New IRS compliance initiatives.

• Author: Dougherty, Jim

Sixty percent of Americans believe that people are willing to cheat on their taxes and gamble that they will not be audited. Seventeen percent think that it is acceptable to cheat on their taxes (Written Statement Of Commissioner Of Internal Revenue Mark W. Everson Before The Senate Committee On Appropriations Subcommittee On Transportation, Treasury And General Government Hearing On Internal Revenue FY 2005 Budget Request April 7, 2004). Obviously, the IRS is concerned about these statistics on America's view of tax compliance and enforcement and is introducing several new initiatives to encourage compliance and to improve audit coverage. Some of these initiatives will examine executive compensation, employment tax and excess-benefit transactions for exempt organizations.

Initiatives

Over the past eight years, audit coverage, which is the percentage of taxpayers that the IRS selects for audit out of filed returns, has declined (see Exhibit 1 on p. 445). To improve coverage, the IRS is expanding its scope of compliance initiatives by (1) introducing pilot programs, which will help it to learn more about compliance; and (2) standardizing audit procedures for the future. As part of this process, the Service is looking at certain taxpayers and issues that were not a major focus of recent audits.

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Executive compensation initiative:

Last year, the IRS began a compliance initiative for executive compensation. Under a pilot program, it selected 24 corporate returns from inventory already designated for examination by its Large and Mid-Size Business Division; for details, see Neuhauser, Tax Clinic, "Executive Compensation Compliance Initiative," TTA, May 2004, p. 265. These cases were selected because the IRS already had evidence on eight issues:

* Nonqualified deferred compensation;

* Stock-based compensation;

* The $1 million cap on deductible compensation under Sec. 162(m);

* Sec. 280G golden parachutes;

* Split-dollar life insurance;

* Transfers of compensatory options to family limited partnerships;

* Employee leasing asset protection plans; and

* Fringe benefits.

For each of the selected cases, the IRS is also examining Forms 1040, for executives, to determine whether that form is consistent with information reported on Form 1120.

Over the past five to 10 years, executive compensation has generally not been a part of corporate audits. However, lately, revenue agents (RAs) have been frequently requesting Forms 1040 as part...