The IRS’ funding level has sharply declined since 2010. Its employee head count has decreased significantly. At the same time its workload has been expanding, partly due to new programs such as health care reform and the complicated foreign account reporting rules, as well as its efforts to prevent fraudulent refunds from going to scammers who commit tax identity theft. Identity theft alone has consumed as much as 40% of the IRS’s resources.
Many are feeling the impact of the cuts as both enforcement and service have waned. The IRS is struggling on the enforcement front as examinations are plummeting. Last year’s audit rate of 0.96% for individuals was the lowest since 2005. The individual audit rate for 2014 is expected to drop to 0.80%. Exam rates for partnerships, S firms and regular corporations are steadily falling, too.
A lot of filers are being let off the hook because of scarcer audit resources. For example, IRS recently admitted to Treasury inspectors that it is able to audit a mere 4% of ex-spouses who failed to report alimony that the payer deducted. Also, the agency is balking at going after over statements of the retirement savings credit.
Two enforcement initiatives have been put on hold because of budget cuts: A planned project to match sales income reported on 1099-K forms with sums listed on business returns. Also, an electronic review program to sniff out fraudulent returns.
The agency is suffering brain drain as experienced examiners retire and rookies replace them. With training budgets cut, it’s harder to get them up to speed on complex tax issues…foreign business activities, multiple pass-through entities, etc.
It’s also pared back on important services relied upon by filers and preparers. Long wait times when calling the IRS are now the norm, not the exception. The agency isn’t answering any tax law questions from taxpayers. Instead, the Service is directing callers to find the answers themselves in IRS publications or on its Web site. In addition, tax professionals who call the practitioner priority line can get assistance only on account issues for their clients and not with legal inquiries.
The IRS is way behind on answering correspondence from taxpayers. Last year, it responded timely to fewer than half of taxpayers who protested adjustments. Also, because of the agency’s significant delays in processing incoming mail from taxpayers, many filers who sent in documentation that a tax bill was erroneous keep getting billed.
So what do you do if you get a tax notice from the IRS?
- Don’t ignore it. You can respond to most IRS notices quickly and easily. And it’s important that you reply promptly.
- IRS notices usually deal with a specific issue about your tax return or tax account. For example, it may say the IRS has corrected an error on your tax return. Or it may ask you for more information.
- Read it carefully and follow the instructions about what you need to do.
- If it says that the IRS corrected your tax return, review the information in the notice and compare it to your tax return.
- If you agree, you don’t need to reply unless a payment is due.
- If you don’t agree, it’s important that you respond to the IRS. Write a letter that explains why you don’t agree. Make sure to include information and any documents you want the IRS to consider. Include the bottom tear-off portion of the notice with your letter. Mail your reply to the IRS at the address shown in the lower left part of the notice. Allow at least 30 days for a response from the IRS.
- You can handle most notices without calling or visiting the IRS. If you do have questions, call the phone number in the upper right corner of the notice. Make sure you have a copy of your tax return and the notice with you when you call.
- Keep copies of any notices you get from the IRS.
- Don’t fall for phone and phishing email scams that use the IRS as a lure. The IRS first contacts people about unpaid taxes by mail – not by phone. The IRS does not contact taxpayers by email, text or social media about their tax return or tax account.
Best tip – have your tax professional handle this for you. It can be frustrating, complicated documenting your interactions with the IRS, and costly if you do it wrong.
Adopted from articles from the Kiplinger Tax Letter and the IRS Newswire 7/3/14