Every week, there are several news releases from the Tax Division of the Department of Justice and the IRS Criminal Investigation (CI) unit about people caught in tax evasion and sometimes not only stealing from all of their fellow taxpayers but also employer or others. I encourage you to scan recent headlines for the reports of catching some of these bad actors.
But, of course, many are not caught and some are caught after the statute of limitations has closed for some years of taking deductions they were not entitled to. If civil fraud is involved, the statute of limitations remains open, but some cases have not involved fraud but instead negligently claiming, for example, unallowable hobby losses as allowable business losses (and not getting caught until after doing it for many years) or claiming large charitable contributions of grossly overvalued property with the deductions carrying forward (recent example – 4th Circuit case with conservation easement charitable deduction claimed at $5.1 million on property bought a year earlier for $652,000. The court noted that because the initial years of the deduction are closed and the IRS had not examined the initial year, the taxpayers “received the benefit of having deducted $1.75 million”).
A 9/26/24 news release from IRS CI describes a person who over three years made over $1.2 million as a software engineering manager. So he would owe some taxes on this $400,000 of annual income. But he greatly reduced his taxes by claiming over $1.1 million of medical expenses which were actually under $100,000. A jury found him guilty on three counts of tax evasion. Per the news release, this high paid person “deducted nonexistent medical expenses from his taxes for multiple years because he had not been ‘caught’ the first time he did it.”
But why wasn’t this person’s return flagged by the IRS as needing an audit? Why is an employee with wages well beyond the median U.S. income (about $64,000 for the years involved), allowed a very large medical expenses exceeding 7.5% of his AGI when it is extremely likely he has good health insurance from his employer who pays his high salary? This should be a “red flag” to trigger an examination – high paid employee with medical expense deduction.
For the overvalued charitable contribution deduction, why didn’t data on Form 8283 trigger an audit in the initial year of the donation? While the taxpayers overstated the basis making it look just a little bit less overvalued, how can a $5.1 million deduction of property purchased a year earlier for about $650,000 not be a “red flag”. These taxpayers improperly listed the basis as $1.35 million but even this spread should have still been a red flag.
Well, likely more “red flags” to trigger audits are needed. And, of course, funding for IRS enforcement is needed. Examinations of high income individuals can be complex and human resource intensive. The IRS has reported that recent additional enforcement dollars bring in tax owed. For example, a September 2024 press release from the IRS notes that with better funding of enforcement, they “launched an initiative to pursue 125,000 high-income, high-wealth taxpayers who have not filed taxes since 2017”!! Yes, go after these people. Also, Congress has noted that enforcement dollars bring in revenue because additional funding allocations are scored by government agencies as revenue raisers (the IRS will bring in more tax dollars than the budget allocation). Per a 2/29/24 CBO report: “A $20 billion rescission [of IRS funding] would reduce revenues by $44 billion and increase the cumulative deficit by $24 billion.”
Congress cut $21 billion of the additional $80 billion provided to the IRS over 10 years by the Inflation Reduction Act of 2021 and the cut came from the enforcement dollars! How odd. Doesn’t Congress want to bring in tax dollars for which it already passed laws saying the taxes were owed? Why should compliant taxpayers subsidize tax cheats who, like the person just found guilty of tax evasion by a jury, kept cheating because they got away with it (until now)?
Besides the medical expense and high valuations of donations on Form 8283, what additional red flags do you think would catch non-compliant filers?
