The new IRS “audit”: Upfront information-statement matching
In the past, the IRS didn’t get around to auditing tax returns until several months after they were filed and after taxpayers received the refunds. But the 2017 tax season was a turning point. The IRS implemented the first phase of a move toward more upfront matching to improve return accuracy and increase its reach to more taxpayers. This new capability offers the IRS many opportunities in the future to expand its use of upfront matching as an audit alternative.
This has practical implications for taxpayers. For example, in 2013, the IRS received about 148 million tax returns and more than 2.1 billion information statements (Forms W-2, Forms 1099, etc). When the IRS matched returns several months after they were filed, the IRS found more than 27 million returns that didn’t match all the information statements. But because of limited resources, the IRS sent only about 4.1 million notices to these taxpayers proposing additional taxes. And taxpayers who aren’t notified can continue to make the same errors every year.
Tax compliance is transforming
Until 2017, the IRS hasn’t had many tools to scrutinize tax returns before issuing refunds.
Tax software helps with many mathematical errors, and the IRS can compare taxpayers’ names to their Social Security numbers to eliminate dependent errors.
But before 2017, when it came to checking upfront on whether taxpayers correctly reported their wages and certain other income, the IRS couldn’t match income information against tax returns before sending the refunds. Fraudsters took advantage of this situation to commit refund fraud.
New in 2017: The IRS scrutinized income reporting before sending refunds
Starting in the 2017 filing season, the IRS started upfront matching of filed tax returns against Forms W-2 and Form 1099. These information statements show the income that taxpayers receive during the year.
Here’s how the matching works:
- The IRS receives the tax return like usual.
- The IRS matches the return against Forms W-2 and/or Forms 1099 that the IRS has received.
- If everything matches between the return and the information statements, the IRS releases the refund.
- If the IRS finds a mismatch, the IRS freezes the refund and sends a notice to the taxpayer asking for more information to prove his or her income and withholding.
Why, and how, did the IRS start upfront income matching?
In short: the PATH Act. The PATH Act helps the IRS fight stolen identity refund fraud and allows the IRS to do a “quick audit” of tax returns before sending refunds. The law requires earlier Form W-2 filing, which gave the IRS more time to match returns in the short time that is tax season.
This change affected taxpayers who claimed the earned income tax credit (EIC) and/or the additional child tax credit (ACTC). Those credits can amount to thousands of dollars in additional refunds. The IRS releases EIC/ACTC refunds starting Feb. 15 at the earliest.
What can taxpayers do?
Taxpayers should take care to file an accurate tax return and report items from the information statements they receive. If taxpayers discover an error on the tax return, it’s important to amend the return as soon as possible to avoid possible penalties.
Taxes can be confusing, and some information statements report items that taxpayers don’t need to add to their returns. The best bet: Consult an expert who completes many tax returns. This will help taxpayers avoid a refund hold and even an audit.
By Jim Buttonow, guest contributor
Jim Buttonow, CPA, CITP, directs product development for H&R Block’s Tax Audit & Tax Notice Services. Previously, he was vice president of product development and co-founder of tax technology company New River Innovation. A CPA and former IRS Large Case Team Audit Coordinator, Jim worked at the IRS for 19 years. Since leaving the IRS, Jim has represented many clients before the IRS and has been in private practice since 2006. Jim’s articles have appeared in the Journal of Accountancy, Accounting Today and various state CPA society magazines. In 2012 and 2013, Accounting Today named Jim one of the Top 100 Most Influential People in Accounting.