Improving IRS Correspondence Audit

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In the recent IRS Oversight Board public forum, some suggestions on improving the IRS correspondence audit was brought up. In order to appreciate these suggestions, you need to know some pertinent facts about the IRS audit process as it is conducted today.

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Generally, audits are conducted when the IRS requires further information or clarification on some aspect of a taxpayer’s tax submission. This would involve reviewing the taxpayer’s tax return or resolving questionable details within the return. The audits can either be conducted via the mail, over the phone or face-to-face at the taxpayer’s business premise. When the information sought by the IRS is not very extensive or the issue is not complex, the agency usually conducts a correspondence audit via the mail.

According to Margaret Begg, Compliance and Enforcement Operations Unit in the Treasury Inspector General for Tax Administration’s (TIGTA) office, the correspondence audit is “less intrusive, more automated, and conducted by examiners who are trained to deal with and focus on less complex tax issues”.

Between 2004 and 2008, the statistics show that on average, each correspondence audit resulted in an additional $6,800 in recommended tax revenue per audit. This came from more than 5.1 million correspondence audits that recommended about $35 billion in additional taxes. This figure makes up about 60% of the approximately $58 billion in total recommended additional taxes from all individual audits between 2004 and 2008. Correspondence audits are the cheapest to conduct and have been proven to be effective, thus its use is increasing.

But the main drawback of the correspondence audit has to do with the amount of time it consumes. Although approximately 48% of taxpayers were satisfied with the service they received during the correspondence audit, the source of greatest dissatisfaction could largely be attributable to how much time it takes to get through the process.

Begg disclosed that “the top three areas of dissatisfaction involved the time spent on the audit, the ease of getting through to the IRS on the phone for help, and the overall length of the audit from start to finish. The (public forum) results suggest that the IRS needs to streamline the process so it becomes less time consuming for taxpayers.”

Patricia Thompson, chair of the tax executive committee in the American Institute of Certified Public Accountants (AICPA) has urged the IRS to resolve issues pertaining to correspondence audits namely the time the IRS takes to resolve issues, the difficulty faced by taxpayers in contacting the IRS about the status of their case and the large number of unreturned phone calls by the taxpayers to the IRS.

Thompson also suggested that the IRS reviews the criteria it uses to determine which types of returns are being selected for review under the correspondence audit program. For example, it appears the IRS makes lots of requests for tax deductions like miscellaneous itemized deductions, state and local income taxes and real estate taxes. But the majority of taxpayers selected for audits on these matters are in the alternative minimum tax position, where these deductions do not change the amount of their tax liability. This results in the audit being closed with a “no charge” conclusion, thus wasting the resources of the IRS and the taxpayer’s time.

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