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Automated IRS Examinations

October 14, 2014

IRS reviewing more tax returns for accuracy and requesting additional information from tax payers.

The difference between the taxes actually collected by the IRS and the taxes that should have been reported and paid is referred to in Congress as the tax gap. The IRS indicates that there are three reasons for the tax gap: underreporting, underpayment and non-filing. One of the tools available to the IRS to combat underreporting is automated IRS examinations. These usually take the form of either a correspondence examination (vs. an IRS office or field audit) or the automated under-reporter program.

In 2013 the IRS conducted 5.7 million correspondence examinations resulting in $40.4 billion in additional taxes. This has boosted the examination coverage rate for individuals with incomes below $100,000 from about 1% to 6.9% and from 0.6% to 7.3% for individuals reporting incomes between $100,000 and $200,000. These are substantial increases in the probability of your return being reviewed and additional explanation or information being requested from you.

The focus of a correspondence examination is well defined and is usually on a specific schedule or line item on the tax return rather than on the entire return. However, if something unusual is identified, the scope can be expanded or the case referred to a field or office audit agent. The issues are usually less complex than those involved in office or field audits, typically involving requests for records and supporting documentation.

Various notices are used to contact the taxpayer. We always advise that whenever and however you are contacted by the IRS you should immediately contact us. Regardless of the type of IRS examination, you have the right to be represented by a CPA or enrolled agent and we establish this representation by completing a Power of Attorney and Declaration of Representative form with you for this purpose. Once we are engaged, we can use the Practitioner Priority Services line to contact the IRS on your behalf and resolve questions and issues as fast as possible.

The IRS automated under-reporter program produces correspondence indicating a potential miss-match of information the IRS has received from information returns such as 1099 forms and the individual’s income tax return. This program usually results in contact 12 months or more after the individual filed their return and requests a response within 30 days of the notice date. This is a very short amount of time for you to look through financial records that are over a year old and likely filed away. You should not assume that if you and the IRS could not find an item on your return that it was not reported.

As with the correspondence examination, we will likely have you execute the appropriate form to name us as your representative and, with your help, we will address the IRS concerns to hopefully eliminate or mitigate the amount of additional taxes and penalties you may owe. For more information on IRS examinations, please contact us.

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