How Competent the IRS Is in Countering Tax Fraud

Tax fraud by the self-employed is more common than by W2 employees because with estimated taxes. they withhold their taxes themselves. Schemes, such as underreporting income or overstating deductions, are used to decrease the tax liability. The Treasury Inspector General for Tax Administration (TIGTA), in its recent report, found that high-income taxpayers and sole proprietors are escaping punishment for tax fraud because of the incompetence of the IRS in dealing with tax fraud.

The TIGTA states that because "indicators of fraud are not always recognized and properly investigated, the IRS may be missing opportunities to further promote voluntary compliance and enhance revenue for the Department of the Treasury."

After this damaging March report, the IRS will need to strategize about how it can stop the numerous fraudulent tax returns from passing under its nose. The TIGTA conducted 100 office audits, closed between October 2009 and September 2010, involving high-income taxpayers and sole proprietors, and found them agreeing to owe additional taxes of at least $10,000 or more. The TIGTA also found 26 audits with fraud indicators that were not recognized and investigated by the IRS. Based on the sample, the TIGTA estimates that during 2010, there were fraud indicators that were not recognized or investigated in approximately 939 office audits, resulting in an estimated loss of $5.8 million in civil fraud penalties.

This not only encourages tax fraud, but also boosts repeated non-compliance and cheating. It is time the IRS considers taking strong steps to correct the quality and efficiency of their examiner and first-line managers whose job is to recognize tax fraud indicators.

This kind of tax fraud has also been featured in the IRS' 2013 Dirty Dozen Tax Scams Report. Although the IRS says that "claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions," the TIGTA report shows how many of those who indulge in this type of fraud get away with paying less in taxes.

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