IRS Tax Enforcement: An Overview of the Process

IRS tax enforcement encompasses the actions the agency takes to ensure individuals and businesses comply with their legal tax obligations. The purpose of these activities is to maintain the integrity of the U.S. tax system by identifying and addressing non-compliance. This ensures all taxpayers contribute their correct share. The scope of enforcement covers detecting errors, collecting debts, and addressing fraudulent behavior, guided by the Internal Revenue Code. The goal is to encourage the highest possible degree of voluntary compliance.

The IRS Examination Process

An IRS examination, or audit, begins with the selection of a tax return. The IRS uses a computer program called the Discriminant Information Function (DIF) system, which scores returns based on their potential for error. Returns with higher DIF scores are more likely to be selected for review by an IRS employee.

Another selection method is information matching, where computers compare third-party data like Form W-2s and Form 1099s against a taxpayer’s return. Discrepancies can trigger an examination. Returns may also be selected based on referrals or their connection to another taxpayer’s audit.

Once a return is selected, the examination takes one of three forms. The most common is the correspondence audit, conducted by mail for straightforward issues. A taxpayer might receive a letter, like a CP2000 notice, proposing changes or requesting documentation for a specific deduction. These audits are handled by IRS service centers and resolved through written communication.

An office audit requires the taxpayer to bring records to a local IRS office for a meeting with a tax compliance officer. These examinations are broader and may focus on itemized deductions, small business profits, or rental income. The notification letter specifies the issues under review and the required documents.

The most comprehensive examination is the field audit, conducted by a revenue agent at the taxpayer’s home, place of business, or accountant’s office. Field audits are for complex situations, such as a large business or an individual with intricate finances. The agent may review public records and issue a Form 4564, Information Document Request, to obtain specific records.

IRS Collection Actions for Unpaid Taxes

When a tax liability goes unpaid, the IRS begins collection actions, starting with a series of mailed notices. The first notice, often a CP14, states the balance due and demands payment. If the debt remains unpaid, subsequent notices become more insistent, ending with a final notice of intent to take more forceful measures.

A federal tax lien is a legal claim against a taxpayer’s property, including real estate and financial assets. The claim arises automatically after the IRS assesses a tax, sends a demand for payment, and the taxpayer fails to pay. While this initial lien is not public, the IRS can file a Notice of Federal Tax Lien (Form 668(Y)), making the claim public and impacting the taxpayer’s ability to get credit.

Following a lien, the IRS can proceed with a levy, which is the seizure of property to satisfy the tax debt. Before a levy, the IRS must send a “Final Notice of Intent to Levy,” often as Letter 1058 or LT11. This notice gives the taxpayer 30 days to pay the debt before the IRS can legally take possession of assets.

Common levies target financial accounts and wages. A bank levy, using Form 668-A, freezes funds in an account up to the amount of the debt; the bank holds these funds for 21 days before sending them to the IRS, providing a brief window for the taxpayer to resolve the issue. A wage garnishment, using Form 668-W, is a continuous levy where an employer sends a portion of the taxpayer’s wages to the IRS each pay period until the debt is paid.

The most severe action is the seizure and sale of physical assets like a home, vehicle, or business equipment at a public auction. This is a last resort used after other collection attempts have failed. Seizing a principal residence requires judicial approval, while seizing business assets requires internal IRS managerial approval.

Criminal Tax Investigations

Criminal tax enforcement is separate from civil audits and collections. Its goal is not to collect tax but to investigate and recommend prosecution for willful violations of tax laws. This is the responsibility of the IRS Criminal Investigation (CI) division, the agency’s law enforcement branch, staffed by sworn federal special agents who investigate financial crimes.

Criminal investigations address conduct showing a deliberate intent to defraud the government. Common triggers include tax evasion under Internal Revenue Code Section 7201, filing a false return under Section 7206, or the willful failure to file a return under Section 7203. CI also investigates related crimes like money laundering.

Special agents gather evidence using interviews, surveillance, and search warrants to analyze financial records. If an investigation finds sufficient evidence of a willful violation, CI will recommend prosecution. The taxpayer may be offered a conference to be informed of the allegations.

The authority to prosecute tax crimes rests with the U.S. Department of Justice (DOJ). CI forwards cases with merit to the DOJ’s Tax Division for review. DOJ attorneys independently evaluate the evidence and decide whether to bring criminal charges in federal court. This separation of duties ensures an independent legal authority makes the final decision to prosecute.

The Taxpayer Bill of Rights and The Appeals Process

The tax system includes protections consolidated in the Taxpayer Bill of Rights, which outlines ten principles the IRS must uphold. These include the right to be informed, the right to quality service, and the right to privacy. The rights also guarantee taxpayers will pay no more than the correct amount of tax.

Among these protections are the Right to Challenge the IRS’s Position and the Right to Appeal an IRS Decision in an Independent Forum. This allows taxpayers to dispute IRS findings without going to court. The IRS Independent Office of Appeals is a separate body within the agency that resolves tax controversies impartially, aiming for a fair settlement for both parties.

A taxpayer can request an appeal after an examination results in a proposed tax deficiency they disagree with. This is offered in a “30-day letter,” which explains the proposed changes and the right to appeal within 30 days. Appeals are also available for certain collection actions, such as after receiving a notice of intent to levy, which allows the taxpayer to request a Collection Due Process (CDP) hearing.

The appeals process is a less formal alternative to litigation. Taxpayers can represent themselves or authorize a representative, such as an attorney or CPA, by filing Form 2848, Power of Attorney. The goal of an Appeals conference is to reach a resolution based on the facts and law, with the office operating independently to ensure an unbiased review.