IRS Compliance Campaign Use of "Soft Letters"


By Elena Faurie

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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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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