By Daniel J. Pilla *

In its quest to “touch” more citizens with the enforcement process in a more efficient manner, the IRS is increasing its correspondence audit program significantly. The correspondence audit is nothing more than a mail-order audit. The process involves the IRS mailing a letter notifying you that you’ve been selected for audit then asking that you provide by return mail certain documents and information to verify the questioned items in the return.

This all seems harmless enough. In fact, when properly handled, the correspondence audit is generally a more preferable way to handle an audit than the face-to-face examination. In the first place, you don’t have to take time away from work or family to meet with an IRS agent who’s job is to get into your pocket and take your money. Even more importantly, the correspondence process generally does not involve open and flagrant attempts to threaten and intimidate citizens into accepting audit results that are just plain wrong. And like all audit decisions, correspondence audits are subject to the same rights of appeal as any other audit. The list of advantages goes on.

That’s the good news. The problem is that most people simply do not know how to handle any kind of audit, correspondence audits included. Because of that, they end up paying more taxes than they owe. This is because we know that the IRS’s audit results are wrong between 60% to 90% of the time, depending on the issue.

When people receive notices and demands from the IRS, they often don’t respond or they respond incorrectly. Unfortunately, too often paid tax professionals also don’t respond correctly. These failures lead to audit assessments that are just plain wrong. And it’s not until the IRS begins enforced collection action, through wage or bank levies and the filing of tax liens, that people get shocked into taking some action to resolve the problem.

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* Dan Pilla is a Tax Litigation Consultant and author of eleven books on successful methods of dealing with the IRS. His book, The IRS Problem Solver, was ranked by the Wall Street Journal is the number one tax book in American. Dan’s web site is www.taxhelponline.com.

Because of the efficiency factor for the IRS, the agency is looking for more ways to use the correspondence audit process. And they’re successful, at least in terms of sheer volume. Since 2000, the number of annual correspondence audits has increased over 285%, growing from under 400,000 to over 1,400,000 last year. The correspondence audit is a significant element of the IRS’s audit arsenal and can only be expected to grow—and quickly—given the current Administration’s desperate need for cash.

A sister program to the correspondence audit is the Automated Underreporter Program (AUR). This is computer-driven initiative compares the gross income figure on your tax return with all the Forms 1099 and W-2 that have been filed bearing your name and social security number. If the total income reported on the information returns exceeds that claimed on your tax return, the computer spits out a CP 2000 notice. This notice explains the discrepancy, re-calculates your tax bill (with penalties and interest) and demands payment. If you don’t respond explaining why you disagree with the notice, the IRS assumes its calculations are correct and the assessment remains on the books.

When you fail to properly respond to the CP 2000, you lose your primary appeals rights. The tax becomes assessed and the IRS begins to enforce collection through wage levies, bank levies and tax liens. And though it is still possible to challenge the CP 2000 at this point, the outcome becomes somewhat less certain.

Last year, the IRS mailed 4,500,000 CP 2000 notices. Because people don’t know how to respond to these notices and because the assessments framed by the notices as largely achieved by default, the error rate is tremendous. So much so that the National Taxpayer Advocate (NTA) has complained to Congress about “systemic problems” with the CP 2000 program. Because the assessments are achieved largely by default, the problems that grow from them include:

1. Very high rates of audit reconsiderations associated with the assessments, and

2. Very high rates of abated assessments because of the reconsiderations.

According to the NTA, the IRS either fully or partially abated a whopping 88% of all the CP 2000 assessments that were reviewed through the reconsideration process.

Of course, the vast majority of taxpayers know even less about the reconsideration process than they do about the audit appeal process in the first place. And if they can’t find a way to challenge a CP 2000 on the front end, it’s highly unlikely they’ll find a way to do so on the back end. This tells me that the vast majority of people who find themselves facing CP 2000 assessments are burdened with taxes they don’t owe.

Besides the people who actually received a CP 2000 last year, the agency identified more than 10,000,000 additional citizens who “could have received” the notice due to some discrepancy in their return. Those cases went “unworked” because the IRS deemed them to be not worth the cost of pursuing. Now the agency is working a different angle to capture the revenue from those ten million citizens.

That angle is the so-called “soft notice.” A soft notice is one to which the citizen is not required to respond. The notice does not “declare” that a person owes additional tax. Rather, it states only that there is discrepancy and that the individual should look into it and if necessary, amend his tax return. If the mistake is not corrected, the IRS could send a CP 2000. The notice the IRS is using for this purpose is the CP 2057. The IRS has already sent out 31,000 of these notices.

My question is this: if people don’t respond to a CP 2000, which plainly states that one must take action to avoid an assessment, what makes the IRS think people will deal with a CP 2057, which requires no action? Hasn’t the agency just added a layer of process to an already apparently too complicated process?

This is why every person with a pulse needs to know how to deal with: 1) a CP 2000, 2) the audit appeal process, and 3) the audit reconsideration process. I have heard people tell me a thousand times that they don’t have to worry about the IRS because they pay their taxes. “I don’t cheat,” they tell me. “Why should I be concerned?”

Well, 88% of the people who received CP 2000 assessments last year didn’t cheat either. But because they didn’t respond correctly to the IRS’s erroneous assessment, they ended up with a tax debt they didn’t owe. Moreover, they had to fight uphill to get the assessment abated. They had to go through tedious processes to achieve that abatement and no doubt, had to endure at least some level of enforcement action before winning the abatement. Why put yourself through that? Why not learn a few basics beforehand that will prevent all that hassle?

This is why you need my IRS Problem Solver Series if you don’t already have it. One of the key features of this series is a full and comprehensive analysis of the entire process of dealing with all of the IRS’s correction notices, including the CP 2000. You simply must have this series in your library. Get it now by calling my office at 800-346-6829, or go to www.taxhelponline.com. Click on the scrolling “Problem Solver” banner on the home page.