Service boosts number of correspondence examinations.

The IRS is increasingly relying on correspondence examinations, rather than face-to-face office or field examinations, to audit taxpayers' returns. In a correspondence examination, the Service asks the taxpayer to explain questionable items and send supporting evidence by mail. Correspondence examinations increased by 170% during fiscal years 2002-2005 and now account for more than 70% of total audits.

With the increase in such examinations, practitioners should clearly understand the types of correspondence a client has received and respond promptly. The most common correspondence to taxpayers is the CP2000, Notice of Underreported Income. Failure to respond timely or in accordance with the notice's instructions will result in the Service issuing a Notice of Deficiency and could also subject the client to backup withholding under IRC section 3406(a)(1)(C). An amended return is rarely required; filing one could result in more notices (requiring more responses) and a significant delay in resolving the issue.

DUE DILIGENCE 

CPAs should give a correspondence examination the same due diligence and attention as an office examination. The tax adviser should first file form 2848, Power of Attorney and Declaration of Representative, then review the issues the IRS raised to determine if they can be reasonably answered via correspondence. If the matters are too complex to be addressed properly without a face-to-face discussion with an examiner, the practitioner should request that the case be forwarded to the area office for examination.

Converting the case to an office examination increases the possibility that the examiner will review the entire return or raise additional issues. The practitioner should consider this when deciding how to proceed. If he or she elects a correspondence examination, the response should include detailed explanations of each issue, including copies of supporting documentation, reconciliations or any other corroborating evidence that the taxpayer's position on the return is correct.

DOCUMENTATION

CPAs should always document the correspondence examination process and send responses and any supporting documentation via certified mail, return receipt requested. Telephone conferences with the Service should be documented in the practitioner's files, by identifying the agent's name and badge number and the date and results of the conversation, and by writing to the IRS contact, outlining the practitioner's understanding of the issues discussed and the resolutions agreed to.

Concluding a correspondence examination is similar to the office examination process. The Service either accepts the return as filed or issues a 30-day letter. The taxpayer then accepts the IRS's changes and pays the additional tax or files an appeal. Failure to respond or to file an appeal within 30 days will result in the issuance of a deficiency notice.

CPAs should know the appropriate procedures for addressing Service Center correspondence. They should also minimize IRS correspondence to their clients by providing return information in a manner that allows the Service to reconcile the return with third-party information reporting.

For a detailed discussion of the issues in this area, see "IRS Increases Correspondence Exam Coverage," by Danny R. Snow, CPA, in the July 2007 issue of The Tax Adviser.

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The Tax Adviser