The Internal Revenue Service (IRS) is the nation’s tax collection agency that administers the Internal Revenue Code legislated by congress and the most powerful collection agency in the world. The agency conducts audits to determine if a business or individual is tax compliant. However, audits are just part of the whole tax compliance process of the IRS.
With the tax gap widening, the IRS has implemented different tactics for this massive undertaking to crackdown on taxpayers who habitually find a way to cheat the system. Let us examine the tax compliance process and how this affects you as a taxpayer.
What is the Tax Compliance Process?
The Tax Compliance process can be categorized into compliance checks and examinations. A compliance check is a point of contact with a taxpayer involving reviews of filed information and tax returns. It serves as verification of recordkeeping, tax return, and information return filing.
In contrast, examinations are systematic inspections of a taxpayer’s financial books and records to figure out the correct tax liability.
Tax Compliance Officers Explained
Now, this entire process can’t be executed by one person alone, so the IRS assigns specific personnel to perform checks in the tax compliance process.
1. Tax Examiners (TE) and Tax Compliance Officers (TCO)
TEs and TCOs audit financial books and records, as well as related reviews of less complex tax laws and account issues.
2. Revenue Agents (RA or Auditors)
RAs lead exams of higher-income taxpayers and audit complex tax returns, such as foreign, estate, and gift taxes, to secure tax payments owed.
3. Revenue Officers (RO)
ROs collect revenue for the government or another agency in taxes or duties. A duty is a form of taxation levied on certain goods, services, or other transactions.
4. Criminal Investigation Special Agents
These special agents investigate establishments or individuals suspected of intentionally failing to pay taxes or dabbling in illegal practices like fraud or money laundering.
6 IRS Touchpoints with Taxpayers for Tax Compliance
The IRS utilizes touchpoints to check, verify, and crossmatch the information they gathered. However, having these exchanges with the IRS does not necessarily mean you have tax-related issues. Here are six touchpoints taxpayers might encounter.
1. Automated Under Reporter (AUR) Program
TEs and TCOs utilize AURs to detect discrepancies in data made by computerized systems that are programmed to match income. A taxpayer reports their tax returns with information provided to the IRS by third parties.
2. Automated Substitute for Return (ASFR)
ASFR programs implement tax compliance to those who’ve failed to file tax returns and inform them of their potential liability. The IRS determines who to contact based on the available income information, indicating individuals with possible income tax liability.
3. Correspondence Examinations
During correspondence examination, tax compliance officers or revenue agents obtain and audit supplementary information about limited issues on taxpayers’ returns. This is primarily conducted through mail or written communication.
4. In-person examination
Some cases require ROs and TCOs to be involved and conduct an in-person examination to gather more information, reviewing one or multiple years of a taxpayer’s tax returns in conjunction with their financial books and records.
5. “Soft” and educational letters
“Soft” letters provide taxpayers an opportunity to address tax-related issues, preventing further investigation or examination by the IRS. Meanwhile, educational letters inform taxpayers of law changes and circumstances that may impact their tax obligations.
6. Criminal Investigations
Criminal investigations are conducted when criminal tax fraud or other financial crimes are suspected. These IRS tax compliance special agents determine tax crimes and turn to the Department of Justice for possible prosecution.
3 Ways the IRS Checks Your Tax Compliance
If you don’t necessarily fall into one of the tax issues or cases mentioned previously, the IRS does routine and subtle checks to catch tax cheats and fraudsters.
1. Computer Data Analysis
The IRS utilizes an Information Returns Processing system that matches information sent by employers and third parties based on tax return reports submitted by an individual. These ensure that individuals report the correct information on their tax returns to prevent tax evasion.
2. Social Media Footprint
The IRS analyzes the social media activities of taxpayers and determines if their lifestyles fit their income, possibly leading them to tax cheats. However, social media is not reliable enough to even trigger an audit. This is just one way of assessment to identify tax evaders and financial crimes.
3. Reported by Someone
Citizens can be a source of information and report any erroneous taxation practices they witnessed to the proper authorities. If investigated and proven accurate, the IRS can recoup taxes.
Comply with the Proper Taxation Process
The IRS has put forth its best efforts to uphold integrity and respect for taxpayer rights by employing methods and special tax compliance officers to ensure fairness. As responsible citizens, we must abide by the law to warrant equality between all hardworking individuals.
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