The Tax Times: TIGTA - Correspondence Audit Selection Process Could Be Strengthened To Include Audit of Prior Year Returns!

Tuesday, September 10, 2013

TIGTA - Correspondence Audit Selection Process Could Be Strengthened To Include Audit of Prior Year Returns!

TIGTA evaluated a statistical sample of 102 of 7,470 single-year correspondence audits of individual tax returns closed between April 1, 2010, and March 31, 2011, in which each of the taxpayers involved agreed that they understated their tax liabilities by at least $4,000.

Similar tax issues also existed for the prior and/or subsequent years tax returns filed by 43 of the 102 taxpayers.

IRS records showed that:

32 of the 43 taxpayers’ prior and/or subsequent year tax returns were not audited.

For 16 audits, the taxpayers agreed they owed approximately $4,100 to $7,550 in additional taxes after the IRS determined they were not entitled to Earned Income and other credits taken on their tax returns. The 16 audits were initiated through the Revenue Protection Strategy process.

For 12 audits, the taxpayers agreed they owed approximately $4,100 to $14,400 in additional taxes after the IRS determined they overstated itemized deductions on their tax returns. The 12 audits were initiated as a result of the correspondence return classification process.

For four audits, the taxpayers agreed they owed approximately $4,450 to $5,850 in additional taxes after the IRS determined they overstated business expenses on their tax returns. The four audits were initiated as a result of the correspondence return classification process.

Had the prior and/or subsequent tax returns for these 32 taxpayers been audited for similar tax issues, we estimate the potential additional tax, penalty, and interest assessments would range from $2,343 to $18,874—totaling $189,422.

When the sample results are projected to the population of 7,470 audits closed between April 1, 2010, and March 31, 2011, we estimate that 2,344 taxpayers may have avoided additional tax, penalty, and interest assessments of $13.9 million.

TIGTA Recommended that the Director of Campus Compliance Services, SB/SE Division, should develop and implement procedures in the IRM that instruct how current year correspondence audit results are to be used in deciding whether the prior and/or subsequent year tax returns warrant an audit. Furthermore, to ensure that the instructions are properly followed; the procedures should include instructions for monitoring how well current year correspondence audit results are used in deciding to audit prior and/or subsequent year tax returns.

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