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- Written by: T. Steel Rose, CPA
WASHINGTON – While the Internal Revenue Service (IRS) makes a substantial amount of recommended adjustments when auditing the returns of S corporations, the number of audits the IRS closes with no recommended adjustments is very high, according to a new report released publicly today by the Treasury Inspector General for Tax Administration (TIGTA).
IRS statistics show that 62 percent of the Discriminant Index Function (DIF) selected returns of S Corporations were closed by the IRS with no recommended changes to the items reported on the return in FY 2011.
“These results are troubling because, according to the IRS, a high no-change percentage means the agency is spending a significant amount of resources on unproductive audits and burdening compliant taxpayers with unnecessary audits,” said J. Russell George, Treasury Inspector General for Tax Administration.
TIGTA conducted its review to determine whether the IRS’s Small Business/Self-Employed (SB/SE) Division examiners are conducting audits of S corporation returns in accordance with IRS procedures and guidelines.
S corporations annually file Form 1120S, U.S. Income Tax Return for an S Corporation, although they generally do not pay any Federal income taxes. Instead, an S corporation’s income, deductions, and other items are divided among and passed on to its shareholders, who are required to report the items on their individual income tax returns.
TIGTA did not identify any significant quality problems that would suggest the manner in which items are selected and audited on S corporation returns substantially contributes to the no-change percentages. However, TIGTA believes that SB/SE Division researchers should explore the use of S corporation data files to determine if examiners are auditing the most productive returns.
TIGTA also found that additional steps could be taken to strengthen controls over the return classification process to further minimize the risk of selecting returns for audit that have limited audit potential.
TIGTA recommended that, as resources become available, SB/SE officials 1) analyze S corporation data files to help identify additional productive returns for audit, and 2) revise classification guidelines to clarify that quality reviews need to be completed for each type of return classified. In their response to the report, IRS officials agreed with TIGTA’s recommendations and stated that they plan to take corrective actions.
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- Written by: T. Steel Rose, CPA
IMPACT ON TAXPAYERS
The Collection Due Process Program was designed to allow taxpayers a process for exercising their right to appeal when the IRS files a Notice of Federal Tax Lien or a Notice of Intent to Levy against them. Additional improvements are needed to ensure statutory requirements are met. Misclassified hearing requests, inaccurate collection action suspensions, and inconsistent documentation of impartiality may result in taxpayers not receiving their full rights during an appeal hearing.
WHY TIGTA DID THE AUDIT
This audit was initiated because TIGTA is statutorily required to determine whether the IRS complied with the provisions of 26 United States Code Sections 6320 (b) and (c) and 6330 (b) and (c) when taxpayers exercised their rights to appeal the filing of a Notice of Federal Tax Lien or the issuance of a Notice of Intent to Levy.
WHAT TIGTA FOUND
Compared to our previous reviews, this year’s audit continues to identify the same deficiencies in the IRS’s processing of Collection Due Process cases as previously reported. Our review identified that the Office of Appeals did not always classify taxpayer requests properly and, as a result, some taxpayers received the wrong type of hearing. In addition, TIGTA also identified an increase in errors relating to the determination of the Collection Statute Expiration Date on taxpayer accounts compared to that identified during prior audits. TIGTA also found that Appeals personnel continue to not always document their impartiality in the Form 12257, Waiver of Appeals Notice of Determination in a Collection Due Process Hearing (Form 12257 Waiver) issued to taxpayers.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the Chief, Appeals, provide refresher training to Appeals personnel to reemphasize the process to follow when determining whether a taxpayer is entitled to a Collection Due Process hearing or an Equivalent Hearing. TIGTA also recommended that Appeals request written guidance from Chief Counsel that specifies what constitutes timely receipt of a taxpayer’s request for a Collection Due Process hearing to ensure taxpayer requests for Collection Due Process hearings are processed consistently. Finally, TIGTA recommended that Appeals review and correct the taxpayer accounts that were identified with Collection Statute Expiration Date errors and revise its guidelines to ensure impartiality is properly documented in the Form 12257 Waiver issued to the taxpayer.
In their response, Appeals management agreed with all of our recommendations. Appeals plans to develop a refresher class on the topic of determining the timeliness of Collection Statute Expiration Date and Equivalent Hearing requests as well as request a written advisory opinion from Chief Counsel on what constitutes timely receipt of a taxpayer’s appeal request for a CDP hearing. In addition, Appeals corrected all Collection Statute Expiration Date errors made on the taxpayer accounts that TIGTA identified during this audit and revised its guidelines to require that hearing officers include the impartiality statement in the Letter 4382, Closing Letter For Form 12257, that accompanies the approved Form 12257 Waiver.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
http://www.treas.gov/tigta/auditreports/2012reports/201210077fr.html.
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- Written by: T. Steel Rose, CPA
By: T. Steel Rose, CPA | Early implementation is permitted for the proposed SSARS covering Preparation of Financial Statements. If accepted they would be effective for the preparation of financial statements for periods ending on or after December 15, 2015. This illustrative engagement letter (Ref: par. A11) for an engagement to prepare financial statements in accordance with accounting principles generally accepted in the US is not authoritative. It is intended as an illustration that may be used in conjunction with the considerations outlined in Statements on Standards for Accounting and Review Services.
An example of such a letter:
To the appropriate representative of management of ABC Company:
You have requested that we prepare the financial statements of ABC Company, which comprise the balance sheet as of December 31, 2014, and the related statements of income, and changes in stockholders’ equity, and cash flows for the year then ended and the related notes to the financial statements. We are pleased to confirm our acceptance and our understanding of this engagement to prepare the financial statements of ABC Company by means of this letter.
Our Responsibilities:
The objective of our engagement is to prepare financial statements in accordance with accounting principles generally accepted in the United States based on information provided by you.
We will conduct our engagement in accordance with Statements on Standards for Accounting and Review Services (SSARSs) promulgated by the Accounting and Review Services Committee of the AICPA and comply with the AICPA’s Code of Professional Conduct, including the ethical principles of integrity, objectivity, professional competence, and due care.
We are not required to, and will not, verify the accuracy or completeness of the information you will provide to us for the engagement or otherwise gather evidence for the purpose of expressing an opinion or a conclusion. Accordingly, we will not express an opinion or a conclusion or provide any assurance on the financial statements.
Our engagement cannot be relied upon to identify or disclose any financial statement misstatements, including those caused by fraud or error, or to identify or disclose any wrongdoing within the entity or noncompliance with laws and regulations.
Your Responsibilities:
The engagement to be performed is conducted on the basis that you acknowledge and understand that our role is the preparation of the financial statements in accordance with accounting principles generally accepted in the United States.
You have the following overall responsibilities that are fundamental to our undertaking, in accordance with SSARSs, the engagement to prepare your financial statements:
a. The prevention and detection of fraud
b. To ensure that the entity complies with the laws and regulations applicable to its activities
c. To make all financial records and related information available to us
d. The accuracy and completeness of the records, documents, explanations, and other information, including significant judgments, you provide to us for the engagement to prepare financial statements
You agree that the financial statements will clearly indicate that no CPA provides any assurance on them.
Our fees for these services are…
You agree to hold us harmless and to release, indemnify, and defend us from any liability or costs, including attorney’s fees, resulting from management’s knowing misrepresentations to us.
Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our engagement to prepare the financial statements described herein, and our respective responsibilities.
Sincerely yours,
_______________________
[Signature of accountant or accountant’s firm]
Acknowledged and agreed on behalf of ABC Company by:
_______________________
Signed
[Name and title]
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