Auto-Audit: Automated Tax Return Evaluation

As you may have heard, there has been a large drop in the IRS budget leading to a decrease of 13,000 workers. As a result the number of audits has dropped to the lowest level in ten years. To compensate, the IRS has expanded its automated exam programs allowing it to reach more taxpayers than ever before.

Two important compliance programs for reducing underreporting are the automated underreported program (AUR) and the correspondence examination (Corr exam). Examination commences with an inquiry notice on one or more entries or schedules on the tax return.

The AUR program focuses on discrepancies between information reported on tax returns and information reported to the IRS by third parties. To avoid inquiries:

  • Use correct names and spelling
  • List each reported amount separately on an information return (Do not combine amounts even if received from or paid to the same entity)
  • Report income on the correct line (Reporting income incorrectly may lead to lower or higher tax rates)

The Corr exam focuses on one or two simple issues, such as filing status, exemptions, tax credits, or itemized deductions and makes face-to-face meetings unnecessary. Of all credit issues, the Earned Income, Adoption, and First-time Homebuyers’ credits are the most common. To avoid a Corr exam inquiry make sure to:

  • Attach an explanation for irregular/unusual items
  • Attach the required form(s)
  • Provide all required information

The deadline to respond to inquiries is usually 30 days. If you receive a notice and do not address it, a Statutory Notice of Deficiency will be sent to you. Not responding may result in additional taxes, penalties, interests, and initiation of collection action.

For more information on these automated exams visit acctaxsolutions to review the Thomson Reuters special report on this topic.