Advisory Panel: IRS Should Do More Targeted, Less Random Audits

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WASHINGTON – The Internal Revenue Service should do more targeted than random audits to reduce burdens on issuers and improve compliance amidst strained resources and staff, an advisory panel recommended.

"Routinely asking for volumes of information not clearly related to the rationale behind the examination is disruptive and potentially a waste of issuers and examination team resources," the tax-exempt bond subcommittee of the IRS' Advisory Committee on Tax Exempt and Government Entities (ACT) said in its annual report presented at an IRS public hearing here on Wednesday.

The panelists who worked on the report were David Dannenfelzer, the development finance manager of the Texas State Affordable Housing Corporation; William Johnson, a financial advisor at First Southwest in Dallas; and Floyd Newtown III, a partner at King & Spalding in Atlanta.

The theme of the tax-exempt bond subcommittee's ten-page report was "doing more with less in a time of diminished resources." It made five recommendations. The group urged the IRS to establish: more targeted enforcement efforts; more targeted outreach programs; more regular communication between the bond subcommittee and the IRS' tax-exempt bond office; and more involvement by TEB in industry outreach and education. It also urged the IRS to revise Form 8038, the information return for tax-exempt private-activity bonds.

On enforcement, the panel wrote in its report that examinations should "be more targeted and focused in recognition that requesting extensive documentation from issuers which is not related to the focus of the examination is disruptive to and expensive for issuers and is not an effective use of TEB resources."

Newton told IRS officials at the hearing that the panel suggested a reduction in random audits rather than an outright elimination.

"While some random examinations are necessary to ensure compliance, we believe IRS examination efforts could be more focused and the burden on issuers could be lessened," he said.

The increase in efficiency is important for the IRS, which is having to do more with fewer resources. Fiscal 2015 marked the fifth consecutive year of reductions to the IRS budget. The agency had a 15% reduction in full-time staff compared to 2010, according to the IRS' 2015 data book. A total of 643 tax-exempt bond returns were audited in fiscal 2015, according to the IRS.

TEB director Rebecca Harrigal said earlier this year she expected the number of examinations in 2016 to be "pretty close" to that of last year. She also said she expected TEB to lose seven employees this calendar year and another three during the fiscal year, which would put the total staff at close to 60 people.

Newton said the tax-exempt subcommittee's relationship with ACT has changed "quite a bit," over the past year, saying it has become more of an advisory and consulting one. In past years, his subcommittee had made more recommendations on technical matters, he said. The subcommittee will probably become more advisory and less project-oriented in years going forward, he said.

"We have been focused on trying to assist TEB to better utilize its limited resources," Newton said. "We want to lessen the negative impact of routine examinations on market participants and issuers."

The subcommittee also recommended the IRS provide an electronic filing option for Form 8038. Officials said changes to the form could also help with more focused audit efforts.

Enhanced communication between TEB and the bond subcommittee can "improve compliance and limit unnecessary burdens" imposed on issuers, subcommittee members wrote in their report.

"We recommend further review of publications and other informal guidance in the tax exempt bond area with an eye toward targeting those outreach efforts for maximum effectiveness," they wrote. In addressing panel members at the hearing, IRS Commissioner John Koskinen said the annual public hearing is a way for the agency to make the tax process as "transparent, easy, efficient and effective as possible."

"Over the years we've taken advantage of, and adopted a number of, recommendations from ACT," Koskinen said. "It helps us address what we can do to make things run more efficiently and effectively for taxpayers."

The ACT is made up of five subcommittees: tax-exempt bonds; employee plans; exempt organizations; federal, state and local governments; and Indian tribal governments. Members of the other four panels also spoke before Koskinen and other IRS officials Wednesday. Most of their recommendations also stemmed from the IRS' dwindling staff and resources and how they could be better utilized.

The tax-exempt bond advisory panel recommended last year that the TEB adopt the Industry Issue Resolution program and the Industry Director Directive program to improve efficiency amidst strained resources.

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