By: Thomas Stemmy
You may have noticed the government has already been trying to raise your tax bill — even before the debacle in Congress began.
One IRS solution simply calls for the examination of more tax returns at the least possible cost to the government. Welcome to the IRS “audit-by-mail” program, which has led to a surge of tax audits and has increased every year. Out of more than 1.5 million audited returns for 2011, about 75 percent were conducted by correspondence.
If you haven’t had the distinction of undergoing a correspondence audit, you should at least know what to expect if the time comes. Often, the examination begins with a seemingly routine computer notice from a special IRS “campus” that seeks to substantiate a certain tax deduction that had been claimed.
More frequently, the IRS is trying to match the income you reported on your return with one of those ubiquitous 1099 forms payers of all types of income must file. It’s no secret reliance on the 1099 form as a compliance tool continues to increase as the government tries to close the “tax gap.”
There are a few things to keep in mind if you happen to receive one of those supposedly routine notices regardless of what prompted the audit.
First, the “audit-by-mail” program has not been a quick-fix solution as was expected. In fact, the Office of the Taxpayer Advocate (who keeps a close eye on consumer’s rights) recently observed that correspondence audits may be imposing a bigger burden on taxpayers than the IRS originally thought.
Professionals in the tax community agree. Many report significant disadvantages for their clients when they can’t deal with the IRS the old-fashioned way — that is, with a face-to-face discussion with an examiner who is properly trained in the tax law.
Perhaps the main complaint with the correspondence audit is with operational problems within the IRS — particularly “mail-processing delays.” In one common example, a taxpayer responded promptly with requested substantiation — only to later find he had to defend himself from an additional tax assessment anyway. Why? The documentation he mailed didn’t get into the hands of the right employee in time.
In other examples, the IRS appears to be intimidating when it states that a charitable deduction (or, perhaps, a business deduction) will be disallowed and additional taxes assessed unless acceptable substantiation is received within 30 days.
What should you do if you receive a correspondence-audit notice from IRS? Typically, under this program, the IRS will raise a question about only one or two specific items on your return. Any responses should be brief and to the point, so as not to open the door to further time-consuming questioning about other tax issues that are not relevant.
It should be followed up to ensure it was received on time. Responding by certified mail is usually the best idea.
Finally, if at all possible, try to coordinate all your communications with the IRS with a qualified tax professional. Remember, a real, live, trained tax examiner will be reviewing your case once your response is received.
All too often, well-intentioned taxpayers wind up with an extended confrontation with the IRS, which could have easily been avoided with a properly worded response citing the appropriate authority of the tax code and regulations.
Mike Nolan, an experienced broker with the Edward Jones firm in Annapolis, says everyone knows “the rules of the tax code could be confusing at best. Any correspondence that you receive from the IRS in connection with 1099 reporting (or any tax-related item for that matter) should be reviewed by your tax adviser in all cases.”