The IRS sends more notices annually than the total number of taxpayers. That’s a lot of notices. The U.S. has a large and complex economy to support, and the combined cost of noncompliance from under-reporting, non-filing, and nonpayment is projected to be $450 billion annually. The IRS has been going into overdrive to enforce compliance to collect some of that $450 billion, so that Congress doesn’t have to increase tax rates or cut more programs than needed.
The IRS’s latest study shows that the projected federal tax gap has three causes. 84% is related to under-reporting of taxable income and taxes on returns. 10% is related to underpayment of taxes reported by taxpayers or assessed by the IRS. 6% is related to non-filing of tax returns.

According to Jim Buttonow of Beyond415, who presented at the AICPA Practitioners Symposium in June, here are a few things that the IRS will be focusing on in the near future:

  1. Doing more with less. The IRS has experienced budget cuts during the economic downturn, but they’ll be making up for it by using technology.  
  2. Increasing compliance rates to 90% by 2017. If the IRS is able to reach its goal, the current $450 billion tax gap would be reduced by about 40% to $266 billion. Every 1% increase in compliance would generate at least $27 billion.
  3. Focusing on high-yield assessments. The IRS has kept stats on areas that continually see significant underreporting noncompliance and has committed to focus on these areas:
    • High-income individuals.
    • Worker classification: W-2 vs. independent contractor.
    • S corp. losses claimed in excess of basis.
    • Rental property losses: passive vs. active, as well as basis issues.
    • General small business underreporting of taxable income.
    • Form 1099 filing compliance.
    • Review of international taxpayers/FBAR, etc.
  4. Increasing tax document matching. Computer matching technology is currently in place for many tax forms, including Forms 1099 and W-2, which results in a 99% compliance rate in reporting those amounts. However, computer matching technology is not in place for others, and the compliance rate is only 44% in these cases. The IRS is going to focus on technology as a solution to effectively and efficiently increasing compliance.
  5. Regulating and deputizing tax professionals. The IRS focusing on requiring tax preparers to meet certain requirements and register to be part of a database to help ensure that preparers are qualified and (hopefully) honest.  

  1. Mandating disclosures. The IRS has gradually increased the level of detail that must be included in returns. If preparers fail to make these disclosures, it can result in civil penalties and sometimes even criminal penalties.

Although receiving notices from the IRS can be stressful, be aware that it’s just a part of what the IRS is doing to help close the gap resulting from under-reporting. If the IRS is successful, it could greatly reduce the federal deficit and prevent increased taxes to those who are reporting honestly and correctly.