The Structure of the Internal Revenue Service
The Internal Revenue Service (IRS) has four separate divisions. Each division performs its own function. Cases start with the first division, which is the examination division, and they will pass to the other divisions as appropriate.
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 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 can not handle the case or if the taxpayer doesn’t live near the Service Center, the case will be referred to a revenue officer or agent in a local field office. This 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 and issue a revenue agent’s report. In other words, the agent decides whether the IRS is going to pursue a case against the taxpayer.
IRS personnel are trained to elicit harmful information on subjects outside the scope of the issue under examination and often information that you are not legally obligated to disclose. Taxpayers often fail to limit the scope of information that is provided to the agent, information that ultimately makes its way into the examiner's report. This type of information can be fatal to a taxpayer’s case if it is included in the examiner's report. The examination function generally ends when the examiner issues the examiner's report.
As you may have guessed, resolving a tax matter while it is in the examination process is ideal. Most taxpayers may not know when their case is and is not in examination. This problem often arises due to the IRS’s slow examination process.
The examiner's report may not be issued for several months following the taxpayer meeting with the examiner. 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. 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 they 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; they are not required to make sure that taxpayers actually receive the notice.
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 are the taxpayer’s statements in the appeals protest and appeals conference, the taxpayers documentation, and the IRS’s revenue agents report. Knowledge of the applicable facts, tax law, and procedures are necessary to draft an effective appeal protest and to make sure that the taxpayer does not inadvertently disclose irrelevant and harmful information.
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 efficient and effective tool available for taxpayer to resolve their tax disputes with the IRS. But 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 and may not stop the amount of interest that is accruing on the balance that the government says you owe.
The appeals function ends when the appeals office decides to settle your claim or that it is not in the government’s interest to settle your 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 is where the IRS attempts 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 where their assets are. 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, innocent spouse, or in some instances, bankruptcy. Only licensed attorneys can advise taxpayers as to most 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.
The Criminal Investigation Function
Cases involving fraud or misrepresentations will often be referred to the criminal investigation function.
All other IRS functions stop 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.
However, you should know that an experienced tax attorney might be able to help ward off this type of problem before it arises.
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