A report issued on July 6, 2011 by the Treasury Inspector General for Tax Administration (TIGTA) concludes as did the National Tax payer Advocate that IRS correspondence functions need improvement. Without a study any professional who deals regularly with IRS could tell you the same thing.
The TIGTA study sampled correspondence from several IRS functions for accuracy and timeliness. IRS policy statement P-6-12 issued in 1998 requires IRS to respond within 30 days to taxpayer correspondence. What did the study find?
1. Accounts Management Function: The Accounts Management Organization is responsible for taxpayer relations by answering tax law/account inquiries and adjusting tax accounts. In addition, it is responsible for providing taxpayers with information on the status of their returns/refunds, and for resolving the majority of issues and questions to settle their accounts. Of 73 correspondence cases sampled only 14 taxpayers received timely and accurate responses.
2. Automated Under-reporter Program (AUR): This program falls under the IRS Compliance Services Organization which is responsible for taxpayer relations under many programs, including AUR and to list some:
- Automated Collection System (ACS)
- Backup Withholding
- Combined Annual Wage Reporting
- Correspondence Examination
- Earned Income Tax Credit
- Installment Agreements (IA)
- Offers in Compromise (OIC)
- Return Delinquency (RD)
- Substitute for Return & Automated Substitute for Return
The AUR function produces the well-known CP-2000 letter, Notice of Under-reported Income which results from IRS computer matching programs. A third-party reporter files a Form 1099, Schedule K-1 not reported in a taxpayer’s return, and a notice is generated. All 48 taxpayer correspondence cases sampled in the study showed accurate responses by IRS but only 27 responses were timely. Despite the finding, many CP-2000 notices are not accurate and one receiving a Notice CP 2000 should seek professional help or carefully compare the notice to his or her return. Common errors are:
- Including as taxable income the gross proceeds reported on a Form 1099 B that does not consider cost basis. In fact, there may have been a loss.
- Failing to properly match dividends and interest income that may have been combined in the return or reported under a pre or post merger financial institution name.
- Failing to properly take into account Passive Activity Loss carryovers on a Schedule K-1.
3. The Field Assistance Organization: This function is responsible for taxpayer relationships by providing personal assistance to answer tax law questions and resolve account issues. In addition, the Tax Assistance Center (TAC) offices provide help with such matters as payment arrangements, proof of receipt of tax returns, tax return preparation and alien clearances (Sailing Permits). Of 73 correspondence cases sampled only 6 taxpayers received timely and accurate responses.
IRS disagreed with parts of the study results but my own experience finds that IRS is less accurate and timely than even the study suggests. Often interim correspondence as suggested in the study is an endless delaying game. Letters arrive stating IRS is still looking into the matter. When a response is finally received often it is inapposite to the issue raise in the initiating letter.
Corresponding with IRS is frustrating but at least a letter provides a clear record of what you wrote about, what you enclosed and of the IRS response. This is very helpful should you have to seek assistance from the Taxpayer Advocate or go to court. Telephone calls may be quicker but do not result in the same clear record of request and response. IRS personnel notes of a call can be self-serving.
Recommended when responding to a CP-2000 Notice:
- Include the IRS reference number, taxpayer name, SSN and year in a heading.
- Respond to the correct correspondence address stated in the notice.
- State the adjustments, if any, with which you agree; and, the items with which you disagree in the order they are presented in the notice. Use numbered paragraphs which are easier to read and refer to in follow-up letters or calls; or state that you disagree with all of the adjustments.
- Index supporting documents attached with reference to the numbered paragraphs in your letter.
- Include the IRS Response Sheet with the appropriate boxes checked.
- Explain with law and facts income not reported for some unique reason.
- Do not file an amended return to report items listed in the notice. IRS will adjust the return.
- Do not procrastinate. If you need more than the initial 30 days, IRS will issue an audit report, proposing additional tax but giving you an additional 30 days to respond; and, more time if facts justify. If you do not respond, IRS will assume the notice is correct, and, eventually mail to your “last known address” a Statutory Notice of Deficiency. In that case, you will have to file a Tax Court Petition within 90 days of the notice date, to avoid assessment of the tax (IRS action noting the amount of the tax liability on your taxpayer account). This is true even if an IRS person tells you not to worry; an adjustment will be made to your account if documentation is submitted. Once assessed, IRS activates its collection function to obtain the funds from you voluntarily or through enforced collection action (recording tax lien, levy, seizure, foreclosure of its tax lien).
- Make sure IRS has your correct address. If the CP-2000 notice was forwarded to you file Form 8822 with IRS. IRS having properly mailed a Deficiency Notice to your “last known address” can assess the tax even if you do not receive the notice, once the 90 day period runs.
Copyright 2011 by Robert S. Steinberg, Esquire
All rights reserved.