A report of the Treasury Inspector General for Tax Administration (TIGTA) from May 16, 2016, entitled “Improvements are Necessary to Ensure That Individual Amended Returns with Claims for Refunds and Abatements of Taxes are Properly Reviewed” provides significant insight into the handling of refund claims by the IRS. The report itself follows the typical TIGTA style of reviewing actions by the IRS and finding fault with those actions; however, in describing what the IRS does with amended returns, the reports offers a detailed view of what happens once the amended return arrives at the IRS. For that reason, the report may interest readers who want to know more about that process. In this post, I will talk about the process and also about why auditing amended returns may matter more than auditing original returns.
Why the IRS Should Audit More Amended Returns
The report criticizes the IRS for accepting certain amended returns without auditing them or providing any explanation for making the decision not to audit. The report acknowledges that some of the decisions may result from resource limitations but still decries the lack of documentation surrounding the decision. It details the reasons for its concerns but does not discuss the collection criteria applicable to audits. I see a link between this report and the report I discussed in a recent post concerning the requirement that the IRS make a collectability determination prior to starting an examination.
In the amended return context, the taxpayer has made the collectability determination for the IRS. The IRS holds the taxpayer’s money, which the taxpayer wants back. If the IRS audits this return and makes adjustments, the collection division never becomes involved. For this reason alone, amended returns should receive more scrutiny in a world where collectability provides a finger on the decision making scale of which returns to examine. The reasons for filing amended returns vary greatly and do not by any means involve bad motives. I could even argue that because practitioners generally, and I think correctly, believe that filing an amended returns brings scrutiny to the return that filing an original return does not, that amended returns have a greater likelihood of accuracy than original returns. Since I believe that the IRS should take collectability into account in making audit determinations, I think the IRS should audit a higher percentage of amended returns than original returns since the collectability factor will always support auditing the amended return, but, other factors matter as well and I am not arguing for the audit of all amended returns.
Other factors may override collectability but on that one factor, the decision is clear. While not clearly articulated in the IRS guidance or in this report, this factor has always played a role in making the scrutiny of amended returns higher than that of original returns. Just reading the process of review of amended returns, whether or not selected for audit, provides plenty of support for the conclusion that the IRS guards the money it already has more than it looks for money it might obtain through an audit.
The Process of Reviewing Amended Returns
The report gives a fairly detailed walk through of the procedures that the IRS uses to pipeline an amended return. The report suggests that tax examiners manually review each claim. That process obviously provides greater scrutiny than original returns receive. Claims that the initial reviewers list as Category A go on to additional review and possible audit, while claims that avoid Category A in the initial screening apparently move forward for acceptance. Figure 1 of the report provides a flow chart of the processing of amended returns that receive the Category A classification. I.R.M. 126.96.36.199.3 provides guidance to the IRS employees processing amended returns. The initial review also checks for timeliness of the claim which could result in a denial of the claim at the initial review if the claim is deemed untimely.
The report does not talk about how long after the filing of the amended return this initial screening takes place. The IRS now has a handy track my amended return feature on its web site. I have not yet used that feature to track a refund and do not have a sense of how quickly someone can obtain a refund. The TIGTA report reads as though the refund could occur relatively quickly if the initial screeners do not put the amended return into Category A.
For amended returns falling into Category A, the IRS sends them to field or campus exam depending on the type of case. The chart suggests that all Category A claims going to campus exam get audited, while cases going to field exam get another level of review once they reach the field. The written report does not make this distinction.
For field exam cases, two additional levels of review occur after the initial screening has designated the case as Category A. The case first goes through the Planning and Special Programs (PSP) office and then, potentially, to the field exam group. PSP could survey the return if it determines that an audit of the amended return would not result in a material change. In reviewing the amended return, PSP should also review the original return and other relevant case file material. If PSP does not survey the case – survey meaning accept the amended return after the PSP review – then it goes to the group manager of the group assigned to the case.
The group manager gives the amended return another review, which includes the review done by PSP for risk analysis, but the group manager must also “plan, monitor, and direct the input of work to accomplish program priorities and effectively utilize resources….” This means that the group manager’s decision to assign the amended return for examination not only includes a determination of the need for examination of the amended return, but balances that need against other workload priorities with the group. The group manager could conclude that the risk analysis does support examination of the amended return but still survey the return because of other priority work within the group.
The report does not talk about time frames but they will enter into the equation. The statute does not require the IRS to examine the amended return within any set time. The IRS can simply sit on an amended return forever if it chooses to do so and need not act. Of course, sitting on amended returns forever would be a bad practice for the IRS to adopt, but when a group manager considers priorities, the statute of limitations for making an assessment provides a bright line for decision making about auditing original returns, while the absence of such a bright line for amended returns slightly changes the equation. The group manager will have internal guidance driving the decision but has a bit more leeway with amended returns.
The system established by the IRS provides three cut points for the amended return headed to field exam, i.e., those amended returns with larger and more complicated refund claims, to get sent for acceptance without an audit. TIGTA’s concerns about the IRS process for surveying amended returns focuses on the cases getting sent for acceptance because the IRS did not adequately document that decision. The further the case gets into the process, the greater the concern because the more likely that an audit of the amended return would result in adjustments. Because the acceptance of an amended return means handing over money, TIGTA wants more documentation of the decision to accept the refund claim without an audit.
Timing of Refund and Choices between Original and Amended Returns
Of course, a very high percentage of original returns also involve handing over money, meaning that these returns are also refund claims, yet the system does not require the same type of review and documentation for handing over money as the result of an initial return. When taxpayers file the initial return, the IRS, as with the amended return, has no statutory time pressure within which it must accept the return. Mild pressure exists in both circumstances based on interest which will accrue. Stronger pressure exists with original return based on social expectations that have developed over decades and systems the IRS has created to send back refunds as quickly as possible, but the statute does not require that the IRS race to refund money with original returns yet carefully scrutinize refund requests on amended returns.
With the PATH Act, Congress signaled that it wanted to slow down the payment of refunds on certain original returns and stop the race that happens at the opening of filing season. The PATH Act concerns focus on refundable credits which cause the same concerns in many ways as amended returns. Yet, the biggest part of the tax gap does not exist because of amended returns or refundable credits. It exists with self-employed. TIGTA’s concerns about documentation of amended returns being surveyed has a legitimate basis because of the likelihood that amended returns surveyed after making the cut to Category A probably contain mistakes. It makes sense, if resources permit, for the IRS to internally explain why it allows the payment of a refund in those cases. Except for the distinction concerning collection, it would also make sense to explain why the IRS does not examine original returns with an equal likelihood of adjustable mistakes, but the TIGTA report focuses only on amended returns and not original ones.