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).