Dealing with the IRS can be confusing and complicated. The IRS has a lot of power. Taxpayers have certain rights in dealing with the IRS. If you are audited, you may want to seek professional help. There are several types of audits, but the most common are the correspondence audit, the office audit, and the field examination.
We will discuss the correspondence in this article and the other types of audits in future articles.
The correspondence audit program is increasing. The procedures with respect to correspondence audits are fairly simple. Initially, the IRS will send a letter to the taxpayer requesting information or explaining corrections with the solicitation of agreement to the adjustments from the taxpayer. The correspondence audit is handled by correspondence between the IRS and the taxpayer. The IRS sends correspondence to the taxpayer asking for support for items contained on the tax return. The IRS is looking for proof to support deductions taken on the tax return. Some of the items the IRS is looking are proof of itemized deductions taken.
When the taxpayer requests additional information, the IRS will attempt to answer the taxpayer’s questions and telephone contact will be made if feasible. Every effort is made to process replies within 45 days after they are received.
If the taxpayer’s correspondence to the IRS with respect to the audit includes a satisfactory explanation to the proposed adjustment, then a no-change letter will be issued. If the information furnished by the taxpayer is not satisfactory to the IRS, then a 30-day letter will be issued, advising the taxpayer of the proposed tax changes and appeal rights. If the IRS needs additional information, then the Campus will request such by letter from the taxpayer. If the second explanation is not a sufficient basis to resolve the matter, then the return may be transferred to a local office for further review.
If the IRS does not receive an agreement or receives no response from the taxpayer within 30 days of the issuance of its initial contact letter, then the IRS will issue a 30-day letter. If the taxpayer fails to respond to the 30-day letter, then a notice of deficiency will be issued, and the taxpayer will have 90-days to file suit in the United States Tax Court to contest the determination made by the IRS.
The IRS also has an Unallowable Items Program, where the computer identifies items which appear to be unallowable by law. Some of these items include disability income exclusion; deduction for a married couple when both work; gambling winnings; income earned in a foreign country; automobile expenses; medical expenses; federal taxes; utility taxes; automobile license, registration, tag fees or taxes; educational expenses other than taxpayer or spouse; charitable contributions as they relate to automobile expenses; business expenses as they relate to automobile mileage rate; casualty loss; sale or purchase of a personal residence; personal insurance premiums; adoption expenses; personal living expenses; child and disabled dependent care expenses; political contribution; taxes on gasoline and other fuels; income from a possession of the United States; partial exemptions; personal exemptions; itemized deductions relating to medical expenses; interest and taxes; foreign tax; widows and widowers filing status; and several others.
When a return is identified as containing unallowable items, the taxpayer is contacted by correspondence from the IRS Campus and the necessary corrections to the return are made. The correspondence sent to the taxpayer under this program requests that the taxpayer agree to the adjustments which are being proposed by the IRS, to respond with any disagreement in writing. If the taxpayer submits a satisfactory explanation, then the matter is concluded. If not, then the IRS retains the matter for a correspondence examination. Should no agreement be reached, in most cases the IRS will notify the taxpayer of the taxpayer’s appeal rights, and then, if no request for administrative appeal is received, a notice of deficiency will be issued permitting the taxpayer to file a petition in the United States Tax Court. Adjustments made under the Unallowable Items Program are considered to be as a result of an examination, and therefore the taxpayer is entitled to a notice of deficiency and administrative appeal rights.
The IRS also has the Information Returns Program (IRP) to identify cases of unreported income. The IRS receives millions of information returns each tax year. The IRP process begins with the IRS receiving information returns from payers of income. The wage and non-wage information returns are then processed and prepared for computer matching with income tax returns filed by individuals.
The entire process takes approximately 17 months from the time the IRS begins to receive information returns to the time the nonfiler and under-reporter notices are sent to taxpayers. The match identifies cases where taxpayers have under-reported their income on filed tax returns or not filed returns at all. In these type of processes the IRS determines that a taxpayer has unreported income or has not file a return.
For nonfiler cases, a series of several notices are sent to taxpayers requesting them to file their tax returns.
Mathematical/Clerical Error Abatement Program
Mathematical error is defined in Section 6213(g)(2) of the Code as follows:
1. An error in addition, subtraction, multiplication or division shown on any return;
2. an incorrect use of any table provided by the Internal Revenue Service with respect to any return if such incorrect use is apparent from the existence of other information on the return;
3. an entry on a return of an item which is inconsistent with another entry of the same or another item on such return;
4. an omission of information which is required to be supplied on the return to substantiate an entry on the return; and
5. an entry on a return of a deduction or credit in an amount which exceeds the statutory limit imposed by subtitle A or B, or Chapter 41, 42, 43, 44 or 45, * * *.
The correction of mathematical and clerical errors is not considered to be an examination. Therefore, the assessment can be made without giving the taxpayer any notice of deficiency and the taxpayer has no right to appeal to the United States Tax Court. Thus, the IRS is permitted to summarily assess the additional tax resulting from these errors. However, the statute provides that a taxpayer who receives a math/clerical notice of an assessment for additional tax has the right to appeal. The appeal must be made by the taxpayer within 60 days by filing a request for an abatement of the assessment. The taxpayer sets forth any disagreement with the amount of the assessment. Under Section 62l3(b)(2)(A) of the Code, upon receiving a request for abatement from the taxpayer, the assessment shall be abated, and during the 60-day period the IRS may not proceed to collect the tax (Section 62l3(b)(2)(B)). If the taxpayer’s appeal is denied by the Service Center, it will be referred to the examination branch in the Service Center for examination. If the Service Center is unable to resolve the matter, then the taxpayer will be sent a statutory notice of deficiency.
Never, never send original documents to the IRS. Always send copies and send all correspondence by certified mail, return receipt requested.
For other Insights on IRS audits and related topics, check out The IRS and Big Data: The Future of Fighting Tax Fraud; IRS Penalties–A Brief Primer; Representing Taxpayers in Sensitive Audits: A Look at the Fundamental Challenges of an Eggshell Audit.