The IRS allows employers that determine that they are not in compliance with various employment and income tax laws to step forward and be accountable by entering into an agreement with the IRS. Generally, the agreements are structured so that the taxpayer is better off than if the IRS had identified the issue on exam. While this assists the IRS in improving compliance without using scarce resources to uncover noncompliance, a recent report by the Treasury Inspector General for Tax Administration ( TIGTA ) found that the program lacked controls resulting in inconsistencies, inaccuracies and potential taxpayer rights violations. The weak internal controls increase the risk of error, fraud, or abuse.
TIGTA recommended several steps, and the IRS agreed to strengthen its controls. To that end, the IRS will develop guidance on how to process, review, and monitor agreements, follow up on taxpayers whose rights were potentially violated, research claims and take action to ensure future claims are worked properly; improve inventory and case management controls; and develop guidance on how to negotiate the terms and conditions of the agreement.
The TIGTA report on voluntary compliance, coupled with the July 7, 2011 announcement that the IRS will initiate more employment tax examinations, should cause concern among all employers. With the knowledge that voluntary compliance will get more challenging while more comprehensive employment tax exams are on the horizon, employers must make business decisions to “get it right ” now or play the increased odds of the audit lottery all the while knowing that the audits will be more aggressive than in the past. The time is ripe for mock internal audits to identify weaknesses and quantify potential exposure. Strategies to mitigate exposure should be seriously considered.
Because of the complex and changing nature of the voluntary compliance program and the increase in the number of comprehensive employment tax exams, it is recommended that companies seek tax counsel assistance on these matters before they proceed .