IRS Expands Use of Correspondence Examinations

April 28, 2011
Greg Gandy

Greg Gandy

Director

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Michael McDevitt

Michael McDevitt

Director

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The IRS has expanded the use of correspondence examinations of individual income tax returns. The IRS initiates a correspondence examination by mailing either Letter 566 (CG), often termed an initial contact letter, advising the taxpayer that a return has been selected and listing the items to be verified, or a CP 2000 notice, which contains proposed adjustments based on information documents issued by third parties, such as Forms W-2, Wage and Tax Statement; 1099-MISC, Miscellaneous Income; and 1098, Mortgage Interest Statement. The examinations are handled at an IRS Service Center or campus.

Please notify us if you receive correspondence from the IRS. Do not assume the change(s) proposed in any IRS correspondence is correct. Often, it is not! Let us review the correspondence and respond on your behalf.

When the IRS receives returns, it compares them against norms for similar types of returns. The IRS develops the norms from audits of statistical random samples of returns that are selected as part of the National Research Program, which the IRS conducts to update return selection information.
The IRS typically selects returns for correspondence examinations based on data indicating that the taxpayer has not reported income, claimed improper deductions, or claimed erroneous tax credits. Some typical items for which the IRS requests verification include alimony, moving expenses, various itemized deductions, casualty losses, employee expenses, Schedule C receipts and expenses, foreign tax credits, earned income credits and education credits.

Unlike a field examination, a correspondence audit is not assigned to a specific examiner. When the IRS receives correspondence, the file is assigned to an auditor. If there is no response from the taxpayer, the process moves through an automated system. After a certain period of time, the IRS issues a second notice, and if there is no reply, it will issue a statutory notice of deficiency or a 90-day letter.

The IRS has been having workload problems in timely responding to taxpayer or practitioner letters that provide the requested information or express disagreement with proposed adjustments. Often correspondence is not assigned to the auditor who reviewed earlier documents. Correspondence tends to not be reviewed for several months, resulting in the IRS sending letters advising the taxpayer that it needs additional time to review the correspondence. When the IRS finally issues reports, in some cases the proposed adjustments are not correct because proper consideration and evaluation have not been given to the documents and substantiation furnished by the taxpayer or his or her representatives.

If you have any questions, please call your contact at BiggsKofford at (719) 579-9090.

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