IRS correspondence examinations are conducted through a service center “campus”, and used where there is: (i) a single or limited audit issues (e.g., a line item on return rather than the entire return); (ii) the query lends itself to asking for documentation to substantiate tax return entries (vehicle purchase information for deduction, canceled check for charitable deduction, birth certificate or school records for EIC); and (iii) there is a limited likelihood for the necessity of a face-to-face interview or discussion with the taxpayer or their representative/preparer. Telephone contact is encouraged. Tax examiners use judgment when evaluating responses, so results may vary. These examinations have increased significantly since 2000, and constitute a significant percentage of the Service’s audits.
Two types of letters are used to begin a correspondence examination: (i) an Initial Contact Letter (ICL) is used to notify a taxpayer of the opening of an audit without proposing a balance due, used on all EITC examinations and when the IRS is questioning a general deduction or credit; and (ii) a Combo Letter, which includes an examination report with the notification of the audit, used on issues where there is reasonable certainty of the potential liability. The combo letter significantly reduces the audit cycle time, and presents the taxpayer with a clearer understanding of the proposed changes.
Returns are selected for a correspondence audit that appear to have a questionable deduction, expense or credit. The IRS uses data to identify returns with high potential for a tax adjustment, including third party information, a potentially inconsistent/contradictory line items on the tax return, and referrals from Criminal Investigation and preparer /promoter actions. The primary audit issues addressed via a correspondence examination include:
- Earned Income Credit (EIC) (returns are selected based on use of prior audits results to project the potential of an EIC disallowance, use of certain return attributes to forecast the likelihood of adjustment, and third-party information, including: (i) Federal Case Registry (FCR), which provides information on custody orders for children receiving public assistance as well as private divorce cases; and (ii) Social Security Administration, to validate the Social Security Number for the Qualifying Child, date of birth, and names of parents);
- Certain Non-filing Conditions (information received from employers and interest payers)
Schedule A Issues (there are a high level of incorrect Schedule A deductions, especially employee business expenses, and charitable contributions);
- Self-employment tax; and
- Adjustments to income, such as alimony.
If a return with an EITC is selected, the EIC portion of the refund will be held pending examination and a letter is generated alerting the taxpayer that the refund is being held, and the non-EITC amount will be refunded to the taxpayer. The letter will contain specific paragraphs that explain the issues being examined.
Examination Workflow uses automation
Cases are assigned to an examiner only if and when correspondence is received from the taxpayer. Cases where there is no-response are systemically advanced through the audit process using an automated system. After 42 days without a response a second, “30 day notice” is issued, 63 days later a Statutory Notice of Deficiency is issued, and 105 days later the case is closed and tax assessed. Each notice can be halted if contact is made at least 10 days prior to the notice going out.
Responding to an Examination Notice
- Review your tax return
- Read the enclosed Form 886 outlining what information is being requested
- Answer any questions on the attachments
- Provide a phone number where you can be reached (night time if appropriate)
- Respond by the due date
- Enclose the Response Page from the Examination notice
- Use the return envelope provided. If you need to use a larger envelope, use the complete address shown on the provided return envelope. Do not use the address you would use for filing an amended return.