Tax is something that pervades every area of business, and it is of great benefit for business owners to understand the types of things that IRS focuses on and goes after—as well as their emerging priorities and capabilities.
Historically, when you filed a tax return, you had a very low risk of random audit, coupled with the returns being evaluated by IRS software that looked at the size of various deductions and the ratio of deductions against gross income. Then an agent would review the ones that the computer chose, to select which ones looked promising to audit and which ones would not be audited.
Emerging technologies and trends have given IRS the opportunity to generate greater revenue, even as they struggle with budget issues—and they are aggressively pursuing these trends:
1. Artificial Intelligence, Data Mining and Social Media
The IRS has begun a massive project to mine data from tax returns, bank filings, property filings, social media and an extensive list of other records. The goal is to utilize machine learning, natural language processing and complex analytics to uncover tax evasion, money laundering, hidden assets, identity theft and other crimes. This allows IRS to analyze exponentially more data and uncover far more crimes than when it was relying solely on human agents to conduct tedious and time-consuming financial investigations. It also means that even the most honest taxpayers will want to be aware of their online footprint and what data the IRS is tracking that relates to them.
2. For those who owe IRS, much more aggressive "Alter Ego" and "Nominee" Enforcement.
Along with rising capability to track this data, for people who owe IRS, the agency has begun to prioritize discovering any commingling of accounts between that taxpayer that owes taxes and any business that they have an interest in. If a person pays their personal bills from their business or the business bills from their personal account, it will allow the IRS to levy funds from the business as being an "alter ego" of the person. Likewise, if records show that the taxpayer has transferred funds or property to another person to avoid IRS collection, in addition to the risk of it being deemed tax evasion, the IRS is more often filing a "nominee lien" against that property and third party.
3. Crypto-Currencies and Offshore accounts
The IRS knows that the number of crypto-currency owners who report their trades have been very low. Obtaining records from the exchanges and auditing those taxpayers who have failed to report the transactions is a top priority for IRS. Because of the IRS focus, it is a particularly important area to make sure that you are correctly reporting all transactions. Many U.S. crypto-currency exchanges such as Coinbase make it possible to import transactions onto tax software.
For overseas financial accounts over a certain size, failing to file annual reports is both a crime and subjects the taxpayer to severe penalties. It is critical to make sure any required reports are being filed—and that relief is sought for any past periods that were not filed, before IRS finds the accounts. Tackling the problem before IRS finds it will generally avoid the Draconian penalties that can be imposed for failing to report offshore accounts.
Cal Bomar is a former IRS Chief Counsel attorney in the Vinings area who represents clients in IRS and state tax audits, tax court disputes and tax relief.