Tax Attic

One of the largest businesses in the world recently issued its 2012 financial data. It was an outstanding report but the stock market barely noticed. In its fiscal year beginning October 1, 2011 and ending September 30, 2012, it had revenues collected of just under 2.5 trillion dollars based on servicing 237 million clients. It spent forty-eight cents to collect $100 of revenue. Forty-eight cents! That’s a profitable operation. Of course, the business in question only has one share-holder so it’s easy to see why the stock market didn’t shoot up when the data was released. The business in question is the Internal Revenue Service.

I would imagine when the IRS issued its 2012 fiscal year report called the “2012 Data Book”, the most interested parties were those people who deal with the IRS on a professional basis such as Certified Public Accountants, Enrolled Agents, Attorneys, Registered Tax Return Preparers, and other tax professionals. In reality, however, the report contains details of interest to all taxpayers. In addition to all of the financial data they report, the IRS also reports how many returns were filed by category; how may returns were audited by category; how many people were assisted by the IRS; how many penalties were assessed by category; and how many criminal investigations were initiated and the final result of those investigations. For example, as stated above, the IRS processed 237 million total business and individual tax returns. 145 million were filed electronically. 146 million individual tax returns were processed, an increase of 1.8%, with 120 million receiving refunds. Of particular interest to all interested parties, the IRS audited approximately 1% of the individual tax returns filed. About 25% of those audited returns were completed in person. The other 75% were correspondence audits in which the taxpayer gets a letter to provide proof of a deduction via the mail. The IRS projects that the correspondence audit percentage will grow in the future because of the demonstrated cost savings. It’s cheaper to audit a taxpayer by mail than to pay a revenue agent, revenue officer, or tax examiner to meet with the taxpayer in person. By category, 32.9% or 487,408 of the returns audited contained the Earned Income Tax Credit. That should also be instructive to all parties.

Studies have proven there is a fair amount of fraud in the EITC credit area and this shows the IRS is serious when it comes to enforcing the rules. The Due Diligence that is required for returns with EITC requires tax professionals to ask questions and verify answers before calculating the EITC. The IRS is doing their job to make sure the EITC rules are being followed. The next highest category of those audited is individual taxpayers that have positive income of $1 million or more with 12.1% being audited. The highest category of business taxpayers audited was businesses with $10 million or more with assets getting audited at the rate of 17.8%. It appears like the quickest way to get audited is to have either the EITC on your return; have income of at least $1,000,000; or have at least $10,000,000 in assets on your business return. On a lighter note, the report tells us why it’s difficult to get through to the IRS via one of their toll-free numbers and easy to be put on hold for what seems like an eternity. About 97 million taxpayers attempted to contact the IRS via the phone or at one of their walk-in locations. In addition, there were 372 million web-site contacts through-out the year. No wonder the telephone line was busy and the web-site operated slowly once in a while. As far as penalties assessed, the IRS assessed almost 29 million civil penalties against individual taxpayers. Broken down by percentage, 60.2% of those penalties were for failing to timely pay the tax on a return; 24.8% were for the underpayment of estimated tax; and 11.5% were for the delinquent filing of a tax return. On the business side of things, they assessed approximately 1 million penalties. 51.4% of those penalties were for the delinquent filing of returns; 25.8% for failing to timely pay a tax; and 20% for the underpayment of estimated tax.

It’s very important to note that the IRS does have what I call is a “first time offender” program. If the taxpayer’s penalty is due to a first time offense of a particular provision, asking for an abatement of the penalty will usually result in the IRS waiving the penalty. The taxpayer does have to ask and it only works once but it usually does work that first time. To finish up this report on the IRS’ report, the IRS had 5,125 criminal investigations in 2012. There were 2,634 convictions and over 80% of those convictions resulted in some type of incarceration. From a tax professional’s point-of-view, the report was informative reading. I would not recommend reading it past midnight even if a Red Wings play-off game is on television but it is important information. This is Jerry Coon signing off.

 

Jerry Coon is an Enrolled Agent and

a Registered Tax Return Preparer.

He owns Action Tax Service on

Northland Dr. in Rockford.

Contact Jerry through his website:

www.actiontaxservice.com

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