The IRS Notice Boom (Part 1)

Meet the new IRS. It’s 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 Internal Revenue Service notices are going out to taxpayers than ever before. In fact, since 2001, notice volume has increased 670 percent, to 201 million sent in 2009. This is the IRS being smarter about tackling what it considers to be 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.

While the IRS still conducts audits and face-to-face meetings, its compliance strategy for the 21st century is shifting. The agency 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 percent, 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 percent 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 also improved its compliance practices and reduced personnel by 6 percent during the past 10 years.

© 2011, Accounting Today.