Taxpayer Advocate Questions IRS Audit Effectiveness

The National Taxpayer Advocate is raising concerns about the effectiveness of the Internal Revenue Service’s increasing reliance on correspondence exams instead of face-to-face audits.

In a blog post Tuesday, National Taxpayer Advocate Nina Olson noted that the IRS has significantly increased its use of correspondence exams in the past decade or so. Between fiscal years 2000 and 2011, face-to-face audits increased by 56 percent, from 251,108 to 391,621. In contrast, correspondence-based exams, or “corr exams,” increased by 220 percent, from 366,657 to 1,173,069.

“Today, the IRS generally reserves face-to-face individual audits for the most affluent taxpayers,” wrote Olson. “Because corr exams focus on a single year and only one or two issues, they impact low and middle-income taxpayers. These taxpayers are the least likely to be knowledgeable about IRS processes and taxpayer rights or to be able to afford representation. For example, 44.6 percent of all FY 2010 individual corr exams relate to the Earned Income Tax Credit (EITC), a refundable credit for low income workers and their families.”

Olson also questioned the effectiveness of corr exams in comparison to face-to-face audits.

According to the IRS, when it conducts EITC examinations face-to-face, it achieved an 85 percent response rate for fiscal year 2007, she noted, but the response rate fell to 30 percent in fiscal year 2010 for regular EITC examinations conducted by correspondence.

“In other words, EITC taxpayers were almost three times more likely to respond to and participate in a face-to-face EITC audit than one conducted by correspondence,” she wrote. “If a taxpayer doesn’t respond and provide documentation of EITC eligibility, his or her EITC claim will be disallowed. Thus, the method of conducting an audit can have a significant impact on its outcome for the taxpayer.”

Olson noted that correspondence exams have the highest no-response rate. They also have extraordinarily low rates of administrative appeals and U.S. Tax Court petitions, she added. “These low rates may be the consequence of unrepresented and inexperienced taxpayers’ ignorance of the audit process and their right to appeal an unfavorable decision,” she wrote.

In surveys of taxpayers, the IRS found that they expressed far greater satisfaction with face-to-face audits as opposed to correspondence exams, at a rate of 71 percent to 43 percent.  Forty-one percent voiced overall dissatisfaction with correspondence exams, compared to 18 percent who were dissatisfied with face-to-face audits.