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California taxpayers should know about tax fraud monitoring

The Internal Revenue Service is constantly trying to detect tax fraud and ensure compliance with the nation's tax laws. But according to one government agency, it is not doing a good enough job. In a report released last month by the Treasury Inspector General for Tax Administration, that agency recommended that the IRS take additional steps to detect tax fraud during field audits and thereby capture additional tax revenue.

When conducting a tax fraud audit, IRS agents and examiners are trained to spot certain hallmarks of fraud as listed in the Internal Revenue Manual. An IRS examiner who believes that a taxpayer has committed fraud may bring that person to the attention of higher-level officials, such as a first-line manager and a Fraud Technical Advisor. These officials determine if the taxpayer's return meets the criteria for civil or criminal penalties, which can include time in jail.

But when TIGTA checked a sample of 116 field audits, it found that in one out of five audits, examiners either overlooked potential fraud or failed to address fraudulent activity. TIGTA then extrapolated this 20 percent rate over the total number of field audits conducted and estimated that the IRS missed collecting approximately $20 million per year from taxpayers in penalties alone.

TIGTA recommended two changes to current IRS policies to better detect tax fraud. First, it stated that examiners should have a more detailed and thorough Fraud Development Lead Sheet, one of the important documents an examiner uses during a field audit. Second, TIGTA argued that Fraud Technical Advisors--more senior and experienced IRS officials--should bring their increased expertise to bear by playing a greater role in tax audits.

The IRS declined to adopt the first recommendation, stating that it had already revised the lead sheet to its satisfaction. It did adopt something similar to the second recommendation, however, pledging to inform examiners that Fraud Technical Advisors can be helpful in audits.

TIGTA has urged that the IRS become more thorough during audits. Therefore, taxpayers who become the subject of an audit should know what rights they have and what penalties they could potentially face.

Source: Treasury Inspector General for Tax Administration, "Actions Can Be Taken to Reinforce the Importance of Recognizing and Investigating Fraud Indicators During Field Audits," Reference Number: 2012-30-030, March 29, 2012.

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