IRS audits and how Low-Income Taxpayer Clinic (LITC), Indiana Legal Services, Inc. can help you.
IRS audits are done to enforce the tax law, and the objective of an examination is to determine if income, expenses, and credits are being reported accurately. There are two kinds of IRS audits, one being correspondence audits and the other being face-to-face examinations. There are also three kinds of employees who conduct these audits, which are tax examiners, Tax Compliance Officers (TCOs), and Revenue Agents (RA). Tax examiners conduct the correspondence audits which are conducted by the taxpayer mailing in their documentation. Issues at hand are EITC, additional child tax credit, American opportunity tax credit, medical expenses, contributions, taxes, or employee business expenses. Tax examiners are trained but not required to have accounting skills. These comprise of around 75% of all examinations.
The generally more higher ranking TCOs conduct face-to-face examinations and have some accounting training. They do not require an on-site inspection of the taxpayer’s books, records, or assets. The issues are income from tips, pensions, annuities, rents, fellowships, scholarships, royalties, and income not subject to withholding; deductions for business related expenses; deductions for bad debts; determination of basis of property; capital gain versus ordinary income determinations; and complex miscellaneous itemized deductions such as casualty and theft losses.
The generally highest-ranking RAs also conduct face-to-face examinations of the most complex returns (certain individual, corporate, and partnership returns) at the taxpayer’s place of business. RAs are highly trained and are experienced with substantial accounting skills. This is necessary because of the complexity of business transactions, voluminous records, and extensive time required to complete the audit. Issues include high income, high wealth taxpayers, cash intensive businesses, transfer pricing, executive compensation, research and development credits, crypto currencies, partnerships and flow through entities, micro captives, offshore transactions, and syndicated conservation easements.
IRS has lost 28% of personnel across its tax examiner, TCO, and RA population resulting in a decline in audits across all income levels. As of April of 2019, there were 969 tax examiners, 572 TCOs, and 6463 RAs. The National Research Program (NRP) estimates that half of EITC claims have errors and the $18.1 billion improper payments account for almost half of the $40 billion portion of tax gap attributable to credits. Audit coverage is around 1.2% for EITC claims. Taxpayers with over $10 million in total positive income (TPI) are categorized as higher income taxpayers, and audit coverage for these taxpayers were 8.1% in 2018 and 15.6% in 2017. There is a need for Congress to fund and the IRS to hire and train more personnel to have a balanced coverage across all income levels, to maintain voluntary compliance levels.
If you are subject to a tax audit as a low-income taxpayer living in the State of Indiana, including EITC, the Low-Income Taxpayer Clinic, Indiana Legal Services, Inc. is a great resource to reach out to. We help low-income taxpayers by identifying tax issues, filing or amending tax returns for nonreported or erroneous years, negotiating payment plans, lowering tax debt, etc.
Here is how to contact Low-Income Taxpayer Clinic, Indiana Legal Services, Inc. if you need help.
Indiana Legal Services, Inc.
College Square, 2 nd Floor
214 South College Avenue
Bloomington, IN 47404
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