The Internal Revenue Service needs to take additional steps in order to expand its audits to include returns from prior or subsequent years when taxpayers being audited may owe substantial taxes.

A new report from the Treasury Inspector General for Tax Administration, which reviewed the work of compliance officers at the IRS' Small Business/Self- Employed (SB/SE) Division Examination to determine whether they were conducting required filing checks, found that tax compliance officers working on such cases seldom expand an audit to a taxpayer’s prior year return  because the IRS strives to keep its audit inventories free of old tax year returns.

According to TIGTA’s study, an estimated 1,124 to 1,691 taxpayers may have avoided between $9.3 million and $17.7 million in additional tax, interest, and penalty assessments as a result.

“The Internal Revenue Service’s own estimates show that more than half of the Tax Gap is caused by individuals underreporting their income tax liabilities,” said J. Russell George, Treasury Inspector General for Tax Administration. “The IRS should take all possible measures to help close that Gap,” he added.

TIGTA recommended that IRS officials provide: detailed examples to tax compliance officers on when it would be appropriate to expand audits to prior or subsequent year returns; information to tax compliance officers that focuses on using IRS systems to enhance the quality of required filing checks; and additional guidance to first-line managers to improve the feedback provided to tax compliance officers on the quality of required filing checks.

TIGTA reviewed the work of tax compliance officers at the function. IRS examiners complete certain filing checks to determine that a taxpayer under audit is complying with all Federal tax return filing requirements and evaluate the returns for potential areas of noncompliance.

Also, it was unclear whether tax compliance officers were taking advantage of the IRS’s internal sources of information when conducting required filing checks.

IRS officials agreed with TIGTA’s recommendations, but did not agree with the potential monetary benefits associated with the recommendations.


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