IRS automated underreporter initiative.

• Author: Schreiber, Gerard H., Jr.

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THE IRS AND CONGRESS HAVE LONG struggled with the estimated $300 billion tax gap and have acknowledged the need to find ways to identify people who are avoiding tax or not calculating their income and deductions correctly. The IRS recently started a "sort notice" initiative and has sent notices to taxpayers to spur voluntary compliance.

A recent article outlines the significant increase in the use of correspondence audits and the amount of taxes generated by their use (Placid, Cecil, and Pacini, "IRS Enforcement Activities: Past, Present, and Future," 39 The Tax Adviser 448 (July 2008)). It also shows that from 2003 to 2007, correspondence audits accounted for close to 80% of all audits.

IRS Commissioner Douglas Shulman stated on July 18, 2008, that "I also believe we cannot audit our way to full compliance. We need to drive greater innovation into our enforcement endeavors. We need to supplement our efforts with new tools, such as more information reporting, soft notices and self-correction options for taxpayers" (remarks before Tax Analysts Conference on the IRS Restructuring and Reform Act of 1998).

The automated underreporter program, which affects 4-5 million taxpayers annually, starts with third-party information returns filed with the IRS by employers, banks, and brokers. The Service matches the amounts reported on the individual and the information returns and creates an inventory of the resulting mismatches. IRS technicians select cases from this available inventory and review them. Notices CP2000, We Are Proposing Changes to Your Tax Return, are then issued to taxpayers for discrepancies that remain unresolved. The CP2000 notice makes changes to the original return whether the taxpayer agrees or not. If the IRS is incorrect, it is up to the taxpayer to prove it is right.

Nearly 3.5 million CP2000 notices were issued in the government's 2007 fiscal year, with $5 billion in tax revenue generated. The Service bas recommended taking the following actions to avoid the automated underreporter program:

* Do not group income amounts together;

* Include an explanation when payer data is incorrect;

* Avoid netting;

* Report income on the correct line of the tax return;

* Identify reporting from joint accounts;

* Provide an explanation when the amount differs from the payer information;

* Include copies of revised schedules; and

* Maintain detailed records.

The AICPA Practice and Procedures Committee has received...