December 2018 JD Supra
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Understanding how IRS identifies and selects Individual Tax Returns for Automated Underreporter Review was published by JD Supra on 1/8/19.

The IRS Automated Underreporter Matching Process matches Tax Returns against Information Returns.  IRS states that there were approximately 150 million individual tax returns filed in 2017 and about 25 million of them (17%) had a “mismatch”; meaning that the information returns did not match the individual tax returns. IRS posts individual tax returns it receives every year to an Individual Master File (IMF); comparing them with the Information Return Master File (IRMF).  IRS receives approximately 3.5 billion information returns and posts the information on the IRMF. The Automated Underreporter (AUR) program is its largest compliance program.

3.5 Billion Information Returns is a lot of data to match!  

3.5 billion information returns for 2017 comprised of:

  • Form 1099-B (Proceeds from Broker and Barter Exchange Transactions):  2.2 Billion
  • Form W-2 (Wage and Tax Statement):  272 million
  • Form 1099-INT (Interest Income):  135 million

The remaining Information Returns were sourced from:

  • Form 1099-MISC (Miscellaneous Income)
  • Form 1099-PATR (Taxable Distribution Received from Cooperatives)
  • Schedule K-1 (Shareholder’s Share of Income, Deductions, Credits, etc.)
  • Form 1099-K (Payment Card and Third-Party Network Transactions)

How does IRS match up all the data?

IRS first matches Taxpayer’s Social Security Numbers and Tax Returns.  Then it turns to:

  1. Data Assimilation: Assimilation identifies the link between tax forms and information returns filed for the same Taxpayer.
  2. Data Correlation: Correlation compares tax return and information return data and applies business rules to identify potential AUR cases.

How does IRS select AUR Cases?

According to IRS, an optimal mix of cases includes cases that:  

  • Yield the highest assessments or money recovered.
  • Address repeat-offenders.
  • Ensure fair coverage of all Taxpayer segments.

AUR Cases – somewhere between 3 and 5 million returns a year

IRS selects cases three times per year based on correlation cycles that correspond with tax reporting deadlines.  First, IRS looks at the timely filed returns (by April 15th), then the returns that had an extension and filed by the extension date, and finally the late filers.   Before the Notices are sent out, IRS performs some internal testing.

The AUR Notices

  • CP2501:  IRS contacts the Taxpayer and asks for some additional information because IRS has received information that is not reported on a Taxpayer’s return.  This notice is not a bill.
  • CP2000:  This Notice is not a bill, but it is a proposal to adjust the Taxpayer’s income, payments, credits, and/or deductions. The adjustment(s) may result in additional tax owed or a refund of taxes paid.
  • CP3219A:   Is a statutory notice of deficiency (also known as the 90-day Letter) and explains how the amount was calculated and how the Taxpayer can challenge it in U.S Tax Court.

Keeping yourself out of the AUR Notice Stream

  • Don’t net amounts
  • Report on the correct line
  • Don’t group income amounts (attach a schedule or statement)
  • Double check your math and make corrections if needed
  • If you have income that belongs to someone else (nominee income), report it, back it out, and then tell IRS who it went to
  • Include back up schedules, attachments and corrected payer documents

Don’t be a victim of your own making

The perception of most Taxpayers is that once they have submitted a tax return and obtained a refund, the tax process is finished. Not so.   IRS can send AUR Notices after a Taxpayer receives a refund. Taxpayers ought to make sure that they are staying out of the AUR Notice stream by engaging with a specialized tax representative.