IRS Overlooks Fraud Indicators

[kcjenkins]

http://www.accountingtoday.com/news/IRS-Overlooks-Fraud-Indicators-66386-1.html?ET=webcpa:e6970:61496a:&st=email

[jainen]

The study looked at 100 Schedule C's that were assessed at least $10,000 more, and found that 26 had fraud indicators. I believe it, but I'm not sure it's bad. I think the IRS prefers an early win about numbers rather than a long fight about intent. Taxpayers, on the other hand, might accept a higher settlement instead of more legal costs.

[kcjenkins]

I agree. I know clients will often accept a bill for something they really don't owe, if the amount is for less than the cost of fighting it would be.

[Cathy]

I agree. I know clients will often accept a bill for something they really don't owe, if the amount is for less than the cost of fighting it would be.

How true, KC! I recently had a correspondence audit where the taxpayers were told to prove expenditures reported on Sch A for employee business expenses from Form 2106.

During the height of tax season, I pains takingly sent back meticulous records whereas every single expense was documented completely. The taxpayers received a response stating that none of the documents sent in my reply changed the initial amount IRS calculated as them oweing if the expenses were denied.

After getting POA's signed and faxed back followed by at least 4 calls initiated by me, I finally got the long awaited call from the actual auditer who sent the original correspondence to review with her the proof of the expenses claimed on the tax return.

I would speculate that the biggest issue of an audit of Sch A concerns the employee business expenses from Form 2106. If it isn't the biggest issue, I'm sure it ranks in the top 3 issues at least. In my talking with the auditor, It dawned on me that she did not know the difference between an "Accountable" and "Non-Accountable" plan dealing with payments certain employers make to their employees for certain employee business expenses.

As you know, when an employee documents with receipts amounts employers have provided for travel and other business expenses and the employees return the excess, if any, of the advance the employer has made, then that employer is said to have an "Accountable Plan", thus those expenses ARE NOT included in Box1 of a W-2 as taxable earnings.

"Non-Accountable Plans" are just the opposite of "Accountable Plans". Under a Non Accountable Plan, the employee is advanced an allowance for their miscellaneous travel and other employee business expenses, however, as the employee does not have to account to the employer with receipts and the employee is entittled to keep the excess, if any, those funds advanced to the employee are TAXABLE and included on Box-1 of the W-2 as taxable earnings.

KC, I'm certain you know the difference between the two plans...the above is strictly for those who might read my post and not know the difference. I'm sure most of us on this forum do know the difference so just consider the above is for a newbie who stumbles on to this thread.

Back to my point.....(the conversation with the auditor when I realized she had no clue) she told me that since the employee was paid for those business expenses, she was not allowed to deduct them on her tax return....period. She remarked that she has proof from the taxpayer's paystubs that she was indeed paid for those expenses. She was positively correct! However, on those same paystubs, it was very evident that those expenses were added to the taxpayer's "base salary" and were included in Box 1 of her W-2 as taxable earnings. I then told her to look at the "base salary" plus the "travel allowance", minus out the cafeteria items and the result would be the taxable earnings as the checkstub indicated. She still said that the reason why the taxpayer could not use those expenses on Form 2106 and Sch A is because she was paid by her employer already for them, thus disallowing them as deductions to her income.

At that point, I realized she didn't know about the difference in Accountable and Non-Accountable Plans, neither did she have a background strong enough to be auditing said returns. At all times, I must say the auditor was always very, very polite. She put me on hold so she could talk to her supervisor and even wrote down "Accountable and Non-Accountable Plans. She came back a couple of minutes later and relayed that her supervisor had the same opinion she had. Thank goodness, I am now over 60 and have mellowed out over the years. Had I been younger, I'm sure my reply probably wouldn't have been as carefully stated. I then reiterated the difference in the two plans and told her to take her time if she needed to research some more, as I have known about these type plans for many years and I'm sure it was just that she (and her supervisor) had never been exposed to them before. She continued to research, checking back with me every 2 to 3 minutes to ask me if I was o'kay with continuing to hold. I reassured her each time to take all the time she needed.

Finally, her last time to speak with me was to tell me she was closing the audit as a "No Change Audit" as she had found that I had prepared the return correctly. Again, she was one of the nicest agents I have ever spoken to. What concerns me though is as you stated, people will pay a "bill" if the amount of fighting is for less than the bill itself. To add to your statement, many clients (especially elderly ones) will pay any bill they receive from IRS even if it is their last penny as many are scared (terrified) of IRS.

My intention of this post is also to let everyone know that evidently undereducated IRS employees are being hired in the auditing section. As a tax professor at LSU once told me, NEVER, NEVER give up on your theory unless someone can prove you wrong. This was after I had disagreed with him on a matter regarding one of my clients. My client had given me the professor's name and phone number and asked me to call him and discuss a particular situation with him. To appease my client, I did make the call, however, never expecting the outcome I got. At first the professor told me I was wrong, however, after he researched the situation, he called me back to tell me my theory was correct. It was a very valuable lesson at a very young age. That professor's words have been the force that has motivated me over the years to never give up unless I was proven to be wrong.

Since that recent correspondence audit, I now believe competency testing is a must, however, I now also feel IRS employees (especially auditors and their supervisors) should also have to be tested and have the proper continuing education as well.

[kcjenkins]

Good for you for not giving up, and especially for resisting the urge to scream at the auditor for her ignorance. That is sometimes the hardest thing. It is also frustrating to know that your client is still being cheated, because they have to pay you for the time you spend on educating someone who should not have that job until they have been educated!

[jainen]

>>I now also feel IRS employees (especially auditors and their supervisors) should also have to be tested and have the proper continuing education as well.<<

Not me! I love an audit that gets stuck on the stupid stuff. You fuss a bit, and the supervisor supports the examiner, and then you say, "Let's just read down Form 2106 itself line by line." When you get to Step 2 (Reimbursements) you point out the bold face in "not reported to you in box 1 of Form W-2." Meanwhile, you hope she is so embarassed she never gets back to the real question, actual receipts and log books.

[Cathy]

KC,

I think you just hit the nail on the head as to my aggravation! I don't charge my clients in those type situations. Now that I think about it, perhaps I need to change my policy...I'm sure I'll still be aggravated, but probably not as much. My clients ALWAYS ask me how much they owe me and whatever I would charge would be well worth it to them rather than paying IRS's bill.

And, as usual, THANKS!

Take Care,

Cathy

[Cathy]

Not me! I love an audit that gets stuck on the stupid stuff. You fuss a bit, and the supervisor supports the examiner, and then you say, "Let's just read down Form 2106 itself line by line." When you get to Step 2 (Reimbursements) you point out the bold face in "not reported to you in box 1 of Form W-2." Meanwhile, you hope she is so embarassed she never gets back to the real question, actual receipts and log books.

Again, a different view of a situation that had I not sent in all the actual receipts, log books, etc.. with double tapes to prove each expense listed on the 2106 originally, your view, jainen, definitely is worth remembering. Then again, as NONE of the expenses were deductible per the IRS agent, I wonder if she even looked over the various receipts, log books, etc....probably not, but as you suggested, she might have been so embarassed that she didn't see the forest from the trees.