Nina Olson, executive director of the Federal Tax Clinic at Harvard Law School’s Legal Services Center, has made available for download her article “How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 1”, published on the Procedurally Taxing blog. The abstract is as follows:
Over the past several decades, correspondence examinations have become the IRS’s primary method for auditing individual taxpayers. The Transactional Records Access Clearinghouse (TRAC) at Syracuse University just reported that of the 659,003 individual audits conducted by the IRS in Fiscal Year (FY) 2021, all but 100,000 were conducted by correspondence. TRAC reports that correspondence exams now account for 85% of all audits, up from about 80% in the previous two years.
Originally designed for “less complex” matters, correspondence exams are now used for complex factual issues including the child tax credit, earned income tax credit, self-employment income (gross receipts and expenditures), and charitable deductions. Correspondence is also the only method applied in “unreal” audits – examinations that the IRS doesn’t count as “audits” under IRC § 7602 because it says they don’t arise to an examination of the taxpayer’s books and records. Through the Automated Correspondence Examination (ACE) system, unless the taxpayer responds in writing, a correspondence exam automatically moves from one stage to the next, up to the issuance of a Notice of Deficiency, without any human intervention.
IRS maintains that correspondence exams are an efficient and cost-effective method of conducting audits. For example, in a summer 2021 release, the IRS justifies the low cost of these audits ($150 for the IRS!) by highlighting the minimal burden on taxpayers. This blog will show just how wrong the IRS is about the burdens correspondence audits impose on taxpayers and their consequences.
Posted by Marin Larkin, Associate Editor, Wealth Strategies Journal.