IRS Could Prod Taxpayers with More ‘Soft Notices’

The Internal Revenue Service is trying to decide whether it should make so-called “soft notices” a permanent part of its automated program for encouraging more voluntary compliance by taxpayers.

A “soft notice” is a written notice from the IRS, on Form CP 2057, which requires no action on a taxpayer’s part but encourages the taxpayer to check their return for errors. It serves as an educational tool and aims to improve voluntary compliance. The notices ask the taxpayer to review their return, and if they underreported their income, to file an amended return.

A new report by the Treasury Inspector General for Tax Administration recommended that the IRS should improve its plan to determine whether the soft notices should be used permanently in the IRS’s Automated Under-reporter Program. The TIGTA audit was initiated because the IRS is involved in a multi-year initiative to determine if soft notices can address underreporting discrepancies.

The AUR Program identifies income discrepancies between two types of information received by the IRS: information provided by taxpayers and related information provided by their employers and financial institutions. The IRS launched its AUR Program Soft Notices Initiative to encourage taxpayers to voluntarily correct errors reported on their tax returns.

The soft notice provides information for the taxpayer to check against their tax return to see if the return was correct. Although the notice then tells the taxpayer what they should do if they find a problem, the taxpayer is not required to pay more taxes, provide documentation, or file an amended return.

TIGTA performed a performance audit of the IRS's planning activities for the soft notice initiative. As a result of the audit, TIGTA determined that the IRS could improve its plans for evaluating the initiative’s results. If determined to be successful, the soft notices initiative, which is currently a pilot project, could be made a permanent part of the IRS AUR Program.

“While the IRS is to be commended for implementing an initiative that encourages voluntary compliance with the law, it must establish criteria for determining what constitutes success and ensure that all costs are quantified in order to determine the net benefit to taxpayers,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA made two recommendations to the IRS in its report, and the IRS agreed with both of those recommendations.

TIGTA recommended that the IRS establish criteria for determining what will constitute success for the initiative and ensure all costs are quantified for determining the net benefit of implementing the soft notice process in the AUR Program.

IRS management agreed with the recommendations and plans to develop the metrics in the coming year to measure and report soft notice results.

As for determining the net benefit of the soft notice process, IRS management responded that the large-scale rollout will be fully costed and that no corrective action is necessary. TIGTA said it is pleased that IRS management agreed with this recommendation. However, the absence of a specific commitment on when the full-scale rollout will take place could diminish the effectiveness of an important control for assuring that key issues were considered before using soft notices in the AUR Program on a permanent basis.

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