Meet the new IRS—the kinder, gentler IRS. It's an agency with processes that are fast becoming structured, streamlined—and strangely quiet.
Quiet, that is, except on paper.
More Internal Revenue Service notices are going out to taxpayers than ever before. In fact, since 2001, notice volume has increased 670 percent, to 201 million sent in 2009. This is the IRS being smarter about tackling what it considers to be a big problem.
In 2001, the IRS conducted a study to identify the amount of taxes that goes unpaid each year. The result: a $345 billion tax gap - stemming mainly from a complicated and changing Tax Code, often vulnerable to fraud. The IRS quickly made plans to close this gap while maintaining itself as a customer service organization. The result: improved technology and information systems that isolate compliance areas - and a dramatic increase in IRS notices.
For accounting firms, this means more work and more contact with the IRS, because two thirds of taxpayers rely on their accountant each year for compliance. While this sounds like a potential problem, it can represent a tremendous opportunity to enhance client service and further strengthen the client-accountant relationship.
A SHIFT IN STRATEGY
While the IRS still conducts audits and face-to-face meetings, its compliance strategy for the 21st century is shifting. The agency has realized that it must leverage its channels, such as tax preparers and IRS information systems, to close the tax gap.
This year, the IRS started regulating tax preparers by requiring registration and competency standards, a strategy that may have also reduced the number of preparers. There were more than 1.2 million registered preparers before IRS regulation; now there are less than 700,000. The IRS will continue to work with tax professionals so that preparers will assist with compliance.
In the 1990s, the IRS approached compliance through traditional methods such as audits and in-person tax collection. During the past 10 years, however, the IRS has improved its ability to target potential noncompliance through technology. The rate of e-filed returns is fast approaching the IRS target of 80 percent, and improved information systems have automated matching techniques and specialized, issue-focused notices - all aimed at narrowing the tax gap. The IRS reported the following results:
For the more than 4.3 million information-matching notice discrepancy audits, the average return on investment for the IRS is $1,670 per return, with little involvement by IRS personnel.
The IRS mail audit program, responsible for 78 percent of all IRS audits in 2010, averages almost $6,600 in additional taxes owed per audit.
With enhancements in notice and information systems, the IRS also improved its compliance practices and reduced personnel by 6 percent during the past 10 years.
In a recent speech, IRS Commissioner Doug Shulman indicated that the IRS is also looking ahead, analyzing taxpayer compliance data to recognize trends and improve compliance practices. He explained that the agency created an office of compliance data analytics that helps create hypotheses for compliance improvement, launches pilots to test hypotheses, and then implements enhancements if pilots are successful. The ultimate goal, Shulman said, is to take advantage of technology to modernize IRS processes.
Shulman also described an upgrade to its Customer Account Data Engine to take effect for the 2012 tax filing season. The agency's core account database, which holds basic taxpayer information such as current account balance and payments, will move its batch processing cycle from a weekly or bi-weekly basis to a daily basis, he said. For practitioners, the upgrade means faster refunds for clients, and dealing with IRS agents who have up-to-date information, he explained.
Among IRS efforts to improve compliance through technology, the most striking statistics involve changes to the notice system. In 2001, the IRS issued about 30 million notices. From 2001 to 2009, volume increased 670 percent to 201 million notices. In that same time period, the number of individual and business taxpayers increased by only 10 percent, from 141 million to 155 million.
This year, it's likely that the IRS will exceed the 201 million notices issued in 2009. For practitioners and their clients, this means more contact with the IRS.
NOTICES FOR EVERY SEASON
Where the IRS is concerned, there is no defined busy season. IRS compliance systems and staff work year-round on tax compliance issues, consistently monitoring activity and issuing notices.
The IRS sends certain types of notices throughout the year. For example, in May and June, practitioners can expect notices related to the tax returns they filed for their clients before the April 18, 2011, deadline. The following is a sampling of such notices.
CP23/24, Estimated Tax Discrepancies. Retirees, small-business owners, or investors who make estimated tax payments may receive this notice when estimated payments reported on their return were incorrect. Practitioners should review payments their clients made to the IRS to see whether the payments were posted correctly. If so, practitioners can facilitate payment of the balance or help dispute the account discrepancy.
CP14, Balance Due. Clients who did not pay an outstanding balance when they filed their return will receive this notice. Practitioners can help their clients make arrangements to satisfy the balance with the IRS.
CP2000, Underreported Income Adjustment. Investors, small businesses or taxpayers filing for early refunds may receive this notice when income was not reported on their return (most likely from 2009). Practitioners may need to reconcile the discrepancy and respond to the IRS, or investigate whether the income reported is their client's income. It may have resulted from identity theft or an incorrectly filed information statement.
CP88, Refund Hold Due to Missing Tax Return. Clients may receive this notice when the IRS has not received their tax return. This is more common for returns filed by paper or for e-filed returns that the IRS rejected with no follow-up. Practitioners should immediately file the return. If there is a balance due, practitioners can consider submitting a penalty abatement request with the return if there is reasonable cause or if the return was filed but not recorded by the IRS.
Letter 3850/1-B, Appointment Letters for Employment Tax Audit for the IRS National Research Program. Employers receive this notice when they are selected for an IRS audit to determine whether their contractors are actually employees. Practitioners should review their clients' use of independent contractors.
CP12/CP13, Math Error Notices (IRS adjusted a filed return due to a miscalculation, changing the refund). Form 1040 filers may receive this notice when the IRS recalculates their return. Practitioners should recheck the return for accuracy, and if they dispute the adjustment, contact the IRS to correct the error.
CP11 series. Clients may receive these notices when they take new IRS credits or the Earned Income Credit, or when the IRS adjusts the return due to a discrepancy. The IRS thinks there was an error on the return, resulting in a balance due. Practitioners may need to prove a credit to the IRS or help their client make arrangements for the unpaid balances.
It's clear that the IRS has turned to technology to boost compliance. And with more than 200 million notices on the way again this year, practitioners can expect more clients to look to them for support.
To provide value all year long, firms need to manage their clients' post-filing activity. For most, that means reacting to notices. While it's necessary, it's hardly proactive. And many clients either don't provide all of the notices they receive or provide them with inadequate time for practitioners to prepare a response before IRS deadlines.
Tax firms can prepare now for increasing IRS activity. By managing their clients' post-filing activity and using best practices to address any issues or notices that arise, practitioners can respond quickly, monitor progress, and stay current on shifting IRS practices.
Jim Buttonow, CPA, is a 19-year IRS veteran and co-founder and vice president of product development at New River Innovation, as well as chief architect of Beyond415, a Web-based application that enables tax professionals to manage their clientsâ€™ post-filing compliance. Reach him at firstname.lastname@example.org.
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