The IRS's examination workhorse: the correspondence audit.

• Author: Goldstein, Benson S.

THE AICPA HAS HAD ACTIVE CONVERSATIONS with the IRS over the past several years about the difficulties taxpayers face with correspondence examinations. This is an area that national taxpayer advocate (NTA) Nina Olson, in her 2009 annual report to Congress, calls one of the most serious problems facing tax administration.

While the IRS generally relies on correspondence, field, and office audits of taxpayers' returns, the correspondence audit is the IRS's examination workhorse. According to Olson's report, 72% of all examinations in fiscal year 2008 were correspondence audits, a significant increase from 54% in fiscal year 2000. The NTA report suggests that this increasing reliance on correspondence audits has a lot to do with the fact that "IRS employees spent an average of only 1.6 hours in 'direct time' on each correspondence examination in FY 2008, as compared to 8.5 hours on each office examination, and 46.4 hours on each field examination" (National Taxpayer Advocate, 2009 Annual Report to Congress 158 (December 31, 2009)).

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Correspondence audits are much less labor intensive, and more computerized and cost efficient, compared with other types of examinations. In general, in a correspondence exam the IRS mails a letter to the taxpayer, asking him or her to address a few limited issues on the tax return, often focusing on credit or deduction issues. Unfortunately, when receiving the letter many taxpayers either assume they made a mistake on their return and quickly send in a check to cover the IRS's computation of the tax underpayment, or they ignore the response deadline set out in the IRS's letter, which is often 30 days. If the taxpayer ignores the letter, the IRS's computers automatically send out a notice of deficiency to the taxpayer.

To the IRS's credit, it does acknowledge that it can make improvements to the correspondence audit program. Over the past several years, the IRS has actively engaged the AICPA and other stakeholders to identify areas for improvement in the program. The NTA report indicates that the IRS views correspondence examinations as "part of the overall strategy to close the tax gap by identifying issues which can be addressed through correspondence that may otherwise remain untouched by other compliance streams" (p. 163).

Olson believes that correspondence audits are more likely to obtain the wrong results because of communication problems and the limited scope of the audits. She contends...