The IRS regularly conducts national, regional, and local compliance initiative projects (CIPs) to study perceived areas of noncompliance. The IRS uses the data from these projects to develop more comprehensive projects and allocate its audit resources in the areas showing significant noncompliance.
Below is part one of a two-part series of IRS alerts detailing IRS audit projects for individual Form 1040 filers, scheduled to be completed before the end of the government’s fiscal year. Additional alerts will be provided during the next two months about CIPs for businesses and specialty taxes.
Travel, Meals and Entertainment
Taxpayers targeted: Schedule C filers with travel, meal and entertainment deductions.?Specifically:
Gross receipts greater than $10,000
- Travel, meal and entertainment deductions greater than total Schedule C income, and
- Meal and entertainment expenses less than $1,000
Notable information: The IRS has determined that this taxpayer segment is deducting personal travel, meal and entertainment expenses to reduce taxable income and conceal meals and entertainment under travel expenses to avoid the 50% limitation (IRC §274).
Duplicate Interest Deduction Claimed on Schedules A and C
Taxpayers targeted: Taxpayers taking duplicate mortgage interest deductions of $10,000 or more on Schedule A and C.
Notable information: This duplication results in underreporting income tax and, in most cases, underreporting self-employment tax from Schedule C. Most of the returns identified were self-prepared.
Employee Business Expenses
Taxpayers targeted: Form 1040 filers with employee business expense deductions of more than $50,000
Preliminary IRS results: The most common cases in this project are office audit cases for taxpayers with less than $200,000 in income who don’t file Schedule C. The no-change rate was 5%, and the average adjustment was $11,250.
Notable information: The IRS will conduct office audits for this project.
Most Productive Issues Per IRS Audit Results Data
Taxpayers targeted: Field and office audit issues with lowest no-change rates and highest adjustments. Specifically:
- Schedule A: Unreimbursed business expenses and real estate taxes
- Schedule C: meals and entertainment, travel, repairs and maintenance, utilities and business use of the home
- Schedule E: depreciation
Residential Energy Property Credits (ARRA Provisions 1121 and 1122)
Taxpayers targeted: Taxpayers claiming residential energy credits on 2009 returns
Notable information: A new law increased the energy tax credit for homeowners who make energy-efficiency improvements to their existing homes. The IRS thinks there is incentive to abuse these credits.
Taxpayers targeted: Schedule C filers with gross receipts of more than $5 million and income of less than $200,000.
Notable information: With this project, the IRS is examining the legitimacy of techniques taxpayers use to significantly reduce their taxable income. Examiners will be instructed to conduct thorough income audits and consider Schedule C and related entities.
National Office Construction Specialty Trades
Taxpayers targeted: Construction independent contractors who file Schedule C (self employed). Specific industries:
- Other foundation
- Residential building
Preliminary IRS results: Office and field audit results from Gulf states region office (average dollars per return):
- Flooring: $56,664
- Masonry: $62,622
- Plumbing: $214,961
- Drywall: $56,428
- Framing: $55,327
- Painting: $52,995
Notable information: The IRS expanded this project nationally in 2010.
Taxpayers targeted: Taxpayers reporting losses on Schedule C returns for consecutive tax years 2007, 2008 and 2009. Specifically:
- Gross receipts less than $20,000 and
- Losses of more than $20,000 above the gross receipts amount