What Is IRS Enforcement and How Does It Work?

The Internal Revenue Service (IRS) is responsible for ensuring compliance with the nation’s tax laws. IRS enforcement encompasses all activities the agency undertakes to make sure taxpayers file accurate returns and pay the correct amount of tax as part of the U.S. system of voluntary compliance.

Enforcement activities range from automated computer checks to in-depth examinations and collection actions. The process often begins with preliminary screenings of tax returns for mathematical errors or signs of identity theft. When discrepancies are found or taxes go unpaid, the agency has a structured system to address these issues, which can become progressively more serious if not resolved.

Triggers for IRS Scrutiny

The IRS uses an automated system to select tax returns for further review, with the primary tool being the Discriminant Information Function (DIF) score. This computer program assigns a numeric score to each return based on a formula that compares it to national and regional norms. A higher DIF score indicates a greater probability of a tax change if the return is audited, flagging it for potential human review.

A high DIF score does not guarantee an audit, as an experienced IRS employee makes the final decision. Other triggers for scrutiny include mismatches between the income a taxpayer reports and information provided by third parties, like a Form W-2 or 1099. The IRS’s Automated Underreporter (AUR) program cross-references these documents, and a discrepancy often generates a notice requesting clarification.

Failing to file a tax return can also attract IRS attention. The agency’s Automated Substitute for Return (ASFR) program can create a return for a non-filer based on third-party income data, which may not account for all eligible deductions or credits. Additionally, reporting unusually large deductions relative to income or operating a cash-intensive business, like a restaurant or car wash, can increase the likelihood of an examination.

The IRS Examination Process

An IRS examination, commonly known as an audit, is a formal review of a taxpayer’s financial information to ensure it has been reported correctly. The process always begins with a notification letter sent through the mail, as the IRS does not initiate audits by phone or email. This letter outlines the tax year under review, the issues being examined, and the type of audit.

There are three primary types of examinations. The most common is the correspondence audit, handled entirely by mail, which focuses on a few specific items like itemized deductions or tax credits. An office audit is more complex and requires the taxpayer to visit a local IRS office, often for issues related to small businesses on Schedule C or rental income on Schedule E.

The most comprehensive type is the field audit, where an IRS agent conducts the examination at the taxpayer’s home, place of business, or accountant’s office. Field audits are reserved for more complex returns and can cover a wide range of financial activities. During the examination, the auditor will review records and may request additional information through an Information Document Request (IDR), also known as Form 4564.

Upon completion, an audit has three possible outcomes. A “no-change” report means the IRS accepts the return as filed. An “agreed” report means the taxpayer concurs with the proposed changes, signs a report like Form 4549, and pays any additional tax and penalties. If the taxpayer disagrees, the IRS issues a “disagreed” report and a letter detailing their right to appeal.

The IRS Collection Process

When a tax liability remains unpaid, the IRS initiates a collection process separate from an examination. The process begins after a taxpayer fails to respond to the initial bill, starting with a CP14 notice, the first formal demand for payment. The situation escalates with a CP504 notice, which warns the IRS can seize state tax refunds. The final warning is the Final Notice of Intent to Levy and Notice of Your Right to a Hearing, which gives the taxpayer 30 days to pay or request a Collection Due Process hearing.

If the taxpayer does not resolve the debt, the IRS can use a lien or a levy. A Notice of Federal Tax Lien is a public document that establishes the government’s legal claim to a taxpayer’s property. While federal tax liens no longer appear on consumer credit reports, they are public records that can hinder a taxpayer’s ability to get new credit or sell property.

A levy is the actual seizure of property to satisfy the debt. The IRS can levy wages, bank accounts, and other financial assets without a court order. In some cases, the IRS can resort to seizure, which is the physical taking and selling of tangible assets like a home or vehicle.

Resolution and Payment Options

Taxpayers who cannot pay their tax debt in full have several formal resolution options. These programs are designed to help individuals and businesses resolve their outstanding liabilities and avoid more severe collection actions.

A short-term payment plan allows a taxpayer up to 180 days to pay their full tax liability, though interest and penalties continue to accrue. For those needing more time, an Installment Agreement allows for monthly payments over a longer period. Taxpayers can often apply for an installment agreement online using Form 9465 if their total tax debt is below a certain threshold.

An Offer in Compromise (OIC) allows certain taxpayers to resolve their tax liability for a lower amount than what they originally owed. The OIC program is for those experiencing significant financial hardship, and the IRS will only accept an offer if it believes the amount is the most it can reasonably expect to collect. To be eligible, a taxpayer must have filed all required tax returns and not be in an open bankruptcy proceeding.

For taxpayers facing extreme financial difficulty, Currently Not Collectible (CNC) status may be an option. This temporarily suspends collection efforts because the taxpayer has demonstrated they cannot afford to pay their basic living expenses and their tax debt. To qualify, the taxpayer must provide detailed financial information on Form 433-F or 433-A. While in CNC status, the debt remains and penalties and interest continue to accrue, but the IRS will stop actions like levies.

The Taxpayer Bill of Rights

Every taxpayer has fundamental rights when interacting with the IRS, known as the Taxpayer Bill of Rights. Detailed in IRS Publication 1, these ten principles govern all agency actions and provide a framework for fair treatment:

• The Right to Be Informed of tax laws and IRS procedures.
• The Right to Quality Service and to receive prompt and professional assistance.
• The Right to Pay No More Than the Correct Amount of Tax.
• The Right to Challenge the IRS’s Position and Be Heard by raising objections and providing additional documentation.
• The Right to Appeal an IRS Decision in an Independent Forum.
• The Right to Finality and to know the maximum time the IRS has to audit a return or collect a debt.
• The Right to Privacy and to expect that any IRS inquiry will be no more intrusive than necessary.
• The Right to Confidentiality and to expect taxpayer information will be protected from unauthorized disclosure.
• The Right to Retain Representation and to have an authorized representative handle their tax matters.
• The Right to a Fair and Just Tax System, including access to the Taxpayer Advocate Service for significant hardship.