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IRS practice and procedure changes: A look back at 2012 and a preview of 2013

January 17, 2013

In 2012, a $305 million IRS budget reduction resulted in $5 billion less in enforcement revenue. Despite budget challenges, the IRS expanded some programs and improved others.

On Jan. 6, 2012, the IRS announced the results of its most recent measurement of annual losses to the U.S. Treasury due to taxpayer noncompliance, also known as the tax gap. This study reflected the IRS’ estimates of noncompliance for tax year 2006. The IRS’ conclusion: In only five years, the tax gap increased from $345 billion in 2001 to $450 billion in 2006. In 2012, the IRS implemented new programs and made changes to its procedures to try to close the tax gap. But budget cuts also meant that the IRS had to conduct compliance activity with $305 million less. The result was $5 billion less in revenue from enforcement activities.

Despite budget challenges, the IRS expanded some programs and improved others. Here are some of the most significant changes in IRS compliance that took place in 2012 – and a look ahead at what to expect in 2013.


In 2012, the IRS continued to focus on correspondence (mail) examinations, which contributed to an overall audit coverage rate of slightly more than 1% for individual taxpayers. This rate dropped slightly in 2012 due to a reduction in examination personnel. The IRS will continue to focus on Schedule A deductions and tax credits in these examinations.

In 2012, the IRS started to focus closely on flow-through entities, and increased field examinations of partnerships and S corporations by 18.7%. In 2013, the IRS will focus on partnerships, looking closely at abusive transactions and underreported income, and on S corporations, looking closely at officer compensation and losses taken in excess of basis. IRS field agents will also continue to investigate small businesses, including e-commerce, for underreported income in 2013.

In 2012, the IRS emphasized accuracy-related penalty assessments and held preparers responsible for return errors and omissions, especially in areas of rental property and deducting S corporation losses in excess of basis. This trend will continue in 2013.


In 2012, the IRS continued to pursue penalties to deter noncompliance. Since 2005, accuracy-related penalties assessed against individual taxpayers have increased 757%. In 2013, the IRS will continue to press for accuracy-related penalties in CP2000 underreporter adjustments and audits.

For 2011 individual returns, the IRS provided a six-month grace period for unemployed and self-employed taxpayers who experienced a significant reduction in income. For certain taxpayers who filed Form 1127-A, this grace period allowed an extension of time to pay, without penalty, until Oct. 15, 2012. The IRS has not extended this provision for 2012 returns.

In 2012, the Treasury Inspector General for Tax Administration (TIGTA) criticized the IRS about what TIGTA described as a lack of uniformity in applying penalty abatement, and specifically criticized the IRS for not facilitating access to the first-time abatement relief option for failure to file, failure to pay, and failure to deposit penalties. First-time abatement is an administrative waiver that many taxpayers qualify for, but that the IRS does not readily publicize and that practitioners often don’t understand or request. In 2013, look for more pressure on the IRS to provide a form to simplify the process of requesting all types of penalty abatement.


In 2012, the IRS instituted additional Fresh Start initiatives to help struggling taxpayers pay their taxes. As part of these initiatives, the IRS relaxed streamlined installment agreement rules for individuals by increasing the threshold from $25,000 to $50,000, and the time to pay from 60 months to 72 months. The IRS also increased the qualifying amount for business trust fund express installment agreements from $10,000 to $25,000 to help businesses pay employment taxes and avoid the filing of a federal tax lien.

In 2012, the IRS made significant changes to its offer in compromise (OIC) program terms to provide more access to the program. The IRS revised the future income calculation and made changes to allow taxpayers more expenses in determining the offer amount. In 2012, these changes allowed many more taxpayers to qualify for and receive an OIC.

Installment agreement and OIC changes in 2012 were part of a multiyear effort by the IRS to help struggling taxpayers with better payment alternatives. In 2013, we will likely continue to see a kinder, gentler IRS in regard to payment alternatives.

IRS matching programs

2012 was a breakthrough year for IRS automated matching programs. In 2012, it’s likely that the IRS exceeded the 4.7 million individual CP2000 (underreporter) notices that it sent in 2011. In 2012, this was the only major IRS compliance program that generated increased enforcement revenue over 2011. However, the IRS was not limited to information matching on individual returns.

In 2012, the IRS initiated a business information-matching program and a Form 1099-K matching program. The IRS sent new notices in late 2012 questioning businesses on the accuracy of their returns, based on information statements filed under business employer identification numbers (EINs). The IRS also matched Forms 1099-K to business returns and sent inquiries to taxpayers with potential discrepancies, requesting explanations for possible unreported income.

The IRS’ business information-matching initiative is in the first of several phases. In 2013, the IRS will learn from, fine-tune and expand this opportunity to address small business underreporting, which is the taxpayer segment of most interest to the IRS in closing the tax gap.

Voluntary compliance programs

On Jan. 9, 2012, the IRS provided another opportunity for taxpayers to disclose previously unreported offshore accounts: the 2012 Offshore Voluntary Disclosure Program (OVDP). OVDP is the third voluntary foreign bank account reporting (FBAR) program from the IRS in four years. This program required correction of eight years of returns and payment of a computed penalty. Unlike prior FBAR initiatives, the 2012 OVDP has no expiration date.

In 2012, the IRS also focused on worker misclassification in audits and voluntary compliance programs. In December 2012, the IRS announced a revision to its current Voluntary Classification Settlement Program (VCSP) that allows employers to voluntarily change the prospective classification of their workers (switch the workers from independent contractors to employees). This VCSP temporary eligibility expansion removes several previous qualification requirements, including strict Form 1099 filing compliance, and is available through June 30, 2013.

Other 2012 highlights
Identity theft

Tax identity theft continued to be a concern for the IRS in 2012. In the first 10 months of the year, the IRS identified 1.2 million incidents of tax identity theft. The IRS inventory of tax identity theft cases increased 50% from 2011 to 2012. For the 2013 filing season, the IRS plans to send about 500,000 Identity Protection Personal Identification Numbers to allow tax identity theft victims to file their tax returns with the IRS. While most of these incidents are related to fraudulent refund schemes, many result in notices for underreporter inquiries, duplicate returns and other discrepancies. The IRS established specialized identity theft groups in each of its business units to help with identity theft cases and provide timely responses.

Power of attorney

In March 2012, the IRS stopped accepting Form 2848, Power of Attorney, for joint taxpayers. For joint returns, practitioners must now file two Forms 2848 to represent both spouses.

Focus on preparers

The IRS Office of Professional Responsibility (OPR) has brought up concerns about whether tax practitioners could have a conflict of interest in representing their clients in an examination of a return that they prepared. With the IRS focusing on preparer penalties and holding tax professionals accountable for tax return due diligence, expect OPR to provide more guidance in this area in 2013. In September 2012, the IRS also proposed substantial changes to Circular 230, including removing the complex rules for written tax advice and clarifying the competency requirement for practitioners engaged in practice before the IRS. These proposed regulations will be modified based on practitioner comments and are expected to be adopted in 2013.

While 2012 was a down year for IRS enforcement revenue, look for a rebound in 2013, when the IRS should receive a significant budget increase. In February 2012, President Obama proposed an IRS budget increase of $944 million, with more than 40% designated for increased enforcement. In 2013, the IRS will increase automated compliance initiatives and use its field personnel in the most cost-effective manner to help meet its strategic goal of closing the tax gap.

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If Your e-mail address changes, You must notify New River of such change immediately. If You fail to do so, You understand and agree that any communications sent via e-mail shall nevertheless be deemed to have been provided or made available to You in electronic form. You may withdraw Your consent to receive Information by either indicating Your decision within Your Online Account or by making a request in writing to the following address: New River Innovation, Inc., PO Box 10941, Greensboro, NC 27404. Please provide Your physical address and email address to request the change. If You choose to withdraw Your consent to electronic communications, then You may be unable to access certain features or functionality that would otherwise be made available to You.

14. Arbitration

New River and You agree that any claim, dispute or controversy, whether in contract, tort (intentional or otherwise), whether pre-existing, present or future, and including constitutional, statutory, common law, regulatory and equitable claims in any way arising out of or relating to: (1) the Services; (2) advertisements, promotions, or oral or written statements arising out of or relating to the services provided pursuant to this Agreement; or (3) the relationship between New River and You, including the validity, enforceability or scope of this Agreement or any part hereof (collectively, "Claim"), shall be resolved, upon the election of either New River or You, by binding arbitration pursuant to this arbitration provision and the applicable rules of American Arbitration Association or the National Arbitration Forum in effect at the time a Claim is filed. The party initiating the arbitration proceeding shall have the right to select one of these two arbitration administrators. In the event of a conflict between this arbitration provision and the rules of the arbitration administrator, this arbitration provision shall govern. No class actions or joinder or consolidation of any Claim with other persons are permitted in the arbitration without the written consent of New River and You. Any arbitration hearing that You attend will take place in Greensboro, North Carolina. This arbitration agreement is made pursuant to a transaction involving interstate commerce and shall be governed by the Federal Arbitration Act, 9 U.S.C. §§ 1-16 ("FAA"). The arbitrator shall apply substantive law consistent with (1) the FAA; and (2) except where inconsistent with the FAA, the choice of law provision of this Agreement. The arbitrator's award shall not be subject to appeal, except as permitted by the FAA. Upon request of either party, the arbitrator shall prepare a short, reasoned written opinion supporting the arbitration award. Judgment upon the award may be entered in any court having jurisdiction. Nothing in this arbitration provision shall prevent New River from seeking or obtaining injunctive relief as a result of a violation or threatened violation of this Agreement and any such injunctive action shall not constitute a waiver of the requirement of arbitration for any Claim.

15. Entire Agreement

This Agreement constitutes the entire agreement between New River and You in connection with Your use of the Services provided pursuant to this Agreement, and verbal communication with New River and any Content. New River may update the terms and conditions of this Agreement from time to time by: (i) posting a "change of terms" notice on the Beyond415 application home page, (ii) emailing an updated copy to the most recent email address You have provided to New River, or (iii) without notice to You, and Your subsequent use of the Services provided pursuant to this Agreement, is governed by such new terms and conditions. In the event of termination of this Agreement, all disclaimers and limitations of liability provisions set forth in this Agreement will survive. If any provision is deemed to be unlawful or unenforceable, it will not affect the validity and enforceability of the remaining provisions. The section headings are for convenience only and do not have any force or effect.

16. Miscellaneous

This Agreement is not for the benefit of any third party, whether directly or indirectly (including, if applicable, any user accessing the Services provided pursuant to this Agreement by means of Your Online Account). The failure to exercise in any respect any right provided for herein will not be deemed a waiver of any further rights hereunder. If any provision of this Agreement is found to be unenforceable or invalid, that provision will be limited or eliminated to the minimum extent necessary so that this Agreement will otherwise remain in full force and effect and enforceable. This Agreement is not assignable, transferable or sub-licensable by You except with New River's prior written consent. THESE TERMS AND CONDITIONS WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF OR THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS. YOU AND PROVIDER AGREE TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS LOCATED IN GUILFORD COUNTY, NORTH CAROLINA.


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