Congress will spend a lot of time in 2011 looking for ways to reduce the budget deficit that is expected to reach $1.5 trillion this fiscal year. Much of the debate centers on whether to increase income (raise taxes) or reduce spending. The IRS is weighing in by trying to collect what is already owed. The so-called tax gap, which is the difference between taxes owed and those collected, was estimated to be $350 billion last year. Being able to shrink the tax gap would help narrow the budget deficit without raising taxes or cutting spending.
One area of major interest is undeclared assets of U.S. residents that are held overseas. The IRS scored a huge win in 2009 with Switzerland by forcing them to report information on accounts held by U.S. citizens. 14,700 citizens turned themselves in under a partial amnesty program. Now the IRS is turning its attention to accounts held in Asia. The Department of Justice sent letters to taxpayers with undisclosed accounts in India and Singapore advising them they were subjects of criminal investigations. The IRS is pressuring large financial institutions to provide this information. IRS Commissioner, Douglas Shulman, warned taxpayers in a recent speech “If you hold overseas assets, you must report and pay your taxes or we will be increasingly focused on finding you.”
Mortgage foreclosure isn’t the only problem in the housing market these days – over reporting mortgage interest is an area of concern for the IRS. Many taxpayers are reporting income that is insufficient to cover the mortgage payment required to support the interest deduction they are claiming. The inspector general estimates unpaid tax revenues of $1.4 billion due to incorrect or fraudulent mortgage interest deductions. The IRS plans a nationwide program to make greater use of mortgage data in audits this year.
The Internal Revenue Code Section 7623(a) was passed into law at the end of 2006 to help the IRS crack down on tax cheats. This section is also known as the Whistleblower rule. It provides for two types of awards, 1) 30% of the amount collected if the dispute exceeds $2 million in taxes, penalties and interest or the taxpayer’s income is more than $200,000 and 2) 15% of the amount collected for amounts less than $2 million. If you decide to submit information and seek an award for doing so, use IRS Form 211. The same form is used for both award programs. The program is barely four years old but it has already attracted a lot of interest from potential informants looking to cash in on the awards.