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Financial Planning / Tax Strategies


Subject:  Re: The Cost Basis Crisis Date:  7/1/2006  4:00 PM
Author:  Wradical Number:  87639 of 127616

(Phil:)That said, IMO we'd benefit from another round of Taxpayer Compliance Measurement Program (TCMP) audits, a/k/a the audits from hell, in which the randomly selected victims have to prove everything.
(Eric:)Crap. I beg to differ. We're being accused of a crime--indirectly, to be sure, but it's an accusation, nonetheless. Such audits are nothing but a government fishing expedition. The government should have to prove we've done something illegal--and that includes having done this deliberately and not simply as a result of a mistake.

Well, from the point of view of a CPA who had to participate in a couple of rounds of TCMP audits, I feel very strongly both ways.

An audit is an audit. It is not a criminal investigation, though in the right circumstances it can escalate into one. The IRS has the right to verify the accuracy of a return that it receives. Usually, for an individual taxpayer, that just involves selected items, but not necessarily.

In a criminal case, the prosecution has the burden of proof. In a tax audit, where the taxpayer has alreay declared under penalties of perjury as to the accuracy of his return, it's not unreasonable to inquire what he's got to back it up.

In both cases, the burden of proof is on the party with the evidence to support its assertions. How do you give the IRS the burden of proof, when the taxpayer has all the evidence?

Actually, TCMP audits haven't been done for a long time now, for individual taxpayers, for a couple of reasons:

1. The congressional oversight committees, who got a lot of complaints about them, don't like them.

2. IRS has had serious budget constraints in recent years, not getting anywhere the percentage increases that other government agencies have gotten. (Which is really stupid, because it's the IRS that brings in the money to run the whole government, including itself. Resources for the IRS pay for themselves many times over.)

3. The TCMP process has produced some good results. IRS does audit fewer returns, but they're selected more scientifically. The average audit produces more dollars than back when I started working. There are very few "no-change" audits, or refunds, compared to when I started working.

I can think of 2 audits in 30 years where a refund happened. And 30 years ago, a no-change audit was certainly good news, but not that uncommon. Today, it's very unusual. Actually, we just got a no-change letter a few weeks ago, but that was an odd case. It was an amended return, with some odd circumstances, that was practically asking for it. So we had the numbers lined up, and were ready for them.

And the IRS has made some "insightful" discoveries through the TCMP process that seem rather obvious, but it's nice they got the message eventually. For example:

1. If it's indicated that the taxpayer, or one of them on a joint return, is deceased, it's not worth auditing the medical expenses, which may look high. He/she was really sick.

2. This may not have been a TCMP, but I think it was, where they audited a lot of people with high mortgage interest, based on their income. They found that a lot of people had higher mortgages than they could afford, based on their income. They did start the matching of 1098 reporting, though.

So they should probably do more - but to somebody else's clients, as always.

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