IRS Tax Study Intended to Guide Future Audits Nears Completion

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March 25, 2016

The IRS expects to soon conclude its study of 6,000 audits that was aimed at identifying problem industries that show a history of noncompliance with certain tax and reporting rules, including worker classification, the accountable plan rules, and the fringe benefit rules. At an American Payroll Association conference on March 21, John Tuzynski, the IRS’s director of Technical Services in Exam, said that the results will likely be published in early 2017.

The results should help the IRS focus its increasingly limited resources on industries and issues that produce the most violations, as the IRS plans to use them to inform examination decisions. Currently, the IRS is relying on the results of a study conducted in the mid-1980s, so the new data provides a much-needed update and, depending on the results, could result in a significant shift in decision-making with respect to examinations and compliance programs. Although decisions are currently made based largely on anecdotal evidence, the IRS seeks to become more calculated going forward and target the industries proven to produce significant rates of noncompliance.

It is no secret that the IRS expends a disproportionate amount of its enforcement resources auditing the same large businesses year after year while largely ignoring small and mid-size businesses on the theory that audits of larger taxpayers result in larger assessments. The practical problem with this approach is the development of a lack of evenness with respect to compliance, which suggests unfairness in the enforcement process. Perhaps the research program undertaken by the Service with respect to these 6,000 audits, which began approximately seven years ago, will result in a more even distribution of enforcement resources and a more broad-based focus on compliance from all taxpayers rather than pursuing past practices in a wooden fashion.