United States law requires that US persons pay income tax. But that doesn’t necessarily mean that everyone does. In fact, there are quite a few Americans that don’t pay tax at all and an even larger share that do not report all of their income come tax time. The current political climate and newly enacted tax reform may actually aid tax cheating. But tax cheats shouldn’t get too excited, the IRS is using technology and other resources to make up for lost tax revenue where they can.
Political Issues Surrounding The IRS
No matter the party of the President that is in office or who controls the House of Representatives or the Senate, the Internal Revenue Service typically serves that the proverbial punching bag of Washington. Whether members of Congress rally to cut IRS funding due to alleged targeting of certain conservative non-profits or the public demanding that President Trump’s tax returns be released and blaming the IRS when they weren’t, cutting funding seems to be the country’s best solution to its gripes with the Tax Man.
But what Americans (and potentially some of those in Washington) fail to realize is that the when the IRS has their budget cut, tax revenue goes down. According to a statement by former IRS chief John Koskinen, every dollar that is added to the IRS budget results in several dollars added to the amount of tax revenue collected. When you think about it, his assertion makes sense. When the IRS can hire more auditors, they perform more examinations, which result in more adjustments, which result in additional tax revenue.
Investors in the private sector likely wouldn’t pass up an opportunity to invest in a company and be guaranteed a three-to-four times return. But the politics of revenue collection and the debt position of the United States have resulted in easy targets, such as the IRS, having their budgets cut significantly. Between years 2012 and 2016, the IRS lost nearly $2 billion in funding. Unsurprisingly, the cut resulted in a reduction of income tax collected.
But taxpayers shouldn’t rely on the fact that the IRS is understaffed to intentionally cheat on their taxes or not tax a tax audit seriously. The IRS has recently launched initiatives that leverage technology to catch those who try to omit income, overstate deductions, or simply fail to pay. Like the private tech sector, the U.S. government is using big data to increase efficiencies, including catching those who are less than honest on their taxes.
Tax Reform and Its Impact On Small Business Owners Already Cheating
U.S. tax reform, passed and signed into law at the tail end of 2017 provides small business owners (like sole-proprietors, partnerships, etc.) a deduction for Qualified Business Income. This is great news for those who own their own business as the deduction provides relief to those not benefited by the corporate tax rate reduction. This is even better news for those who are already underreporting their income.
Those who earn a W-2 are less likely to cheat on their taxes because the government receives copies of the same tax forms that employees receive in January of each year. It is extremely easy for IRS computer systems to check to see if a taxpayer has not reported his or her W2 and 1099 income. But business owners and independent contractors have less earning transparency with the government, which leads to frequent understatements of earnings and overstatements of deductions. Although computer software will likely be deployed to combat abuses of sole-proprietor self-reporting in the future, the reduction in IRS funding allows the Service to perform fewer examinations and recover less tax revenue from small businesses.
But small business owners and sole-proprietors beware: when the IRS does examine a taxpayer, they will likely attempt to recover as much tax revenue as possible. This means less leniency and more hard-lined approaches to adjustments on audits. This reality evidences the need to involve an experienced tax defense attorney at the first sign of an examination.
The Benefits of hiring a Dually Qualified Tax Attorney & CPA
A dually qualified Tax Audit Defense Attorney & CPA will provide guidance at each critical step of your interactions with the IRS to ensure that you do not provide information or documents that can be used against you at a later time or make incriminating statements. Furthermore, a tax defense attorney can ensure that your rights under the Constitution are upheld. Unlike other tax professionals, tax attorneys have extensive legal training in constitutional law, criminal tax law, criminal procedure, and evidence. Combine this training with over 20 years of experience as a CPA with a Master’s in Taxation and you have an incredibly powerful advocate in your corner.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience representing taxpayers from all walks of life. Whether you are a small business owner, sole proprietor, or W-2 wage earner, our zealous advocates are ready to develop a strategy to limit the potential negative impacts of a tax examination. Don’t let the threat of an IRS audit keep you up at night. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
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