IRS Under Attack For Sending Incorrect Notices To Compliant Taxpayers

by Leroy Baker, Tax-News.com, New York

11 July 2003

Two US senators, Olympia J. Snowe (R - Maine) Kit Bond (R - Missouri) have responded to a General Accounting Office report which was critical of the IRS's treatment of small businesses by demanding a progress report from the agency by the end of August.

The GAO had reported on attempts by the IRS to improve its Schedule K1 matching program, which it had been forced to suspend last year after sending out tens of thousands of notices demanding extra taxes which it later had to withdraw.

Schedule K1 is a statement required from 'flow-through' entities such as limited partnerships, trusts and S corporations, which shows the amounts of income accruing to participating individuals and the IRS compares this schedule with the individuals' tax declarations. But a K1 is a notoriously difficult and complex document, and it seems the IRS is frequently wrong in its judgements about extra taxes that may be owing.

According to the GAO report, about two-thirds of the 69,097 notices sent last year went to people whom the IRS later determined to be compliant. The IRS suspended its K1 matching program last year, promising improvements, and recommenced sending notices last March.

Senator Snowe, who heads the Senate committee on small business and entrepreneurship, wrote to the IRS: "In light of the significant burdens this process might have on small businesses, we would appreciate your providing our staffs with a report that details the program's progress".

"While we support fully the agency's efforts to enforce the tax laws, the IRS must strive to preserve not only its own resources but also those of our nation's taxpayers, especially the thousands of small business owners who operate their business in the form of flow-through entities," the letter says, adding that the K-1 matching program's success "depends on the agency's ability to develop a program that identifies taxpayers who are not meeting their tax obligations while imposing the least inconvenience possible on compliant taxpayers and small business owners."

The IRS told the GAO that it planned to increase its accuracy in identifying delinquent taxpayers by 50%. IRS statistics show that more than US$1 trillion was distributed by flow-through entities to partners, shareholders and beneficiaries last year.

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