WASHINGTON -- The IRS is cutting back on the use of a new letter criticized as too intimidating to taxpayers facing audits. The agency has to fix its heavy-handed wording.
Two months after its inception, the Internal Revenue Service announced Tuesday it will stop sending letters to all audited taxpayers warning that their employers, neighbors and even banks could be contacted.Beginning next week, the letters will be mailed only in situations where the IRS has tried and failed to get the needed audit information from the taxpayer, said IRS Commissioner Charles Rossotti. A rewrite is in the works.
"Many of these letters have gone out too early and needlessly alarmed taxpayers in cases where the IRS had no need to contact outside parties," Rossotti said.
The letters, in use since mid-January, were intended by Congress in the new IRS reform law to be a "fair warning" to taxpayers that the agency was preparing to use these powers. But lawmakers and tax professionals say the agency stumbled by choosing such intimidating wording and sending the letters at the beginning of an audit.
"They turned fair warning into a threat," said David Lifson, tax committee chairman of the American Institute of Certified Public Accountants. "If the IRS is going to contact your friends and neighbors, that's a pretty serious step. It should only be undertaken in the most extreme circumstances."
Rossotti said the new policy on the letter more accurately reflects a long-standing IRS practice of resorting to outside contacts only if all else fails.
"There's no reason to send these letters when we can work directly with the taxpayer in most cases," Rossotti said.
The IRS is still working on a new version of the letter that Rossotti said will be "clearer, better-written" than the current one. Several tax professional organizations, including AICPA, are involved in improving the wording.
The current letter says that during an audit, the IRS "may need to contact third parties. Third party contacts may include, but are not limited to, neighbors, employers, employees and banks. We may use these contacts to help us determine your correct tax liability, identify your assets, or locate your current address."
In a letter Tuesday to IRS, Lifson submitted a draft replacement explaining more carefully that the taxpayer will be notified in advance if any outside party is to be contacted and that a list of who has been contacted can be obtained.
"If taxpayer rights are to be protected, and if taxpayers are to perceive the IRS as protecting those rights, the IRS should avoid even the appearance of engaging in secretive activities in noncriminal cases," Lifson wrote to IRS.
One vocal congressional critic of the IRS, Sen. Christopher Bond, R-Mo., said the rewritten letter should help taxpayers "minimize the damage to personal and business relationships" if such contacts are necessary.
"We mustn't lose sight of the real reform at the heart of this matter," Bond said. "The notice is supposed to serve taxpayers, not frighten them."