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MSP #08: Correspondence Examination

The IRS’s Correspondence Examination Procedures Burden Taxpayers and Are Not Effective in Educating the Taxpayer and Promoting Future Voluntary Compliance

TAS Recommendations and IRS Responses

1
1.

TAS RECOMMENDATION #8-1

Require at least one personal contact between an IRS employee and the taxpayer (this can be satisfied by an outgoing or incoming phone call) before closing a correspondence examination.

IRS RESPONSE TO RECOMMENDATION: The Correspondence Examination program was specifically designed as a mail-based workstream. Returns and issues are selected that are conducive to this type of audit. This workstream supplements other workstreams that necessitate a higher level of taxpayer contact. Current Correspondence Examination procedures in Internal Revenue Manual (IRM) 4.19.13.10.1 require employees to contact the taxpayer or authorized power of attorney by telephone when taxpayer information provided is insufficient and an audit report has been sent. Non-response cases are processed using the Automated Correspondence Examination system (ACE). Use of the system enables the IRS to process specified cases with no, or minimal, tax examiner involvement until a taxpayer reply is received. Because the ACE system will automatically process the case through creation, statutory notice, and closing process, there is no tax examiner involvement when a taxpayer fails to reply to the initial correspondence  contact.

For such no-reply cases, contact is made through letters and notices, since Correspondence Examination does not have the resources to contact every taxpayer by telephone. This correspondence provides the taxpayer with information on the audit issues and supporting documents needed to resolve the issues. In addition, taxpayers are provided options for obtaining more information about the audit process and applicable tax law. Taxpayers can call the Examination toll-free telephone line to secure information about their specific case and/or documentation that will resolve the taxpayer’s issue(s).

We understand that taxpayers with lower incomes or education levels, or with a language barrier, may have more difficulty understanding the tax laws. We appreciate the collaboration of the Taxpayer Advocate Service on the Audit Improvement Team focused on examinations involving the Earned Income Tax Credit (EITC). The team developed an online tool, the Form 886-H-EIC Toolkit, that helps a taxpayer determine the correct documents needed to resolve an audit. The Toolkit is tailored to the taxpayers’ situations, based on their responses. This effort was implemented as a result of  feedback received from tax preparers, Low Income Tax Clinic counselors, and taxpayers who shared concerns about identifying the documents needed to prove EITC eligibility.

CORRECTIVE ACTION: N/A

TAS RESPONSE: First, the National Taxpayer Advocate would like to acknowledge the IRS’s collaboration in creating the Form 886-H-EIC Toolkit, which provides a valuable resource for taxpayers. Notwithstanding  this development, the Toolkit does not eliminate the need for personal contact. The Most Serious Problem discusses a TAS study showing the benefits of expanded, personal communication with taxpayers. Direct contact can help educate taxpayers about what they did wrong and how to avoid making the same mistakes in the future. Although the IRM instructs employees to make an outgoing call during a correspondence examination when taxpayer information is insufficient and an audit report has been sent, this may be too late in the process. Unless taxpayers know to request an extension, they only have 30 days to provide the correct information. Providing a personal contact earlier in the process, before the exam report is sent, may assist the taxpayer in providing the correct information the first time, or fixing it before the IRS goes through the process of issuing the audit report.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

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2.

TAS RECOMMENDATION #8-2

Measure taxpayers’ filing compliance (including filing a return, making an error on a return, and underreporting taxes on a return) following correspondence examinations and apply this data to guide audit selection based on the resulting impact on compliance.

IRS RESPONSE TO RECOMMENDATION: Due to the large volume of taxpayers we examine in a given year, the monitoring of individual taxpayers’ post-audit behavior would be cost prohibitive.  In addition, we cannot assume a change in a taxpayer’s behavior is a result of an examination. A taxpayer’s behavior can change from year to year for a variety of reasons, including changes to their employment or other environmental factors. We also may not know whether a subsequently-filed return is accurate. To know for certain whether a return is accurate, or the reason for the behavioral change, would require a follow-up examination of the taxpayer. This would be burdensome to the taxpayer and may not represent the most effective use of IRS resources. For this reason, from a cost-benefit perspective, we do not believe this is the best use of limited IRS resources. However, we do analyze closed examination results for use in improving our audit selection process. We will continue to use aggregated examination data to find areas that need further taxpayer education, form or instruction changes, or outreach events.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS’s response provides a general description of how it uses aggregated examination data, but does not provide any details about whether it analyzes taxpayers’ subsequent filing behavior after examinations. The IRS raises a valid point that monitoring the subsequent filing behavior of every taxpayer who underwent an exam might be cost prohibitive. However, the IRS could instead use samples of different taxpayers audited for different issues to determine how the exams might educate taxpayers or lead them to repeat the same mistakes. While the IRS is correct that a taxpayer’s behavior can change from year to year based on several factors, the IRS could conduct an analysis and control for other factors so that it was comparing like taxpayers.  The IRS could compare taxpayers’ likelihood to make a specific mistake for taxpayers who were previously audited on an issue versus those who were not, controlling for things such as filing status, income, age, and other factors. A discrepancy between these two groups would suggest that the examination played a role in changing taxpayer behavior.

It is surprising that the IRS is characterizing a follow-up examination as burdensome, given that it is common practice for the IRS to conduct related-year audits on taxpayers already under audit for another year. Finally, although conducting audits does use resources, the IRS should consider the cost benefits that would result from increasing voluntary compliance and better selecting taxpayers for audit.

Based on the limited actions the IRS has committed to in its response, the National Taxpayer Advocate disagrees with the IRS’s characterization of this response as “agreed to in part.”

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

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3.

TAS RECOMMENDATION #8-3

Continue to assign a single employee for a  correspondence examination when the IRS receives a response from the taxpayer either by phone or correspondence, and expand on this right by retaining this employee as the single point of contact throughout the remainder of the exam.

IRS RESPONSE TO RECOMMENDATION: The Correspondence Examination program was specifically designed as a mail-based workstream. Returns and issues are selected that are conducive to this type of audit. When Correspondence Examination receives a response from a taxpayer or representative, it is assigned to one employee. This employee remains as the single point of contact. If additional responses are received on the case, those responses are generally reviewed by the same employee.

Given the design of the program, employees do not have telephones able to receive direct external incoming calls. Instead, the program was designed for Correspondence Examination enterprise telephone calls to be answered corporately for all campus operations. When taxpayers call the Correspondence Examination toll-free line, their call is routed to the next available assister. The assistor is experienced, has access to case history, and will work with the taxpayer toward resolution. A phone call alone does not constitute assignment to an employee. An employee is not assigned to the case until documentation is received from the taxpayer. However, if the taxpayer has responded to the initial contact letter with correspondence and later calls the toll-free line and is not satisfied at the end of the call, the taxpayer has the option to have the assigned tax examiner return their call.

The program appropriately implements the direction in the IRS Restructuring and Reform Act of 1998 to develop procedures to the extent practicable and if advantageous to the taxpayer for one IRS employee to handle a taxpayer’s matter until it is resolved. Given the technology limitations, it is not practical to assign one employee to handle the taxpayer’s correspondence examination from beginning to end; however, upon receiving a written response, we are able to assign one employee to review. We disagree with the Recommendation’s characterization of this assignment procedure as a “right” to be expanded.

CORRECTIVE ACTION: N/A

TAS RESPONSE: It is troubling that the IRS disagrees with “the Recommendation’s characterization of this assignment procedure as a ‘right’ to be expanded.” First, the ability to have a single employee assigned is most certainly a taxpayer right, provided by section 3705(b) of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98). Second, the IRS’s implementation of this right should be expanded because the IRS’s current procedures only implement this right half-way. The IRS assigns a single employee as a point of contact after a taxpayer submits documentation during a correspondence exam. This misses taxpayers who call in prior to submitting documentation. The Most Serious Problem notes how many callers in correspondence exams are repeat callers; yet, these taxpayers must talk to a different employee each time. Furthermore, as the IRS implements programs using virtual service, taxpayers may share documentation during a video call, yet not receive the same benefit as a taxpayer who mails in documentation because the IRM only requires assigning an employee upon receiving mailed correspondence from the taxpayer. Even for taxpayers who have submitted documentation and been assigned to a single employee, this assignment is of little use if when they call to ask a question, they speak to an employee not familiar with their case.

Although taxpayers who are not satisfied with the employee on the phone can request the assigned tax examiner return their call, this practice burdens the taxpayer and wastes IRS resources by having two contacts where one would likely suffice. The IRS’s reference to technology limitations appears disingenuous considering the IRS itself designed the system that makes it impossible for employees to receive direct, external, incoming calls. The National Taxpayer Advocate hopes the IRS will reconsider its policy and remove the technological limitations it has placed on the program.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

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

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4.

TAS RECOMMENDATION #8-4

Per RRA 98 § 3705(a), place on outgoing taxpayer correspondence the name and telephone number of the tax examiner who reviewed the taxpayer’s correspondence where a tax examiner has reviewed and made a determination regarding that specific documentation.

IRS RESPONSE TO RECOMMENDATION: ​In compliance with section 3705(a) of the Restructuring and Reform Act of 1998, the Internal Revenue Manual provision addressing Correspondence Examination letters dictates that any letter sent in reply to taxpayer correspondence must identify the originating tax examiner for all subsequent contact and include a telephone number. See IRM 4.19.10.1.5.1(6). The toll-free telephone number is provided since tax examiners do not have telephones capable of receiving direct external incoming calls. Extensive training was provided to all examiners on all audit issues to effectively respond to telephone calls. The Correspondence Examination toll-free line allows taxpayers to reach an experienced assister at any campus for immediate assistance without having to wait for a return call from an individually-assigned examiner. If, at the end of the call, the taxpayer is not satisfied, they have the option to have the assigned tax examiner return their call.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS is ignoring the purpose of RRA 98 § 3705(a) by only providing a general toll-free number. RRA 98 § 3705(a) requires “the name, telephone number, and unique identifying  number of an Internal Revenue Service employee the taxpayer may contact with respect to the correspondence…” (emphasis added). There is little point in providing a telephone number if it does not allow the taxpayer to reach the specific employee whom he or she “may contact with respect to the correspondence.” If the IRS is concerned that taxpayers would prefer to speak to any examiner to avoid the time waiting for the specific employee to return the call, then the IRS could have the employee’s voicemail message provide the general toll-free number for taxpayers to call who did not want to wait for a call back. Similar to the above response, the IRS is placing blame on self-imposed technology  limitations.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

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5.

TAS RECOMMENDATION #8-5

Conduct surveys of taxpayers following correspondence examinations to gauge their understanding of the examination process and their resulting attitudes towards the IRS and towards filing and paying taxes.

IRS RESPONSE TO RECOMMENDATION: The IRS has conducted Customer Satisfaction (CSAT) survey analysis since the Restructuring and Reform Act of 1998. The Small Business/Self-Employed Division’s (SB/SE) research function completes the analysis and reporting of CSAT survey results for functions in SB/SE on an annual basis.

The CSAT survey questions are constructed in a manner to solicit feedback from the taxpayer to gauge their understanding of the examination process and their attitude and feelings toward the IRS. Taxpayers are asked to rate the overall way the IRS handled their audit and if our correspondence to them adequately explained the examination process. The taxpayer is also invited to provide any positive or negative feedback and comments regarding their experience.

The survey results are reviewed and used to identify process improvement opportunities, prepare for program reviews, and identify training issues. In addition, we use the results to identify areas of poor communication within the examination process and revise letters as warranted, to increase clarity to the taxpayer. We review the survey questions annually for any necessary changes.

The survey population is determined by the contractor from the total population of all closed cases with the expectation that a minimum of 193 taxpayers will be surveyed per campus. The data on all closed cases are sent to the survey contractor monthly. Surveying the entire correspondence exam population would be cost prohibitive.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate disagrees with the IRS’s characterization of this recommendation as implemented. The Most Serious Problem explains how the customer satisfaction surveys do not capture taxpayers’ attitudes towards the IRS and filing and paying taxes. Open-ended questions that allow taxpayers to provide any additional comments will not capture statistically valid data regarding whether taxpayers have changed their attitudes towards the IRS and meeting their tax obligations. The National Taxpayer Advocate would welcome the opportunity to work with the IRS to draft additional questions that would help the IRS better determine the effects of correspondence exams on taxpayers.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

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6.

TAS RECOMMENDATION #8-6

Collect data regarding which forms of documentation taxpayers sent in a correspondence examination that were deemed insufficient and revise existing correspondence examination letters to better explain documentation requirements.

IRS RESPONSE TO RECOMMENDATION: Systemic data collection tools do not exist for this data. However, there are other internal processes that provide this type of information. Tax examiners are required to document the workpapers with the information the taxpayer provided. In addition, the responses to taxpayers explain why the information was insufficient and what additional information is needed. There are internal processes that provide feedback to program owners. For example, employees elevate documentation issues through their management chain and other employee feedback vehicles, such as the Servicewide Electronic Research Program (SERP) Feedback Tool.

Program owners review the feedback received to determine if existing letters need to be revised and if the information document requests need to be clarified to provide clear guidance to taxpayers on acceptable documentation to support the issue under examination.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is pleased the IRS has internal processes in place to provide information to program owners about what types of documentation are confusing for taxpayers or where the IRS could provide further guidance.  Although systemic data collection tools are not available, the National Taxpayer Advocate hopes the IRS will highlight the importance of examiners providing this information to program owners through employee training and other messaging.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

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

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7.

TAS RECOMMENDATION #8-7

End the practice of using the combination letter and provide taxpayers with an initial contact prior to issuing the preliminary audit report.

IRS RESPONSE TO RECOMMENDATION: The IRS has previously acted to reduce the use of combination letters. We use combination letters on a small percentage of cases in correspondence examinations, and only when the IRS already has internal information that supports the issues for the examination. The taxpayer still has the opportunity to dispute the facts and provide supporting or correcting  documentation.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is disappointed that the IRS continues to use combination letters, which send a message to taxpayers that the IRS has already made a determination before the examination begins. These letters infringe upon taxpayers’ right to challenge the IRS’s position and be heard. If the IRS only uses combination letters in a small percentage of cases, then it should not be overly burdensome for the IRS to discontinue the practice altogether.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

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