Many taxpayers experience difficulties with correspondence audits. Once a return is selected for examination, the IRS notifies the taxpayer by letter and, as the name implies, conducts the audit via correspondence. Correspondence audit letters fail to provide a point of contact – the taxpayer is not given a direct phone number or the name of an IRS employee to contact. Instead, the letter provides a phone number for all correspondence audits. If no response to the initial contact letter is received, the IRS generally makes no effort to contact the taxpayer before proposing adjustments, issuing a Statutory Notice of Deficiency, and closing the case. Taxpayers wishing to speak with someone regarding an audit are limited to calling a representative on a toll-free line. The correspondence audit process is meant to create efficiency; however, these audits can present a host of challenges for our nation’s most vulnerable taxpayers and have downstream consequences for taxpayers and the IRS, as discussed in my 2021 Annual Report to Congress, Low-Income Taxpayers Encounter Communication Barriers That Hinder Audit Resolution, Leading to Increased Burdens and Downstream Consequences for Taxpayers, the IRS, TAS, and the Tax Court.
The correspondence audit process works single-year, single-issue cases that the IRS believes it can easily resolve via mail, using an automated process to achieve efficiencies that enable the IRS to complete a high volume of correspondence audits with a limited number of examiners (per the IRS, 1,094 correspondence audit examiners conducted 559,369 correspondence audits during fiscal year (FY) 2019). Though the IRS views correspondence audit issues as “non-complex,” low-income taxpayers under audit may not share this perspective.
Low-income taxpayer correspondence audits often involve Earned Income Tax Credit (EITC) and other refundable credits that frequently require consideration of complex factors that include a taxpayer’s income, marital status and relationship to dependents or children claimed. Navigating these audits can be complex for low-income taxpayers, who are more likely to experience lower literacy rates and often possess limited English proficiency. Low-income households are more likely to be unbanked, which can impact a taxpayer’s ability to substantiate income and expenses, and they tend to be more transitory, a factor that negatively affects a taxpayer’s ability to receive and respond to IRS correspondence in a timely manner. Low-income children are more likely to live with a single parent, in a multigenerational household, in a cohabiting household, in a family with at least one non-biological child, or in a shared custody arrangement, rendering the application of the “qualifying child” rules much more complicated for low-income taxpayers. The IRS should provide low-income taxpayers more direct access to personalized IRS service in an effort to increase low-income taxpayer audit participation, build trust, and engage and educate low-income taxpayers. Instead, low-income taxpayers generally experience difficulty reaching the IRS for assistance.
More than half of the individual audits conducted by the IRS in FY 2019 were conducted on taxpayers with total positive incomes below $50,000, with 82 percent of these low-income taxpayers claiming the anti-poverty EITC. The majority of these audits (92 percent) were conducted via correspondence, while only eight percent of these audits were conducted in field offices where taxpayers are assigned an examiner that can serve as their direct point of contact and meet with them face-to-face. Unlike IRS field audit programs, which require the IRS to follow up with an unresponsive taxpayer and research internal and external data to locate taxpayers whose mail has been returned undeliverable, follow-up attempts are not required for nonresponsive taxpayers undergoing the correspondence audit process, and research of external data to locate taxpayers with undeliverable mail is not conducted.
Because 82 percent of these low-income individual audits are completed by the IRS’s Wage and Investment (W&I) Division, taxpayers having questions or seeking clarification regarding the audit process are most often referred to the IRS’s W&I correspondence audit toll-free telephone number for assistance. Though correspondence examiners are responsible for both conducting correspondence audits and answering calls for assistance, most of the IRS’s W&I correspondence audit resources (96 percent in FY 2019) were devoted to conducting audits, while only four percent was applied toward answering the telephone inquiries these audits generated. As shown below, the volume of calls received on this toll-free line is high, while the Level of Service has consistently remained in the 40 percent range – making it difficult for many low-income taxpayers to reach the assistance they need to comply with their audit notices.
|Level of Service
Although 55 percent of the low-income taxpayers audited in FY 2019 had their returns completed by a tax professional, only three percent of these taxpayers had professional assistance during the correspondence audit process – making low-income taxpayers the population most subjected to individual audits, the least represented by tax professionals, and the most reliant on IRS correspondence audit toll-free lines for assistance. Personal interaction is limited, with the IRS spending little time on these audits. For comparison, FY 2019 low-income correspondence audits were completed on average within two hours, while office and field audits took an average of 11 and 41 hours, respectively. With its Automated Correspondence Examination System, the IRS automatically processes correspondence audit cases from creation to statutory notice to closing without any tax examiner involvement when a taxpayer does not respond to IRS correspondence – quite possibly the best explanation of why low-income taxpayer correspondence audits produce the lowest agreement rate, the highest no-response rate, and the highest volume of cases assessed by default.
In FY 2019, similar to prior years, the IRS closed 35 percent of these low-income taxpayer correspondence audits without a response from the taxpayer. About 14 percent of these nonresponsive taxpayers may not have been aware of the IRS audit, because the IRS’s initial audit contact notices were returned undeliverable.
Low agreement, high no-response rates result in additional downstream costs for the IRS and additional burden to low-income taxpayers. Some of these costs include the cost of audit reconsiderations, the cost of TAS involvement in case resolution, and costs expended by the IRS Independent Office of Appeals and the IRS Office of Chief Counsel to ultimately bring these unagreed cases to resolution.
The IRS should consider the totality of the low-income taxpayer’s interactions with the agency and design its correspondence audit programs to meet taxpayer needs. By providing increased access to service that includes personal interaction, the IRS could improve overall efficiency by reducing the need for additional or higher cost downstream resources for audit resolution, while reducing taxpayer burden, promoting taxpayer education, and increasing compliance. In my view, these achievements would outweigh short-term gains recognized by using automated correspondence to drive cases to closure. In my Annual Report to Congress, I have made several administrative recommendations to improve the correspondence audit process, and further asked that Congress consider restructuring the EITC to make it simpler for taxpayers to understand and easier for the IRS to administer.
Good news: The IRS has recently created a cross functional working group with TAS to identify specific challenges and propose solutions in an effort to reduce the default rate and provide better taxpayer service.
Eligible taxpayers can reach out to Low Income Taxpayer Clinics (LITCs) for assistance with correspondence audits. LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs are a great resource and can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court, including the Tax Court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. For more information or to find an LITC near you, visit www.taxpayeradvocate.irs.gov/litc or IRS Publication 4134, Low Income Taxpayer Clinic List. This publication is also available online at https://www.irs.gov/forms-instructions or by calling the IRS toll-free at 800-TAX-FORM (800-829-3676).
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.