(Part 2 – Master Files)
LAST week we discussed how tax returns are received, verified, and reviewed for completeness.
Let’s now discuss the second of a three-part series on how your tax returns are stored into master files.
– How efiled and paper-filed tax returns are verified, validated, and reviewed for accuracy.
– How tax returns are stored into master files.
– How IRS scores your tax returns for audit.
After receiving your tax return, the IRS enters your tax data into an IRS master file. The master file is separated into Individual Master File, Business Master File, and Non-Master Files.
1.Individual Master File is a magnetic tape record of all individual income tax filers in social security number sequence. All tax data and related information pertaining to each individual income tax filer are posted to this file. It’s continuously updated as a current record of each taxpayer’s account.
2. Business Master File is a magnetic tape record of all business taxpayers with employer identification numbers. Taxes processed include corporate, partnership, LLC, employment, excise, fiduciary, estate, gift, and tax-exempt organizations with investment income.
Each taxpayer’s account is divided into tax modules (tax years) reflecting current status, balance, and transactions applicable to each tax year. This information includes tax return data, assessments, and changes made to return as filed. A transcript of taxpayer’s account is a printout of tax module information.
3. Non-Master File is a smaller database that controls returns not processed on the master files. This includes assessments, adjustments, and refunds that are performed manually at the Service Centers. Master files are not efficient because of manual processing required to obtain accurate balances from other files. The IRS hopes this problem to disappear with the introduction of a modern data engine called CADE (see below).
4. Customer Account Data Engine (CADE) is gradually replacing the Master File System. This is a modern data storage management and accessing system that is designed to provide real-time access to taxpayer accounts, up-to-the-minute data, and easy access by authorized IRS personnel. CADE handles returns with Schedules C, E, and F and those claiming Earned Income Tax Credit (EITC) and Dependent Care Credit. A newer version called CADE 2 updates taxpayer account information on a daily basis. This speeds up responses to taxpayer inquiries, reduce the number of out-of-date notices, and allow a shorter refund cycling time.
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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.
