All audits start when the IRS mails a Notice of Audit to the taxpayer. “Dear JOE & JANE TAXPAYER:” the Notice of Audit begins. “Your federal return for the period(s) shown above has been selected for examination.”
Additionally, the IRS almost always includes Form 4564, Information Document Request (IDR), with the Notice of Audit. The first IDR included with the Notice of Audit typically asks the taxpayer to provide records such as receipts, bank statements, invoices, etc. The IRS requests these documents because the taxpayer has the burden to prove the accuracy of his income and deductions claimed on the return.
The first IDR is usually pretty generic. When it’s received, the taxpayer may breathe a small sigh of relief and think, “I’ve got all of my records so this may be no big deal after all.”
But don’t be fooled by the first IDR. IDR numbers two, three, four, etc. could soon follow (I’ve had as many as twelve in a single-year audit). “No big deal” may become a very big and very expensive deal.
You may be surprised to learn that very few audits involve the taxpayer meeting face-to-face with an IRS employee. Most audits are “Correspondence Audits” which are conducted entirely by mail or fax.
All audits (whether Correspondence or face-to-face) can be stressful and frightening for the taxpayer. There are the constant requests for more documents and records, the long periods of silence while an unseen auditor examines hundreds of pages of records, and the weeks and months waiting for the unseen auditor to reach a decision.
The Correspondence Audit can be particularly troubling because it is often so frustrating. If your return is selected for a Correspondence Audit, you may be treated to any or all of the following—and then some:
- You can ask to talk to the person assigned to your audit, but it won’t happen.
- If you call the number given in the Notice of Audit, you won’t likely talk to a human being.
- If the phone picks up quickly, a recorded message asks you to leave a call-back number. The message promises a call back within two business days, but don’t hold your breath.
- In the rare instance a human being answers the phone, he may tell you that your Correspondence Audit has been shipped to a different IRS office half-way across the country.
- When you fax or mail the documents requested in the IDR, the IRS will respond by saying, “Thank you, we will contact you within forty-five days.” They’re lying. It won’t happen.
- The IRS will mail a response (eventually), usually in six to eight months (so much for 45 days).
- The response usually claims that the documents were: a) incomplete, b) not sufficient to prove your case, or (and I love this one) c) you didn’t send the documents at all.
Publisher’s Note: Whenever you send mailed correspondence to the IRS, send it via return receipt mail. Your cover note should reference the number of the receipt and spell out all the contents of your letter to them. Keep copies of all your correspondence in a single manila file.
The truth is (and the IRS will NEVER admit this) that in a Correspondence Audit, you’re not dealing with a human being. You’re dealing with a computer.
Computers never get upset, tired or frustrated and they don’t care if you do. Arguing with a computer is like arguing with a snare drum.
In a report recently released by the Government Accountability Office (GAO), the IRS was criticized for the way it conducts Correspondence Audits. The GAO Report stated, among other things, that the IRS has “misled taxpayers by providing unrealistic time frames on when IRS would respond to their correspondence.”
When confronted with all of its Correspondence Audit problems, the IRS did what any responsible government agency would do: it hired an outside contractor to “study the matter” and recommend solutions to the problems. And what did the IRS do to implement the outside contractor’s recommendations? “IRS officials said they would consider the recommendations but did not have a specific plan or time frame.” Surprise, surprise.
The IRS loves Correspondence Audits because they involve less employee time and effort so the audits are much cheaper than face-to-face audits. At least that’s the IRS’s stated reason.
However, there is another, unstated, reason the IRS loves Correspondence Audits: Correspondence Audits are gold mines. The IRS computers running the audit send the taxpayer confusing letters, deadend phone numbers and names of human beings who don’t have a clue what’s going on with the audit and don’t care. Eventually the taxpayer concludes, “I can’t win an argument with a snare drum, so I’ll just pay the money.”
Bingo! The IRS wins without firing a shot.
Editor’s note: Paul R. Tom, Attorney at Law, is a Consulting Member of the Tax Freedom Institute (800-346-6829; www.taxfreedominstitute.com). A version of this article originally appeared in Dan Pilla’s newsletter Pilla Talks Taxes.