IRS Compliance Campaign Use of "Soft Letters"

The IRS Large Business and International (LB&I) division is transitioning its audit process from industry, taxpayer-focused examinations to targeted return selection within specifically identified tax areas.  On January 31, the LB&I announced the launch of its first 13 compliance campaigns.  These campaigns are designed to enhance tax compliance by identification of specific tax areas that present compliance risks.  The LB&I works with large and mid-size businesses with assets that exceed $10 million.

One of the tools used by LB&I to gather taxpayers’ information is a technique called “soft letters.”  According to the IRS, a “soft letter” is a letter sent to a taxpayer inquiring about a tax position they’ve taken.  “Soft letters” are being utilized in four of the compliance campaigns as follows:

  • IRC 48C Energy Credit Campaign

  • Land Developers – Completed Contract Method Campaign

  • S Corporation Losses Claimed in Excess of Basis Campaign

  • Form 1120-F Non-Filer Campaign

Taxpayers have had concerns about this technique and questioned if “soft letters” indicated that a taxpayer was under IRS examination.  Holly O. Paz, director of the IRS Large Business and International Division’s Pass-Through Entities Practice Area, said at the American Bar Association tax section meeting on May 12: “A soft letter is not an examination.  It does not request books and records, so it does not rise to the level of an examination.”  Other IRS representatives have indicated that a “soft letter” is just a request for additional information.

Taxpayers are not required to respond to a “soft letter.”  However, not responding could result in an examination process that otherwise would not have been initiated.  Taxpayers should provide any additional information requested by the IRS in a ‘”soft letter,” so appropriate compliance can be assessed and an accurate determination can be made without an examination process.  The “soft letters” are meant to encourage voluntary self-correction, if necessary.

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