IRS Increases Use of Automated Systems to Scrutinize Tax Returns

The digital revolution is underway everywhere in America. The payment of taxes, and the administration of the tax system by the IRS, are certainly not exceptions to this.

In fact, increased use of technology may make IRS tax audits more likely. According to a recent report by the national taxpayer advocate, the IRS is using automated systems to find more mistakes in tax returns than it ever has before.

The report found that in 2005, the IRS identified 4 million returns with math and clerical errors. By 2010, the number of errors had more than doubled to 10.6 million.

Through greater use of electronic systems, the IRS is better able to identify mismatches between the data on an individual return and the corresponding data from third parties. These third party sources include employers’ pay records, the Social Security Administration, and others.

To be sure, sometimes the discrepancies with third party data can benefit the taxpayer. This happened, for example, with many employers who were seeking to claim a refundable tax credit called the Making Work Pay credit.

Indeed, mismatches relating to this particular tax amounted to over half of the 10.6 million errors the IRS flagged for review in 2010.

The increased use of automation can also introduce errors of its own. The taxpayer advocate’s report found that the IRS incorrectly disallowed the dependent care exemption to tens of thousands of taxpayers.

The main point is that taxpayers need to realize that the IRS is using enhanced automated systems to scrutinize returns more closely. Be prepared to respond quickly if the IRS sends a letter asserting that a return contained an error or errors.

Source: “IRS on autopilot,” CNN Money, 1-11-12