Correspondence Exam Practitioner Concerns (or CEAP)

Correspondence Exam Practitioner Concerns (or CEAP) was a major undertaking that started in Correspondence Exam, which began in 2012. We gathered, evaluated, and addressed all feedback received about the Correspondence Exam process.

 

What are recent Correspondence Exam Practitioner Concerns?

A large part of this effort was based on practitioner feedback that we gathered at venues such as this or through phone forums as well. In addition, we also included some of the information that was elevated through the stakeholder liaisons. During the course of this project, several improvements were made including changes to guidance. We identified over a dozen IRM changes that were necessary to clarify our examination procedures.

 

Changes to Correspondence Exam

Also, we made changes to publications and letters. We completed several changes to the printed material, including to the Publication 3498-A, which is included in all of our notices. We also made changes to printed materials and letters such as to Letters 566 and 525, as well as the information request forms, the 886As that we issue for Schedule A and mortgage interest audits. We increased the experience base of assistors on the Practitioner Priority Service line by removing the less experienced tax examiners from answering these types of calls. There was no substantial increase in wait time. We did check the wait time on the PPS line, and the time is about one minute total wait when the correct prompts are followed, so please listen to the prompts accordingly.

 

Calling IRS About Correspondence Exam

And I know I hear chuckles constantly; this is not the first time that I have heard that. We did go back after this last forum, and we did call the PPS number and followed the appropriate prompts to reach the Correspondence or AUR, and it was less than one minute wait time. If you continue to have problems, please elevate those through the stakeholder liaison. It could be based on the time that you are calling into the PPS line as well. We also piloted process changes to minimize the touches on a correspondence audit.

 

Virtual Service Delivery

We also rolled out Virtual Service Delivery. And what this is, this VSD equipment allows for a virtual face-to-face meeting. We piloted and tested this approach for some correspondence audits that occurred during FY13 and 14, and we are currently evaluating the cost and benefits of being able to provide this virtual face-to-face service avenue. We also developed an Exam Mail Tool. This is an automated tool to help with the controlling and routing of all incoming mail, and it is uniform within Correspondence Exam in all of the campuses. So, mail is now controlled usually within four days of the IRS received date (once it is received in our department).

 

IRS CEAP

We also developed and delivered training to all employees on the results of this effort (the CEAP) with an emphasis on customer perspective, including the need to own contacts with the taxpayers over the toll-free line. Additionally, we developed new training on the proper use of sound judgment to help us resolve correspondence audits. Now, this formal project concluded at the end of September 2014, but the long-term solutions identified through CEAP will continue as independent efforts, and these include taxpayer digital communications. We conducted some audits and pilots on a secure email portal; Internet videos explaining the Correspondence Exam process; and then also the future of Virtual Service Delivery. Now, we continue to work on many more suggestions and continue to gather feedback and share information with you, the practitioner community, through various phone forums and venues such as this.

 

Letter Received from IRS during Correspondence Examination

Letter Received from IRS during Correspondence Examination

Although audit issues are identified and selected for examination through various automated and manual processes, a few different letters and notices are used for initial taxpayer contact depending on the issues being examined. Correspondence Examination uses these letters and notices to initiate the examination. They identify the issues under audit and request information and documentation from the taxpayer to verify and support these credits and deductions that were claimed on the original return or even perhaps a subsequently-filed amended tax return.

 

IRS Form 886 during Correspondence Examination

Oftentimes, Form 886 with various suffixes (such as “A” or “H”) is used, and depending on the issues being examined, it is also included in the notices. These provide specific explanations of the issues being audited and the information and documentation that is required to be submitted by the taxpayers for the issue in question. Now, if the information is not provided, we will be unable to allow that line entry on the tax return. Some initial contacts will also include issue-specific questionnaires, such as on employee business expense audits. This needs to be filled out and returned with the response. Also, all of the Correspondence Exam notices will include Publication 3498-A. This publication explains the examination process for examinations conducted by mail, and it also addresses taxpayer appeal and advocacy rights.

 

IRS Notice CP 75 during Correspondence Examination

The main initial contact letters used in Correspondence Exam (and this would be the Wage and Investment function within the IRS) are the CP 75, which is used as the taxpayer initial contact letter for EITC and dependency issues when we are holding at least a portion of a refund. Now, the Notice CP 75A is used as the initial contact letter for the Earned Income Tax Credit or dependency issues when there is no frozen refund pending. The CP 06 and the CP 06A is used for the premium tax credit or the PTC audits. These audits are sent with Form 14950, which is the Premium Tax Credit Verification form, which explains what is needed to verify the amount of the premium tax credit that was claimed.

 

IRS Letter 566 during Correspondence Examination

Most other issues under audit, via correspondence, will begin with a Letter 566. Now, the 566 letter explains that we are examining the return and states which issue we are looking at. This letter is issued from the SB/SE Correspondence Exam departments. This letter does not propose a potential tax liability. It does not contain the report. These letters allow 30 days to provide a response. Now, as I mentioned previously, we encourage a response to the initial letter or at the earliest time after our initial contact. So, if you have been granted an extension, please respond within that extension timeframe. Otherwise, letters will continue to be sent throughout the process depending on when and whether or not a response is received.

 

IRS Letter 525 and IRS Form 4549 during Correspondence Examination

If we cannot close the case after we review the information that was submitted (the documentation and support for that line item) or if there is no response, we will send the next letter, which is Letter 525. Now, this letter will include the examination report. The examination report is the Form 4549, and it will show the proposed tax liability. Again, you have 30 days to respond to this letter. The response should include either the required taxpayer’s signature confirming agreement with the proposed liability that is on the Form 4549 (the report) or a disagreement response to the proposed liability that is shown on the Form 4549.

 

IRS Letter 3219 during Correspondence Examination

This process is highly automated as I mentioned before, and if you do not respond or request an extension, subsequent notices are issued automatically. If a sufficient, timely response to the report is not received, the next notice is a Statutory Notice of Deficiency. This is the Letter 3219, and it is issued via certified mail. This letter, as mentioned previously as well, is often referred to as the 90-day letter, and it is also used in the AUR program. If the taxpayer resides overseas, you are afforded 150 days to respond. An audit will not begin with the Statutory Notice of Deficiency. I have heard people express that they never received any of the other notices. Well, perhaps they were undelivered, but the statutory notice is never the first initial contact notice. So, if you do have any specific examples of this, please provide them to the stakeholder liaison.

Correspondence Exam or Corr Exam IRS Audit

Correspondence Exam or Corr Exam is the most common type of IRS audit procedure. Corr Exam asks for verification of credits and deductions claimed on the tax return.  A major compliance program, Correspondence Examination asks for verifications of credits and deductions claimed on a tax return to determine if they are being reported correctly. The major areas covered by this program are Earned Income Tax Credit, non-filers, and Schedule A deductions.

 

Major Areas Covered Correspondence Exams

The major areas covered by Correspondence Exam are Earned Income Tax Credit (or EITC), non-filers, and Schedule A deductions. The Schedule A deductions include items such as charitable contributions and employee business expenses. Correspondence Examinations are conducted on Wage and Investment and Small Business/Self-Employed taxpayers out of 10 campuses. Although the cases initiated in each campus are site-specific, the cases can be accessed universally allowing any Corr Exam tax examiner to assist the taxpayers (or you) during telephone calls.

Correspondence Exam and Automated Underreporter

There are two major correspondence compliance programs that operate out of IRS campuses. The campuses were formerly called service centers, and they are Correspondence Exam and Automated Underreporter. These two programs look at the items that are reported on the return and resolve issues primarily through the mail and telephone. As I mentioned earlier, Corr Exam and AUR share some basic similarities, but there are also some differences as well, and we are going to cover those today.

 

How do IRS Correspondence Exam or Corr Exams work?

Correspondence Exam will attempt to stagger how they start the cases and the types of issues to be examined in order to balance compliance risk, level the incoming mail as well as the telephone traffic, and minimize burden on practitioners and taxpayers alike. For examinations where collectability and timing are a factor – for example, on the Earned Income Tax Credit cases – we will initiate examination before releasing the refund.

 

What are IRS Correspondence Exam Issues?

We generally will immediately release any money not related to the examination issue. Under a realignment that occurred in 2014, all Earned Income Tax Credit and other pre-refund audits are now worked in the Wage and Investment division within IRS. And the department that works these issues is Refund Integrity and Compliance Services, or the RICS organization.

 

The focus of the IRS Correspondence examination is on recordation.

The focus of the examination is on recordation. We are seeking to get the substantiation to support that line item. A Correspondence Examination essentially will ask for documents and/or records to support the entry on the tax return or the schedule in question. If the requisite documents or records are not provided, we will disallow that item. There are times we will partially allow an item where the substantiation has been provided.

 

What information is looked at during IRS Correspondence exams?

Examples of recordation include the following: receipts to support the deductions, such as the car and truck expenses on Schedule C; we could request cancelled checks to support the charitable contributions deduction that is shown on Schedule A; we also could request birth certificates and school records to support an exemption or an Earned Income Tax Credit change.

 

Most Common IRS Correspondence Exams

We try to focus on issues where a face-to-face interview or discussion with the taxpayer or the representative is not necessary. Now, we have heard that oftentimes a face-to-face is preferred. While at times these issues seem like it would be best to resolve in a face-to-face meeting, the majority of the Correspondence Exam issues can be and are resolved through correspondence very successfully. The most common issues include:

 

The Earned Income Tax Credit

The Earned Income Tax Credit. A Correspondence Examination is the best venue to quickly conclude an audit involving Earned Income Tax Credit. Basically, we will ask for documentation, such as a birth certificate or school records, to support the claim for the credit. As mentioned earlier, we will generally release any refund up to the amount that is under examination, and we will work quickly to resolve examinations where the refund is impacted.

 

Certain non-filing conditions

Certain non-filing conditions. As mentioned previously, we receive information from various third parties, such as employers and payers, which we then will correlate against a tax return. If we find that there has been no tax return filed after attempts to secure one through the Correspondence Exam process, we will prepare a return using that thirdparty information.

 

Schedule A Issues on Audit

We also will look at Schedule A issues. The Schedule A is a significant part of our inventory and is also an area with a high level of incorrect deductions. Two major issues we cover on the Schedule A are:  employee business expenses. Now, while we hear at times concerns about these types of examinations, the results show that this issue overall is conducive for a Correspondence Examination. We have a high percentage of examinations where the individual comes in agreeing that the amount reported on the original return was actually incorrect.  Another item that we look at on the Schedule A is charitable contributions. We continue to see misreporting with charitable contributions, so please ensure that accurate records and receipts of both cash and non-cash deductions are kept.

 

Tax Compliance and Correspondence Examinations

Correspondence Examinations are an important part of the Service’s compliance strategy for legislation enacted over the last several years. Compliance is a major concern when there is any kind of refundable credit that is involved. The campus operations are the best-poised compliance treatment for quickly resolving pre-refund examinations. Over the last few years, we have been very involved in examinations on the adoption tax credit as well as the first time home buyer’s credit.

 

IRS Correspondence Exam and Premium Tax Credit

This year, the premium tax credit is also an area of focus. Similar to the employee business expense examinations, we may also work entries that are generally supported with receipts regarding deductions shown on Schedule C, such as the car and truck expenses mentioned earlier. We also may work a broad number of other issues that are on the tax return and supporting schedules, such as self-employment tax or adjustments to income (such as alimony).

Basic and General Information about Tax Audits

The IRS will audit hundreds of thousands of individual tax returns this year. Although that represents but a small percentage of all returns filed, this is little consolation if your return is among those selected for audit. But with proper preparation and planning, taxpayers should fare well through an IRS audit. You might be surprised that there are many misconceptions about an IRS audit.

 

What is purpose of IRS Audit?

The purpose of the IRS audit is to verify items reported on a tax return. The easiest way to survive a tax audit is to prepare for one in advance. On an ongoing basis you should systematically maintain documentation-invoices, bills, cancelled checks, receipts or other proof-for all items to be reported on your tax return. Keep all your records in one place and hold on to your calculations. The government normally has three years within which to conduct an audit, and often the audit won’t begin until a year or more after you file your return.

What is the scope of an IRS audit?

The scope of an IRS audit depends on the complexity of the return being examined. A return reflecting business or real estate income and expenses is likely to take longer to audit than a return reflecting only salary income. You can facilitate matters by having the necessary records arranged in an orderly and systematic fashion for presentation to the IRS agent. The typical IRS agent is experienced and knows his job.

Trying to outsmart the agent or sidestepping questions is likely to create friction and raise suspicions in the agent’s mind. This could cause them to try and find smaller errors that they were not even looking to enforce.

 

IRS Tax Audit Representation for Taxpayers

Representation. Even if you prepared your own return, it is often advisable to have a tax professional represent you at an audit. Your representative knows what issues the IRS agent is likely to focus on and can prepare accordingly. More importantly, a tax professional knows that in many instances IRS agents will take a position (for example, to disallow deduction of a certain type of expense) even though courts and other authority have expressed a contrary opinion on the issue.

Getting Someone to Help with IRS Audit

Because the representative knows and can point to the proper authority, the IRS agent may be forced to throw in the towel

What is IRS Civil Fraud Penalty?

Due to its steep rate, the civil fraud penalty is one of the most powerful tools that IRS has. It applies if any part of a tax underpayment is due to fraud, and the penalty equals 75% of that portion of the underpayment attributable to fraud. Although IRS has the burden of proving fraud by clear and convincing evidence, if it shows that any portion of an underpayment is due to fraud, the entire underpayment is treated as  attributable to fraud except for any portion  hat the taxpayer shows (by a preponderance of the evidence) not to be so attributable.

 

What is IRS Civil Fraud Determination?

Other adverse results also flow from a civil fraud determination. For example, no time limit exists on the assessment and collection of tax if a fraudulent return is filed. Likewise, a return subject to the civil fraud penalty is treated as fraudulent for bankruptcy purposes. As a result, taxes shown on such a return are not normally discharged in a bankruptcy proceeding. This can be of very serious consequence to a tax payer who is trying a new start.

 

Definition of IRS Civil Fraud?

What is Civil Fraud? Although civil fraud is not defined by statute, some courts have defined it as an actual and deliberate, or willful, wrongdoing with specific intent to evade a tax believed to be owed. Fraudulent intent is rarely shown by a single act or by direct proof of a taxpayer’s intent. Instead, it’s usually shown by looking at all of the facts and circumstances.

 

What is the IRS Civil Fraud Penalty?

The civil fraud penalty does not apply if no underpayment exists or if no return is filed. However, a separate fraudulent failure to file penalty, imposed at a maximum rate of 75%, may apply to late-filed or non-filed returns.

 

Defenses of Civil Fraud Penalty

Certain constitutional defenses to the civil fraud penalty, including double jeopardy, have been rejected because the penalty is civil and not criminal in nature. The tax law clearly provides that the reasonable cause and good faith defense, which is available against certain accuracy related penalties such as the negligence penalty, is also available against the civil fraud penalty, but the usefulness of the defense is limited because the fraudulent intent that is required for imposition of the civil fraud penalty is difficult to reconcile with reasonable cause and good faith.

 

How to Defend IRS Civil Fraud Penalty?

However, taxpayers have often been successful in avoiding the civil fraud penalty by proving that they relied reasonably on professional advice. In invoking this defense, it’s critical for a taxpayer to show that he gave complete information to his adviser and that he actually followed the advice.

Notice CP75 and Earned Income Tax Credit

Taxpayers will receive a Notice CP75 because the IRS is auditing your tax return. The IRS will retain your refund until they finish the tax audit related to claiming the earned income credit. You must send the information that the IRS needs before the IRS can give a refund and pay you the earned income credit.  The CP75 letter is very carefully worded about what exactly the IRS is looking for. People who do meet the tests will pass, but the letter is sent because the IRS has reason to believe you won’t.

The Internal Revenue Service (IRS) accepts most federal returns as filed. Some returns, however, are examined, or audited, to determine if income, expenses, and credits are reported accurately. Most IRS audits are not actually as bad as they sound and can typically be resolved very easily.

 

Understanding Notice CP75

This a is a very important warning from the IRS and could lead to penalties. It is extremely important that you contact the IRS no later than on the date indicated in the Notice CP75. If you need more time to gather all the information we request, please call the number on the notice to inform the IRS. It is also important that the IRS can contact you during the audit;to another address if you move or change your phone number, please let the IRS know by calling the toll-free number on the notice or by faxing to 855-235-6788 part of your response message indicating the update.

What is Notice CP 75?

Notice CP 75 tells you which parts of your tax return being audited the IRS . Other forms included tell you what to send for a refund or provide other useful information. The notice includes a lot of information and materials but the IRS can help you understand every step of what to do. You should have a copy of your tax return handy when analyzing this notice. At this point, it may be necessary to consult and tax lawyer on CPA to handle the Notice CP75.

 

Notice CP75 and Earned Income Credit

The IRS needs documentation to verify the Earned Income Credit (EIC) that you claimed. The EIC and/or the Additional Child Tax Credit (ACTC) portions of your refund are being held pending the results of this audit. If you claimed the Premium Tax Credit (PTC), that portion of your refund is also being held.

 

IRS Notice CP 75/CP 75A/CP 75B – EIC Portion of the Refund Delayed

The CP 75 series of notices are issued to inform the taxpayer that their Earned Income Credit portion of their refund is being delayed while the IRS is examining the return or determining their eligibility. The notice will state why the IRS is delaying the Earned Income Credit portion of your refund and what information or documentation you need to provide so the determination of your tax refund can be completed.

 

Notice CP75 and Earned Income Credit

The first item listed is the tax credit for earned income. Your package includes a Form 886-H-EIC (PDF) indicating all other documents that you can send to prove he can claim the EIC with your child or children who qualify. You can send any combination of these documents to get the information we need. See Schedule EIC (PDF) (Schedule EIC in pdf format) included with your tax return and follow the steps for each of the children listed:

 

 

What Information do you need to verify Earned Income Tax Credit?

  • First, you must prove that he lived with his son in the US for more than half the year:
    • If your child lived with you at the address listed on your notice, you must send a document stating that his son lived in the same direction during the tax year. For example, you could send us copies of your child’s school grades include your name and show the direction of his son. The dates of the documents have to be more than six months of the tax year.
    • If you moved to address both you and your child lived at another address, send us documents showing the same address for both of you during the tax year.
    • If your child does not attend school, you can send copies of medical records or a statement signed by the child care provider.
    • If you can not prove your child lived with you for more than half the year, then you do not qualify for the EIC .
  • Second, you must try your relationship with your child. The child must be related to you in any of the ways listed on Form 886-H-EIC. The form provides examples of what to send to test the relationship between you.
  • Third, if your child is 19 years of age or older, must show that:
    • Your child was under 24 years old and was full-time student for at least five months of the tax year (can do so by sending copies of official school records), or
    • Your child is permanently and totally disabled, sending a copy of any of the official documents listed on Form 886-H-EIC.

You can only claim the tax credit earned income if your child lived with you for more than half the year in the United States, if your child is related to you in any of the ways listed on Form 886-H -EIC and if your child had an eligible age. Your child must meet three conditions to qualify you for the loan. If you can not prove the three conditions, you may still be eligible for the credit without having a qualifying child.

 

Why was my  tax return selected for audit?

While most returns are accepted as filed, some are selected for examination. The IRS examines (or audits) some federal tax returns to determine if income, expenses, and credits are being reported accurately. The IRS selects returns for examination using various methods which include random sampling, computerized screening, and comparison of information received by the IRS such as Forms W-2 and 1099. Having your return selected for examination does not suggest that you made an error or were dishonest.

 

How does the IRS select Audits?

Another way is to use information from compliance projects that indicates a return may have incorrect amounts. These sources may include newspapers, public records, and individuals. If we determine the information is accurate and reliable, we may use it to select a return for examination.

 

Notice CP75 IRS Help

  • Call the 1-800, 1-866 or 1-888 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf usingForm 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.

What to do when in Tax Trouble with the IRS?

Tax Problem: It’s 2015. For the last five years, I’ve been taxed at Single no Exemptions, and levied on top of it for the missing years. Having learned from my mistake, I filed in 2012 for 2011, 2013 for 2012, 2014 for 2013, and watched what would be the refund from my W4 (and going to college) get intercepted for the missing years. When I file for 2014 this month, I expect the same thing’s going to happen. Unfortunate, but it is what it is.

 

Local Taxpayer Advocate

Is the Local Taxpayer Advocate a better idea than the private companies? Or is there a specific office in the IRS I should contact? I’m not trying to find a magic “Get Out Of Debt Free” fairy. I didn’t know I was fucking up at the time, but I fucked it up, big time, and I just want to know the best way to make this right, and put it behind me.

 

Getting out of trouble with IRS

1) Did you ever file the missing returns? The IRS systems automatically assume Single with the standard deduction. If you had any mitigating items (educational fees, student loans, business expenses, IRA contributions) then the amount may be lower.

2) Get on a payment plan – maybe. Having an installment agreement will reduce the compounding penalties, but sometimes you have to agree to extend the statute of limitations.

3) Request a penalty abatement for one of the paid-off years. May be a drop in the bucket, but having those 100% – 200% penalties applied to your open balance instead may move things along

4) File an offer in compromise. You can do it yourself or have a professional, but as you said the papermills that advertise on the radio are usually not worth the fees they charge you. IRS will consider your current income and expenses to determine your disposable funds, and base your repayment on what they would be able to collect before the statute of limitations runs out.

The taxpayer advocate is a powerful tool for an individual, but you need to have something to aim them at. Give them a call and ask them what they would recommend in your situation, and what they could help you with.

 

Legal Aid Clinic

See if your local Legal Aid has a Low Income Taxpayer Clinic. They can often help.

  1. Did the IRS do the actual returns for you, and assess the income?
  2. How much do they think you owe?
  3. Do the numbers they put in look right?
  4. This is a good overview. You basically need to read all of this: http://www.nolo.com/legal-encyclopedia/back-taxes-debt

Trust Fund Recovery Penalty (TFRP)

What is the Trust Fund Recovery Penalty (TFRP)?

To encourage prompt payment of withheld income and employment taxes, including Social Security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the TFRP. These taxes are called trust fund taxes because the employer holds the employee’s money in trust until making a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes are not immediately deposited by the business.

 

TFRP Taxes

The TFRP may be assessed against any person who is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and who willfully fails to collect or pay them. It is very important for employers to accurately report and pay employment taxes.

 

What are employer trust fund taxes?

Generally, the federal income tax, Social Security tax, Medicare tax amounts withheld by an employer from his employees’ paychecks are considered trust fund taxes. The employer holds those amounts in trust and should be remitted to the Treasury. Each employee receives full credit for these trust fund taxes withheld from your paycheck even if the employer fails to pay them over to the Treasury. The employer’s matching portion of the Social Security and Medicare taxes are not considered trust fund taxes. Social Security tax is evenly split at 6.2 percent for both the employer and the employee for the 2008 tax year example in the presentation. Medicare tax for both the employee and the employer are evenly split at 1.45 percent.

 

Internal Revenue Code Section 6672

Internal Revenue Code Section 6672 provides the legal basis. It states that the person must be responsible for collecting truthfully, accounting for, and paying over the tax that is withheld, and must have willfully failed to do so.In short, it is generally the individual or individuals responsible for the financial management of the business. Per Internal Revenue Code Section 6672, willfulness means that the responsible individual or individuals voluntarily, consciously, and intentionally fail to pay over the taxes. It is important to note that bad motive or intent is not necessary. Willfulness can be presumed if net payrolls were paid and the actual knowledge of the unpaid trust fund is not necessary.

 

Trust Fund Penalty Recovery Process

A trust fund recovery penalty dispute may be resolved through the mediation process. Fast Track Mediation is a nationwide program in which a trained Appeals mediator is assigned to help facilitate an agreement between the taxpayer and Collection while the case is still with Collection division. It is designed to conclude within 30 to 40 days after the parties agree to mediate. If no agreement is reached, the taxpayer still retains full appeals rights. Revenue Procedure 2003-41 contains the Fast Track Mediation procedures.

 

Who does the Trust Fund Penalty Apply to?

The trust fund recovery penalty applies when a person who is responsible to collect, account for and pay over the taxes withheld willfully and fails to pay over the trust fund. Responsibility is a matter of status, duty and authority and being responsible means the person had significant control over the corporation’s financial decisions.

 

Types of Recovery Processes

The rules governing disclosures are contained in IRM 11.3.40, and the appeals officer may consult with a disclosure officer to determine what could be shared with whom. The appeals officer would carefully avoid improper disclosure of any other taxpayer’s personal information, but will work with you to provide sufficient information about the issues in the case to enable you to resolve the case.

Fast Track Mediation – A nationwide program in which a trained Appeals mediator is assigned to help facilitate an agreement between the taxpayer and Collection while the case is still with the Collection division.

Post-Appeals Mediation –Post-Appeals Mediation is currently available through a pilot program in Atlanta, Chicago, Cincinnati, Houston, Indianapolis, Louisville, Phoenix and San Francisco. Post-Appeals Mediation takes place after settlement negotiations with Appeals are complete but unsuccessful.

Automated Underreporter program IRS AUR Cases

The Automated Underreporter program. AUR cases are created from two primary sources: the Individual Master File, or IMF, that contains the individual tax return information filed; and the Information Returns Master File, or IRMF, that contains the payer information filed. After all current-year returns are processed, they are computer-matched to the corresponding IRMF file.

 

IRS Information Matching and Audits

IRS matches information from 140 million 1040 returns to over two billion information returns each year. It is important to note that AUR is not a real-time process. When systemically identified mismatches are encountered, cases are selected into the AUR program as potential inventory for analysis. This begins within seven months of the filing due date. Not all mismatches result in a notice being generated.

How does the IRS Get Information for Tax Audit?

Tax examiners screen the data to verify whether the mismatch is located elsewhere on the return before creating a case. Tax years generally end on December 31, but the IRS does not receive information from employers, banks, businesses, and other payers until later. Once the IRS receives all the payer information, our computer system compares the information the payers provided.

 

Automated Underreporter Program Notices

This IRS is working hard to shorten the time it takes to contact the taxpayer. Generally, the earliest you’ll be contacted will be within 12 months from the date you filed the return. The IRS selects inventory throughout the year. The amount of time it takes to contact the taxpayer is a recurring concern received in customer satisfaction surveys related to AUR. The IRS understands the challenge and frustration this is for both you and your client. It is important to inform your clients that contact cannot be made any sooner due to the time necessary to ensure all information returns have been received and the matching process is complete.

 

IRS AUR Case Review

AUR cases are reviewed by IRS tax examiners before a notice is generated. If income reported by payers cannot be identified on the tax return, AUR will issue a Notice CP2501 or CP2000. When certain conditions are present, a CP2501 notice will be issued. This notice is a preliminary inquiry letter and does not propose a change to tax liability. It supplies payer information and explanation paragraphs concerning the income discrepancy.

 

What are AUR Notices?

I would like to take a moment to cover a few items regarding the AUR notices. It is important to read the notice and understand the issues that are being questioned. You can identify the notice type, the tax year in question, the taxpayer’s Social Security number, the AUR control number, and the AUR toll-free telephone number by reviewing the top right of the notice. Now, this area will also include the last day to file a petition with tax court if it is the Statutory Notice of Deficiency.

What is an AUR Control Number?

The AUR control number is used internally and cannot be used to research or look at that taxpayer account. The taxpayer’s SSN is what is needed. At this time – we understand because of identity theft and the issues surrounding that – we are working on implementing the use of barcodes in lieu of showing the full SSNs on these notices. But right now, due to some systemic and budgetary constraints, this is not going to be feasible until FY17. Each notice under the additional information section on page two contains a Web landing page link, and this link will direct you to notice-specific items, such as various FAQs, helpful hints, how to avoid the same mistakes next year, direct links to the publications that you may find helpful, as well as links and information on various payment options that could be available, and also how to order a transcript.

 

What do AUR Notices contain?

All AUR notices will contain Publication 1, Your Rights as a Taxpayer, as an enclosure, which addresses taxpayer rights and includes information on the examination process, the collection process, appeal, and taxpayer advocacy rights. Now, if you still have questions after reading the notice and reviewing this Web landing page, you may call the tollfree number that is shown on the notice.

 

Summary of IRS Letter Codes

CP 2000 – This notice shows proposed changes to your income tax return. This proposal is based on a comparison of the income, payments, credits, and deductions reported on your tax return with information on these items reported to us by employers, banks, businesses, and other payers. The CP 2000 also reflects any corrections we made to your original return when we processed it.

CP 2501 – This notice is a preliminary inquiry letter and does not propose a change to tax liability. It supplies payer information and explanation paragraphs concerning the income discrepancy.

Letter 525 – This is a follow-up letter which includes the examination report. The examination report is the Form 4549 and will show the proposed tax liability.

Statutory Notice of Deficiency (Letter 3219) – This is frequently called the “90 day” letter. The certified letter is sent when the taxpayer does not respond to a notice.

Most Common IRS Tax Audit Compliance Programs

The two major compliance programs that involve reporting compliance issues are programs that look at the items that are reported or should have been reported on the tax return. They are Correspondence Examination, also referred to as “Corr Exam” throughout this presentation, and Automated Underreporter, or AUR. These programs share some similarities, but there are also some differences. While most returns are accepted as filed, some are selected for examination, and the IRS will cover those briefly today.

 

 

What is a Corr Exam?

Corr Exam asks for verifications of credits and deductions claimed on a tax return to determine if they are being reported correctly. The major areas covered by Corr Exam are Earned Income Tax Credit, or EITC, nonfilers and Schedule A deductions. Schedule A deductions include items such as charitable contributions and employee business expenses, or EBE. Correspondence Examinations are conducted on Wage and Investment and Small Business/Self-Employed taxpayers out of 10 campus operations located around the country.

 

How are IRS Audits Selected?

Cases can be selected using various methods, including computerized screening and comparison of information received from third parties, such as Forms W-2 and 1099. Although the cases initiated in each campus are site-specific, they can be viewed universally, allowing any examiner to assist taxpayers during telephone calls. The IRS will attempt to stagger how they start cases and the type of issues to be examined in order to balance compliance risk, level incoming mail and telephone traffic and minimize burden on practitioners and taxpayers.

 

Correspondence Corr Exams

Corr Examinations fall under two major categories: pre-refund and post-refund. For examinations where collectability and timing are a factor – for example, returns claiming the EITC – the IRS initiates the examination before releasing the current-year refund. The IRS generally immediately refund any money not related to the examination, and the IRS treats these as a priority to minimize impact to the taxpayer. Post-refund examinations address other issues and are initiated after the IRS analyzes filing trends and return entries.

 

Automated Underreporter, or AUR Exams

All casework in the AUR program is conducted post-refund. The AUR program initiates inquiries about discrepancies identified between information reported on tax returns and information reported to us from third parties. This includes employers, financial institutions, and banks, as examples. The forms the IRS looks at could include the W-2 and a variety of Forms 1099. Issues the IRS match vary and could include interest, dividends, rent and medical payments. AUR inquiries are conducted on Wage and Investment and Small Business/Self-Employed taxpayers out of seven campus operations located around the country. And as with Corr Exam, although the cases initiated in each campus are site-specific, the AUR system allows for universal access, which allows the AUR cases to be viewed and worked at any AUR campus. In addition, telephone assisters can view the two primary AUR notices. They are the CP2501 and CP2000. And as mentioned earlier, if practitioners have urgent issues, they can also call the Practitioner Priority Services line.

 

Information About IRS Exam Process

While there are some fundamental differences between these two campus programs, the realizes they seem very similar from the taxpayer’s perspective. Each program starts with a notice asking about a tax return. Some of these letters propose a liability or a balance due. If the taxpayer does not respond, a certified letter, the Statutory Notice of Deficiency, or 90-day letter, will be sent.

 

Extending Response Time for IRS Exam

While we cannot extend the period of time to file a petition with the Tax Court, it is important to note that in both programs, we encourage you to work with us prior to and during the 90-day statutory period. If at any time prior to the Statutory Notice of Deficiency being issued you need an extension of time to respond, please call and let us know. We typically grant an extension of time in both programs. If there is no response received to the statutory notice, the IRS will assess the proposed liability by default. Collection activity will begin if there is a balance due.