.

During an oversight hearing in March, IRS Commissioner Chuck Rettig argued that the IRS was not targeting lower-income taxpayers, pointing to the IRS Data Book, the latest edition of which had not been released at that point. Commissioner Rettig blasted Syracuse University’s TRAC report, and in turn, TRAC called on the IRS to release the latest numbers. The release of the fiscal year 2021 Data Book, which covers the period from Oct. 1, 2020, to Sept. 30, 2021, and the additional statement from the IRS sheds light on the moves the IRS has been making to counter the argument that it is targeting lower-income taxpayers for audits.

In conjunction with the Data Book release, Rettig also highlighted the hard work the agency had been performing to respond to the pandemic and the various forms of tax relief and stimulus payments delivered. In the Data Book, the IRS reported that overall, net revenue through enforcement by the collection function equaled almost $60 billion, an increase of 54% over the prior year. As part of its collection activities, the IRS saw an increase in the use of payment plans. Nearly 2.4 million taxpayers set up new payment plans and installment agreements with the IRS during the fiscal year 2021, an increase of 29% compared to FY 2020. The IRS collected nearly $13.7 billion through installment agreements in 2021, up 9% from the prior fiscal year.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

According to a report released recently by the Government Accountability Office (GAO), it has been found that in recent years the IRS has been auditing fewer taxpayers since 2010, with audit rates for wealthier taxpayers decreasing the most. The IRS officials blame the decline in audit rates on staffing decreases and the fact that it takes more staff time and expertise to handle complex higher-income audits. From tax years 2010 to 2019, audit rates of individual income tax returns decreased for all income levels, according to the findings. On average, the audit rate for these returns decreased from 0.9% to 0.25%. However, while audit rates saw a greater decline for higher-income taxpayers, the IRS generally audited them at higher rates than lower-income taxpayers. 

The average number of hours spent per audit was generally stable for lower-income taxpayers but more than doubled for those with incomes of $200,000 and above. According to IRS officials, the greater complexity of higher-income audits and increased case transfers due to auditor attrition contributed to the time increase. In response to the report, the deputy commissioner of services and enforcement at the IRS, Douglas O’Donnell, commented that auditing requires auditors to appropriately respond to taxpayers with increasingly complex business and investment activities. The greater the complexity, the more sophistication, skill, and time to perform the necessary review of information and correctly apply the law. 

House Ways and Means Oversight Subcommittee chair Bill Pascrell, had requested the GAO report and criticized the findings. His office found that except for those with over $5 million in income, audits of the lowest-income taxpayers resulted in higher amounts of recommended tax per audit hour. The IRS collected about one-half of all recommended taxes between 2011 and 2020, with collection rates generally higher for those taxpayers with incomes under $200,000, including Earned Income Tax Credits (EITC) recipients. That is probably because the IRS conducts EITC audits before issuing refunds. According to the IRS, high-income audits are more likely to have recommended tax amounts that are abated or more challenging to collect fully.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

The SBA decided, in consultation with the Department of Treasury, that it will review all loans in excess of $2 million following the lender’s submission of the borrower’s loan forgiveness application. That being said, the SBA has reserved the right to also audit loans in any amount at any time, and will likely “spot check” loans in lower amounts.

Since the first round of funding was depleted so quickly, and many large businesses were approved for loans they didn’t need, the SBA is stepping up efforts to make sure every loan is going to the right business, for the right amount, for the right purpose.

When would an audit happen? PPP loan audits will be performed when a business seeks loan forgiveness. However, the borrower must retain PPP documentation files for six years after the date the loan was forgiven or repaid in full.

What are some items that the SBA may verify?

  • Eligibility: Was the borrower eligible for the PPP loan based on the rules and guidance available at the time of application?
  • Loan amount and loan use: Did the borrower calculate the loan amount correctly, and did the borrower use the loan funds for allowed expenses under the CARES Act?
  • Loan forgiveness: Is the borrower eligible for forgiveness on the claimed amount?

Are you using PPP funds correctly? If you are looking for the loan to be forgiven, at least 60% of the fund must be spent on payroll and employee benefits, while the remaining 40% on utilities, rent and mortgage interest. This will be verified by examination of your payroll records and expense documentation. If you spend funds on anything else, you could be subject to additional liability or even charges of fraud.

What could happen as the result of an audit? If you are ineligible for the loan or forgiveness amount, your forgiveness application may be rejected by the SBA and they may demand you repay the outstanding loan balance. You may choose to appeal the SBA’s decision.

How can you appeal? Your appeal must be filed within 30 calendar days after: 1. The receipt of the final SAB loan review decision, or; 2. Notification by the lender of the final SBA loan review decision; whichever is earlier. Once the appeal is filed, a judge will issue a decision within 45 calendar days.

Do you need a CPA for a PPP Audit? Although it is not required to have a CPA during this process, having one will help with finding and preparing documents that will be requested during an audit.

Talley’s professionals have spent hundreds of hours reviewing the law, regulations and SBA PPP FAQs issued on an almost daily basis and we are happy to assist you in the process. We are available to simply answer a quick question or assist in the application and/or forgiveness audit process.

The year has been off to a rocky start for Uber, as they are experiencing the highs and lows of going public. Although their tumbling share price is currently a main worry for the company, it seems that the rideshare giant may be facing even more problems regarding their tax situation. This week, Uber’s SEC filing showed that the company is currently under audit by the IRS as well as other foreign authorities.

The main tax returns under question are for the year 2013 and 2014, with the primary cause related to Uber’s transfer pricing positions. These are essentially how Uber allocates the locations of its different incomes and costs. Additionally, in many countries, including the United States, the United Kingdom, Mexico, Brazil, Australia, India, and others, the company’s 2010-2019 returns are still open and under question. Although Uber has stated they are prepared for the additional tax liability, the company cannot estimate the total liability at this time.

It is entirely possible that in the next year Uber’s gross unrecognized tax benefits will be subject to substantial changes, with the company noting they estimate that the reductions will be at least $141 million. Considering Uber has had tax issues in the past, particularly regarding international activities since its start in 2010, this might not be the end of the company’s struggles with the IRS and many foreign tax jurisdictions.

For the future, many predict that these audits may also lead to more problems for Uber’s tax situation with respect to the classification of its drivers. Over the years the company has tried to categorize its workforce as independent contractors rather than employees to save on tax liabilities. The increased attention on their financials and tax returns may lead to a larger investigation on this matter as well.

Talley’s experienced team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance and pass on to the next generation the assets and wealth that you’ve worked hard to build. We welcome the opportunity to discuss with you the current opportunities available to you. For more information, contact us today.

Near the end of 2018, the state of New York experienced a $2.3 billion decrease in tax revenues, with the fleeing of its wealthy citizens to lower-tax states believed to be the cause. Since 46% of their income taxes are sourced from the New York’s top one percent, it’s no surprise that the state may have some worries. As New York has increased limits on state and local income tax deductions, many have sought tax refuge by moving to Florida, a state that has no income or estate taxes. Although this may seem like a simple change of location, attempting to relocate can bring tax liabilities into question and can ultimately result in an audit.

Over the past ten years over 3,000 residency audits were conducted resulting in an estimated $1 billion in collections. In the past three years alone, more than half of those who were audited lost their cases, resulting in an average tax bill of $144,270. New York auditors are using traditional and new methods of digging for information, including credit card statements, schedules, cell phone records, social media, vet and dentist records, and in-home inspections.

Many believe spending 183 days out of New York will automatically exempt them from state taxes. Though the amount of days you spend in and out-of-state matters, these cases ultimately come down to proving “domicile,” being able to demonstrate that a taxpayer’s permanent, primary home is in Florida rather than New York. For people who spend time in two or more states, evidence can come from comparing which house is nicer, where your primary doctors are, where your prized possessions or pets are, and even which refrigerator is stocked with fresh or expired food. Since rulings on “domicile” can be subjective, this gives New York an advantage and most taxpayers being audited end up settling.

Consulting tax experts is one way individuals can educate themselves on policy changes and learn how their life decisions may impact their tax situation.

Talley’s experienced team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance and pass on to the next generation the assets and wealth that you’ve worked hard to build. We welcome the opportunity to discuss with you the current opportunities available to you. For more information, contact us today.

Who is Martin Shkreli? If you google “most hated man in America”, he is the top hit -in fact, the entire first page of results is devoted to him. So why the animosity? Most of it stems from his controversial decision as former CEO of Turing Pharmaceuticals to increase the price of a medication produced by the company by 5,000 percent. His actions have drawn the ire of many already, but now you can add the IRS to that list as well.
The Internal Revenue Service has filed a tax lien for $4,628,928.55 against Martin Shkreli, the former CEO of Turing Pharmaceuticals. The tax lien against Shkreli comes from unpaid 2014 taxes of $4,625,496.70 and unpaid 2013 taxes of $3,431.85, according to which broke the news first.
Shkreli became infamous last year when he and his company Turing Pharmaceuticals increased the price of Daraprim, a lifesaving HIV medication produced by the company by 5,000 percent, from $13.50 to $750 for each pill. A decision he said he regretted, not because of what he did, but because he didn’t raise the price higher. Democratic presidential candidate Hillary Clinton denounced him: “Price gouging like this in the specialty drug market is outrageous.” Republican opponent Donald Trump also attacked Shkreli. “He looks like a spoiled brat to me,” Trump said.
Heat coming from the IRS may be the least of Shkreli’s worries at the moment though: In an unrelated securities fraud case, Shkreli is accused of using money from a pharmaceutical company that he founded, Retrophin, to pay off investors in his hedge fund. Retrophin filed suit against him last August for $65 million. His other drug company, Turing, replaced him as CEO last December following his arrest.
This may be one of the rare occasions where most individuals will be rooting for the IRS.
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In a landmark estate tax settlement the IRS netted $388 million in a record settlement with the estate of Bill Davidson, a noted philanthropist and owner of the Detroit Pistons, the WNBA’s Detroit Shock and the NHL’s Tampa Bay Lightning. The IRS claimed an astounding $2 billion deficiency of estate/gift/generation-skipping taxes with the former Pistons owner’s estate. To put it perspective, the Treasury took in a total of $12.7 billion in estate tax revenue in 2013. Where did Davidson go wrong?

Here’s the quick breakdown in dollars: $187 million in gift taxes, $152 million in estate taxes, $49 million in generation-skipping taxes, and a $133,000 gift tax penalty.

The IRS took note of two main issues that led to the deficiencies:

The estate undervalued corporate stock. The IRS claimed the estate reduced the value of privately held Guardian stock held in trust for children and grandchildren. Estates with hard-to-value assets such as privately-held stock, real estate or art need to pay close attention to the valuations for gift and estate tax purposes.

The estate also improperly valued self-cancelling installment notes (SCIN’s). Although they are a well-recognized means of tax mitigation, the IRS questioned the computations Davidson employed and claimed Davidson was making taxable gifts he should have reported. The IRS takes a tough stance on how you value the notes and what you need to do to establish that it’s a fair exchange of assets for the notes.

You don’t have to a part of the “Billionaires Club” to face estate planning challenges. Any individual or family with a business, real estate holdings, household property, liquid savings, or stock investments will want to establish a thorough estate plan before unforeseen circumstances intervene. The only way to make sure more of your money is transferred to the people and causes you care about (over the IRS) is to plan for it with your advisors. Talley & Company is here to help.

January 9, 2015
While most of us were settling back into the office this week, Teresa Giudice from the infamous reality TV show “The Real Housewives of New Jersey” was settling in to her new home at the Federal Correctional Institution in Danbury. She’ll be trading the opulent, Italian-style divans inside her NJ mansion for a shabby, not-so-chic cot in a jail cell for the next 15 months (if she actually serves her full sentence).
According to the New York Daily News, Teresa and husband Joe were convicted of mail, wire and bankruptcy fraud. They took out millions in falsified mortgage and construction loans to support their lavish lifestyle. Joe was also convicted of tax fraud, since he failed to file a return in 2004 and admitted he didn’t pay taxes on some $1 million in income between 2004 and 2008.
At sentencing, Judge Esther Salas was infuriated by the Giudice’s lack of transparency in their pre-sentencing disclosure documents. Among the omissions the judge seemed to think had dubious justifications were the estimates of the family’s furnishings and jewelry. The courts and the IRS have increasingly sophisticated tools for identifying discrepancies in stated earnings and assets, but in this case a simple paperwork trail proved enough.
That’s because when declaring bankruptcy in 2009, the Giudices listed $60,000 in furnishings, but only $25,000 on sentencing day. Other recreational vehicles, cars and construction equipment seemed also to be missing from the probation office report that managed to make it to the Feds. When asked why no jewelry assets were reported, the Giudice’s lawyer said Teresa wore only the costume type.
Judge Esther Salas gave Teresa 15 of the maximum 27 months but allowed her to spend the holidays with family. The judge also allowed Teresa’s husband to begin his sentence after hers expressly to maintain a parent in the household for their four children.
For Joe the sentence is 41 months, but even then he may not be altogether free. Although he has lived in New Jersey for most of his life, he never became a U.S. citizen and will likely face deportation.
Albeit this couple offers an egregious example of misconduct, it goes to show the seriousness with which the courts take tax and bankruptcy fraud. Particularly if, as some believe, the judge in this instance was being lenient, whether owing to the couple’s fame or other reasoning.
Should Teresa miss the spotlight facilitated by Bravo, she can take heart knowing she’s staying at the prison made famous by the Netflix original series “Orange is the New Black.” The reality of it all is that she’s likely to be back in the limelight fast, though maybe not at her NJ home since it was put up for sale. Once she’s free to go, she may very well pick up her hair extensions on the way out and get back to the celebrity life.
April 4, 2014
With only days left to file before the April 15th deadline, a lot of taxpayers are wondering whether they’ll be audited. The 2013 Data Book issued by the IRS is just the place to find the odds, which not surprisingly, go up as your income or business’s balance sheets do. This year’s report shows 1.0% of all individual returns were audited, but for those with income between $200k and $1 million that number grew to 1.4% and then jumped to 10.8% for income of $1 million or more. Approximately 1.4% of corporate returns were audited overall, but the rate ticked upward fast according to balance sheets, hitting up to 91.2% for corporations with $20 billion or more.
The IRS acknowledged in the report that ongoing budget constraints contributed to a 5% decline in audits between FY 2013 and 2012. Approximately 1.4 million individuals were audited, the lowest number since FY 2008. That’s good news for filers, right? Not necessarily. Here are three trends we’re seeing based on our experience representing hundreds of taxpayers and businesses:
Auditors’ Ability to Understand Complicated Tax Issues is Compromised –   Taxpayers aren’t the only ones challenged with navigating the 4,838 changes in tax code since 2001; its enforcers are, too. Do more with less, a mantra entrepreneurs of growing companies understand well, is one IRS auditors are also coming to terms with as a result of budget constraints.
Quality of Documentation Matters More Than Ever – Whether this is the IRS’ attempt to improve audit efficiency or reduce errors, we can’t know for sure. But the impression we’re getting is that auditors are adhering closely to a checklist of requirements, whether that list includes items actually required by regulations or not.
Auditors Don’t Always Understand How a Business Operates – We’ve seen auditors object to businesses with more than one landline and even deny deductions for businesses that reimburse salespeople for taking clients to lunch. What seems universal to us still needs to be defended to the IRS.
If you do get a notice of an examination, you don’t have to go it alone. Talley and Company’s tax and legal professionals can guide you through the process. We can submit requested documentation per an auditor’s preferred format, advocate for legitimate deductions taken by businesses in your specific industry, and go toe to toe with auditors through every inch of the tax code. Just remember that if the IRS comes calling you, you can call us.