The Internal Revenue Service is a part of the Department of the Treasury. The functions that interact most frequently with members of the public are the Service Center, Collection, Examination, and Criminal Investigation. The personnel and duties of each of these functions are summarized in a very cursory fashion below.
When returns are filed, be they income, payroll, estate or gift tax returns, they are processed by an IRS Service Center. During processing, the Service Center determines that the returns are signed, complete based on information returns filed the IRS from other sources, and mathematically accurate. If there are any problems in this regard, the return will either be rejected and sent back to the taxpayer who filed it or a notice of proposed adjustment will be sent to the taxpayer. If there are no problems, then the tax reflected on the return will be assessed to the taxpayer’s account (i.e. entered as a liability in the IRS database) and a determination will be made whether the account has been overpaid, in which case a refund will be generated, or underpaid, in which case a notice of assessment and demand for payment will be sent. When you receive computer generated notices from the IRS, they most likely originate from a Service Center. It is important that you read any notice you receive and respond timely and appropriately. Interactions with the Service Center are typically with Automatated Collection System Support employees (“ACS”). If you find yourself speaking with an ACS employee, you should make a note of their name and employee number, the date of the conversation, a summary of what was discussed, and any deadline for taking action.
If a filed return shows a tax due, or if a tax becomes due as the result of an audit, then the IRS Service Center sends a series of notices demanding payment. The final notice gives the taxpayer an opportunity to request a collection due process hearing (“CDP”) to propose a collection alternative before the IRS takes enforced collection action. IRS Revenue Officers (“ROs”) are employees of the Collection function who are responsible for collecting tax delinquencies. Enforced collection tools that ROs can use include filing a notice of federal tax lien (“NFTL”), serving a financial account on a financial institution or a wage levy on an employer seizing account balances or wages, seizing and selling assets, including personal residences, retirement accounts, and even Social Security benefits, and filing suit and obtaining a judgment. Collection alternatives include offers-in-compromise (“OICs”), installment agreements (“IAs”), having an account classified as currently not collectible (“CNC”), or in some cases getting a discharge or payment plan in a bankruptcy proceeding. Generally, the IRS has 10 years to collect a tax (the collection statute expiration date or “CSED”), but there are many exceptions to this general rule. Depending on the facts, you may have the right for an administrative or judicial appeal.
A very small percentage of returns are selected for examination, also knowns as audits. Audits can result from a number of factors, including large, unusual or questionable items (“LUQs”) on a return, returns with high discriminant function (“DIF”) scores, IRS compliance programs such as abusive return preparer program, returns of taxpayers related to other taxpayers already being audited, information returns filed with the IRS including currency transaction reports (“CTRs”) or suspicious activity reports (“SARs”) filed by banks, informants, and for many other reasons. Audits or examinations are conducted by Office Auditors, who audit primarily a select number of entries on wage earner returns, or Field Agents, who audit returns of businesses or wealthy individuals at their business locations. During the course of an audit an examiner will issue information document requests (“IDRs”) requesting documents and/or information relevant to the examination. These IDRs need to be reviewed and responded to timely and appropriately. It is very important to ensure that all privileges (including attorney-client, accountant-client, or self-incrimination) are preserved. At the conclusion of the audit, the examiner will either issue a no-change letter or a revenue agent’s report (“RAR”) proposing adjustments. As a general rule, the IRS has 3 years to assess a tax (the “ASED”), but as with the CSED, there are many exceptions. Statutes of limitations will be covered in greater detail in future posts. Taxpayers typically have the right to an administrative appeal by filing a timely protest with the IRS Office of Appeals, and/or judicial review by filing a petition with the U.S. Tax Court or a U.S. District Court or the US Court of Federal Claims. The jurisdiction of these various courts as well as the factors relevant to forum selection are well beyond the scope of this post, but will be covered in future posts.
Finally, in rare but exceptionally dire circumstances, a taxpayer may be contacted by a Special Agent with the IRS Criminal Investigation Division. Except for stating the obvious that no one should meet with or speak to a Special Agent without consulting with an experienced attorney, an in depth discussion of IRS criminal statutes is beyond the scope of this post, but will be covered in future posts.
As noted, the purpose of this post is merely to provide a cursory overview of various functions within the IRS. If you have any questions about a specific matter, please feel free to contact us at https://www.kauffgroup.com/contact-us/
The Kauffman Group is a law firm, and an accounting firm (the “Kauffman Firms”) of which Stephen P. Kauffman (“Steve”) is a founder and principal. Steve has been practicing law for over 30 years. His law firm, Skeen & Kauffman, LLP is owned by Steve and his law partner, Jim Skeen. In 2019 Steve and his accounting partners, John and Soo Kim and Shirley Huang formed Kauffman Kim, LLP. In this weblog Steve intends periodically to post articles about Tax Controversy, Commercial Litigation, and Business Transactions, the areas that he knows best. His intended audience is attorneys, CPAs, business owners and Business managers. Although he will exercise his best efforts to make his posts as accurate and informative as possible, by using and accessing this site you agree that the information provided is not intended to be professional advice, and may not be relied upon for that purpose. Furthermore, no attorney-client or accountant-client relationship will be created either of the Kauffman firms unless and until such time as a written fee agreement is signed by Steve.