Hazards of the IRS Audit by Mail

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The IRS’ Audit by Mail program has come under fire recently. This is due to complaints about tax returns documents mishandled or not received by the correct personnel in the IRS resulting in extra taxes levied where there should not be.

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A government watchdog, the Treasury Inspector General for Tax Administration (TIGTA), has produced a report detailing such incidents. For instance, the IRS sends a letter to a taxpayer on certain tax issues asking for documentary proof of eligibility for tax deduction within 30 days. But often the results produced by the IRS have been ‘inaccurate and overstated’. Nevertheless, the taxpayer then provides the document as requested and mails it back to the IRS. Another potential problem occurs in the form of delays in mail processing and delivery resulting in a late submission past the 30 day deadline. The late receipt of the documents by the IRS will cause the taxpayer to be assessed with extra taxes, often wrongfully. Although the final tax figure can be abated but this often takes time, an average of 159 days, according to the TIGTA report.

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In an effort to clean up its act, the IRS was scheduled to implement a more efficient mail processing system in October 2009 but this has been delayed to the end of the next fiscal year in 2010. When pressed to comment, the IRS merely confirmed that they were ‘studying the possibilities’. Another means to smoothen the process is to use fax machines to accept taxpayers’ information. But it is widely understood that this does not dispel the problems, they may only alleviate some inconvenience.

In the meantime, vocal complaints have been brought up across the board by many affected parties such as accountants and ‘enrolled agents’ who are engaged by taxpayers to handle their tax disputes. Besides the TIGTA, other government watchdogs such as the National Taxpayers Advocates have also highlighted the same problems.

Nevertheless, the numbers of correspondence audits have been steadily on the rise. In the fiscal year 2000, the number of correspondence audits numbered 440,000, compared to 1.1 million in fiscal year 2007. The majority of correspondence audits have to do with the Earned Income Tax Credit (EITC).

Besides the EITC, the other main item pertaining to audits by mail have to do with ‘discretionary’ correspondence, which involves 123 million taxpayers who do not have self-employment, farm or rental real estate income. Under this category of ‘discretionary’ correspondence, the main element challenged by the IRS are the un-reimbursed employee business expenses and charitable and mortgage deductions, which numbered 234,508 audits in 2007.

Industry players say one big problem with these ‘discretionary’ correspondence audits is that sometimes the taxpayer does not actually owe anything but in fear of the IRS, they pay up anyway. Such cases came up to 17% of total audits by mail in 2007 while in 2005 it was 26%.


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