IRS watchdog: Agency should take second look at problematic returns

{mosads}The report digs into the IRS’s use of correspondence audits to enforce tax compliance. Those audits, conducted remotely as opposed to face to face, account for roughly three-quarters of the agency’s audit activities. The IRS conducted more than 1 million of these audits in fiscal 2012, and recommended over $9 billion in additional taxes be assessed from those examinations.

IRS agents who conduct face-to-face audits are required to consider if similar issues found during an audit of one return could exist on others from the same taxpayer. Those conducting correspondence audits are not required to do the same.

The report stated that the IRS failed to follow up on many older returns that could contain problems due to an effort to avoid filling its workload with older returns that might not be completely examined before the statute of limitations expires. Generally speaking, the IRS can only audit returns up to three years after they have been submitted, although the IG noted that the IRS can ask the taxpayer to agree to more time to evaluate the returns.

The IG recommended that the IRS establish procedures for agents conducting correspondence audits to help them determine when additional returns should merit a second look, and IRS management agreed with that assessment. However, the IRS disputed the overall revenue figure reached by the report, arguing that the $69.4 million figure was reached without taking into account other steps the IRS takes to identify strong candidates for an audit, as well as returns that would be out of reach due to the statute of limitations.