The National Taxpayer Advocate (NTA) has published several opinions about the issue of “real” vs. “unreal” audits. Under Internal Revenue Code (IRC) § 7602(a)(1), the IRS has the authority to examine any books, papers, records, or other data that may be relevant to ascertain the correctness of any return. Tax scholars, professionals, and the NTA refer to this type of examination as a traditional or “real” audit.
However, the IRS disputes this characterization based on its narrow interpretation of § 7602(a)(1). The IRS believes that its contacts with taxpayers regarding compliance issues through measures and practices that include Automated Underreporter (AUR), Automated Substitute for Return (ASFR), math error corrections, and identity and wage verification, do not constitute “real” audits.
It is these types of contacts, or “unreal” audits, that the IRS uses primarily to oversee compliance. To demonstrate the extreme disparity between “real” and “unreal” audits, in the fiscal year 2016, the IRS conducted 1 million traditional audits while the combined number of both “real” or traditional audits and “unreal” audits was 9.1 million.
Even if the IRS considers a compliance contact not to be an audit, for taxpayers, the request and requirement to provide documentation or information to the IRS may seem considerably similar to a “real” examination, especially a correspondence examination.
As a result of the IRS making the distinction between “real” and “unreal” audits, the rights of taxpayers are affected significantly. These rights include the right to challenge a determination and be heard, the right to appeal an IRS decision in an independent forum, the right to finality, and the right to a fair and just tax system.
The Taxpayer Advocate makes an interesting, if not valid, point that the IRS conducts much more activity monitoring taxpayer compliance than the “real” audits indicate publicly. In the IRS’ response to the NTA’s standard request that the IRS verify the data cited in a blog about this very subject, the IRS objected to the NTA’s use of the terms “real audits” and “unreal audits” and requested that the NTA discontinue use of these terms.
The IRS response stated:
An audit is defined per the Code as an examination of books and records, and is subject to limitations (i.e., only one inspection of a taxpayer’s books shall be made each taxable year — unless there is evidence of fraud, malfeasance, etc. [See IRC §] 7605(b), Policy Statement P-4-3). Other contacts with a taxpayer (e.g., to verify or adjust a discrepancy between the taxpayer’s return and third-party information returns) do not meet the definition of an inspection of the books and records within the meaning of [section] 7605(b) of the Code. Taxpayers may not always make such a distinction. However, the IRS must follow the law and properly distinguish an audit versus a contact. The terms “real” and “unreal” are inaccurate, misleading and a mischaracterization of IRS’ interactions with taxpayers [emphasis added].
The IRS even notes that taxpayers generally do not make a distinction between a traditional audit and contact that the IRS considers not to be an audit. When taxpayers receive a notice that the IRS will increase their tax liability unless some reply and evidence is submitted, they feel like they are the subject of an audit, and they feel all the inherent emotional stress associated with it, regardless of whether it is technically an audit within the definition of IRC § 7605(b).
The National Taxpayer Advocate believes the IRS’s data reporting that focuses primarily on the rate of traditional audits understates and de-emphasizes the true level of IRS action and efforts directed to taxpayer compliance. If you are currently the subject of an IRS audit, or fear that the IRS will audit your return in the near future, the Georgia tax professionals at the Gartzman Law Firm can help.
The Gartzman Law Firm offers tax settlement solutions for both federal and state tax debt. Use our contact form to request a consultation with a Georgia tax resolution attorney or call (770) 939-7710.