Oct. 2009

IRS Exams Will Rise: IRS SB/SE Commissioner Chris Wagner

By T. Steel Rose, CPA

Chris Wagner, IRS Commissioner, is responsible for the Small Business/Self-Employed (SB/SE) division. He started with the IRS 32 years ago in California, where he completed all levels of audits and collections. Wagner came to Washington in 2000 and was placed in charge of workflow planning. In that position, he determined the focus areas for exams and collections.

Wagner left SB/SE for three years and worked as deputy taxpayer advocate for Nina Olson. "It was different from compliance," Wagner says. "It was an eye-opening experience. The biggest takeaway was from all the good things the IRS does. We have policies that work for 95% of the cases but not for the special cases. Our effort is to concern them, too. We work a lot with [the taxpayer advocate office] to resolve special issues."

The SB/SE division is an organization with about 28,000 employees who serve about 55 million taxpayers, or roughly one-third of the overall taxpayer base. This group of taxpayers consists of self-employed persons and supplemental income earners, about 9 million small business corporations and partnerships with assets of less than $10 million and about 7 million filers of employment, excise, state, gift and fiduciary returns.

We spoke with Wagner about the current level of exams his department is conducting and what tax professionals should know about his division.

CPA Magazine: How long do you expect the current level of audit activity to continue?

Wagner: Exams will rise for two reasons. We are trying to be successful in what we do. We want to work more cases than we did the year before. I think you will see a continuous rise to bring more money to the till and to get more compliance.

CPA Magazine: What is the success rate?

Wagner: We don't have a number we are trying to hit. The number we are focused on is the number of cases we are trying to close. The big number is the tax gap, which changes over time. We used to do a study every five years; one was conducted in 2004. We now do National Research Program (NRP) audits [to update the study]. There were from 30,000 to 50,000 NRP audits. Now it could be 12,000. We determine under-reporting based on examinations. It takes a year afterward to determine the results.

SB/SE has about 75% of the tax gap and one-third of all taxpayers. The gap is from 82% underreporting, 8% nonfiling and 10% underpayment.

CPA Magazine: How do you measure success?

Wagner: In exam, we measure cases closed, no-change rate, taxpayer audit satisfaction and quality reviews. We review a sample of the work to meet quality standards. We also survey taxpayer and practitioner satisfaction; those numbers are going up.

CPA Magazine: How can practitioners expedite their clients' audits?

Wagner: For exam or collections and un-agreed cases, if [what the practitioner is doing] is not working, always ask to talk with a manager. We also have an administrative appeals process. These officers keep their independent decisions away from the audit situation. If we are not responding, you can always go to the taxpayer advocate.

CPA Magazine: What are some dispute resolution possibilities besides the IRS Nationwide Tax Forums?

Wagner: [IRS examiners] really like to work that room. The other thing, similar to the case resolution room, are offices across the country where you can walk in and get a case resolved. We called it Super Saturdays during the stimulus period. We want to do more of those. We had one in 2008 and 2009. Usually the taxpayer, not the practitioner, takes advantage of those. The practitioners have special hotlines handled by the wage and investment division.

CPA Magazine: How is the hiring and training process for new SB/SE auditors going?

Wagner: We've done significant hiring, but it takes time to get them up to speed. The first two years, they are still in training mode. It takes about three years to be fully trained.

CPA Magazine: How much in demand are experienced CPAs? At what level?

Wagner: SB/SE and the large and midsized divisions are looking for CPAs. SB/SE is looking for people who already have experience as well as new grads. Experienced CPAs can get trained and be productive sooner. Job openings are posted on usajobs.gov.

CPA Magazine: What is the current status of Offers in Compromise (OIC)?

Wagner: It is an area of concern for practitioners, including the down payment, which is nonrefundable. There is a lot of paperwork. We are doing a study to make it simpler.

CPA Magazine: How can our readers help?

Wagner: When working with us on any issue, [the best way to help] is to be prepared for a meeting to try to resolve the issue. We know most taxpayers want to comply; that's why we have an 85% compliance rate. We ask that they try to be timely. We want to be as expeditious as possible. The tax preparer should be looking at things that don't look right. It is also important that practitioners stay up-to-date on tax law changes.

We ask them to inform our local office about compliance. We want to know about abusive tax avoidance schemes. Rather than not letting clients get involved, inform a manager at the local office. They can get it to the right place. The Whistleblower Office is for when you have firsthand knowledge.

CPA Magazine: IRS Commissioner Douglas Shulman announced that the IRS would help taxpayers during the recession, but specifics have not followed. What do you see?

Wagner: We're trying to offer more flexibility. People who have defaulted on installment agreements used to get kicked out of the system and had to start over. Now we ask that the taxpayer give us a call. The same goes for an OIC or a compliance problem.

We are having a specialist determine the latest real property value because property values are changing every day. This hopefully makes it a little easier in hardship situations.

CPA Magazine: What do you expect in terms of tax preparer registration?

Wagner: The commissioner has authorized a tax preparer study to get the preparers to help reduce the tax gap and make taxpayers more compliant.

CPA Magazine: What is your biggest challenge?

Wagner: Our biggest challenges are getting the new hires trained by experienced personnel and determining the best method of bringing on new hires so we have competent people for you to deal with.