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Better IRS Compliance Practice Means Big
Change for Practitioners
Firms prepare as their clients receive more notices and the IRS enhances
technology
By Jim Buttonow, CPA
Meet the new IRS. The kinder, gentler IRS. It’s an
agency with processes that are fast becoming structured, streamlined – and
strangely quiet. Quiet, that is, except on paper.
More IRS notices are going out to taxpayers than ever before. In fact, since
2001, notice volume has increased 670%, to 201 million sent in 2009. This is
the IRS being smarter about tackling what it considers a big problem.
In 2001, the IRS conducted a study to identify the amount of taxes that goes
unpaid each year. The result: a $345 billion tax gap – stemming mainly from
a complicated and changing tax code, often vulnerable to fraud. The IRS
quickly made plans to close this gap while maintaining itself as a customer
service organization. The result: Improved technology and information
systems that isolate compliance areas – and a dramatic increase in IRS
notices.
For accounting firms, this means more work and more contact with the IRS
because two thirds of taxpayers rely on their accountant each year for
compliance. While this sounds like a potential problem, it can represent a
tremendous opportunity to enhance client service and further strengthen the
client-accountant relationship.
IRS Shifts Compliance Practice
While the IRS still conducts audits and face-to-face meetings, its
compliance strategy for the 21st century is shifting. The IRS has realized
that it must leverage its channels, such as tax preparers and IRS
information systems, to close the tax gap.
This year, the IRS started regulating tax preparers by requiring
registration and competency standards, a strategy that may have also reduced
the number of preparers. There were more than 1.2 million registered
preparers before IRS regulation; now there are less than 700,000. The IRS
will continue to work with tax professionals so that preparers will assist
with compliance.
In the 1990s, the IRS approached compliance through traditional methods such
as audits and in-person tax collection. During the past 10 years, however,
the IRS has improved its ability to target potential noncompliance through
technology. The rate of e-filed returns is fast approaching the IRS target
of 80%, and improved information systems have automated matching techniques
and specialized, issue-focused notices—all aimed at narrowing the tax gap.
The IRS reported the following results:
- For the more than 4.3 million information-matching notice discrepancy
audits, the average return on investment for the IRS is $1,670 per return
with little involvement by IRS personnel.
- The IRS mail audit program, responsible for 78% of all IRS audits in 2010,
averages almost $6,600 in additional taxes owed per audit.
- With enhancements in notice and information systems, the IRS simultaneously
improved its compliance practices and reduced personnel by 6% during the
past 10 years.
In a speech in May, IRS Commissioner Doug Shulman indicated that the IRS is
also looking ahead, analyzing taxpayer compliance data to recognize trends
and improve compliance practices. He explained that the agency created an
office of compliance data analytics that helps create hypotheses for
compliance improvement, launches pilots to test hypotheses, and then
implements enhancements if pilots are successful. The ultimate goal, Shulman
said, is to take advantage of technology to modernize IRS processes.
Shulman also described a customer account data engine upgrade to take effect
for the 2012 tax filing season. The agency’s core account database, which
holds basic taxpayer information such as current account balance and
payments, will move its batch processing cycle from a weekly or bi-weekly
basis to a daily basis, he said.
For practitioners, the upgrade means faster refunds for clients and dealing
with IRS agents who have up-to-date information, Shulman said.
Among IRS efforts to improve compliance through technology, the most
striking statistics involve changes to the IRS notice system. In 2001, the
IRS issued about 30 million notices to 141 million individual and business
taxpayers. From 2001 to 2009, IRS notice volume increased 670% to 201
million notices. In that same time period, the number of individual and
business taxpayers increased by only 10% to 155 million.
This year, it’s likely that the IRS will exceed the 201 million notices
issued in 2009. For practitioners and their clients, this means more contact
with the IRS.
Notices for Every Season
Where the IRS is concerned, there is no defined busy season. IRS compliance
systems and staff work year round on tax compliance issues, consistently
monitoring activity and issuing notices.
The IRS sends certain types of notices throughout the year. For example, in
May and June, practitioners can expect notices related to the tax returns
they filed for their clients before the April 18, 2011, deadline. The
following is a sampling of such notices.
- CP23/24, Estimated Tax Discrepancies – Retirees, small business owners, or
investors who make estimated tax payments may receive this notice when
estimated tax payments reported on their return were incorrect.
Practitioners should review payments their clients made to the IRS to see
whether the payments were posted correctly. If so, practitioners can
facilitate payment of the balance or help dispute the account discrepancy.
- CP14, Balance Due – Clients who did not pay an outstanding balance when they
filed their return will receive this notice. Practitioners can help their
clients make arrangements to satisfy the balance with the IRS.
- CP2000, Underreported Income Adjustment – Investors, small businesses, or
taxpayers filing for early refunds may receive this notice when income was
not reported on their return (most likely from 2009). Practitioners may need
to reconcile the discrepancy and respond to the IRS or investigate whether
the income reported is their client’s income. It may have resulted from
identity theft or an incorrectly filed information statement.
- CP88, Refund Hold Due to Missing Tax Return – Clients may receive this
notice when the IRS has not received their tax return. This is more common
for returns filed by paper or for e-filed returns that the IRS rejected with
no follow-up. Practitioners should immediately file the return. If there is
a balance due, practitioners can consider submitting a penalty abatement
request with the return if there is reasonable cause or if the return was
filed but not recorded by the IRS.
- Letter 3850/1-B, Appointment Letters for Employment Tax Audit for the IRS
National Research Program – Employers receive this notice when they are
selected for an IRS audit to determine whether their contractors are
actually employees. Practitioners should review their clients’ use of
independent contractors.
- CP12/CP13, IRS Adjusted a Filed Return Due to a Miscalculation, Changing the
Refund – Form 1040 filers may receive this notice when the IRS recalculates
their return. Practitioners should recheck the return for accuracy, and if
they dispute the adjustment, contact the IRS to correct the error.
- CP11 Series – Clients may receive these notices when they take new IRS
credits or the earned income credit, or when the IRS adjusts the return due
to a discrepancy. The IRS thinks there was an error on the return, resulting
in a balance due. Practitioners may need to prove a credit to the IRS or
help their client make arrangements for the unpaid balances.
Practitioner Preparation
It’s clear the IRS has turned to technology to boost compliance. And with
more than 200 million notices on the way again this year, practitioners can
expect more clients to look to them for immediate support.
To provide value all year long, firms need to manage their clients’
post-filing activity. For most firms, that means reacting to notices. While
it’s necessary, it’s hardly proactive. And many clients either don’t provide
all of the notices they receive or provide them with inadequate time for
practitioners to prepare a response before IRS deadlines.
Tax firms can prepare now for increasing IRS activity. By managing their
clients’ post-filing activity and using best practices to address any issues
or notices that arise, practitioners can respond quickly, monitor progress,
and stay current on shifting IRS practices.
About the Author
Jim Buttonow, CPA, is cofounder and VP of product development with New
River Innovation. He serves as chief architect of Beyond415™ (Beyond415.com),
a Web-based application that enables tax professionals to manage their
clients’ post-filing compliance. Jim is a 19-year IRS veteran with expertise
in IRS practice and procedure. While with the IRS, Jim led multifunctional
teams stationed across the US in the areas of examination, collection,
filing, and appeals. Entries from his popular blog,
IRSMind,
which provides practical solutions to IRS matters, have appeared in the Wall
Street Journal. Contact Jim at
jbuttonow@NewRiverInnovation.com.
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July/August 2011
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