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IRS Computers and You

© by Greta P. Hicks, CPA

The IRS is updating it’s 1970 computers in order to provide faster processing of filed tax returns and to more quickly and accurately answer taxpayer’s questions about their tax account. How is this going to affect you the small business owners? You are going to need to be prepared to electronic file returns or file returns using magnetic media and pay taxes using electronic funds transfer. You are going to need to be computer literate in order to comply with IRS filing and paying requirements and in order to protect yourself from IRS invading your privacy.


The Audit

Before the audit begins, the IRS is uses computers to secure data from the Department of Motor Vehicles, the court house records, the credit bureau, other federal and state agencies (such as W-2 and 1099 forms), and other third party public records. No more is the IRS going into an audit blind. They probably know more about you that you do yourself, and you need to find out what they know. When you go in for the audit conference, ask the auditor for a copy of the records they have in your file. They are suppose to give it to you.


Electronic Filing

Electronics will affect the way you file your income, employment, and pension tax returns. The IRS is pushing themselves and taxpayers towards a paperless tax system. By 1996, the IRS will be accepting completed Forms 1040, Individual; 1041, Trust and Fiduciary; and 1065, Partnership; and all 940 series (employment tax) forms electronically. For some larger employers filing electronically or on magnetic media is already mandatory.


Non-Taxable Fringe Benefit

The IRS is encouraging employers to offer electronic filing to its employees as a non-taxable fringe benefit. If you are interested, refer to your local telephone directory for the IRS Electronic Filing Coordinator.


Electronic Funds Transfer

Beginning in 1997, employers with $50,000 in federal tax deposits will be required to pay the employment taxes by using electronic funds transfer rather than writing the IRS a check. Currently employers who have more than $47 million in deposits are using the electronic funds transfer payment system. Some employers are experiencing difficulties complying with the rigid time elements of the EFT system.


Lockboxes

The IRS wants the money in the bank quick and has contracted with selected banks to receive and process checks through a lockbox system. Below is a partial list of payments which are to be mailed to the lockbox address rather than the Service Center address:

  • Form 1040ES Estimated Tax Payments for Individuals
  • Form 1040V Voucher for Individual Taxes Due
  • Form 4868V Payment for Extension to File Individual Return
  • Form 1040PC Payments Due on Form 1040PC, Individual Return
  • Form 1040ELF Payments Due with Electronically Filed Individual Return
  • CP Notice 521 Payment on Installment Agreement


Federal/State Cooperation Agreements

The IRS and the states are working on a federal/state electronic filing program and for 1996 there will be over 30 states where taxpayers will electronically file only one time for both the state and federal returns. Another program in the making is a Simplified Tax and Wage Reporting System which will require employers to file wage and information returns only one time and the information will be shared between the appropriate federal and state agencies.


IRS Computer Targets Industries

The IRS is using computers extensively in their Market Segment Specialization Program (MSSP), the District Office Research and Analysis Program (DORA), and the National Office Research and Analysis Program (NORA). The purpose of these programs are to download taxpayer data perform certain analytical tasks to determine compliance within industries and target industries for audits. Each IRS office has it’s own separate list of industries it is targeting but some reoccurring targets include doctors, attorneys, auto dealers, construction companies, and clothing manufacturers.

The IRS is also securing data from the states such as lists of persons with states licenses and determining whether those persons have filed income tax returns. Most research projects are in their infancy but if you get a call or letter for a compliance check, your industry has probably been targeted. You always have the right to have your representative present , the right to ask why the IRS needs to know the information and the right to know why you are being audited.


The Super Highway

You can access the IRS’s Internal Revenue Information Services (IRIS) bulletin board to download and print forms, publications, instructions, monthly newsletters, notices, and announcements. Call 703-321-8020 or ftp.fedworld.gov. Users of World Wide Web services should point their Mosaic client or other Web browser to http://www.-fedworld.gov. FedWorld’s help desk offers technical assistance during business hours at 703-487-4608.


Small Business Advocate

If you feel like the IRS is picking on small businesses and have a specific recommendation on how your paper work burden can be reduced, write to IRS Office of Small Business Affairs PC, Room 1313, 1111 Constitution Avenue, NW, Washington DC 20224.


Invasion Of Privacy

The IRS is exchanging information with other tax agencies, other federal agencies, and other state/local agencies. If you are concerned that your private taxpayer data is not being protected write: Robert N. Veeder, IRS, Privacy Advocate, 1111 Constitution Ave, NW, Washington, DC 20224.


Computer Friendly

If you are not friendly with you computer, you may need to get friendly. The computer age is upon us and the IRS is making progress. Look for a number of changes in IRS requirements during the next four years. For larger companies many are currently required to electronically file and electronically pay. Your company may be next on the list. Are you ready?

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List of Articles by Greta P. Hicks, CPA

GRETA P. HICKS, CPA and former IRS manager, concentrates in solutions to IRS problems and advises business and tax professional on IRS policies and procedures. Ms Hicks is owner of TAX SOLUTIONS, Inc., a company providing educational materials and programs on solutions to IRS problems and is a nationally known speaker and writer on solutions to IRS problems. To arrange for consultation contact: Greta's web site: http://www.gretahicks.com

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