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Keeping Your Balance: Audits of individual returns by IRS continue to drop

James W. Rahmlow

James W. Rahmlow

For the fifth straight year, the audit rates for individual tax returns has decreased. In fact, the rate fell to its lowest level in a decade. For fiscal 2015, the audit rate was .84 percent. In fiscal 2011, the audit rate was 1.11 percent and it has been consistently declining since that date.

The term “audit” includes both field audits where there is normally face-to-face contact with the agent and correspondence audits, which are normally handled via correspondence. Interestingly, the number of field audits decreased approximately 8 percent while the number of correspondence audits increased by approximately 1 percent. Worthy of note is that the IRS budget was $10.9 billion in fiscal 2015, its lowest funding level since 2008.

Individual signatures still required for every person listed on power of attorney

In Chief Counsel Advice, the IRS has reiterated its position that every person who represents a taxpayer before the IRS must individually sign the practice declaration on Form 2848, Power of Attorney and Declaration of Representative. The practice declaration is in Part II of the Form 2848 and in it, the signing representative indicates under penalties of perjury that they are authorized to represent the taxpayer, that they are not suspended from practice before the IRS and that they are subject to Circular 230.

Extender bill update

This column normally is not devoted to possible or probable legislation; rather, legislation is normally reported only after it is signed by the president. However, since there is such a pattern of legislation for extension of popular but temporary tax incentives (example Sec. 199 expensing or the Research and Development Credit), it seems prudent to report the status of legislation here in the fourth quarter as taxpayers are planning for year end.

These provisions expired at the end of 2014. Recently, an extenders package (the Tax Relief Extension Act of 2015, Sen. 1946) has cleared the Senate Finance Committee and has moved to the full Senate for action. Meanwhile, the House of Representatives has previously approved several stand-alone extender bills. There are no guarantees here, but it appears that re-approval for 2015 is a good possibility.

Internet domain names are code sec. 197 intangibles

In recent Chief Counsel Advice, the IRS concluded that costs incurred to acquire an Internet domain name must be capitalized as intangible assets under Code Sec. 263(a) and amortized over 15 years.

While the ability to amortize over 15 years can be viewed as a benefit, there are many unresolved issues related to this conclusion.  In a buy/sell transaction, there has never been a push to separately state (and more importantly value) a domain name. Depending on the aggressiveness of the IRS position, there could be many situations where the actual valuation becomes a subject of contention.

IRS commissioner’s impeachment considered

In a resolution put forward by House Oversight and Government Reform Committee Chair Jason Chaffetz, R-Utah, the impeachment of IRS Commissioner John Koskinen is being sought for failure of Koskinen to cooperate with Congress in its investigation into the IRS handling of applications by conservative organizations for tax-exempt status.

A quote from the resolution indicates that Koskinen engaged in “a pattern of deception that demonstrates his unfitness to serve as commissioner of the Internal Revenue Service.” The investigation of the IRS has been an ongoing matter.

2016 initiatives by the IRS to combat tax related identity theft and refund fraud

Responding to the too numerous cases of tax related identity theft and refund fraud in the 2015 filing season, the IRS has issued releases affecting both taxpayers and tax preparation firms offering both requirements and suggestions to combat the increasing sophistication of those seeking to fraudulently claim refunds and steal taxpayer related identities.

  1. Early in 2015, the IRS began a collaborative effort with tax preparation firms, software providers and, payroll and financial product processors and state officials. Key takeaways from the project include:
  2. Taxpayers using tax preparation software now will have much heightened security. Password standards to access the tax software will require a minimum of eight characters which must include upper case, lower case, alpha, numeric and special characters.
  3. Taxpayers using tax preparation software now will have up to three security questions that must be answered.

Professional tax preparers are encouraged to use security software that includes a firewall, anti-malware and anti-virus programs which automatically update so that the software can remain current against the most current threats.

November 2015 AFRs, issues

In Rev. Rul. 2015-22, the IRS released the short-term, mid-term and long-term applicable interest rates for November 2015. Below is a summary of those rates as computed monthly.

Short          Mid          Long

Term          Term        Term


Applicable Federal Rates (AFRs)                                 0.49%        1.57%      2.54%

Adjusted AFRs                                                                     0.49%         1.48%      2.54%

James W. Rahmlow, a certified public accountant, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at jrahmlow@mmb-co.com.

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