On December 17, 2020, the IRS released a document entitled “Closer Look”. It explains the IRS’s desire to balance the taxpayer’s burden with the potential benefit of their compliance efforts in deciding which compliance tool to use. The aim of the IRS is to minimize the burden on taxpayers while promoting voluntary compliance by using the most appropriate resources.
IRS compliance tools for employees
- Tax auditors and tax compliance officers conduct audits and related reviews of less complex tax law and tax account issues.
- Revenue agents check more complex tax returns and secure the payment of taxes owed.
- Revenue officers work by collecting unpaid taxes. This includes cases of taxpayers who have not filed the required tax returns.
- Criminal Police Special Agents investigate criminal tax matters and other financial crimes.
IRS compliance efforts that do not require the “books and records” review of the taxpayer
- AUR program (Automated Underreporter)::
- IRS “computer systems” reconcile the income a taxpayer reports on a tax return with information provided to the IRS by a third party. For example, if an individual taxpayer reports less income on Form 1040 than their employer reports on Form W-2, the AUR program will recognize this. An IRS tax auditor will then send a letter to a taxpayer letting them know the difference and work with them to resolve the problem.
- Mail Math error notifications::
- IRS sends notifications of math errors to taxpayers who appear to be making a calculation or typographical error on their tax returns. There are many tax forms that require adding two lines or subtracting one line from another. If these amounts are miscalculated, it can ultimately affect the amount of tax the taxpayer owes or the amount of refund they should receive. Other examples include not using the correct row and column from the tax table for the claimed filing status and taxable income amount shown, and not including all of the required forms and schedules to substantiate entries and missing or incorrect tax identification numbers. If so, the IRS will send a letter to the taxpayers concerned asking them to fix the problem.
- Automated Substitute for Return (ASFR) program:
- This program enforces tax compliance on individual taxpayers who have not filed a tax return but whose available income information is shared with the IRS, indicating an income tax liability. The IRS will send notices to these taxpayers advising them of their potential income tax liability. The IRS can file a “replacement return” for a taxpayer who does not file a tax return. This statement may not include credit for any deductions and exemptions that the taxpayer may be entitled to. As a result, it is still in a taxpayer’s best interest to file their own tax return to take advantage of all the exceptions, credits and deductions they are entitled to.
- Conformity check::
- As a rule, conformity audits are carried out by tax auditors. It is a “check” to determine whether a taxpayer meets the requirements for reporting and recording information. To do this, the IRS sends a taxpayer a letter with a few questions. In certain circumstances, the IRS might decide that the results of a compliance assessment could warrant opening a taxpayer audit.
What if the IRS decides to review books and records?
An IRS audit or audit requires an IRS review of a taxpayer’s books and records. An IRS review of books and records takes more time than compliance measures for a no books and records review. The time span can vary from a few months to a few years, depending on the subjects examined. The audits are carried out by tax auditors, tax officials or tax officials. They include:
- Correspondence checks: to get additional information on limited issues relating to a taxpayer’s tax return. They are usually carried out by tax auditors and / or tax officers.
- personal exams: This involves reviewing one or more years of a taxpayer’s tax return in conjunction with their books and records. The taxpayer or agent visits an IRS office or a taxpayer’s office to interview them or their employees or agents (such as accountants and attorneys) for more information. These types of reviews are often performed by either Tax Compliance Officers (office reviews) or revenue agents (field reviews).
IRS sends “soft letters”
The IRS sends a “soft letter” to a taxpayer to give the taxpayer an opportunity to resolve an issue that could avoid the need for further IRS contact or review. If a taxpayer doesn’t respond or the explanation is inadequate, the IRS can initiate an investigation.
IRS will use “tighter tools” as part of its criminal investigation department to deter a taxpayer who refuses to comply and intentionally avoids paying his taxes
The IRS Criminal Investigation Function (IRS-CI) investigates taxpayers who intentionally fail to pay their taxes and / or are suspected of having committed fraud, money laundering or other prohibited behavior. If the IRS-CI determines that there has been a tax crime, the matter will be referred to the US Department of Justice for possible prosecution.
And then there are the “High Income Taxpayers”
The IRS is signaling that it remains committed to auditing a higher percentage of tax returns filed by high-income taxpayers. High income taxpayer audits are personally conducted by teams of tax officials and take years to resolve. They encompass numerous complex questions and the scrutiny of multiple tax years and returns of affiliates (partnerships, trusts, close business interests, etc.) and individuals (business partners and others). The audit teams are made up of well-trained and experienced financial agents with extensive accounting and investigative skills. IRS lawyers and economists as well as subject matter experts can be consulted on questions relating to private foundations, international law and foreign taxes, estate and gift taxes, etc.
“On behalf of hardworking taxpayers, who abide by the rules and pay their fair share, it is the duty of dedicated IRS compliance staff to keep others to the same standard.”
This IRS philosophy signals that it is best to get in touch before the IRS finds you. Options are available to sign up. Selecting the correct filing options is an important task that should be done in consultation with the CPA providing assistance and with an income tax dispute attorney based on the facts and circumstances. If the IRS finds you, your ability to comply and negotiate a favorable agreement with the IRS will be limited.
Start with your compliance action plan.