IRS Correspondence Audits, welcome to the machine, please hold!
It has become increasingly difficult to reach a human at IRS in the event of an examination or a notice of proposed changes to a tax return as funding for the IRS has been reduced and budgetary pressure to collect has increased. Like so many other businesses with limited resources, the IRS has turned sharply towards automated processes at the expense of customer service.
4 out of 5 audits are now being done by correspondence (mail for now) where you will not have a single agent assigned to your case. To get anything truly considered adequately requires you to call in and wait on hold for an average of 18 minutes (sometimes an hour) before you can speak to a Revenue officer; even then you will have a different person every time. Like when dealing with other authorities you should really know your rights and fight any incorrect adjustments to your tax return despite any failure of IRS to respond to your communication with clear, prompt, and fair consideration.
Fun fact from Taxpayer advocate Nina Olson:
"Last year, the IRS received about 8.4 million letters from taxpayers responding to proposed adjustments to their tax liabilities. As of the end of the fiscal year, 53 percent of taxpayer letters in the IRS’s “adjustments” inventory were considered “over age” (generally, more than 45 days old)" - Taxpayer Advocate 2013 annual report to congress
Lets say you did your own taxes for 2012 and did a $110k Kickstarter. You reported the kickstarter income on your tax return in the amount that hit your bank account ($100k because amazon and kickstarter charged you 10%).
The 1099 that amazon sends to you and the IRS says 110K so the IRS automated system is looking for $110k of gross income on your schedule C line 1. Because IRS only sees $100k it sends you a notice CP2000 saying that the propose a $10K increase to your taxable income because it only sees 100k on your return. You fax them a letter saying, "Wait, the fees were 'inside' the 100K amount instead of being listed as an expense so it is just cosmetic and I should not owe anything". You are in line for an IRS fail.
You hear nothing for 50 days and all of a sudden you get a 2626C letter. This letter makes no comment about what you sent them other than a "thank you for your response of (date of fax)"... now please sign this consent to an increase in tax and give up your rights to appeal (no amounts...hmmm) and we will be sending you a notice of deficiency in the mail saying you have 90 days to petition the tax court. If you read and sign the vague letter you give up your right to dispute the adjustment in court. So don't do it. Unreal? Sad, but true.
What has happened to you is indicative of the kind of 'automated collection' that the IRS has been increasingly using to collect without any human contact with the taxpayer. They say that your correspondence was received and matched it to your case, but no trained tax professional really looked at it and they didn't change anything from the original proposed adjustment. They simply put your letter on the shelf and went straight to the assessment process whether they have processed your response or not. Now you are wasting your time freaking out about what to do because the process has been obfuscated by poor and passing communication in an aggressively automated process.
What you can do with your rights as a taxpayer:
Like when dealing with other authorities you should really know your rights. Remember that your rights as a taxpayer include the right to quality service which includes receiving "clear and easily understandable communications from the IRS...". You also have the right to "expect that the IRS will consider your timely objections and documentation promptly and fairly and to recieve a response if the IRS does not agree with your position".
We recommend that you contact a tax professional who has had experience with IRS examinations and at least discuss how you should go about handling the communication or an actual agent (who will have the authority to expand the audit).
You may also request that a correspondence audit be transferred to a local IRS office so that you deal with a single (human) agent. You must request this in writing and explain the reasons in a letter sent to the contact information in the initial IRS notice.