High income taxpayers and sole proprietors are getting away with tax fraud and related penalties, according to a report released today by the Treasury Inspector General For Tax Administration, calling for stronger enforcement. It’s a call to action for the IRS and a warning to taxpayers who are underreporting income and overstating deductions.
TIGTA reviewed 100 office audits between 2009 and 2010 where high income and sole proprietor taxpayers agreed they owed additional taxes of at least $10,000 and found that in more than a quarter (26) of the cases, the IRS failed to identify fraud indicators that should have merited further investigation. These taxpayers may have avoided additional assessments of $5.8 million in civil fraud penalties.
In 14 of the cases there was no evidence that the taxpayers were questioned about overstated deductions which ranged from $35,000 to $288,000 and resulted in additional tax assessment of $10,000 to $70,000 per audit. In cases where taxpayers blamed their tax preparers there was no evidence that the examiners contacted the preparers. And in 4 cases the audits were not expanded to include subsequent year returns despite the fact that similar tax issues existed on those returns, and a multi-year pattern of noncompliance is a strong indicator of fraud.
TIGTA’s conclusion: Additional steps are needed to ensure that potential fraud is adequately considered and investigated during office audits. “Civil fraud penalties should be considered when appropriate because they discourage taxpayers from willfully underreporting substantial tax liabilities,” said J. Russell George, Treasury Inspector General for Tax Administration in a statement accompanying the report released today: “Actions Can Be Taken to Reinforce the Importance of Recognizing and Investigating Fraud Indicators During Office Audits.”