Mike: Hello. I’m Mike Landsmann, tax analyst in the IRS’s Small Business/Self-Employed Division, with the second of a three-part series about the Correspondence Examination Program. This is a reenactment of an IRS National Phone Forum from August of 2008, and joining me is my colleague, John Caggiano who, in part 1, outlined some key areas of interest relating to the program. Welcome back, John.

John: Thanks, Mike. Glad to be here.

Mike: In part 3, we’ll answer some commonly-asked questions, so it’s best if you listen to all the three parts in order. In this segment, part 2, I am going to explain the typical timeline of a correspondence examination, starting with an Earned Income Tax Credit or EITC examination.

This timeline is what happens when there is no response to any of our notices.

When the taxpayer responds, the system is updated to indicate a response has been received and prevents the next notice from generating. These timeframes are for domestic cases only – International cases and overseas addresses are allowed additional time.

In my example, the first notice, a CP 75, is sent out on January 15. The suspense timeframe, the time we wait to see if a response is received, is set so the next notice is issued with a report 42 days after the initial notice.

There is a “Notice Generation Process” that would take place from February 7 to February 26. A few years ago the IRS consolidated much of our print operations into National Print Sites, and this represents this part of the process. We can stop the next notice from being issued up until the last 10 days of this process.

The next notice includes an examination report. Again in my example, the report is generated on February 26. Then the case is “suspended” for 45 days, waiting for a response. This allows additional time for mail processing prior to the issuance of the 90 day letter, or Statutory Notice of Deficiency.

Again we go through the notice generation process, and we can still stop the notice of deficiency up until the last ten days of this process. Then the Notice of Deficiency is mailed, in this example, on April 30.

As you are probably aware, the stat notice allows the taxpayer 90 days to petition the Tax Court regarding our proposed assessment. We still encourage you to try to work with the IRS to resolve the matter during this time.

After the 90 days has expired, the IRS allows additional time to be notified that a petition has been filed and after 105 days, the case is assessed by “default.” In our example this happens on August 13.

That is the general process for no-response domestic EITC cases. We’ll talk a little about the process for non-EITC no response cases, and cases when there is a response a little later.

There are two general types of letters used to “open” correspondence examination. We call these two letters Initial Contact Letters, or ICLs, and Combo Letters.

The ICL is generally a CP 75, for EITC, or a 566 Letter. This type of letter is used on most of the issues we examine.

The ICL:

• States what’s being examined and asks for supporting documentation, and
• Does not propose a balance due.

Again, the ICL, without a report, is used on all EITC examinations and most of the other issues worked.

A Combo Letter, usually a 566-B, is called this because it combines the opening of the examination and the examination report in the first contact. The Combo Letter is used when there is a good idea of the specific liability – or a yes-or-no type issue.

A Combo Letter:

• Reduces the overall time of the examination, and
• Clearly presents the liability. For example, Alternative Minimum Tax is more clear when the proposed liability is shown instead of a general question about AMT. Non-filers are another example.

At the time of this recording, the IRS was reviewing and in the process of making changes to further reduce the use of Combo Letters.

There are Two Notice Processes for Non-EITC examinations. The two-notice processes are very similar to the EITC process and are identical with the exception of the first contact.

• The ICL process begins for example on 1/15. This is the date of the notice.
• The case sits idle for 45 days waiting for a response.
• Then the notice generation process, which takes about 19 days, begins, as discussed before. Again, the next notice can be stopped from generating up until the last 10 days of this process. In this example the next notice, which includes the examination report, is dated March 19th.
  From this point forward both processes are identical and the same as the EITC notice process.
• There is a 45 day suspense, then the Statutory Notice of Deficiency generation process begins,
• Then there is a 105 day suspense, this includes the 90 days to petition tax court plus additional time to receive mail.
• Then we will assess the case by default.

Again these are domestic timeframes and show what happens when there is no response.

Here are some of the issues involved for each letter:

• An ICL is used for issues like Employee Business Expenses, Charitable Contributions, and Schedule C expenses
• A Combo Letter is currently used for issues like Non-filed returns, SE Tax, Alternative Minimum Tax, and alimony.

There are a few things I would like to mention regarding the general flow of a correspondence examination and a couple of key points I’d like to stress regarding processing.

The first is automation. As explained in part one, if there is no response, the examination moves through the notice process without manual intervention. As with the EITC process, a case is not assigned to a tax examiner until a response is received – we’ve noted concerns from practitioners in this area. Once mail is received, the system stops this automation until the correspondence is addressed. This makes it very important to respond.

The second is telephone contact. Use of the telephone is encouraged in IRS procedures but there are some obstacles. Some tax examiners prefer not to discuss cases on the phone. Also, while it’s understandable, many taxpayers do not give work numbers where they can be reached during the day and the majority of our workforce works day shift.

Third, our tax examiners use judgment when working cases - this is the “people” part of the process. As explained in Part 1, correspondence examinations are worked at 10 different campuses. One examiner may ask for different documentation than another. And no two cases have the exact same facts and circumstances.

Let’s move on to the general flow of the Correspondence Exam Program.

I do not plan to mention every part of the process in great detail, but just give you an overview of the flow of work.

It starts, as already covered, with either an ICL or Combo Letter.

One of the main points stressed in this recording is the case moves along the process until a response is received. Once a response is received, the case is assigned to a tax examiner, the correspondence is evaluated and the follow up actions are taken.

Since the no-response process has been covered, I will focus on response cases.

Let’s start with an ICL with a response. The response will be evaluated to determine if the case can be closed as agreed, or as a no-change. If not, the next step is generally to issue a report explaining the outcome of the analysis of the response. Once the report is issued the process is the same as an examination that started with a report.

The response to the report will be evaluated similar to the response to the ICL – can it be closed with no-change or is it agreed? The report may also be revised or a letter sent asking for additional information. If additional information is needed, the IRS is required to attempt to call the taxpayer prior to issuing the next letter.

Once a statutory notice of deficiency is mailed, the processing becomes a little more time sensitive. Ninety days – this is a domestic timeframe - is granted to petition the Tax Court. Please try to resolve the matter during this time.

The response to the statutory notice will be evaluated similar to the response to the ICL and report – can it be closed with no-change or with an agreement. A supplemental report may also be issued revising the proposed changes. A letter may also be sent stating what is needed to resolve the matter. If additional information is needed, the IRS should attempt to call the taxpayer prior to issuing this letter. None of this extends the 90-day period to file a petition with tax court.

Again, at the end of the 90 days, additional time is allowed to see if a petition was filed. If there was no response or petition, the examination will be assessed by default.

That is a very general overview of the flow of work for correspondence examination cases. Here are seven key points and tips to consider when responding to a correspondence examination.

• One: review your tax return – this should give you an idea of what the IRS is asking about.
• Two: read the enclosed Form 886, which outlines what information is being requested – this details what the IRS needs to support the issue.
• Three: answer any questions on the attachments – the questionnaire for EBE helps give the IRS a better idea of the overall picture of the taxpayer’s work life.
• Four: provide a phone number where you can be reached – a day and evening number are both important.
• Five: respond by the due date – this is very important. Work with the assigned tax examiner if you need more time.
• Six: enclose the response page from the examination notice – put it on top of the reply.
• Seven: use the return envelope provided even if you are filing an amended return. Do not use the address where you normally file. Some of the longest delays are caused by mailing an amended return to another address. If you need to use an envelope other than the one provided, use the complete address shown on the provided return envelope – Include the PO Box and things like drop points or mail stops. This will ensure your reply gets to the office where it’s being worked, as quickly as possible.

All these will help resolve the examination in the quickest, most efficient way.

That covers the examination process. Now I’d like to share some of the steps the IRS has taken to address  concerns raised by practitioners about this process.

While we work to improve our processed bases on customer feedback, for example, our Customer Satisfaction Surveys, we heard specific concerns from practitioners about potential premature notices and disregarding submitted documentation.

To address this concern, the IRS has taken four significant steps:

One: we’ve modified the processes and ensured consistency

• The process was validated in each IRS site - not how it was supposed to work but how it was truly working. Where inconsistencies were found, we’ve reinforced procedures and altered systems to allow sufficient time to fully consider replies.
• Each site performed an independent review, and processing was, and continues to be, reviewed at each campus during headquarters' site visits.

Two: we’ve revised and clarified procedures

• All written guidance was reviewed to ensure it was clear and consistent and all inconsistencies were resolved.

Step three: we’ve initiated two studies on taxpayer behavior and process performance

• In the area of behavior, we’ve engaged our Research area to look at how and when taxpayers respond.
• In the area of process performance, we’re looking at all parts of the response process from the time the taxpayer mails the response until the IRS replies. We’re also looking more in-depth at adherence to our procedures, including telephone usage.

And step four: we’ve launched several outreach efforts 

• We’ve been holding meetings with practitioner groups to discuss their concerns and the actions the IRS has taken to address them.
• Focus groups have been conducted at our Nationwide Tax Forums trade shows to gather practitioner feedback and suggestions relating to the correspondence examination process.
• And we continue to look for outreach opportunities like our National Phone Forums – the original live presentation this recording is based on.

The IRS wants taxpayers and the practitioner community representing them, to know your concerns are taken seriously. We work hard to improve processes based on customer feedback, such as through our customer satisfaction surveys. We respond to your feedback  and thank you for your input.

This concludes the second of our three-part recording on the Correspondence Examination Program. In part three, John Caggiano will join me to answer some commonly-asked questions.