An IRS webinar, “Automated Underreporter (AUR) and Correspondence Examinations,” held on July 27, focused on the particulars of the IRS’s Automated Underreporter Program (AUR) and Correspondence Examination, and tips on how to comply with those programs. IRS officials participating in the webinar stressed the importance of these two major audit-related processes within the IRS’s overall examination strategy.
Automated Underreporter Program
The primary IRS official who presented at the webinar reported that the AUR is one of the largest compliance programs that the IRS provides. The AUR is located across seven IRS campuses. In addition, there is a toll-free operation at one of the seven campuses.
According to the IRS official, the AUR process leverages data culled from information provided to the IRS by employers, payers and other third parties to match against information provided from various versions of the Form 1040. Once matching is completed, tax examiners physically review any returns that show discrepancies.
On spotting errors, the official explained that the IRS notifies each identified taxpayer regarding a discrepancy and asks for a response. This notice, known as CP 2000, requests verification of underreported income and proposes changes that should occur on a tax return, as well as tax calculations. If no response is returned, the examiner then assesses the case as a “default closure.” However, if a taxpayer disputes the proposed liability, the taxpayer should send a response by mail or telephone to the IRS AUR Unit, which then reviews the response. A determination is then made on the case. The IRS official stated that regardless of the status of a taxpayer’s case, the IRS is always willing to reconsider its determination if a taxpayer can provide new information.
The Correspondence Examination process is a highly automated process that is conducted by tax technicians. It takes less time than field audits. Through Correspondence Examinations, the IRS can achieve broad compliance coverage, according to the IRS official.
The process involves an electronic examination of original or amended returns that seeks to identify what are regarded as questionable credits, deductions or expenses. The process uses results of prior audits, third party information, entries on the return, and referrals from the Electronic Fraud Detection System, and criminal investigation to assess return entry accuracy. The IRS official noted that the Correspondence Examination process is generally less complex than that used by revenue agents.
Particularly through correspondence examinations, the official reported, the IRS is able to quickly conclude the accuracy of claims for credits, particularly the Earned Income Tax Credit (EITC), business expenses and charitable contributions. The examination also assesses certain Schedule C issues.
After discrepancies are noted through a Correspondence Examination, an initial contact letter will be sent for unallowed items, EITC issues and Premium Tax Credit errors via forms known as CP 18, CP 75 and CP 06, respectively. A Letter 566 is provided for most other issues. The IRS official at the webinar explained that these initial contact letters are not accompanied with an examination report. Instead, a Letter 525 is sent in the event a follow-up is necessary, when a taxpayer does not provide a response to the initial letter, and includes an examination report. Additional notices are sent in the form of a notice of deficiency, as well as a notice denoting no changes made to an assessment.
The IRS official also reported that the IRS is implementing a new pilot program for taxpayers to complete the Correspondence Examination process online. The pilot program will allow select taxpayers to interact with correspondence exam technicians and update their information for Schedule A issue related exams. The program is set to start at the beginning of fiscal year 2017.
Tips in Approaching Compliance Programs
The IRS officials at the webinar stressed the importance of responding to notices that are sent from the AUR and Correspondence Examination programs. If a response will not be timely, the officials stated that a taxpayer or a representative should request additional time to respond, which will generally be granted. Taxpayers or representatives are encouraged to provide complete and organized responses to best work with the IRS to resolve all issues. With respect to the AUR process, tax practitioners can call the IRS Practitioner Priority Service for a faster response time. The number to call is 1-866-860-4259, and practitioners are to select menu option five for
“Automated Underreporter Notice.”
By Jalisa Mathis, Wolters Kluwer News Staff