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Credit Card Purchases Open to Increasing IRS Scrutiny

August 29th

credit cardThe Internal Revenue Service have announced plans over the next few months to become more aggressive in their tracking of credit and debit card purchases. They intend to focus more heavily on spotting discrepancies between purchases and the income claimed on tax returns.  Offenders should therefore expect an increase in IRS audits, as well as the more liberal application of penalties and fines to those who commit this form of fraud.

In 2008 the Housing and Recovery Act was passed requiring all credit and debit card transactions be tracked by banks or third-party organizations, and subsequently reported to the IRS. The agency was then supposed to compare this information with income reported by business taxpayers on their annual tax returns, in an effort to maintain tax compliance. At the time, the Treasury Department estimated that such procedures could bring in an extra $10 billion a year in tax revenue.

Housing and Recovery Act Failures

A government report released last week found that the IRS had been somewhat negligent in the actual implementation of the 2008 law

In particular, the report conducted by the Treasury Inspector General for Tax Administration noted that the redesigned income tax forms for 2011 might not be conducive to facilitating the desired communication of information.

There are fears that the new income tax return forms may not match up clearly with the sales reported on Forms 1099-K, Merchant Card and Third Party Network Payments, thereby making it more difficult to notice reporting discrepancies.

Efficiency Improvements to be Implemented

Treasury Inspector General for Tax Administration (TIGTA), J. Russell George, commented that the report clearly demonstrates the need for improvements in the current system. Already the IRS has made adjustments to one tax form and is reviewing other affected forms in order to improve the efficacy of the inspection system as soon as possible.

The report also made a number of other recommendations, including better monitoring of amounts reported for merchant card and third-party payments, the inclusion of additional information such as financial reporting on risk assessments, and additional documentation. Thus far, the IRS has agreed with all the recommendations made and is planning to implement corrective actions.


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