Better management of correspondence audits by the Internal Revenue Service could improve tax compliance and reduce the burden on taxpayers, according to a new government report.
The report, from the Government Accountability Office, found that the notices sent by the IRS during correspondence audits have misled many taxpayers by providing unrealistic time frames on when the IRS would respond to their correspondence. For example, the notices stated that the IRS would respond within 30 to 45 days when it has consistently taken several months to do so, according to the GAO.
As of early 2014, IRS data showed that the agency had not responded in a timely manner to more than half of the correspondence that taxpayers sent to the IRS.
In many cases, tax refunds are held up until an audit is finished. According to IRS tax examiners, notices caused taxpayer frustration and generated unnecessary taxpayer calls to IRS.
“The taxpayers cannot understand why IRS would send a letter out with such unrealistic time frames and there is no acceptable way we can explain it to them,” said one tax examiner who was interviewed by the GAO in a focus group. “That is why they are so frustrated. It puts us in a very awkward and embarrassing situation
. I try to gain control of the situation and tell the taxpayer I understand the frustration so that he will calm down so we can make the phone call productive, but this takes time and wastes time for both the taxpayer and me.”
Examiners who answer such calls told the GAO they do not know when the IRS will respond.
The IRS uses correspondence audits, which are done by mail and constitute the majority of IRS audits, to resolve disputes over tax return reporting of relatively simple issues. Tax observers and the IRS itself have concerns that these audits impose unnecessary burden on taxpayers or costs on IRS.
For audits closed in fiscal year 2012, correspondence audits accounted for 1.1 million of the 1.5 million audits that year, or about 76 percent, and approximately $9.2 billion of the $15.3 billion, or 60 percent, in recommended additional taxes due and refunds disallowed by the IRS.
The IRS recently revised the notices, the report pointed out, but the revisions were not based on analysis of historical data nor did the IRS have a plan to analyze data to ensure it is responding timely per revised notices.
The IRS said it does not have information to determine how the correspondence audit program affects its strategic goals for compliance, taxpayer burden, and cost. The IRS also said it has not documented objectives for the program. While the RS has many program measures such as how many audits are closed annually, they are not linked to the compliance, burden and cost goals. Thus, it is not possible to tell whether the program is performing better or worse from one year to the next, the GAO noted.
Beyond those measures, the IRS also did not have guidance on how IRS managers were to use program data to make decisions. In some cases, the program data being used are incomplete, the GAO pointed out. For example, the IRS did not track data on the number of times a taxpayer called the IRS or sent documents. “Using incomplete information limits insights on the additional revenues identified from IRS's audit investments and on how much burden the audits impose on the taxpayers,” said the GAO.
In 2012 IRS began its Correspondence Examination Assessment Project, or CEAP, to reduce taxpayer burden. With a contractor, the IRS identified five problem areas involving communications with taxpayers, the audit process, expedited audit resolution, resource alignment, and program metrics. CEAP has 19 improvement efforts finished or underway.
However, the IRS has not defined the intended benefits and tracked the actual benefits. As a result, it will be difficult to determine whether the efforts successfully addressed the problems, according to the GAO.
The CEAP contractor recommended that the IRS develop a tool for better balancing resource allocation between, for example, telephone calls and reviewing correspondence. IRS officials said they would consider the recommendations but did not have a specific plan or timeframe. Thus, it will be difficult to hold IRS managers accountable for ensuring that the recommendations are completed in a timely manner, the GAO noted.
The GAO recommended that the IRS collect and analyze data on whether it is responding in a timely way in its revised audit notices, and establish program objectives as well as measures that reflect the objectives and strategic goals. The IRS should also document its guidance for making decisions with program data, as well as track previously unused program data to provide more performance insights, the report suggested. The GAO also recommended that the IRS document the intended and actual benefits of its audit improvement efforts, and develop a plan and timeline for implementing the contractor's recommendations.
In response to the report, the IRS described the actions it plans to take on all the recommendations. However, the IRS pointed out that it is operating under budget constraints due to budget cuts in recent years that have affected its enforcement efforts.
“It is important to note that reductions in the IRS budget have stretched enforcement resources across the agency,” IRS deputy commissioner for services and enforcement John M. Dalrymple wrote in response to the report. “In fiscal 2014, the IRS budget has been reduced by nearly $850 million compared to fiscal 2010. During the same period, the IRS has seen the number of key enforcement personnel drop by 3,000 positions.”
Fred Slater, CPA, a partner with MS 1040 LLC in New York City and a tax practitioner for businesses and individuals for over 25 years, pointed out that budget cuts at the IRS are affecting service and audits.
“The training budget of IRS personnel is down by 83 percent,” he said. “Over the past five years, there is no professionalism in how the IRS audits. If that is not enough, the IRS is closing a key office in midtown Manhattan. There are 10 months before the next tax season and I challenge the IRS to make positive changes toward better service.”
Slater pointed to IRS audits done for deductions on Schedule C, in particular. “The majority of these audits result in more penalties and interest for the taxpayer only because the group the IRS is auditing is usually unrepresented during the audit,” he said. “Auditors follow a strict (no variation allowed) set of rules. As a result, reports are issued every 45 to 60 days disallowing everything for no reason other than that the agent must show they are working the case. It wastes paper, creates animosity and destroys morale.”
Slater added that service from the New York State Tax Department is just as bad. “New York State wants their money and they do not care if they are not entitled to it or not,” he said.