IRS audit initiatives.

• Author: Lerman, Jerry L.

In 2000, the IRS projected that abusive tax shelters accounted for about $5 billion in lost revenue, and began to suspect that this was just the tip of the iceberg of schemes to defraud the government of tax. To combat abuse, the IRS is using its newly realigned audit resources to focus on key areas of noncompliance (FS 2202-12, 9/16/2002). Under this strategy, it is concentrating first on promoters of various abusive schemes, shelters and trusts, then on participants in such arrangements.

The Service's revamped compliance program is using a full scope of tools and techniques, ranging from summons enforcement, injunctions and criminal investigation of abusive-scheme promoters, to civil audits of participants.

Even with its concentration in several problem areas, the IRS will keep a presence in other audit areas to maintain its core tax administration responsibilities. Additional examination resources will help it to meet this requirement.

Key Problem Areas

The Service is directing more resources to six priority areas; 2003 is a transition and training year, as new audit cases move into the IRS system. These areas include:

* Offshore credit card users;

* High-risk, high-income taxpayers;

* Abusive schemes and promoter investigations;

* High-income nonfilers;

* Unreported income; and

* The National Research Program (NRP).

Offshore Credit Card Project. Although having an offshore credit card is not illegal, some people are using credit cards to evade U.S. taxes. The cards give taxpayers easy access to offshore funds and accounts in tax-haven countries,allowing them to hide income.

According to the IRS, there could be as many as two million U.S. citizens with debit/credit cards issued by offshore banks, compared with only 170,000 Reports of Foreign Bank and Financial Accounts filed in 2000. The IRS uses an extensive process to identify the taxpayer associated with the card, including an analysis of spending patterns, unusual expenses and various other factors.

From this information, it has already developed hundreds of cases for civil audits or potential criminal investigations and is increasing resources in 2003-2004 to devote to working these cases. (For further information on IRS efforts to curtail offshore credit card abuses, see Rosenberg, Tax Practice & Procedures "Amnesty for Offshore Tax Evaders," p. 226, this issue, and Godfrey, "Amnesty Participation Requirements," p. 228, this issue.)

High-risk, high-income taxpayers. High-income...