strategies-init

Why the IRS Audits Tax Returns?

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The Examination Division of the Internal Revenue Service is responsible for auditing federal tax returns to determine if income, expenses, and credits are reported accurately. Although the IRS accepts most tax returns when filed, there are circumstances that warrant an audit. Within this context, the IRS is motivated to evaluate those areas of a tax return that fail to comply with current policies and provisions. In general, the IRS motivation behind auditing taxpayer returns falls under multiple categories.

Key Takeaways

  • The Examination Division of the Internal Revenue Service is responsible for auditing federal tax returns to determine if income, expenses, and credits are reported accurately.
  • First, the IRS is motivated to audit returns for the purpose of finding unreported income. In conducting both random and strategic audits, the “IRS has taken a renewed interest in finding unreported income” (Kane, p. 4).
  • Second, the IRS Examination Division is motivated to audit returns to ensure customer service goals are met; these goals are specific to applying the provisions of the Taxpayer Act.

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IRS Examination

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Introduction to IRS Examination

IRS Examination is often likened unto and often referred to as the IRS audit function. Typically, the IRS accepts most federal tax returns when filed. However, there are circumstances in which the IRS examines, or “audits,” to determine if reported income, expenses, and credits have been reported accurately by the taxpayer. When a taxpayer’s return is selected for examination, it is first randomly chosen by computerized screening and then secondly selected by audit by a human reviewer who decided the level of audit that the taxpayer’s return will undergo.

Key Takeaways

  • IRS Examination is often likened unto and often referred to as the IRS audit function. Typically, the IRS accepts most federal tax returns when filed.
  • If an IRS Examination investigation results in a finding of additional tax owed, whether or not this is intentional or unintentional, the IRS requires the payment of a penalty in addition to the remaining tax obligation.
  • The IRS examination, or audit, process begins in one of ten service centers, which depends upon the location of the taxpayer. The service centers receive taxpayer returns; service center representatives catch errors and enter tax return data.

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The IRS Small Business Self-Employed Division

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Introduction to The IRS Small Business Self-Employed Division

The IRS Small Business Self-Employed Division oversees taxpayers and their issues that fall under one or both of these categories. The IRS Small Business Self Employed Division helps taxpayers meet their tax obligations by administering the Internal Revenue Code and applying tax law with “fairness and integrity,” according to the IRS mission statements. According to the IRS, the taxpayer profiles that fall under the IRS Small Business Self Employed Division include fifty-seven million taxpayers, forty-one million self-employed persons; and “[nine] million small businesses with assets of less than $10 million.” [1] An additional profile includes seven million filers of “employment, excise, and estate and gift returns.” [2] According to the IRS, the strategic priorities of the IRS Small Business/Self-Employed division address three types of tax gaps:

Key Takeaways

  • The IRS Small Business Self-Employed Division oversees taxpayers and their issues that fall under one or both of these categories.
  • The IRS Small Business Self-Employed Division’s purpose is also to improve service and business processes, reduce burden, develop human capital, and address strategies that help to promote productivity and improve employee engagement.

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The IRS Tax Exempt and Government Entities Division

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Introduction to the IRS Tax Exempt and Government Entities Division

Established in 1999[1], the Tax Exempt and Government Entities Division protects the public interest by applying tax fairly and provides quality service to customers by helping them understand and comply with applicable tax laws.[2] The Tax Exempt and Government Entities Division serves a customer profile that ranges from small community organizations and municipalities to universities, huge pension funds, state governments, and participants of tax exempt bond transactions.[3] The division’s customer profile also includes those taxpayers that “pay more than $220 billion in employment tax and income tax withholding and control $8.2 trillion in assets.” [4] The division also works with employee plans, exempt organizations, and government entities.

Key Takeaways

  • The customer profile for the IRS Tax Exempt and Government Entities Division represents the following. The division serves the need of three customer segments: Employee Plans, Exempt Organizations, and Government Entities.
  • The IRS Tax Exempt and Government Entities Division taxpayer profile is extended to include 88,000 federal, state, and local entities as well as 550 federal recognized Indian tribes (IRS.gov).
  • Education and communication efforts focus on helping taxpayers understand their tax responsibilities. Efforts include outreach programs and activities.

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The IRS Wage and Investment Division

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About the IRS Wage and Investment Division

The IRS Wage and Investment Division handles roughly ninety million tax returns for individual and married taxpayers. The IRS Wage and Investment Division primarily works with taxpayers that fall under a particular tax profile. Taxpayers that receive W-2 wages, who are employees, and who pay their taxes through withholdings generally fall within the profile that the IRS Wage and Investment Division is responsible for helping. Most taxpayers who contact this division do not do so more than once a year. Finally, many taxpayers associated with the IRS Wage and Investment Division will receive a refund as a result of excess withholdings. The IRS collects third party information from these taxpayers in the form of W2s filed by their employers and information taken from banks, brokerage houses, and other third parties.

Key Takeaways

  • The IRS Wage and Investment Division handles roughly ninety million tax returns for individual and married taxpayers. The IRS Wage and Investment Division primarily works with taxpayers that fall under a particular tax profile.
  • When it comes to administration and ensuring compliance, the IRS Wage and Investment Division’s primary purpose to ensure that returns are prepared correctly.
  • The IRS Wage and Investment Division headquarters office provides strategic and operational direction, which includes managing internal support processes.

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The Current IRS Organization

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The IRS Restructuring and Reform Act of 1998 triggered a comprehensive reorganization of the IRS, which modernized the Service and made it closer to being run like a private sector organization. As such, the IRS organization is led by the Commissioner serving as the chief official, the Chief of Staff and the Deputy Chief of Staff in the executive leadership roles below, and a number of “specialized IRS units” that serve different functions. [1] Staff members from each of these multiple units report to the Commissioner within the IRS Organization. Here is a list of the specialized units within the IRS Organization that report directly to the Commissioner. [2]

Key Takeaways

  • The IRS Restructuring and Reform Act of 1998 triggered a comprehensive reorganization of the IRS, which modernized the Service and made it closer to being run like a private sector organization.
  • Perhaps of most interest within the IRS organization from a tax resolution standpoint is the Services and Enforcement Unit.
  • Another key official within the IRS organization is the Deputy Commissioner for Operations Support, who also reports directly to the Commissioner.

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Tax Lawyers: Selecting Representation – Part One

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Choosing a professional representative is an important decision when dealing with a tax or other legal matter. Usually when you bring in a tax lawyer to handle your matter, you are dealing with an issue that is fairly serious. As such, it is important that you choose a tax lawyer that you feel comfortable with and that you trust with your personal financial information. Although naturally I would recommend myself for any tax matter listed on this website, I wanted to provide some helpful things to think about when choosing from the many tax lawyers that practice in your jurisdiction. Following these helpful hints will ensure that you pick a good one.

Key Takeaways

  • Choosing a professional representative is an important decision when dealing with a tax or other legal matter. Usually when you bring in a tax lawyer to handle your matter, you are dealing with an issue that is fairly serious.
  • Regardless of any other qualification of your tax lawyer, you want to ensure that the person you choose is someone that you can maintain a good working relationship with.
  • Tax lawyers are like any other profession. We get good and are more skilled at the things that we handle on a daily basis or that we have had significant experience handling in the past.

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IRS Tax Lien Release – Part Three – Release and Subordination

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Continued from IRS Tax Lien Release – Part Two – Lien Withdrawal

Key Takeaways

  • Second to getting the IRS to withdraw the lien entirely, you want to make sure that you get a tax lien release from the IRS. A tax lien release will still appear on a taxpayer’s credit, but the lien will be shown as paid and not have as adverse an effect.
  • Finally, it the IRS will not agree to tax lien withdrawal or tax lien release entirely, a lien subordination is a third option for dealing with an IRS lien.
  • In conclusion, IRS tax liens are problematic for taxpayers and are best dealt with sooner rather than later. That said, if a lien has been placed on your property there are a number of options for resolving the issue.

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IRS Tax Lien Release – Part Two – Lien Withdrawal

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Continued from IRS Tax Lien Release – Part One – Avoiding a Lien

Key Takeaways

  • Once the IRS tax lien is in place, it generally will not release it unless the balance owed is paid in full or there is another justification for removing it (such as it was filed erroneously or is for a year that is no longer subject to collections).
  • Lien withdrawal is one remedy that taxpayers can seek from the IRS. If possible, you want to try to get liens withdrawn than simply released or subordinated.
  • Additionally, taxpayers can get a lien withdrawn after the fact by entering into a direct debit installment agreement with the IRS.

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IRS Tax Lien Release – Part One – Avoiding a Lien

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Introduction to IRS Tax Lien Release

One of the biggest debates in the tax practitioner community is the efficacy of IRS tax liens. On one hand, IRS tax liens help the government protect its interest in a taxpayer’s property and secure the underlying tax obligation with real or tangible personal property. On the other hand, liens damage a taxpayer’s credit, place an obstacle in the way of the taxpayer selling that property or borrowing against it in order to pay off their liability, and generally do nothing to satisfy the immediate concern of the IRS. Furthermore, it is extremely difficult to get a lien release and liens are a noted hassle to dispose of once they have been filed against a taxpayer. However, there are a number of things that the taxpayer can do if they are affected by a federal tax lien in order to secure a lien release or achieve some other workable solution that allows them to make progress on the account. After all, the IRS is simply seeking a workable resolution to the problem.

Key Takeaways

  • One of the biggest debates in the tax practitioner community is the efficacy of IRS tax liens.
  • First of all, although it may go without saying, the easiest way to not have to worry about federal tax liens is to not get them in the first place. Being compliant with your federal tax obligations is a one hundred percent guaranteed way to avoid a tax lien.
  • Along those lines, the IRS generally does not go through the trouble of placing a lien on taxpayers who owe smaller liabilities.

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