How does the IRS enforce the Nation’s Tax Laws for the benefit of all Taxpayers?

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On December 17, 2020, the IRS published a document entitled “Closer Look”. It explains the IRS aspiration for balancing the Taxpayer burden with the potential benefit of its compliance effort when deciding which compliance tool to use.  The goal of the IRS is to minimize taxpayer burden while encouraging voluntary compliance through utilizing the most appropriate resources.
 

IRS “Employee” Compliance tools

  1. Tax Examiners and Tax Compliance Officers conduct audits and related reviews of less complex tax law and Taxpayer account issues.
  2. Revenue Agents audit more complex tax returns and secure payment of taxes owed.
  3. Revenue Officers work with collecting unpaid taxes due. This includes and cases of taxpayers not filed required tax returns.
  4. Criminal Investigation Special Agents investigate criminal tax matters and other financial crimes.

IRS Compliance efforts not requiring a Taxpayer “books and records” review

  • Automated Underreporter (AUR) Program
    • IRS “computer systems” match the income that a taxpayer reports on a tax return with information returns provided to the IRS by third parties. For example, if an individual taxpayer reports less income on Form 1040 than his employer reports on Form W-2, the AUR Program will detect this. An IRS Tax Examiner will then send a letter to a taxpayer informing him of the difference and will work with him to resolve the issue.
  • Mail math error notices
    • IRS will mail math errors notices to taxpayers who appear to make a calculation or clerical error on their tax returns. There are many tax forms that require adding two lines together or subtracting one line-item from another. If these amounts are miscalculated, it could ultimately affect the amount of tax that taxpayers owe or the amount of refund they are to receive. Other examples include not using the correct row and column from the tax table for the filing status claimed and taxable income amount shown, not attaching all required forms and schedules to substantiate entries and missing or incorrect Taxpayer Identification Numbers. When that happens, the IRS will send affected Taxpayers a letter asking them to address the issue(s).
  • Automated Substitute for Return program (ASFR): 
    • This program enforces tax compliance for individual taxpayers who have not filed tax returns, but whose available income information shared with the IRS indicates an income tax liability.  The IRS will send notices to these taxpayers alerting them to their potential income tax liability. The IRS may file a “substitute return” for a Taxpayer who fails to file. This return might not include credit for deductions and exemptions the taxpayer may be entitled to receive. Consequently, it is still in a Taxpayer’s best interest to file their own tax return to take advantage of any exemptions, credits, and deductions they are entitled to receive.
  • Compliance check:
    • Typically, compliance checks are carried out by tax examiners. It is a “review” to determine whether a Taxpayer is meeting information reporting and recordkeeping requirements.  To accomplish this, the IRS will send a Taxpayer a letter asking a few questions.  Under some circumstances, IRS could decide that the results of a compliance check might warrant opening an examination of the taxpayer.

What if the IRS decides review books and records?

An IRS examination or audit requires an IRS review of a Taxpayer’s the books and records. An IRS review of books and records requires more time than the compliance actions under a “no books and records” review.  The amount of time may vary from a few months to a number of years depending on the issue(s) under examination. The examinations are conducted by tax examiners, tax compliance officers, or revenue agents. They include:

  • correspondence examinations:   to obtain additional information about limited issues on a taxpayer’s return. They are usually carried out by Tax Examiners and/or Tax Compliance Officers.
  • in-person examinations:  this involves reviewing one or more years of a taxpayer’s tax returns in conjunction with their books and records. The taxpayer or representative visits an IRS office, or visits a Taxpayer’s office to interview them, or their employees or representatives (such as accountants and attorneys) in order to gather more information. These types of examinations are often performed by either Tax Compliance Officers (office examinations) or Revenue Agents (field examinations).

IRS sends “Soft Letters”

The IRS will send a “soft letter” to a Taxpayer to provide a Taxpayer with an opportunity to address an issue that could avoid the need for further IRS contact or examination.  If a Taxpayer does not respond, or the explanation is inadequate, the IRS could initiate an examination. 

IRS will utilize more “severe tools” through its Criminal Investigation function to deter a Taxpayer who refuses to comply and intentionally avoids paying their tax

The IRS Criminal Investigation function (IRS-CI) investigates Taxpayers who intentionally fail to pay their taxes and/or are suspected of engaging in fraud, money laundering or other prohibited conduct. If IRS-CI determines that a tax crime has occurred, it will refer the matter for possible prosecution to the US Department of Justice.

And then there are the “High Income Taxpayers”

The IRS is signaling that it continues its commitment to examining a higher percentage of the returns filed by High Income Taxpayers.   Examinations of High-Income Taxpayers are conducted in-person by teams of revenue agents and require years to resolve. They involve numerous complex issues and the examination of multiple tax years and returns of related entities (partnerships, trusts, closely held business interests, etc.) and individuals (business partners and others). The examination teams are comprised of well trained and experienced revenue agents with extensive accounting and investigative skills. For issues involving private foundations, international law and foreign tax, estate and gift tax, etc. they can include IRS attorneys and economists as well as subject matter experts.

“On behalf of the hardworking taxpayers who follow the rules and pay their fair share, it’s the duty of dedicated IRS compliance employees to hold others to the same standard”

This IRS philosophy signals that it is best to come forward before the IRS finds you.  There are options available for coming forward. Choosing the right filing options is a critical task that should be done in consultation with the CPA who is assisting you and depending on facts and circumstances, with an income tax controversy attorney. If the IRS finds you, options available for becoming compliant and negotiating a favorable agreement with the IRS are diminished.  

Get started with your coming into compliance action plan.  

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