The Structure of the Internal Revenue Service
The Internal Revenue Service or IRS is one bureau or division of the U.S. Department of Treasury. The IRS itself is divided into four divisions. Cases start with the first division, which is the examination division, and they will pass to the other divisions as appropriate. Each division has its own function.
The Examination Function
The examination function determines whether taxes in addition to those reported by the taxpayer are due and owing and, if so, sets in process procedures for assessing and collecting the taxes. Taxpayers know this function as the IRS audit function.
The examination or audit process begins in one of the ten Service Centers around the country, depending on where the taxpayer lives. These service centers are where:
- Taxpayers mail their tax returns to,
- Tax returns are processed to catch obvious errors, tax return data is entered into the computer, computer matching of the items on the return with information that the IRS has received from other sources is performed, and tax returns are “scored” for audit potential,
- Tax assessments identified in reviewing the return or by audits are made,
- The notice and demand for the taxpayer to pay the taxes assessed is generated.
If the Service Center cannot handle the case or if the taxpayer doesn’t live near the Service Center, the case will be referred to a revenue agent in a local field office. This revenue agent will typically ask the taxpayer to come in to discuss their case and to produce certain documents. The revenue agent’s job is to review the facts, make any adjustments, and issue a revenue agent’s report. In other words, the revenue agent decides whether the IRS is going to pursue a case against the taxpayer.
The IRS audit generally ends when the revenue agent issues a no-change letter or a notice proposing adjustments. The IRS audit may not be closed for several months following the taxpayer meeting with the revenue agent. The IRS uses a series of letters or notices which contain specific deadlines for responding (such as 30 or 90 days). These letters or notices allow the IRS to move the case out of examination function. Unfortunately, taxpayers (who are often not aware of the consequences of these deadlines) fail to respond timely and/or appropriately. This often waives certain rights that the taxpayer would otherwise be entitled to. This problem is compounded by the fact that the IRS is only required to mail these letters to taxpayer’s last known address via registered or certified mail; it is not required to make sure that taxpayers actually receive the notices.
The IRS Appeals Function
If taxpayers happen to respond timely and appropriately to one of the IRS notices, then they might have the right to take their case to the appeals function. The appeals function also comes into play after the IRS takes certain actions to collect outstanding tax liabilities and, in some instances, when the taxpayer files a petition with the U.S. Tax Court. In some cases the taxpayer must initiate the appeals process and in other cases the IRS will initiate the appeals process.
The appeals function is an internal process that offers a semi-independent review of IRS determinations. The official mission statement of the Office of Appeals is to: “resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the IRS.”
The appeals office has discretion to settle cases. The primary evidence that will be considered include the taxpayer’s statements in the appeals protest and appeals conference, the taxpayer’s documentation, and the IRS’s revenue agent report. Knowledge of the applicable facts, tax law, and procedures are necessary to draft an effective protest and to make sure that the taxpayer does not inadvertently make harmful statements.
This is particularly important since the appeals office has the authority to re-open previously closed issues and raise new issues for investigation. Generally, the appeals office does not reopen or raise new issues unless they are “substantial” and the “tax liability is material,” but it is possible and it does happen. Therefore, it is imperative that taxpayers be very careful when disclosing extraneous information to the appeals office.
Typically cases get to appeals by filing a protest in response to an IRS determination. In these cases the appeals office basically makes three types of settlements: mutual concession settlements, split-issue settlements, and nuisance value settlements. Taxpayers should be familiar with each to ensure that their case is settled on the most favorable terms possible.
The appeals office also handles Offer-in-Compromises. The Offer-in-Compromise is often an effective tool that can be used to resolve tax disputes with the IRS. Taxpayers often fail to submit appropriately completed or realistic offers. IRS statistics show that only a small percentage of offers are actually accepted. Unrealistic or incomplete offers will almost always be rejected.
The appeals function ends when the appeals office decides whether or not to settle a claim. This decision represents the final determination for the IRS regarding the taxpayer’s tax liability.
The IRS Collection Function
As its name implies, the collection function involves the IRS attempting to collect the tax that was assessed.
The IRS’s primary collection tools involve property liens and levies (seizures), bank levies (seizures), and wage garnishments. The IRS also uses summons and subpoenas that require that the taxpayer to deliver assets or require the taxpayer to show up and tell the IRS about specific assets. Civil and criminal penalties help ensure that taxpayers comply with these requests.
It is at this point that most taxpayers retain legal counsel. Often, an experienced tax attorney can halt the collection process by negotiating with the collection personnel or pursuing other remedies. Some of these remedies include collection due process hearings, requesting innocent spouse relief, or in some instances, filing for bankruptcy. Only licensed attorneys can advise taxpayers as to all of these remedies. A discussion of these topics would be too lengthy for this website and should not be pursued without the counsel of an experienced tax attorney. Suffice it to say that the collection function ends when the taxpayer settles a tax liability — by paying the tax liability or by working out some other arrangement.
The Criminal Investigation Function
Cases involving tax fraud or misrepresentations may be referred to the criminal investigation function.
All other IRS functions stop working on cases when the criminal investigation function begins. This function is carried out by IRS special agents, who typically show up at the taxpayers home or business. The aim of this function is to investigate tax crimes and make recommendations to the Department of Justice as to whether to prosecute. As with collections, most taxpayers will have already retained legal counsel at this point and it is really not necessary for me to tell you why you should not represent yourself once a criminal investigation has began. You should know that an experienced tax attorney might be able to help ward off this type of problem before it arises.