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2012 Obama Budget Surprise: More Tax Audits

President Obama may be planning to slash spending over the next decade, but not on the IRS. The nation's top tax enforcement agency will get $1.1 billion more next year than last if the President's budget proposal is approved.

The bulk of the increased spending will go to adding enforcement and compliance people, who audit, collect and verify the veracity of tax returns, according to a 15-page summary of the Internal Revenue Service's budget request.

That means more audits, more exams and more collection agents pounding on doors to close the gaping "tax gap" -- the difference between what the government believes it is owed and what it receives from taxpayers.

Although the IRS acknowledges that spending more in an era of less might seem odd, the agency collects an average of $4.50 for every $1 it spends on enforcement. That makes beefing up the agency's staff a winning proposition for a government awash in deficits. But if you're a taxpayer who has played fast-and-loose with reporting income or filing tax returns, watch out.

The agency wants to add about 5,112 positions. Nearly 3,000 of those are in some area related to enforcement or collection.

In a press release explaining the budget request, the IRS says these additional employees will help bolster its continuing effort to catch tax cheats who hide their money in foreign bank accounts, ferret out unreported income and send collection agents after tax deadbeats.

Where are you likely to see the biggest impact? According to the budget request, the agency plans to hire:

  • 834 full-time employees to "ensure accurate delivery of tax credits." The report does not specify where these employees will focus their time. However, the IRS has been called to task for failing to stem the flood of cheating in the Earned Income Tax Credit program. The agency also acknowledged it missed a significant number of fraudulent claims for the lucrative new home buyer tax credit.
  • 377 in international enforcement. Thanks to now jailed whistleblower Bradley Birkenfeld, the Swiss government turned over information on more than 4,400 U.S. citizens who were allegedly hiding money in secret accounts last year. That helped touch off a flood of mea culpas from tax cheats convinced that they were about to be caught. The IRS now has about 15,000 disclosures and a massive backlog of complex cases, says Don Rocen, partner at the Washington, D.C. law firm of Miller & Chevalier.
  • 413 collection specialists to resolve delinquent tax accounts and investigations.
  • 415 people to make sure that payment processors, like Visa and MasterCard and PayPal, help the agency identify web-based retailers that are not reporting their sales and income.
  • 497 people to address "tax law changes and other compliance issues" such as the new excise taxes on indoor tanning and fees on importers of branded prescription drugs.
  • 108 people to monitor tax preparers, making sure that they're both honest and competent.
"This means more audits and more risk for people who have been either evasive or negligent in paying their taxes," said Kendall Coffey, a Florida attorney who specializes in tax fraud cases.

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