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MSP #09: CORRESPONDENCE AUDITS

Low-Income Taxpayers Encounter Communication Barriers That Hinder Audit Resolution, Leading to Increased Burdens and Downstream Consequences for Taxpayers, IRS, TAS, and the Tax Court.

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #09-1

Assign the case to an individual examiner who can serve as the taxpayer’s point of contact once a taxpayer contacts the IRS in response to his or her initial correspondence audit contact letter and provide the examiner’s direct phone number.

IRS RESPONSE TO RECOMMENDATION: IRS does not agree to implement TAS recommendation.

The IRS relies heavily on correspondence examinations as an efficient means to address taxpayers with suspected underreporting of tax liabilities. As previously outlined in responses to the National Taxpayer Advocate’s Annual Report to Congress in 2014, 2018, and 2021, correspondence examinations are processed through the Automated Correspondence Examination (ACE) system. Automation is key to achieve efficiencies.

In fiscal year (FY) 2021, the IRS initiated 515,612 correspondence examinations with approximately 1,143 tax examiners. Initial contact letters are sent systemically on a weekly basis. Only cases where the IRS has received a written response from the taxpayer are assigned to a tax examiner and worked outside the automated process until the next step. The tax examiner will send a response letter that identifies them by name and includes Examination’s toll-free telephone number. By calling the toll-free number at their convenience, taxpayers reach the next available examiner. All tax examiners are trained and experienced phone assistors who have access to the taxpayer’s case history and can work with the taxpayer toward case resolution. However, if a taxpayer responds to an examination letter with correspondence and later calls the toll-free line and is not satisfied at the end of the call, they have the option to request the assigned tax examiner return their call.

The IRS has other options for taxpayers to reach examiners and submit documentation. Taxpayers who enroll in Taxpayer Digital Communications (TDC) can send secure messages and upload documents. In general, like with paper correspondence, messages and documentation are directed back to the tax examiner who last worked their case. The IRS has also implemented the Document Upload Tool (DUT), which allows any taxpayer to upload documents to be viewable by examiners on the toll-free line.

Limiting the taxpayer to a single point of contact throughout the entire examination severely limits the IRS’ ability to resolve examinations timely. The taxpayer should have access to the next available tax examiner who can answer the phone and review their correspondence. Examinations should not be delayed because a single point of contact is not available to personally review correspondence or speak to the taxpayer. We believe our current procedures appropriately balance taxpayer service with sound tax administration within our current resource constraints.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS noted that in FY 2021, 515,612 correspondence examinations were initiated by approximately 1,433 tax examiners. Though the IRS uses its Enterprise Planning Scenario Tool (EPST) to determine the number of audits it will conduct based on the number of full-time equivalent (FTE) employees assigned to correspondence audit programs, the IRS continues to cite its planned audit volume as a barrier for altering its existing approach.

TAS acknowledges that absent a reduction in audits or the allocation of additional resources, incorporating personal contact and assigning cases to an examiner that can serve as the taxpayer’s point of contact would be a heavy lift – but these actions are necessary from a customer service perspective. Limited personal interaction is particularly impactful to low-income taxpayers who must rely solely on the IRS’s correspondence audit toll-free telephone services to speak with an IRS employee for answers to their audit and tax-related questions. Currently, only a portion of the calls made to the correspondence audit toll-free phone lines reach an examiner. This is primarily because IRS correspondence audit resources cannot service the volume of inquiries generated from the volume of audits conducted. Assigning cases to an examiner that would serve as the taxpayer’s single point of contact would require the IRS to more appropriately balance correspondence audit resources between taxpayer service and compliance activities.

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 #09-2

Increase phone staffing to deliver an 80 percent minimum correspondence audit toll-free telephone Level of Service.

IRS RESPONSE TO RECOMMENDATION: ​​

​IRS does not agree to implement TAS recommendation.

Tax examiners are trained in all aspects of the examination process including answering the toll-free line, reviewing taxpayer correspondence, making tax determinations, and responding to taxpayers. Shifting resources to increase the toll-free phone Level of Service (LOS) has the negative effect of reducing the number of examiners available to review correspondence, which could delay case resolution. Our staffing model considers the resources needed from the beginning to the end of the examination process to provide quality service to taxpayers both on the phone lines and responding to correspondence.

The IRS has taken the following actions or implemented tools to improve LOS and reduce call volume:

  • Small Business/Self-Employed (SB/SE) and Wage & Investment (W&I) implemented pre-recorded phone prompts to provide information on claiming various credits, documentation to support credits, instructions on finding information on IRS.gov and submitting supporting documents through the Document Upload Tool (DUT).
  • In 2016, SB/SE began piloting Taxpayer Digital Communications (TDC), Secure Messaging, in two campus locations for Correspondence Exam. As of the end of FY 2021, all five SB/SE campus locations utilize TDC. W&I is working on implementing TDC, scheduled to roll out in FY 2023.
  • In January 2021, the IRS implemented a Fast-Track option line for taxpayers responding to a W&I correspondence examination who only want to know if the IRS received their documentation.
  • The Customer Callback feature that was implemented in January 2022 allows taxpayers to choose between waiting on the line or receiving a returned call when a phone assistor becomes available.
  • W&I is working to create other avenues for the taxpayer to receive answers more expeditiously, such as the “Where’s My Audit Tool,” which is currently in development.

CORRECTIVE ACTION: N/A

TAS RESPONSE: Taxpayers call the IRS to learn more about their audits, yet they cannot get that information easily. In FY 2019, W&I devoted 96 percent of its correspondence audit resources to completing correspondence audits but devoted only four percent of its resources to responding to the telephone inquiries these audits generated. Similarly, SB/SE applied 95 percent of its resources toward audit completion and five percent to responding to caller inquiries. The IRS formulates the telephone LOS its staff will deliver and allocates its resources accordingly. Given that the W&I and SB/SE resources applied toward fielding correspondence audit toll-free phone inquiries has consistently produced about 40 and 60 percent Levels of Service, respectively, a minimum increase of six percent and three percent in full-time employees would achieve a more appropriate level of telephone service for correspondence audit toll-free phone lines. Absent the allocation of additional phone resources, corresponding reductions in correspondence audits would be necessary to achieve Levels of Service that would more realistically meet taxpayer needs and protect their right to be informed.

Though IRS has implemented various automated tools such as Online Account, customer callback, TDC, and DUT to positively complement the correspondence audit process, they are not substitutes for personal interactions that could increase low-income taxpayer participation in the audit process, build trust, and engage and educate low-income taxpayers. Further, should these tools successfully reduce call volume as the IRS anticipates, resulting increases in LOS would only occur if the IRS chose to allocate any resource gains recognized from these automated tools toward caller inquiries, rather than shifting these resources toward additional audit completion.

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 #09-3

Implement additional external resources to locate taxpayers whose correspondence audit-related mail has been returned undeliverable, similar to resources the IRS uses in its field examinations.

IRS RESPONSE TO RECOMMENDATION: ​IRS does not agree to implement TAS recommendation.

The IRS has implemented several measures that aid in the improvement of the accuracy of taxpayer addresses by allowing taxpayers to securely update their addresses over the phone, in-person, and by mail. Reducing undelivered mail continues to be a goal of the IRS. Allowing taxpayers more opportunities to update their addresses has had a significant impact on the undelivered mail.

The current undeliverable mail procedures are sufficient and adequate for the Correspondence Examination Program. If mail is returned undeliverable, research is conducted to determine the taxpayer’s current address on file with IRS. The Service exercises due diligence to find and use the taxpayer’s last known address, which is the address on the most recently filed and properly processed tax return unless the taxpayer has clearly and concisely notified the IRS of a change of address. The Service must issue the statutory notice of deficiency to the last known address, regardless of if we find another address for the taxpayer using alternate sources. In addition, the IRS also updates the taxpayer’s address of record by using the United States Postal Service’s (USPS) National Change of Address database (NCOA). Undeliverable mail is given priority to ensure that letters are timely sent to the taxpayer’s correct address.

SB/SE and W&I utilize a Correspondence Examination Undeliverable Research Tool (URT) to assist with researching and processing undelivered or unclaimed mail. The URT introduces automation to research undeliverable and unclaimed examination mail eliminating manual research.

Field Examination must use additional tools such as postal tracers, summonses, credit bureau contacts, local telephone directories, etc. because they have the responsibility to locate the taxpayer to conduct a face-to-face examination. Their research may not result in a change to the last known address. These tools are not appropriate in Correspondence Examination due to differing business processes and the systemic nature of correspondence examinations.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS has stated that “[a]utomation is key to achieve efficiencies.” The IRS utilizes the automated Correspondence Examination Undeliverable Research Tool (URT) to assist with researching and processing undelivered or unclaimed mail. Though this system incorporates information provided by the United States Postal Service’s (USPS) National Change of Address database, it does not consider other external sources for potential address information.

Low-income taxpayers tend to be more transitory – a factor that negatively affects the taxpayer’s ability to receive and respond to IRS correspondence in a timely manner. When a taxpayer does not send a written reply to IRS correspondence, the IRS automatically processes correspondence audit cases from creation to statutory notice to closing without any tax examiner (or taxpayer) involvement. To increase the opportunity for low-income taxpayers to receive correspondence and participate in the correspondence audit process, the IRS should use additional external resources to locate taxpayers whose correspondence audit-related mail has been returned undeliverable.

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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4.

TAS RECOMMENDATION #09-4

Implement a personal contact attempt to reach non-responsive taxpayers and taxpayers whose mail has been returned undeliverable.

IRS RESPONSE TO RECOMMENDATION: ​IRS does not agree to implement TAS recommendation.

When the IRS audits a taxpayer via correspondence, we rely on the most up-to-date address provided by the taxpayer. Knowing the IRS has limited resources, it is unrealistic to personally contact each non-responsive taxpayer or those taxpayers whose mail was returned undeliverable.

In fiscal year (FY) 2021, Correspondence Examination initiated 515,612 cases, of which, 225,435 were non-responsive taxpayers, and 19,718 came back as undeliverable mail. These numbers represent 47% of our correspondence audits. Implementing a personal contact procedure into the correspondence audit process would require the IRS to extract those cases from the automated process and assign them to an individual tax examiner. Taking that action would impede the automated process and its efficiencies. In addition, this would divert our tax examiners from assisting taxpayers on the toll-free line and reviewing taxpayer correspondence, thereby delaying resolution on those cases where taxpayers are engaged with us.

Taxpayers who respond to our notices have the option to provide contact numbers during the examination process. Conversely, we would not have phone numbers for non-responsive taxpayers that would allow us to make a personal contact. The IRS agrees with the Pew Research cited in TAS’ report indicating eight out of ten Americans won’t answer their cellphones for unknown callers, which, if the IRS did attempt a personal contact, would most likely result in expending resources with limited to no results.

CORRECTIVE ACTION: N/A

TAS RESPONSE: As stated, the IRS automatically processes correspondence audit cases from creation to statutory notice to closing without any tax examiner involvement when a taxpayer does not send a written reply to IRS correspondence. TAS finds it concerning that almost half (47 percent) of the IRS’s FY 2021 correspondence audit contacts went unanswered. TAS also notes, however, that this lack of taxpayer response fully eliminated the need for the use of IRS tax examiner resources on 47 percent of the IRS’s correspondence audit cases. Still, the IRS has cited a lack of resources for its inability to initiate a single taxpayer contact to reach these taxpayers. The IRS states “knowing the IRS has limited resources, it is unrealistic to personally contact each non-responsive taxpayer or those taxpayers whose mail was returned undeliverable.” Yet, realistically, had these taxpayers responded, the IRS would have had to possess and utilize an even greater level of resources to conduct these audits.
TAS believes that incorporating procedures that would require correspondence examiners to consult some select information outside of IRS systems to locate taxpayers whose mail has been returned as undeliverable, and by requiring at least one constructive follow-up attempt to reach unresponsive taxpayers or taxpayers whose mail has been returned as undeliverable, the IRS may see an increase in low-income taxpayer audit participation and a corresponding decline in no-response cases, audit reconsideration cases, and cases petitioned to the U.S. Tax Court. Acknowledging that current procedures render it difficult for the IRS to reach taxpayers, TAS has recommended that the IRS explore additional methods for locating and contacting unresponsive 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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5.

TAS RECOMMENDATION #09-5

Add a consent mechanism to Form 1040, U.S. Individual Income Tax Return, that would allow taxpayers to authorize the IRS to leave telephone messages or make email contacts to reach taxpayers.

IRS RESPONSE TO RECOMMENDATION: ​The IRS disagrees with the TAS recommendation to add a consent mechanism to Form 1040, U.S. Individual Income Tax Return, that would allow taxpayers to authorize the IRS to leave telephone messages or make email contacts to reach taxpayers.

IRS employees reach out to a taxpayer if the taxpayer has first contacted the IRS by telephone or correspondence. We have procedures in place for leaving generic voice mail messages for active cases. The consent field would not bypass the need for authentication procedures before disclosing any account information. Finally, capturing and transcribing consent information is not an efficient use of already limited resources.

CORRECTIVE ACTION: N/A

TAS RESPONSE: Since 1998, the IRS has provided an area within the signature section of Form 1040, U.S. Individual Income Tax Return, for taxpayers to voluntarily provide a phone number. Starting with the 2019 Form 1040, the IRS requested a taxpayer’s email address. Because cell phone numbers and email addresses generally do not change when taxpayers change their physical address, this information could provide a productive and efficient means to reach unresponsive taxpayers or locate taxpayers whose correspondence audit notifications are returned undeliverable. Although taxpayers may provide this helpful information, it is rarely used by correspondence examiners to resolve undeliverable mail issues or contact unresponsive taxpayers.

Correspondence audits produce the lowest agreement rate, the highest no-response rate, and the highest volume of cases assessed by default. TAS recommended that IRS explore ways to use taxpayer provided phone numbers and email addresses to engage non-responsive taxpayers in the interest of reducing no-response rates and encouraging taxpayer audit participation. TAS understands that the IRS will reach out to taxpayers that contact the IRS first; however, making contact with “active” cases does little to reduce the significant rate of no-response cases the IRS’s correspondence audit programs produce.

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 #09-6

In collaboration with TAS, establish a working group to explore the root causes that contribute to the low response rates of low-income taxpayers undergoing the correspondence audit process and implement a pilot program to decrease the high default and non-response rates.

IRS RESPONSE TO RECOMMENDATION: ​IRS agrees to implement TAS recommendation in part.

We agree to collaborate with TAS to gather and analyze data on the response rates of low-income taxpayers. If the data supports a difference in response rates compared to other taxpayer segments, we will establish a working group with TAS to investigate the root causes contributing to low response rates of low-income taxpayers.

While there are many reasons why taxpayers do not respond to examination letters, the IRS has taken specific actions to assist low-income taxpayers and taxpayers with limited English proficiency. In December 2020, the IRS revised the Initial Contact Letters in the Letter 566 series to include instructions on how to contact a Low-Income Tax Clinic (LITC) (http://publish.no.irs.gov/cat12.cgi?request=CAT2&itemtyp=L&itemb=566&items=*). Taxpayers who cannot afford representation can contact a LITC to obtain representation. Letter 566 also includes guidance for taxpayers with limited English proficiency and instructions on how to contact the Taxpayer Advocate Service. In addition, interpreter services are available to taxpayers while on the toll-free line.

Wage & Investment (W&I) has an interactive Earned Income Tax Credit (EITC) Assistant on IRS.gov that helps taxpayers determine if they’ve met the eligibility requirements for the EITC. W&I hosts an annual EITC Awareness Day that strives to provide eligibility information, decrease erroneous payments and improve the accuracy of filed returns. W&I also conducts stakeholder summits, tax forums, webinars, and satisfaction surveys on the effectiveness of tools and products in reaching specific audiences to increase awareness.

CORRECTIVE ACTION: The IRS will collaborate with TAS to work to gather and analyze data on the response rates of low-income taxpayers.

TAS RESPONSE: TAS looks forward to collaborating with the IRS to determine the root causes of the low correspondence audit response rates of low-income taxpayers. Once these causes are identified, TAS encourages the IRS to address identified causes, implementing pilot programs as needed to study the results.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): 9/30/2023

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7.

TAS RECOMMENDATION #09-7

Conduct a proof-of-concept project that would assign correspondence audit cases to an examiner who could serve as the taxpayer’s single point of contact once the taxpayer sends in correspondence or reaches a correspondence audit assistor by phone. This project
should involve data collection to determine if the IRS-perceived barriers to correspondence audit case assignment are valid, while also measuring customer satisfaction and responsiveness results.

IRS RESPONSE TO RECOMMENDATION: IRS does not agree to implement TAS recommendation.

As noted in our response to MSP Recommendation 9-1, the IRS relies heavily on automation to efficiently administer our correspondence examination programs, where conducting a proof of concept in this manner is problematic. The system utilized for correspondence examinations has limitations that will not allow the IRS to segment the inventory to allow for some cases to be assigned to a sole tax examiner while others continue through the normal systemic process. Because of this limitation, conducting a proof of concept would require the IRS to extract and manually work the cases assigned to a sole examiner, creating another challenge of managing this inventory without our systemic processes and thereby hinder or eliminate any efficiencies in the program. The manual processing would also require a higher level of resources to monitor and resolve cases, reducing the level of resources answering the phones or reviewing correspondence for those cases going through the systemic process.

IRS has continued to implement virtual tools that help taxpayers quickly resolve examination issues. IRS has begun to scan correspondence so that all examiners can view correspondence regardless of the IRS site receiving the mail. IRS has also implemented the Document Upload Tool (DUT) that allows the taxpayer to upload records to be viewable by any examiner on the toll-free line. IRS also uses Taxpayer Digital Communications (TDC) where the taxpayer can send secure email messages and documentation.

We believe our current operational structure appropriately balances taxpayer service with sound tax administration within our current resource constraints. In addition, assignment to one examiner will delay the case resolution for many taxpayers. The taxpayer should have the right to work with the next available tax examiner who can answer the phone, review their correspondence, and resolve their case.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS’s current operational structure allows the IRS to limit the Level of Service it provides on correspondence audit toll-free phone lines to accommodate planned audit volume completion. Assigning correspondence audit cases to an examiner who could serve as the taxpayer’s single point of contact would ensure a balance between audit completion and taxpayer service activities. Though temporary processing deviations may be necessary, a proof-of-concept project would present a valuable opportunity to capture the level of responsiveness, customer satisfaction, and reduced downstream resource utilization achieved from more closely balancing compliance and taxpayer service activities. Providing increased access to service and integrating personal interactions during the correspondence audit process provides for overall efficiency.

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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8.

TAS RECOMMENDATION #09-8

Implement the use of new Online Account features such as text chat, document upload, and address change options in the correspondence audit programs.

IRS RESPONSE TO RECOMMENDATION: ​IRS agrees with TAS recommendation but cannot implement it currently due to funding limitations.

Information Technology (IT), On-Line Services (OLS), Wage & Investment (W&I), and Small Business/Self-Employed (SB/SE) continually collaborate to explore the use of Online Account (OLA) features and to procure funding, prioritize, and implement new features and capabilities. Some features are in progress or planned, but we cannot fully implement all features currently due to funding and resource capacity limitations.

An address change capability within OLA is under development and is on target to be released in June 2022. OLS has worked with IT on an Engineering Study with the goal of establishing solutions to make TDC eGain functionality – including secure messaging with document upload, live chat, and virtual assistant (chatbot) – available within our Web Apps such as OLA. The study was completed in February 2022 and IT has confirmed readiness to move forward with related implementation work following approved funding and prioritization.

Both W&I and SB/SE Examination are exploring options that use OLA features. Currently, SB/SE submitted a request for both live text chat and a chat BOT feature for secure real-time communication with taxpayers, and W&I requested an on-line application that will allow taxpayers to check on the status of their audit and eliminate the need to call the toll-free number. OLS is working to fund and prioritize the live chat and chatbot feature implementation in OLA. Our requests are dependent on funding; therefore, we do not have a firm timeline for implementation.

IRS is committed to pursuing and implementing new OLA features for the correspondence examination programs. Since 2016, SB/SE Correspondence Exam has offered taxpayers and their authorized representatives the use of Secure Messaging within Taxpayer Digital Communications (TDC). With TDC, taxpayers and their representatives can sign up and submit requested documents online and ask questions and/or request clarification from the examiner working their case through Secure Messaging. This can be accomplished without waiting in a telephone queue, at their convenience, and on their own schedule. In 2021, IRS moved to a new platform, which allows more taxpayers to successfully verify their identity, which is a requirement for TDC. An American Rescue Plan (ARP) funded task has been approved to make existing TDC functionality, such as use of Secure Messaging to respond to a correspondence exam, be made available in OLA. The specific use case to be delivered must still be finalized by IT and the business based on feasibility and priority. The target delivery date is by December 2023.

As of September 2021, both W&I and SB/SE correspondence examination programs use the Document Upload Tool (DUT), which enables taxpayers and their representatives to securely upload requested documents to www.IRS.gov instead of mailing or faxing them. The DUT is available to any taxpayer in a correspondence examination. IRS has continued efforts to digitize case files by scanning some taxpayer correspondence and uploading it to the electronic case file. Although transparent to taxpayers, digitized cases improve customer service by increasing the visibility of case information. Telephone assistors can electronically view correspondence previously sent in by the taxpayer, regardless of the IRS site receiving the correspondence. Although there are currently no plans to implement a DUT within OLA, the features to deliver TDC secure messaging in OLA will enable the user to upload documentation to respond to the case, including correspondence exam.

CORRECTIVE ACTION: We will continue to submit requests to secure funding to implement new online tools and processes when appropriate. Implementation of any corrective action is contingent upon limited IT funding and resources for various IRS priorities and legislative implementation.

TAS RESPONSE: TAS understands that the IRS cannot fully implement all new Online Account features immediately due to funding and resource capacity limitations. We look forward to the implementation of features currently in process, as well as those features the IRS has prioritized for implementation when resources become available.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

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

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