Something revolutionary is taking place within the IRS. What was once considered to be an out-of-date, inefficient and bureaucratic organization is starting to modernize. While it still has a long way to go to match the efficiency of the private sector, the IRS is in fact starting to operate more like a for-profit company instead of a government agency. Concepts such as return on investment, innovation and “intrapreneurship” are slowly finding themselves on the agenda. From a business owner perspective, having a well-functioning IRS may not cause hearts to be filled with joy, but it’s a new reality that is here and the impact is already being felt across the country.
Check your mailbox for an IRS notice
The first palpable change is the dramatic increase in correspondence between the IRS and taxpayers. The IRS now sends out over 200 million notices annually, representing a nearly seven-fold increase when compared to the start of the decade. These additional notices allow the IRS to obtain missing or additional information from tax payers and also sends the message that they are on top of your tax situation.
Approximately 4 million of these notices are “information matching discrepancy notices” which means something is wrong and needs to be fixed. On average the IRS collected $1,670 in additional taxes from the recipients of these notices—not a bad return on investment for the cost of an envelope and a stamp. Previously the IRS would have used agents and audits to address these issues resulting in far higher costs per dollar in tax revenue recouped.
The IRS has also implemented mail-based audits. This mail audit program accounts for nearly 80 percent of all audits and generated well over $6,000 on average per audited return. Yes it does seem a bit perverse to consider these “returns on investment” as a tax payer, but it’s important to understand how they think so we can be prepared.
The IRS is working their network
Additionally, the IRS has also started taking active steps to manage its “distribution channels," especially tax preparers. In January of 2010, the IRS proposed new registration, testing and continuing education programs for tax preparers. These changes are being implemented and the effects are stunning. Before the new requirements were enacted there were an estimated 1.2 million preparers in the country. Yet there are currently only around 700,000 that have been registered, a reduction of 500,000.
These changes are meant to reign in “distributors” that were not serving the interests of the IRS. Many were under qualified, providing incorrect tax advice. Others were committing outright tax fraud on behalf of their clients. By making it more difficult to be a tax preparer, the IRS is eliminating the bottom feeders.
I’ve written before about new technology and other enhancements taking place at the IRS. As a business owner it is more important than ever to maintain excellent tax records and to seek out professional, seasoned tax advice to avoid being flagged for an audit. The mail-based audits may be cost-effective for the IRS, but they can be a draining, painful, drawn-out experience for the target of the audit.