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Sequester budget cuts could affect IRS tax audits

Six weeks ago, it was the fiscal cliff that posed broad implications for tax law. Now, there's another Washington term that is having a similar effect: sequester.

Use of the term for automatic cuts in federal spending comes from the resolution in 2011 of a crisis over raising the nation's debt ceiling. Right now, it refers to the across-the-board spending cuts that will go into effect on March 1 unless Congress takes action to avert them.

Across-the-board, in this case, really would be across-the-board. Both military and domestic spending would be cut by percentages that have already been designated. Such cuts would affect all federal agencies, including the IRS.

The Obama administration is seeking to stop the sequester cuts from happening by warning of the consequences. Understandably, the administration is calling attention to the potential negative impact on the economy as a whole.

One of specific cuts the administration is warning against, however, is one that many Americans would perhaps have mixed feelings about: cuts to IRS staffing levels. Such cuts would affect the agency's ability to provide customer service to taxpayers. For example, taxpayers calling the IRS seeking information would be likely put on hold much longer than they are now. That, of course, would an inconvenience.

But many taxpayers might welcome the news that the IRS would not be able to perform its usual role in enforcing tax compliance. With big cuts to its budget, the IRS would not be able to conduct as many tax audits or move as aggressively to investigate possible tax fraud.

Not surprisingly, then, the Obama administration is making the preservation of resources for the IRS a priority as it negotiates with Congress about resolving the sequester. Invoking the IRS, however, is probably not the most popular argument the administration can make for that resolution.

Source: "White House sounds alarm on non-defense sequester cuts," Politico, Donovan Slack, 2-8-13

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our page on tax audits.

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