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Watchdog Growls At IRS' Audits By Mail

One hopeful sign Hill notes: The IRS has added fax machines to accept taxpayer information. "The problems aren't going to go away," she concludes. "It's just a matter of whether they can make things better."

TIGTA isn't the first government watchdog to hone in on problems with the program.

In her last annual report to Congress, National Taxpayer Advocate Nina Olson cited difficulties responding to correspondence audits as one of the most serious problems taxpayers encounter.

Even as the complaints have mounted, the number of correspondence audits has steadily increased. The IRS did 1.1 million correspondence audits in fiscal year 2007, up from 440,000 in fiscal year 2000. The bulk of by-mail audits concern the Earned Income Tax Credit.

The new TIGTA report deals with a subset of by-mail audits, the "discretionary" correspondence conducted by the IRS' wage and income division, which is responsible for the 123 million individual taxpayers who don't have self-employment, farm or rental real estate income. Discretionary audits don't deal with the EITC. Instead, the items challenged in these letters are typically un-reimbursed employee business expenses, and charitable and mortgage interest deductions. In fiscal year 2007, the division conducted 234,508 of these audits, more than double the 107,382 in fiscal year 2004. (The IRS is using correspondence audits in the self-employed and small-business division too to challenge items on Schedule Cs, reporting self-employment income, and Schedule Es, for investment real estate.)

Practitioners say one big problem with the wage and investment division letters is that many go to taxpayers who don't owe anything, but are so scared of the IRS that they send in money anyway. "It seems like the IRS is trying to raise money by plucking low-hanging
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