The IRS is using "intimidating" tactics to extract the most money it can from small companies in the process of auditing them, including pressuring the clients and neighbors of small business owners, a tax preparer warned Congress this week.
And some of those tactics could be the result of the IRS's reduced auditing budget, which is putting pressure on IRS auditors to shake down companies as quickly and efficiently as possible.
Republicans on the House Small Business Committee held a hearing Wednesday to explore how the IRS is putting small businesses "through the wringer." Warren Hudak, owner of a tax preparation company in Pennsylvania, said pressure from the IRS to score big returns in audits is growing.
He said the number of IRS staff performing audits has fallen 24 percent from 2010 to 2014, and said that seems to be a factor in the new tactics companies are seeing.
"As resources have dwindled, we have witnessed an increase in techniques we believe are intended to bring in more revenue not necessarily the correct amount of taxes," he said in his prepared remarks. "Many of these techniques are intimidating and all too familiarly carry a presumption of guilt."
Hudak said the IRS is now known to put pressure on small business owners by contacting their vendors, banks and even their clients and neighbors.
"This behavior is seen as a way of pressuring the taxpayer to agree to proposed return adjustments," he said.
"One can only imagine how much pressure it puts on the taxpayer when the IRS auditor calls clients, vendors and neighbors and says 'I am from the IRS. I'm wondering what you can tell me about Joe Taxpayer,'" he said. "Taxpayers feel intimidated and often completely capitulate in order to preserve their business reputations."
He said IRS auditors are also known to bypass lawyers and show up at the taxpayer's place of business to talk to the owner. That can lead to situations in which the auditor can ask probing questions in an effort to trip up the owner and expand the audit.
He said one of his "favorites" is when the auditor asks how often the owner deposits cash in the bank, and if the owner says about once a week, the IRS auditor might look more closely if he sees different deposit patterns.
Hudak said the IRS might also stop by the business to drop off a final audit report, "with the signature lines tabbed," and suggests that the owner sign off on the audit without first consulting a lawyer or reading it.
He said reduced resources appear to be the cause of not only these tactics, but of under-trained auditors. He said in some cases, business owners and their representatives are spending time explaining the rules to the auditor.
Kathy Petronchack, director of IRS practice and procedure at alliantgroup, LP in Houston, told the committee that the IRS appears to be using alternative dispute resolution procedures less frequently, which is driving up compliance costs for companies.
She also said that the IRS is too frequently reaching out to third parties in the course of auditing small companies, a practice that Hudak said was a pressure tactic.
While Republicans have blamed the IRS for being too aggressive against companies, the IRS has argued for years that its budget has been chopped by the GOP, to the point where it's having difficulty doing its job.
The IRS has said in recent months that it needs $2 billion more to boost its audit staff, and to implement complex laws like Obamacare.
But Republicans have been whittling away at the agency for years now, in large part because the IRS admitted to targeting conservative groups seeking tax exempt status. That led to an investigation into the IRS that led to more problems, including, Republicans say, the destruction of evidence.
That turn of events has increased the pressure on IRS Commissioner John Koskinen, who many Republicans say should be impeached. The House was expected to decide the fate of that request as early as Thursday, but late Wednesday agreed to delay the impeachment vote, most likely until November.