The New IRS Audit: Snake In Your Mailbox?

The IRS has taken to technology. Back when a few billion dollars used to impress even the most wealthy among us the IRS budgeted a few more to upgrade their computer systems. The aim, in part, was to be able to actually track us in a manner more consistently with what so many of us imagined they were already doing. Truth be told, while so many of us imagined that our financial life was an open book to the IRS, the agency has been anything but omniscient with regards our finances.

No Judy, they are not doing this because they know better and just want to annoy and inconvenience you.

So, they set out to be able to match up all of your W-2s, 1099s, 1098s, 5498s, and the like with what you reported on your 1040 return (along with your Schedules A, B, C, D, etc.). You probably thought that they could do this all along. Not so, unless they actually manually pulled your file and did so “manually”. Now, the IRS is doing this digitally. This is one of the reasons that the IRS insists that CPAs file all of their clients returns electronically. This enables the service to more easily do data matching with the employer and brokerage houses W-2s and 1099s.

“So”, you say “What does this mean to me?”

More “Mail Audits”. This is the “new” IRS audit. This is when you get a 10-20 page document in a #10 window envelope from the IRS. Inside you find that the IRS has determined you understated taxable income on your return and they are billing you for the missing tax. They are able to make very specific (if however inaccurate) claims in this  manner because their computer data base can now match up all incoming records and reports with your SSN on them.

Consequently, your chances of an audit by mail (“correspondence audit”) has roughly doubled, as these are the audits that have dramatically increased. What to do when this occurs:

1.      Assume that the IRS is mistaken and you will not owe much if anything. This, I have found is most often the case, but our immediate reaction is panic.

2.      Open the envelope, see the amount they claim you owe and say “they are mistaken” aloud. This will calm you a bit and set you in the right direction to proceed (rather than ripping the arm off a dining room chair and beating your trusty lap top with it).

3.      Contact your CPA/EA immediately and forward to him/her all of the documents sent to you by the IRS (leaving anything out is perilous).

4.      Set the reply date (typically no more than 30 days from the date of the IRS letter) on your calendar and be sure to reply in some way prior to this date – even if to request more clarification or time to gather information. You, not your CPA is the responsible party if no reply is received.

5.      Once you have submitted your full reply to the letter forget it. There is no practical means of tracking it and expecting a timely reply is a fools delusion. Eventually you should receive a reply. If it is close to what you expected pay and move on. If not (and if unfavorable) see step #2 above and proceed from that point.

So there we are. The new snake in your mail box. If you haven’t gotten one don’t be too proud, they just haven’t gotten to your data yet. If they have and you “beat” the claim well good work but you didn’t really do anything too special.

This is the New IRS, the new face of government, the faceless and voiceless government (at almost all levels). It is the government we created, our systems. Like self-check-out at the grocery this is not too likely to go away – ever.

So, if you do get great service from anyone in a government agency, consider they are bucking the current in so many ways the least we can do is assure them how meaningful their effort is to us.

Neither Commonwealth Financial Network® nor Mark Phillips & Associates provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.