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).

Businesses that improperly classify workers as independent contractors instead of employees

What can happen if a business misclassifies some of its workers?

Businesses that improperly classify workers as independent contractors instead of employees can incur substantial amounts in additional taxes and penalties as a result of that misclassification. The Trust Fund recovery penalty may apply if federal income tax, social security tax, and Medicare tax that must be withheld are not withheld, or are either not deposited or paid. This penalty may apply to the responsible person if these unpaid taxes cannot be immediately collected from the employer or business. Furthermore, the Trust Fund Recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying over these taxes and who act willfully in not doing so.

 

Who a responsible person is, and what we mean with the word “willfully?

A responsible person can be an officer or employee of a corporation, a partner or employee of a partnership, an accountant, a volunteer director or trustee, or an employee of a sole proprietorship. A responsible person also may include someone who signs checks for the business or otherwise has authority to cause suspending of business funds. Willfully means voluntarily, consciously, and intentionally. A responsible person acts willfully if the person knows the required actions are not taking place. More information regarding the trust fund recovery penalty can be found in Publication 15 Circular E, Employer’s Tax Guide.

 

Section 530 Relief

There is relief available for some taxpayers. First, Section 530 provides businesses with relief from federal employment tax obligations if certain requirements are met. If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker.

 

Do You Qualify for Relief Under Section 530

To get this relief you must file all required federal tax returns, including information returns on a basis consistent with your treatment of the worker. IRS publication 1976, Do You Qualify for Relief Under Section 530, provides additional information on this issue. Next we will discuss Section 3509 rates. If you treated an employee as a nonemployee, Section 3509 provides reduced rates for the employee’s share of FICA taxes and the federal income tax that should have been withheld. Section 3509 does not provide relief for the employer’s share of FICA taxes. The applicable rates depend on whether you filed required forms 1099. See Publication 15, Circular E for additional information.

 

The IRS classification settlement program, or CSP

The IRS classification settlement program, or CSP, establishes procedures that will allow businesses and the IRS to resolve worker classification cases as early in the course of an exam as possible, thereby reducing taxpayer burden. CSP agreements are closing agreements that bind the service and the taxpayer to prospective tax treatment for future tax periods. If the business meets the CSP qualification, it may be entitled to a reduced amount of tax. Note that the classification settlement program, CSP, is available in an audit setting. For taxpayers that are not under audit, there’s a different program available. It’s called the voluntary classification settlement program or VCSP.

 

The voluntary classification settlement program or VCSP

As the name indicates, the VCSP is a voluntary program that allows taxpayers to reclassify their workers as employees for future tax periods for federal employment tax purposes and obtain partial relief from federal employment taxes. This is important, because one of the biggest tax issues facing companies today is determining whether their workers are employees or independent contractors. This decision has ramifications to the businesses well beyond the initial determination. The VCSP process is simple.

 

Participate in the VCSP

To participate in the VCSP, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP program using Form 8952, Application for Voluntary Classification Settlement Program, and if accepted, enter into a closing agreement with the IRS. Rebecca, what else can you tell us about the VCSP? It should also be noted that exempt organizations and government entities may participate in VCSP as long as they meet all of the eligibility requirements. Lastly, a taxpayer that was previously audited by the IRS or the Department of Labor concerning the classification of the workers, will only be eligible if the taxpayer has complied with the results of that audit, and is not currently contesting the worker classification in court.

 

Form 8952, Application for Voluntary Classification Settlement Program

First, the application Form 8952, Application for Voluntary Classification Settlement Program, should be filed at least 60 days before the date the taxpayer wants to begin treating their workers as employees. There are also new requirements mandating that the taxpayer include a list of names and social security numbers for the workers identified for the worker classification. The IRS will review the application and verify the taxpayer’s eligibility. As part of the agreement, taxpayers receive audit protection from the IRS employment tax audits concerning the class of workers covered by the VCSP agreement for the past years. However, the audit protection does not extend to other issues, if present.

In return, taxpayers agree to prospectively treat a class or classes of workers as employees and pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year determined under the reduced rates of Section 3509(a) of the Internal Revenue Code. The payment works out to just over 1% of the amount paid to these workers for the most recently completed tax year. In addition, businesses will not be liable for any interest and penalties on the amount due. We believe this is very attractive. For additional guidance, please refer to IRS announcement 2012-45 and the IRS website. Those are the highlights of the voluntary classification settlement program.

 

 

Eligibility for Voluntary Classification Settlement Program

To be eligible for the VCSP, one of the criteria is that the taxpayer; A, must have consistently treated the workers as nonemployees and must have filed all required forms 1099 for the workers to be reclassified for the previous five years; B, is currently under audit concerning the classification of workers by the Department of Labor or by a state government agency; C, is not currently under employment tax audit by the IRS; D, is not an exempt organization.

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

Appeals Judicial Approach and Culture (AJAC)

Appeals Judicial Approach and Culture (AJAC) – The AJAC Project reinforces Appeals’ quasi-judicial approach to the way it handles cases, with the goal of enhancing internal and external customer perceptions of a fair, impartial and independent Office of Appeals. AJAC policy changes include:

 

Appeals Judicial Approach and Culture (AJAC)

  • AJAC clarifies the distinction between the role of Compliance and Appeals;
  • AJAC emphasizes a quasi-judicial approach so that Appeals hearing officers can focus on their core mission, fair and impartial decision making free from influence;
  • Appeals hearing officers will focus on their unique and highly specialized role of administrative dispute resolution;
  • Appeals should receive cases from Compliance that are fully developed and well documented;
  • Appeals will not raise new issues or reopen issues on which the taxpayer and Compliance reached an agreement during the examination except instances involving fraud, malfeasance of a material fact;
  • Taxpayers must fully address issues with Compliance and should only come to Appeals when they have reached an impasse;
  • Appeals will forward new issues, information or evidence submitted by the taxpayer to the originating function for consideration; and
  • Appeals will attempt to settle a case on factual hazards when the case submitted by Compliance is not fully developed and the taxpayer has presented no new information or evidence.

 

What is Early Referral?

Early Referral – One of the Alternative Dispute Resolution options, Early Referral is available to taxpayers whose returns are under the jurisdiction of Examination or Collection and who request a transfer of a developed but unagreed issue to Appeals while the other issues in the case continue to be developed by Examination or Collection. Early Referral can also be requested with respect to issues regarding an involuntary change in accounting, employment tax, employee plans, and exempt organizations. Regular Appeals procedures apply, including taxpayer conferences.

 

What is IRS Fast Track Settlement?

Fast Track Settlement – One of the Alternative Dispute Resolution options, Fast Track Settlement is designed to help the IRS operating divisions and taxpayers expeditiously resolve disputes while their cases are still in the examination or collection process. Appeals resources are used to resolve the dispute generally before the 30-day letter is issued. Fast Track Settlement may be available for factual and legal cases, including listed transactions, Compliance- and Appeals-coordinated issues, and issues that require consideration of the hazards of litigation.

 

What is IRS Mediation?

Mediation – One of the Alternative Dispute Resolution options, Mediation is an informal, confidential, and flexible dispute resolution process in which an Appeals officer trained in mediation techniques serves as an impartial third party facilitating negotiations between the disputing parties.

 

Appealing Decisions

CDP Revised Procedures – With the Collection Due Process revised procedures, Appeals will:

  • Ask Compliance to verify a CIS, if needed;
  • Ask Compliance to make the initial decision for all offers submitted during a CDP proceeding;
  • Return the offer to Compliance for final decision if CDP is withdrawn; and
  • Accept as verified any financial statement Compliance reviewed and is fewer than 12 months old

OIC Revised Procedures – With the Offer in Compromise revised procedures, Appeals will:

  • Identify the disputed issues;
  • Ask the taxpayer to substantiate his claim;
  • Identify certain compliance issues that must be remedied;
  • Refer new information to Compliance for review, if needed; and
  • Appeals will sustain a rejection only under the same basis for which the offer was rejected.