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IRS May Get Help Catching Tax Cheats

One revenue-raising strategy unveiled in President Barack Obama’s budget proposal on Monday calls for beefing up the Internal Revenue Service’s enforcement efforts. That could mean increased scrutiny on individual tax returns, especially for small business owners.

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The president’s budget plan would increase the IRS’s budget next year to $12.8 billion, about $950 million more than the 2012 budget, with the goal of ramping up collections from individuals and business that are behind on federal and state taxes or that owe government loans. The bulk of this money would be part of a program to prevent tax evasion and cheating and to update the IRS’s data system, according to the proposal. The reforms call for increasing collection by more than $2 billion over the next 10 years, much of that owed to states. The enforcement program should return $5 for each additional IRS dollar spent, according to the proposal. The IRS did not respond to requests for comment.

For taxpayers, the changes could mean more audits of individual tax returns, with an emphasis on small business owners, says Patrick Cox, CEO of tax consultantsTaxmasters.com. Self-employed taxpayers who are responsible for reporting their own income could see increased scrutiny on how they document their earnings and file for certain tax credits or deductions, says Cox. Because their tax returns are often more complicated than most individuals—they tend to require additional forms for credits and deductions and more documentation, such as receipts of business expenses—there is more room for those taxpayers to make a mistake on their returns, experts say. “Ultimately that means a larger burden in dealing with the government,” says Cox.

The new efforts would come at a time when the Treasury Department is cracking down on offshore tax dodging and conducting more audits on higher earners. Tax payers can take several steps to avoid an IRS audit, from explaining unusual deductions to watching what they post online. Among other tax changes, Mr. Obama proposed letting the Bush-era tax cuts expire for households making more than $250,000 a year and individuals earning more than $200,000 a year. He also backed a 30% tax on incomes of more than $1 million, also known as the so-called Buffett rule.

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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