TIGTA Suggest Improvement to IRS Correspondence Examinations

TIGTA released its report on September 30, 2021, Suggest Improvement to IRS Correspondence Examinations.  

Correspondence examinations are generally narrower in focus than a traditional in-person audit of a taxpayer’s return and enable the IRS to reach more taxpayers at a lower cost.

The IRS relies heavily on correspondence examinations as a more economical means to address taxpayers with suspected underreporting of tax liabilities. 

From Fiscal Year2017 to Fiscal Year 2019, The IRS Conducted Almost 2 Million Correspondence Examinations And Recommended Approximately $12.2 Billion In Additional Taxes.

In Fiscal Years 2017 through 2019, correspondence examinations accounted for nearly 80% of all IRS examinations completed but accounted for less than one-half of the recommended additional  tax after examination. 

TIGTA’s review of the Small Business/Self-Employed Division’s correspondence examination case selection process found that the issues the IRS examined most frequently were not the most productive issues. This was due in part to the IRS not prioritizing the annual workplan based on prior year results.

In addition, TIGTA’s analysis of 743,648 examinations closed from Fiscal Year 2017 to Fiscal Year 2019 found that the IRS conducted 139,492 (19 percent) subsequent examinations identified by the subsequent return process, and 23,741 (17 percent) of these examinations were closed with the taxpayers agreeing to the additional tax assessed. 

However, the IRS did not open the correspondence examination on the subsequent year return until after it closed the examination on the current year. This increases the burden to the taxpayers, subjecting them to two separate correspondence examinations instead of one examination for multiple tax years.

According to the Internal Revenue Manual, IRS correspondence examiners are to consider subsequent year returns containing the same issues as in the year examined. However, TIGTA interviewed 15 tax examiners who stated that they are instructed only to review the specific issue and year that was selected for the examination and     not to expand their work into the following year. TIGTA identified 53,969 correspondence examinations, that had an issue on an individual tax form or the taxpayer was identified as a non-filer. Further review showed these examinations had a subsequent year tax return with the same potential issue that had not been examined and     met the IRS’s criteria for potential audit selection.

TIGTA recommended that the IRS: 

1) evaluate closed correspondence examination cases to identify the issues that result in the most significant noncompliance and develop a workplan to include most of these cases; 

2) change the subsequent return process to only address returns about which the taxpayer did not respond; and 

3) provide a reminder to ensure that employees are following processes for subsequent year returns during the correspondence examination process.

The IRS agreed with two of the three recommendations, including ensuring that tax examiners and managers are following processes for subsequent year returns during the correspondence examination process. 

However, the IRS disagreed with TIGTA’s recommendation to evaluate closed correspondence examination cases to identify the   issues that result in the most significant noncompliance, stating that historical business results are already utilized in the case selection process.

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