IRS increases correspondence exam coverage.

• Author: Snow, Danny R.

The Federal tax gap has received much attention in the past two years. In her 2006 Annual Report to Congress, National Taxpayer Advocate Nina Olson identified it as "one of the most serious problems facing taxpayers today"; see www.irs. gov/advocate/article/0,,id=165806, 00.html. In an effort to address this growing concern, the IRS has been increasing the use of correspondence examinations. In a 2006 report to Congress, Treasury Inspector General for Tax Administration J. Russell George reported that during fiscal years 2002-2005, face-to-face examinations increased by 25%, while correspondence examinations increased 170%. Correspondence examinations account for more than 70% of the Service's total audit coverage, involving more than one million audits annually.

The IRS has a number of limited-contact programs in addition to correspondence audits, including programs on mathematical/clerical error abatement, unallowable items, information returns and the earned income credit; see Saltzman, IRS Practice and Procedure (Warren, Gorham & Lamont, 2d ed., 1991). Under these programs, Service Centers look for readily identifiable problems that can be resolved via correspondence. For example, under the unallowable items program, the Service questions items on individual returns that appear to be unallowable by law. Taxpayers whose returns are identified as containing unallowable items under this program are contacted by correspondence, and corrections are made to the return. Tax advisers should note that the IRS does not consider correspondence to a taxpayer under one of these programs to be an examination of a return, regardless of whether the return was changed or accepted as filed; see Internal Revenue Manual Section 1.2.1.4.1. As such, the Service is not precluded from future examinations of the taxpayer's return and is not subject to the second-inspection prohibition of Sec. 7605(b).

CP-2000

With the increase in IRS correspondence compliance initiatives, practitioners should clearly understand the types of correspondence a client has received and respond promptly. For example, the most common IRS correspondence to taxpayers is CP-2000, Notice of Underreported Income (in effect, a 30-day letter). Failure to respond timely or in accordance with the notice's instructions will result in the Service Center issuing a Notice of Deficiency (90-day letter) and could also subject the client to backup withholding under Sec. 3406(a) (1)(C). An amended...