The IRS ‘Roboaudit’—An Abuse of Authority

The IRS is increasingly relying on correspondence audits to audit small businesses. This report of a correspondence audit of the personal income tax returns of a college professor with a small business reveals such serious flaws with correspondence audits that the authors have analogized them to “roboaudits.” The authors advocate that Congress cease all funding for correspondence audits until the IRS puts in place checks to ensure that the audits are professionally and fairly conducted, and that there are strict controls against abuses of authority.

In late 2016, a taxpayer with a stellar tax record was facing a deadline to respond to an automated notice of a correspondence exam of the Schedule C expenses on his 2014 return. The IRS had given him until December 25 to substantiate them. So, that Christmas Eve, the taxpayer sent off a lengthy fax to the IRS. It contained more than enough information from which the agency could readily deduce that his business and expenses were legitimate and that no further action was necessary—or so the taxpayer thought. In late 2017, the IRS issued another automated correspondence exam notice of the Schedule C expenses on the taxpayer’s 2015 return.

The taxpayer had dutifully paid his taxes since he was in college. Now a college professor, he had no reason to suspect that he would become the target of an IRS audit; after all, most of the business expenses in both tax years related to a book that had been published by a major academic publisher in 2016. The book was the publisher’s lead title that fall, appearing on page one of its catalog and strategically released just days before a major motion picture on the same subject. A book by Supreme Court Justice Stephen Breyer appeared on page four of the same catalog.

In 2014 and 2015, the tax years under audit, the professor’s book was still a work in progress. He had considerable expenses in those years, especially during a period when a prestigious university invited him to work on the book as an uncompensated visiting scholar. Because he had yet to receive an advance for the book, the absence of directly offsetting revenue in both years triggered the IRS Discriminant Index Function (DIF), a computerized scoring system the agency uses to select returns for examination. The roboaudit was on.