Disclosing Audit Risk to Taxpayers

Abstract

When taxpayers file their tax returns, they are often worried about the prospect of an Internal Revenue Service (Service) audit. To date, the position of the Service and of professional organizations has been that tax return preparers cannot take into account audit risk in evaluating the merits of a return position. Some practitioners have broadly — and incorrectly — interpreted this regulation as a mandate against talking about audit risk with their clients. Taxpayers therefore often make their own assessment of their audit risk, relying on information sources such as the Internet and tax return preparation software. Given the uncertain reliability of such sources, it is appropriate to encourage more communication between tax return preparers and taxpayers on the subject of audit risk. This article argues that the Treasury Department and professional organizations should make it clear that tax return preparers may make full disclosure of Service audit risks to the extent this information is known. While this information cannot be used to evaluate the substantive merit of a particular tax return position, readily dispensing it would be emblematic of a transparent tax system and satisfy taxpayers’s quest to more fully understand the tax return filing process. As such, the availability of Service audit risk information would be a marked improvement over the existing status quo.

Keywords: Tax Return Preparation, Audit Risk

JEL Classification: K34