Practical Tax Bulletin, Issue 8, April 10, 2012
Published by CCH, a Wolters Kluwer business
Correspondence Audit Process
The correspondence exam usually begins when the IRS sends a CP 2000 notice by mail to the taxpayer informing it of a proposed change to be made to the tax return. If the taxpayer disagrees, it has the option of submitting an appeal, generally in writing and within 30 days from the date of the IRS notice. In its response, the taxpayer must provide proof of the item in question.
The CP 2000 shows proposed changes to a taxpayer’s income tax return. The IRS has explained on its website that this proposal is based on a comparison of the income, payments, credits, and deductions reported on the tax return with information on these items reported to the agency by employers, banks, businesses, and other payers. The CP 2000 also reflects any corrections the IRS made to the return when the agency processed it.
One problem cited by practitioners is that taxpayers often do not understand the CP 2000 and fail to respond. In such a case, the IRS will complete the examination anyway under the assumption that the taxpayer earned more income than reported or had fewer expenses or credits than claimed. It will then adjust the tax return accordingly.
National Taxpayer Advocate Nina Olson stated in a recent blog post that the CP 2000 can be difficult for many taxpayers to understand and, consequently, they may not respond. “Correspondence exams have the highest no-response rate and the lowest agreement rate. Correspondence exams also have extraordinarily low rates of administrative appeals and United States Tax Court petitions. 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.”
Other common complaints about correspondence audits stem from the automated nature of their processing. These include assertions that IRS examiners ignore documentation sent in by taxpayers or are unaware of its arrival, that IRS examiners are difficult to reach by phone, and that IRS examiners do not often take the time to call a taxpayer to resolve a simple issue. Often this occurs because no examiner has yet been assigned to a case.