In prepared remarks before the New York State Bar Association Section of Taxation on Feb. 24, IRS Commissioner John Koskinen noted that with the IRS budget falling by more than $1.2 billion in the last five years, and with 13,000 fewer full-time employees at the end of fiscal year 2014 compared to 2010, audits of individuals last year dropped to the lowest level in a decade. But taxpayers shouldn't think they're home free: The IRS has expanded its automated exam programs, which enable it to reach many more taxpayers than it could with “human” examiners.
Two important automated exam programs are the correspondence examination ("Corr exam") and the automated underreporter (AUR) program. While there are fundamental differences between the two programs, both start with a computer notice asking about one or more entries or schedules on the tax return.
Corr exams typically focus on one or two simple issues, such as filing status, exemptions, itemized deductions, or tax credits. Taxpayers may avoid an IRS inquiry by:
- Attaching an explanation to the return. For example, Reggie’s charitable contributions appear excessive compared with his income. However, he attaches a statement that he inherited cash from a relative that was contributed to the deceased relative’s favorite charity.
- Attaching the required form. Fred and Millie are divorced and their child lives with Millie. One of the requirements for a noncustodial parent to claim a dependency exemption is to attach Form 8332 (Release/Revocation of Release of Claim to Exemption for Child. . .) signed by the custodial parent.
- Providing the required information. For example, one of the requirements for claiming a child and dependent care credit is to report the qualifying individual’s Social Security number on the return.
The AUR program initiates inquiries about discrepancies between information reported on tax returns and information reported to the IRS by third parties. Again, taxpayers may avoid an IRS inquiry by:
- Using the payer’s correct name. One example of a possible problem is reporting dividends from "AA" on the tax return when the Form 1099-DIV shows the payer as "American Airlines Group, Inc."
- Separately listing each amount reported on an information return. Combining amounts from the same payer may trigger a notice even though the combined amount on the return equals the sum of the separate 1099 amounts.
- Reporting income on the correct line. Sometimes this can lead to an IRS notice and paying too much tax, such as reporting Form 1099-DIV income on the line for interest income instead of the line for qualified dividends, which are taxed at a lower tax rate.
In all cases, the taxpayer or the return preparer should respond to the notice by the specified deadline, typically within 30 days. Failure to do so can lead to the assessment of additional tax, penalties, and interest—and the initiation of collection action.
About the author:
James A. Keller, JD, CPA, is an executive editor with the Tax & Accounting business of Thomson Reuters. Mr. Keller has more than 25 years of tax experience, including employment with the Internal Revenue Service and with a law firm representing small business owners and incorporated professionals. He has a wide range of experience in the areas of corporate taxation, retirement and estate planning, and representation of clients before all levels of the IRS. Mr. Keller is a coauthor of PPC’s Guide to Dealing with the IRSand PPC’s Specialized Industry Tax Guide, and is a contributing editor to many deskbooks and tax planning guides, including PPC’s Tax Planning Guide—S Corporations.