2015 Results of Underreporting- IRS Mail Tax Audits

The Automated Underreporter Program matches taxpayer income and deductions submitted on information returns by third parties (e.g., employers, banks, brokerage firms) against amounts reported by taxpayers on their individual income tax returns to identify discrepancies.

The Automated Underreporter Program routinely identifies more than 20 million individual tax returns with discrepancies each year and, when warranted, assesses additional taxes as well as interest and penalties.

TIGTA AUDIT

TIGTA found that Automated Underreporter Program tax assessments increased significantly in recent years, from $4.24 billion in Fiscal Year 2006 to $7.84 billion in Fiscal Year 2013, an increase of 85 percent. 

During Fiscal Year 2013, the Automated Underreporter Program also assessed approximately $708 million in accuracy‑related penalties; however, TIGTA found that such penalties were not always assessed when warranted.

For instance, the Automated Underreporter Program’s system does not apply the negligence penalty provided for by law unless the taxpayer has repeated the same type of income omission within four consecutive tax years.

Additionally, TIGTA’s review of Fiscal Year 2012 closed cases found that examiners were incorrectly waiving accuracy‑related penalties, which resulted in about $3.25 million in lost penalty revenue.

TIGTA also found that, due to an inaccurate programming condition, approximately $2.66 million in accuracy-related penalties were not assessed.

Also, after an in-depth study, a number of revisions were made to the taxpayer notice which alerts taxpayers that additional taxes may be owed as a result of underreporting.

Although the revised taxpayer notice was implemented in Fiscal Year 2013, the IRS has not evaluated, or established plans to evaluate, the effectiveness of the revised notice on reducing taxpayer underreporting.