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Increase in IRS Notices Leads to Loss in Productivity; Practitioners Need to Address Phenomenon in Engagement Letters. (Parker Tax Publishing June 10, 2012)

As most practitioners have noticed, there has been a significant increase in IRS notices. These are the result of increased IRS efforts focused on areas the IRS considers to be at high risk for inaccurate reporting, especially Forms 1099 and Form 1040 Schedules A, C, or E. At the same time, there has been a decrease in the ability to reach an IRS person that can effectively deal with inaccurate notices.

In 2011, the Internal Revenue Service Advisory Council (IRSAC), a federal advisory committee composed of members of the public, sounded the alarm in an annual report in which it stated:

Limited resources are forcing the IRS to continually streamline its services. An example of this approach is the limited ability of taxpayers to interface with a local IRS representative when responding to a notice, when seeking resolution of an issue, or during the process of tax collection or the processing of offers in compromise. Instead, taxpayers and representatives often encounter numerous erroneous notices and lengthy holding periods on the telephone followed by a non-discretionary approach that sometimes fails to comprehend the unique issues involved. Every taxpayer is not alike and the need for face-to-face interaction should not be overlooked or ignored in favor of budgetary concerns . . .

In addition, before the AICPA Tax Conference in Washington, D.C. last November, IRS Commissioner Douglas H. Shulman noted that the IRS has begun sending letters to return preparers whose clients' returns contain traits commonly associated with highly questionable earned income tax credit (EITC) claims. In addition, the IRS intends to conduct in-person visits with EITC return preparers to discuss due diligence requirements, and will be assessing penalties against those who are found to be noncompliant.

As Tom Hood, Executive Director of the Maryland Association of CPAs, recently explained at a MACPA conference, what this means for practitioners is a loss of productivity resulting from time spent responding to these notices and in-person visits. Many of these notices and visits are no more than fishing expeditions, he says. But the time and effort it takes on the part of the practitioner to deal with these inquiries can significantly impact the practitioner's bottom line.

As a result, practitioners need to be proactive and explain to their clients ahead of time about the phenomena of increased IRS notices. Practitioners should explain that if there is an error on their part, they will fix it for free. But otherwise, the practitioner needs to charge the client for the time spent responding to such notices. And, as Tom Hood recommends, this should be clearly spelled out in the engagement letter. (Staff Contributor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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