Common Problems in IRS Correspondence Audits

Tax Professionals' Resource
September 18, 2012 — 1,540 views  
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Correspondence audits are often created by software that performs the task of comparing tax returns against certain basic criteria. Those that fail to meet that standard are forwarded to the correspondence unit. Some taxpayers receive a 566 letter from the Internal Revenue Service (IRS) advising them that their return will be examined and that certain documents are needed. Others are sent a CP2000 notice containing adjustments concerning third-party documents related to the return. In some cases, a third party has submitted different information, and in other cases, the information supplied by the third party is missing from the taxpayer’s return.

What You Should Know

While the IRS has made extensive use of correspondence audits in recent years, a survey conducted by the agency revealed that only 48% of the respondents indicated that they were either “somewhat satisfied” or “very satisfied” with the current system.

Accounting Professionals React

CPAs throughout the United States are well aware of the challenges and problems taxpayers have to contend with when they undergo a correspondence audit. Not surprisingly, problems that were identified by those who belong to the AICPA and then presented to the IRS dovetail with those revealed in the taxpayer survey. On the plus side, one authority commented that the IRS is making a greater effort to delay using a deficiency notice until all correspondence received from the taxpayer has been reviewed.

The AICP urges the IRS to take the following steps for the sake of everyone concerned: 
● Verify that tax returns are being properly selected for review in conjunction with the correspondence audit program; an internal review should be conducted.
● Compensate for delays related to the processing of phone calls and correspondence, e-services should be expanded. This would help in improving communication between the taxpayer or preparer and the IRS.
● Acquire the resources needed to properly administer existing tax laws and collect what the government is due.

Another Problem with the Correspondence Audit Program

At times, taxpayers are asked to verify certain tax deductions, including real estate taxes, local and state taxes, and various itemized deductions. However if such a request is made to taxpayers with alternative minimum tax status, their ultimate tax liability is not affected, resulting in a waste of IRS resources and time. This indicates that an additional filter of some kind is needed within the correspondence program to delete those cases from the IRS’ active audit file.

Tax Professionals' Resource