by Greg Yoder, CPA

The Internal Revenue Service this week unveiled its latest compliance initiative. According to the IRS Commissioner, “Clearly it’s time to try something new. We currently estimate that uncollected taxes exceed $300 billion. The current regime of civil and criminal penalties isn’t working.” Speaking at a joint press conference with the ASPCA, the commissioner explained why the new program – dubbed Kittens for Compliance – was developed. “It’s simple, really. We have two big problems: tax evasion and unwanted kittens. The shelters are full, the coffers are empty. We felt that kittens could solve both these problems.

An ASPCA spokesperson added, “Naturally, the ASPCA will continue to urge responsible pet owners to have their cats spayed and neutered. We’ve managed to raise awareness of the problem significantly over the years, but there are still hundreds of thousands of unwanted kittens each year, and if we can find homes for these beautiful animals while increasing tax compliance, we’re on board.”

Technically, the new penalty falls under the substantial understatement provisions of Internal Revenue Code §6662. A little-noticed provision in last year’s legislation providing the 2% payroll tax holiday contained new subsection 6662(k):

The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section. Such regulations may include the responsible assessment of small animals.

In practical terms, the IRS identifies taxpayers who it believes have either significantly underreported their income or taken unsupportable deductions or losses. It schedules a field audit at the taxpayer’s home or place of business, and the agent conducting the audit brings along an ASPCA volunteer – and a litter of kittens. Typically, the agent begins the audit by explaining the expanded penalty provisions and asking the taxpayer whether he or she wants to ‘clarify’ anything on the tax return.” Often that’s enough to get taxpayers to report additional income and agree to additional taxes, interest, and non-feline penalties.

But many taxpayers under audit still maintain that their returns are complete and accurate. “If they can produce the documentation, that’s great,” says the IRS. If not, they end up with anywhere from one to four kittens, depending on the size and the flagrancy of the understatement.

The initiative has resulted in 2,000 audits with collections in excess of $25 million, as well as the placement of 110 kittens. Currently, the IRS is investigating the use of small amphibians and reptiles in situations where taxpayers can produce valid medical evidence of a feline allergy.

Political response to the new program was swift. Congress immediately ended its recess to address the matter. A bipartisan coalition of representatives issued the following statement: “We have heard the concerns of our constituents, and we have made ending this divisive initiative our number one priority for the current legislative session.”

The White House refused to comment on the issue. The press secretary referred all inquiries to the Treasury Department, saying, “The President is really more of a dog person.”