Office Audit and Correspondence Notice CP2000 frequently cover only one-year and are not routinely expanded to include earlier or later years.
A Report of the Treasury Inspector General for Tax Administration (TIGTA) issued September 9, 2011, recommended that IRS implement additional steps to ensure that office audits are expended to prior and subsequent year returns when substantial taxes may be owed. TIGTA based its recommendation on a study of 100 office audit cases covering the years 2005 through 2008 in which taxpayers agreed they owed additional tax of more than $4,400. The study concluded that 48 audits were closed without expansion to other years potentially costing the government lost revenue of $461,184 in additional taxes that might have been assessed had the exams been expanded. The study projected out the results to 2,932 closed audits concluding that $13.5 million of additional tax could have been assessed if the audits had been expanded.
Office audits are conduced by Tax Compliance Officers (TCO). TCOs are required to determine if taxpayers are filing all required returns and to conduct a Required Filing Check (RFC) to evaluate the taxpayer’s other returns for potential areas of noncompliance and determine if the audit should be expanded. Examples of facts indicating that an audit should be expanded cited in the report were where the return being audited:
- Under-reported income.
- Claimed excessive itemized deductions, or,
- Claimed excessive business expenses.
One practical problem of expanding audits, the audit cycle for individual returns mentioned in the study is 26 months. This means that audits normally must commence no later than 26 months following the due date. The study reported for the audits covered that on average there was less than 1 month remaining on the audit cycle for the prior year return and about 11 months remaining on the assessment statute of limitations. Also, by the time the single year audits ended, on average, only six months remained on the assessment statute of limitations. Thus, implementing the TIGTA recommended policy would likely require IRS to request more taxpayers to waive the statute of limitations by signing Form 872, Consent to Extend the Time to Assess Tax or Form 872-A, Special Consent of Time to Assess Tax.
The Director of Exam Policy in IRS management agreed to provide TCOs with examples when to expand audits to other years and to instruct TCOs on using RFCs.
My view: due to manpower and time constraints we are not likely to see major changes in IRS practice at office audit regarding expanding audits to other years.
Copyright 2011 by Robert S. Steinberg, Esquire
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