Recurring Trends The IRS Should Be Looking At

Recently, the Large Business and International (LB&I) Division of the IRS identified five areas that they wanted to focus on. They entailed:

Restoration of sequestered AMT credit carryforwards
S-Corporation Distributions
Cryptocurrency
Repatriation via foreign triangular reorganizations
IRC §965 Transition Tax

While I agree that some of these are important, I wonder if the IRS is seeing what the rest of professionals are seeing as trends in the industry. While I agree that S-Corporation Distributions are out of control, the IRS is approaching these distributions in a way to charge a capital gains tax on excess distributions. While I don’t see this as the problem with S-Corporations and distributions, I suppose it exists.

The main problem I see with S-Corporation distributions, is that they are often taken in lieu of a reasonable salary. While this is not an article on reasonable compensation, it is, and has been a big problem since I’ve been in practice. There are many factors to reasonable compensation that I am not going to go into, however, when you have an S-Corporation shareholder taking distributions and no salary year after year. That is a problem. No matter how many times you tell a client the same thing, even put it in writing, they still do the same thing.

Another one of LB&I’s focus is on Cryptocurrency, or as the IRS and several accountant organizations have begun referring to it as Virtual Currency. I’ve been working with crypto since 2013. That was before any guidance was issued by the IRS. I’ve always treated the mining of crypto like exchanging commodities. For example, if you trade gold, which is tied to a US dollar, for silver, which is also tied to the US dollar, is a taxable event. Further, the IRS has already issued Notice 2014-21 which is clear on the treatment of crypto. It even discusses how to treat someone that is paid in crypto. No further guidance, as LB&I’s recent press release eludes to is needed.

There must be a problem with AMT credits, that I know nothing about. The repatriation issue is an upcoming issue, as well as the transition tax. However, since the IRS’s budget keeps getting slashed, just go back to basics.

There is a very simple check I do when I do a tax return. I simply run a differential between the year before and the current year. If there is a large discrepancy, I ask the client, and put it in my notes. I don’t know if I am an outlier here, but the way I was trained was that returns are typically examined when these kinds of shifts occur. For example, if there is a shift of $500,000 in income from the year before, and that is a 75% shift from the year before, why? If an expense is drastically higher than the previous year, you have to ask the same question.

These areas that LB&I are targeting appear to be an issue. I just don’t run into them. I do know that it is heavily publicized that audits are down. Just human nature would tell you that if that fact is common knowledge, then what is there to prevent the average person from cheating on their return. Enforcement is down, and that is well publicized.

The IRS needs to just stick to basics, until they are funded. If I had a nickel for every time I thought a return would be audited and wasn’t, I’d have a lot of nickels. Just focus on those returns first, and then target groups.

Digital Currency