Using AI to get ahead of the IRS
Have you ever thought that you might be the first person in the world to have dreamed up a particular concept? Bill Nemeth did. Four years ago, the Atlanta practitioner made a discovery about taxpayer transcripts that enabled him to predict, using artificial intelligence, which taxpayer returns would eventually be flagged for a CP2000 letter.
“I called my son and told him that it appears we can see the CP2000 flag much earlier than the letter is sent,” Nemeth recalled. “He said ‘You’re full of it’ — not the first time he’s said that to me.”
“But when I showed him my data points, he was convinced,” Nemeth said. “He made it one of the major selling points for the software he designed. I now pull transcripts for 700 clients once a week and use my son’s Tax Help software to do the heavy lifting. It analyzes the transcript and it tells me any new CP2000 flags it sees.”
When a tax return’s information doesn’t match the data reported to the IRS by employers, banks and other third parties, the IRS sends a CP2000 letter giving detailed information about issues the IRS has identified. If the taxpayer fails to respond to the letter within the specified time, the IRS sends them a Statutory Notice of Deficiency.
“The IRS has been sending out over 6 million of these notices annually,” Nemeth noted. “Typical scenarios include the forgotten prize you won at your local charity, the retirement account a taxpayer emptied and forgot to report, or taxpayers’ unreported eBay income.”
Knowing in advance that the IRS is going to send a letter on unreported income means that the tax professional can fix it immediately and bypass not only the IRS letter but the associated penalties and interest as well, Nemeth explained.
“The IRS maintains a history of each taxpayer by year in a Transcript Database. Tax professionals with access to IRS e-Services can electronically access the Transcript Database via the internet using the Transcript Delivery System application. Individual taxpayers can access this same database using the IRS Get Transcript application,” he said. “The tax professional begins by executing Form 8821 on every client and checking the box to get copies of irs correspondence. Form 8821 also authorizes the tax professional to electronically access the IRS history of each taxpayer — the account transcripts.
“Transcripts should be reviewed on a weekly basis,” said Nemeth. “Access the IRS Master Database directly or use software to automatically access the database weekly to pull the transcripts and, using AI, highlight the taxpayers whose transcripts have just been ‘flagged’ by the IRS [Automated Underreporter Program]. Although taxpayers can do this on their own, most will likely not be consistent at doing this.”
“When the software or the professional detects the code indicating underreported income, they can review the return, compare the reported income against the IRS Wage & Income database, and make a correction by amending the return,” said Nemeth. “The IRS does not check transcripts prior to sending out the actual CP2000 notice, so the letter is still sent. But no one is surprised, and the professional can make a call to the CP2000 AUR unit telling them that the error was ‘self-discovered’ and a complete and accurate return was filed five months ago.”
“The IRS requires that we put in every email that we’re using third-party software to pull transcripts, and the IRS requires us to use authorization forms giving permission to access client documents,” he noted.