Tax return examiners at the Internal Revenue Service often select the wrong prior or subsequent year’s tax return when looking for inconsistencies with the current tax return.

IRS policy requires that an examination should cover not only the single tax period that initiated the examination, but also any and all open tax periods that affect the taxpayer’s return. However, a new report by the Treasury Department’s Inspector General for Tax Administration found that IRS examiners did not always properly inspect the prior and/or subsequent year returns and, therefore, did not make a proper decision to select these returns for examination when warranted.

In addition, the examiners did not adequately document the decision to examine the associated years’ tax returns.

TIGTA auditors looked at 68 sample tax cases, and found that 14 of the returns warranted examination of the prior and/or subsequent year’s returns, but the IRS did not select them for examination.

In 26 of the 68 cases, there was no evidence that the examiners inspected either the prior or subsequent year returns to identify similar issues to the year under examination or if large, unusual or questionable items existed that would have warranted examination. In 33 cases, the files did not include adequate documentation to support the decision for not selecting the prior and/or subsequent year returns for examination.

Among other suggestions, TIGTA recommended that the IRS ensure that managers emphasize with examiners the requirement to consider prior and/or subsequent year tax returns for examination during documented reviews, discussions and other activities. In response, IRS officials agreed with the report’s recommendations.

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