Taxpayer Advocate Service — 2018 Annual Report to Congress — Volume One 129
Legislative
Recommendations
Most Serious
Problems
Most Litigated
Issues
Case AdvocacyAppendices
SB/SE handles discretionary correspondence audits, including over 30 individual tax issues, such
as nonrefundable credits, Schedule A and Schedule C expenses, and unreported income.
12
Of the
nearly 447,000 Schedule C exams closed by SB/SE in the last two fiscal years, about 29 percent were
conducted by correspondence. Schedule C correspondence exams represented about 38 percent
of all correspondence exams conducted by SB/SE.
13
The IRS has indicated that it may conduct
correspondence exams for some issues related to the new deduction for qualified business income under
IRC § 199A, but has not projected the volume.
14
SB/SE uses a variety of sources to determine which cases to audit. To determine the exam work plan,
SB/SE reports looking at the staffing/hours to work returns, projections for inventory already started
or delivered to the various Exam functions, and the Exam Planning Scenario Tool (EPST), which
determines the mix of inventory for Discriminant Index Function returns for Correspondence Exam
Discretionary as well as Field Revenue Agents (RAs) and Tax Compliance Officers (TCOs).
15
EPST
provides scenarios of optimized mix by activity codes for Field (RA & TCO) and by project codes for
Campus, based on historical business results.
16
Activity codes describe the financial scope of the return
and its complexity, which help determine the appropriate type of examiner.
17
Project Codes identify a
specific feature or item on a tax return that the IRS would like to monitor for compliance purposes, for
example, Schedule A – Casualty Loss.
18
Starting in FY 2016, W&I exclusively worked all new EITC correspondence exams.
19
The majority of
the inventory in the Refundable Credits Examination Operation (RCEO) is derived from the computer
program known as the Dependent Database (DDb).
20
In FY 2014, DDb identified more than 77
percent of the closed EITC audits.
21
12
See IRM 4.19.15.1 through 4.19.15.43 (Dec. 1, 2017). SB/SE does not specifically audit Earned Income Tax Credit (EITC),
but they will make automatic adjustments to EITC, the American Opportunity Tax Credit, and the Child Tax Credit when the
Adjusted Gross Income changes due to other audit adjustments, including changes to Schedule C income.
13
IRS response to TAS fact check (Dec. 20, 2018).
14
The IRS anticipates a low volume of IRC § 199A exams during FY 2019 since most examinations efforts during that fiscal
year will be tax year 2017 and earlier returns. IRS response to TAS information request (Oct. 24, 2018).
15
Discretionary exams are conducted by choice, as opposed to EITC exams that are driven by the Revenue Protection Strategy
or the refundable credits exams identified by risk based scoring criteria. See IRM 4.19.15.1.3, Roles and Responsibilities
(Dec. 1, 2017); IRM 4.19.14.1.1, Background (Dec. 7, 2017); IRM 4.19.14.1.4, Program Management and Review (Dec. 7,
2017).
16
IRS response to TAS information request (Apr. 27, 2018). The activity code identifies the type of return examined, e.g.,
Form 1040 in a specified income range and the project code identifies the examination issue(s), e.g., EITC. See Document
6036 (October 2017).
17
IRM Exhibit 4.4.1-1, Reference Guide (Apr. 15, 2016). An activity code would present a brief description of the return such
as: Non-Farm Business with Schedule C or F where Total Gross Receipts are between $XX and $XX, and Total Positive
Income is less than $XX. IRS, Document 6036, Examination Division Reporting System Codes Booklet 18-24 (Oct. 2017).
The activity codes include the actual dollar range, which TAS redacted here. “In general, total positive income is the
sum of all positive amounts shown for the various sources of income reported on the individual income tax return, and
thus excludes losses.” IRS 2017 Databook, October 1, 2016 to September 30, 2017, 33, https://www.irs.gov/pub/irs-
soi/17databk.pdf.
18
IRS, Project Code Listing (Oct. 16, 2018).
19
IRS response to TAS information request (Oct. 24, 2018).
20
IRS response to TAS information request (June 22, 2018).
21
Government Accountability Office (GAO), Certain Internal Controls for Audits in the Small Business and Self-Employed Division
Should Be Strengthened, 16-103 (Dec. 2015). The IRS may not be using the Dependent Database (DDb) effectively because
it concentrates its EITC audit resources on taxpayers with a noncompliance issue that is relatively minor (the relationship
test), compared to an issue associated with 75 percent of all EITC qualifying child errors (the residency test). National
Taxpayer Advocate 2015 Annual Report to Congress 248-260 (Most Serious Problem: Earned Income Tax Credit (EITC): The
IRS Is Not Adequately Using the EITC Examination Process As an Educational Tool and Is Not Auditing Returns With the Greatest
Indirect Potential for Improving EITC Compliance).