TIGTA: IRS Can Take Action to Recognize/Investigate Fraud Indicators

 
By AccountingWEB Staff
 
By better ensuring that fraud indicators are recognized and properly investigated during field audits of individual tax returns, the IRS could increase revenue by an estimated $20 million a year, according to a report publicly released by the Treasury Inspector General for Tax Administration (TIGTA).
 
TIGTA's audit was initiated to determine whether fraud is recognized and pursued in accordance with IRS procedures and guidelines during field audits of individual tax returns. They found that:
 
  • Of the 116 field audits closed between July 2009 and June 2010, twenty-six audits with fraud indicators were not recognized and investigated.
  • Each of the field audits involved unreported income and/or overstated expenses that resulted in the taxpayers agreeing they owed additional taxes of at least $10,000.
"Our review found that a combination of factors caused indicators of fraud to not always be recognized and properly investigated," said Treasury Inspector General for Tax Administration J. Russell George. "Because of this, the IRS may be missing opportunities to further promote voluntary compliance and enhance revenue for the Department of the Treasury," he added.
 
In its report, TIGA recommended that in order to assist examiners, the IRS should list in the Internal Revenue Manual (IRM) the following six categories of fraud indicators:  
  1. Income
  2. Expenses or deductions
  3. Books and records 
  4. Conduct of taxpayer
  5. Methods of concealment
  6. Income allocation
Each category, in turn, would contain specific examples of supporting behavior that range from:
  1. Omitting income 
  2. Overstating expenses that are substantial
  3. Failing to keep adequate records in an attempt to hinder the audit
  4. Making false statements
  5. Failing to disclose relevant facts to an accountant
TIGTA recommended that the Director, Exam Policy, Small Business/Self-Employed Division: 
  1. Enhance the job aid examiners are required to maintain in audit files related to documenting and investigating fraud indicators.
  2. Provide specific examples in the IRM for examiners and first-line managers to use when considering whether to consult IRS technical advisors when field audits of returns suggest possible fraud.
IRS officials did not agree with the first recommendation. They indicated that the job aid (Fraud Development Lead Sheet) was significantly enhanced in March 2011. In addition, IRS officials did not agree with the second recommendation, but stated that they do plan to take alternative corrective action. IRS officials will issue a memorandum to all examination employees emphasizing the importance of involving the technical advisors in audits.
 
As part of the review, TIGTA evaluated the enhanced Fraud Development Lead Sheet and continues to believe further enhancements to it would be beneficial.
 
TIGTA considered the alternative corrective action IRS officials plan to take and concluded that it is responsive to the recommendation. However, TIGTA encourages IRS officials to go beyond merely reiterating existing procedures in their memorandum by providing additional instructions and guidance to clarify when the assistance of a technical advisor should be sought.
 
IRS officials agreed that TIGTA's recommendations have the potential to increase revenue by some $19.7 million over a year ($98.5 million over five years) from approximately 1,872 field audits.
 
 
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Source: Treasury Inspector General for Tax Administration Press Release

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