Fort Worth Tax Law Blog

The IRS does not operate in a vacuum. The agency is affected by political pressure to cut the federal budget, and for the second straight year has less money to do its work.

IRS audits may be affected by the reduction in the agency's budget of about 2 percent compared to last year. Partly as a result of this, the overall audit rate for individuals may drop below one percent for the first time in six years.

Of course, the IRS has ways to try to make do with fewer resources. For one thing, it tends to target higher income taxpayers for audits at a higher rate than those with lower income.

And then there is the use of technology. According to IRS Deputy Commissioner Steven Miller, the agency puts tax returns through a computer program in an attempt to spot returns that raise potential issues.

One aspect of this electronic screening involves assigning returns to "tolerance levels." These levels are based on dollar values or other measurements that the IRS programs into its computers to trigger potential audits.

In practice, what this means is that if a given tax return's financial reporting falls within the tolerance level, a manual review of the return is less likely.

Can the government restrict your right to travel out of country, just because you have a dispute with the IRS about tax collection?

IRS collection tactics are often aggressive. But a proposed bill in Congress would expand the agency's authority even further. If the bill is passed and signed by the president, it would enable the federal government to pull passports from people who have unpaid taxes.

As currently written, the proposed bill would do allow this even if someone with unpaid taxes has not been charged with tax evasion - or any other crime.

The bill in question is actually part of a much larger body of legislation regarding the authorization of federal funds for highway projects and transportation programs. The larger legislation is called the Moving Ahead for Progress in the 21^st Century Act, or MAP-21 for short.

One provision of the MAP-21 proposal would grant the State Department the power to "deny, revoke or limit" passports rights for certain taxpayers. Under the proposal, those rights could be limited for taxpayers with "serious delinquencies."

The IRS is supposed to be accessible to taxpayers. That is why the agency's Taxpayer Advocate service is starting to conduct a pilot project on the use of teleconferences between case workers and taxpayers who have questions.

IRS audits are another possible forum for videoconferences. Nina Olson, the National Taxpayer Advocate, has recommended that the agency develop the technological capacity to offer "virtual face-to-face audits" in the near future.

The need for such a service is made more compelling by ongoing problems with the process for correspondence-based exams. The IRS has been increasingly using the corr-exam procedure, despite the fact that taxpayers are much less likely to respond to it than to an audit notice.

The lack of response to corr exam notices is often due to the confusing nature of the notice - not to taxpayer indifference about the outcome.

The Taxpayer Advocate is firmly opposed to wide usage of corr exams. She argues that too often they can become an "unnavigable labyrinth" for taxpayers.

A basic principle of the tax collection system should be fairness. For the system to work, people of all income levels -rich, poor and middle class alike - should get equal treatment from the IRS.

And yet IRS audits are very much skewed toward higher income taxpayers.

That is what the evidence shows. Overall, 1.1 percent of taxpayers were audited in 2011. But the rate of audits varied widely by income level. To be more precise, the rate gets higher for each level of income over $100,000.

For taxpayers with adjusted gross income between $100,000 and $200,000, the IRS audited 1.0 percent of returns last year. The audit rate for incomes between $200,000 and $500,000 was 2.7 percent and between $500,000 and $1 million it was 5.3 percent.

For those with incomes over $1 million, it was even higher. For taxpayers with incomes from $1 million to $5 million, the audit rate was 11.8 percent. This was a very substantial increase from 2010, when the rate for taxpayers in that income category was approximately 7 percent.