Popular search terms:

MSP #4: AUDIT RATES

The IRS Is Conducting Significant Types and Amounts of Compliance Activities That It Does Not Deem to Be Traditional Audits, Thereby Underreporting the Extent of Its Compliance Activity and Return on Investment, and Circumventing Taxpayer Protections

TAS Recommendations and IRS Responses

1
1.

TAS RECOMMENDATION #4-1

In collaboration with the National Taxpayer Advocate, conduct a comprehensive review of its audit definition under Revenue Procedure 2005-32 to reflect IRS compliance activity today, and the application of the Taxpayer Bill of Rights.

IRS RESPONSE TO RECOMMENDATION: ​There has been no notable change in the types of compliance activities to warrant this review nor has there been a change to IRC Section 7605(b). Revenue Procedure 2005-32 specifies what is considered a closed case; a reopening; and taxpayer contacts and other actions that are not examinations, inspections, or reopenings. Specifically, Section 4.03 defines the four categories of IRS contacts that are not examinations, inspections, or reopening of closed cases:

(1) narrow, limited contacts, such as to correct mathematical errors;

(2) IRS-administered programs in which taxpayers voluntarily participate, such as the Advance Pricing Agreement program;

(3) reconsiderations of tax periods affected by positions taken by the taxpayer or a related taxpayer in other years, such as a change to a carried-back item that affects the carryback year; and

(4) contacts for one purpose that result in information relevant to a different purpose, such as an inspection of a taxpayer’s records in investigating a possible Title 31 violation.

These categories and examples describe the nature of the IRS’ contacts, and are not meant to be exhaustive, exclusive, or limitative. As such, they ensure Revenue Procedure 2005-32 remains relevant and applicable to current compliance contacts, even when specific compliance methods evolve. Taxpayers are informed of their rights during examinations as well as other IRS contacts
with taxpayers, where required.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate fundamentally disagrees with the IRS that there has been no notable change in the types of IRS compliance activities to warrant comprehensive review of its audit definition under Revenue Procedure 2005-32 to reflect IRS compliance activity today, and the application of the Taxpayer Bill of Rights. As noted in the Most Serious Problem, the IRS conducted in the range of approximately eight to nine million “unreal” audits for fiscal years 2014 through 2016, as compared to approximately one million “real” audits annually during the same time period. “Unreal” audit compliance work of this scope certainly warrants IRS review and reconsideration of its definition of an audit. In addition, as noted in the ACA context above, there are circumstances where the IRS essentially conducts a “real” audit under the guise of an “unreal” audit, thereby circumventing the IRC § 7605(b) protection against repeat examinations.

The National Taxpayer Advocate emphasizes that, as a general matter, the definition of an audit should include both pre-refund and post-refund examinations of returns that, like correspondence examinations, require the taxpayer to provide some level of documentation. Such a definition would recognize the “real” audit-like nature of some of the IRS’s “unreal” audit work and provide taxpayers with appropriate rights and protections.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

2
2.

TAS RECOMMENDATION #4-2

Include “unreal” audits in its audit rate and ROI calculations to properly reflect the actual compliance activity that it conducts.

IRS RESPONSE TO RECOMMENDATION: ​​​​An IRS audit is an examination or inspection of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct. Audit coverage should only include contacts that meet the IRC Section 7605(b) definition. As mentioned above, the IRS Data Book provides data on returns examined, number of AUR cases, and number of ASFR cases. Additionally, the IRS’s budget measures, published annually in the President’s Budget and other annual reports, already include the measure Automated Underreporter (AUR) coverage in addition to Examination coverage. Finally, the ROI for major enforcement programs reported in IRS’s annual budget request already includes ASFR as part of the Collection ROI as well as a separate ROI for AUR (FY 2019 Congressional Justification, pp. 79-80, available at http://cfo.fin.irs.gov/SPB/BudgetFormulation/FY_2019/FY_2019_CJ.pdf).

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate believes that the IRS should provide a complete and accurate picture to the taxpaying public of all of its compliance activity, both “real” and “unreal,” by including “unreal” audits in its audit rate and ROI calculations. As noted earlier, we disagree that audit coverage should only include taxpayer contacts that meet the IRC § 7605(b) definition. There is no prohibition on the IRS publishing rate and incidence (by income) information on all of its compliance touches. In addition, as mentioned above, this expanded reporting might benefit the IRS in deterring noncompliance and provide useful data that could be used to appropriately allocate its resources.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

3
3.

TAS RECOMMENDATION #4-3

Grant taxpayers the opportunity to seek Appeals review in certain “unreal” audit cases, such as in certain math error and AUR cases where Appeal rights do not already exist.

IRS RESPONSE TO RECOMMENDATION: ​​​Current procedures grant taxpayers the right to appeal during the AUR and ASFR programs. In both the AUR and ASFR programs, taxpayers receive Publication 1, Your Rights as a Taxpayer, which discusses Appeals rights and processes. In addition, for AUR, the CP2000 notice references Publication 5181, Tax Return Reviews by Mail, which provides specific information on the appeals process. For ASFR, Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree, is also provided. With respect to returns that are adjusted using math error authority, taxpayers have the right to request an abatement within 60 days of the notice date. Then, either the assessment is abated or their case is sent for audit where the taxpayer will receive formal appeal rights if they still do not agree.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate disagrees with the IRS that it has already implemented her recommendation to grant taxpayers the opportunity to seek Appeals review in certain “unreal” audit cases, such as in certain math error and AUR cases where Appeal rights do not already exist. As discussed in the Most Serious Problem, while taxpayers have the right to appeal for almost all “real” compliance activities, which is in accord with the Taxpayer Bill of Rights, such rights do not necessarily exist or are extremely limited in the “unreal” audit context. For instance, a taxpayer does not have the opportunity to seek Appeals review in a math error case, unless, as the IRS notes, the taxpayer responds to the math error notice and requests abatement of the tax within 60 days. However, if the same issue arose in the context of a “real” audit, the taxpayer would have the right to go to Appeals. This undermines the right to appeal an IRS decision in an independent forum. Similarly, depending on the amount of time left in the period of limitation on assessment, a taxpayer might not have the opportunity to seek Appeals review in an AUR case.

The lack of opportunity for Appeals review in certain “unreal” audits has a direct adverse impact on taxpayer rights and, as noted in the Most Serious Problem, disproportionally impacts low and middle-income taxpayers, who are least able to afford the representation to properly challenge the IRS.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

4
4.

TAS RECOMMENDATION #4-4

Where practicable, address all issues in a “real” audit rather than conducting an “unreal” audit and then subsequently conducting a “real” audit.

IRS RESPONSE TO RECOMMENDATION: ​​A significant number of returns reviewed by AUR or adjusted using math error authority have no issues other than unreported or underreported income identified through the document matching process or a mathematical or clerical error noted during return submission. Subjecting such taxpayers to a full audit would increase taxpayer burden unnecessarily and be an inappropriate use of limited IRS resources. Conducting an audit for each unfiled return is also not practicable, and would be costly to nonfilers and the IRS. Audits are the most expensive treatment stream available, and the majority of ASFR issues can be resolved with a voluntarily-filed return.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate understands, and acknowledged in the Most Serious Problem, that there are circumstances (such as a simple math error correction) where an IRS “unreal” compliance contact should not constitute a “real” audit and need not be addressed in a “real” exam setting. Subjecting taxpayers to a full audit under these circumstances would clearly burden taxpayers and be a waste of IRS resources. However, as illustrated by the ACA example in the Most Serious Problem, there are circumstances where the IRS can request information in an “unreal” audit and then request essentially the same type of information in a subsequent “real” audit. This is unfair to taxpayers and abrogates fundamental taxpayer rights and statutory protections. The National Taxpayer Advocate believes that the IRS can take steps to avoid these types of situations and, where practicable, address all compliance issue in a “real” audit.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

en English
X