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How Does the IRS Choose Whom to Audit?

The Internal Revenue Service (IRS) is the tax-collecting agency of the United States government. As part of its mandate, the IRS is tasked with enforcing the country’s tax laws, including auditing taxpayers to ensure they have complied with all applicable regulations. The IRS uses a variety of tools and techniques to select taxpayers for audit, including computer algorithms, random selection, and specific targeting based on various factors. In this essay, we will explore these methods and examine how the IRS chooses whom to audit.

One of the most common methods the IRS uses to select taxpayers for audit is through computer algorithms that analyze tax returns for unusual or suspicious patterns. The IRS uses sophisticated software programs that can detect anomalies in a taxpayer’s return, such as an unusually high number of deductions or a large discrepancy between reported income and reported expenses. These programs use a variety of statistical techniques to identify returns that are more likely to contain errors or omissions, and then flag them for further review.

Another method the IRS uses to select taxpayers for audit is through random selection. The IRS randomly selects a certain percentage of tax returns each year for audit. This method is used to ensure that even taxpayers who have complied with all tax laws are subject to audit, as it helps to deter potential tax cheats from underreporting their income or overstating their deductions.

In addition to computer algorithms and random selection, the IRS also uses specific targeting to select taxpayers for audit. Targeting involves selecting taxpayers who are more likely to have made errors or omissions on their tax returns, based on a variety of factors. Some of the factors the IRS considers when targeting taxpayers for audit include:

Income level:

Taxpayers with high incomes are more likely to be audited than those with lower incomes. This is because high-income taxpayers have more complex returns and are more likely to have made errors or omissions.

Type of income:

Certain types of income are more likely to be audited than others. For example, income from self-employment or rental properties is more likely to be audited than income from wages or salaries, as these types of income are more prone to errors or omissions.

Deductions and credits:

Taxpayers who claim a high number of deductions or credits are more likely to be audited than those who claim fewer deductions or credits. This is because the more deductions and credits a taxpayer claims, the more opportunities there are for errors or omissions.

Geographic location:

The IRS may target taxpayers in certain geographic locations based on a variety of factors, such as the prevalence of certain types of income or the history of noncompliance in the area.

Industry or occupation:

The IRS may target taxpayers in certain industries or occupations that are more likely to have made errors or omissions on their tax returns. For example, the IRS may target small business owners or real estate agents, as these professions often involve complex tax issues.

It is important to note that the IRS does not disclose its exact methods for selecting taxpayers for audit, as doing so could make it easier for tax cheats to avoid detection. However, the above factors are generally considered to be the most important ones that the IRS considers when choosing whom to audit.

Once the IRS has selected a taxpayer for audit, it will typically send a letter informing the taxpayer of the audit and requesting additional information or documentation. The audit may be conducted in person, through the mail, or through electronic communication, depending on the circumstances of the case. During the audit, the IRS will review the taxpayer’s returns and any additional information or documentation provided, and will determine whether any errors or omissions have been made.

If the IRS determines that the taxpayer has made errors or omissions on their tax returns, it may impose penalties and interest on the amount owed, in addition to requiring the taxpayer to pay any additional taxes.

What are the Most Common IRS Notices Received by Taxpayers?

As the tax-collecting agency of the United States government, the Internal Revenue Service (IRS) is responsible for enforcing the country’s tax laws. As part of this mandate, the IRS communicates with taxpayers through a variety of notices and letters, which inform taxpayers of issues with their tax returns, request additional information or documentation, and impose penalties or other consequences for noncompliance. In this essay, we will explore the most common types of IRS notices that taxpayers receive, and what they mean.

Notice CP2000

One of the most common IRS notices that taxpayers receive is the CP2000 notice. This notice is typically sent when the IRS identifies a discrepancy between the income reported on a taxpayer’s tax return and the income reported by third-party sources, such as employers or financial institutions. The notice will include the proposed changes to the taxpayer’s return, as well as any additional tax, penalties, or interest that the taxpayer may owe as a result of the discrepancy.

Taxpayers who receive a CP2000 notice should review the proposed changes and compare them to their own records to determine if they are accurate. If the proposed changes are incorrect or incomplete, the taxpayer should provide the IRS with any necessary information or documentation to support their position.

Notice of Intent to Levy

Another common IRS notice that taxpayers receive is the Notice of Intent to Levy. This notice is sent when the IRS has determined that a taxpayer owes taxes and has not paid them, despite multiple attempts to collect the debt. The notice informs the taxpayer of the IRS’s intent to seize their assets or garnish their wages in order to satisfy the debt.

Taxpayers who receive a Notice of Intent to Levy should take immediate action to resolve the debt, either by paying the full amount owed or by entering into a payment plan with the IRS. If the taxpayer believes that the debt is incorrect or has already been paid, they should contact the IRS immediately to dispute the debt.

Notice of Federal Tax Lien

A Notice of Federal Tax Lien is another common IRS notice that taxpayers may receive. This notice is sent when the IRS has filed a lien against the taxpayer’s property in order to secure payment of a tax debt. The notice informs the taxpayer that the lien has been filed and provides information about the process for releasing the lien.

Taxpayers who receive a Notice of Federal Tax Lien should take immediate action to resolve the debt, as a tax lien can have serious consequences for their credit rating and ability to obtain loans or credit. The taxpayer may be able to have the lien released by paying the debt in full or by entering into a payment plan with the IRS.

Notice of Deficiency

A Notice of Deficiency is sent by the IRS when the agency has determined that a taxpayer owes additional taxes, penalties, or interest based on a review of their tax return. The notice provides the taxpayer with the opportunity to dispute the proposed changes in court, either through a petition to the U.S. Tax Court or by paying the additional tax and then filing a claim for refund.

Taxpayers who receive a Notice of Deficiency should review the proposed changes and determine whether they are accurate. If the proposed changes are incorrect or incomplete, the taxpayer should contact the IRS immediately to dispute the debt.

Notice of Audit

A Notice of Audit is sent by the IRS when the agency has selected a taxpayer for a tax audit. The notice informs the taxpayer of the issues that the IRS will be reviewing and requests that the taxpayer provide additional information or documentation to support their tax return.

Taxpayers who receive a Notice of Audit should review the issues identified by the IRS and gather any necessary information or documentation to support their position. The taxpayer may also want to consult with a tax professional to ensure that they are prepared for the audit andNotice of Proposed Assessment

A Notice of Proposed Assessment is sent by the IRS when the agency has identified a tax deficiency, penalty, or interest that the taxpayer owes. The notice informs the taxpayer of the proposed amount owed and provides them with the opportunity to dispute the proposed assessment through an administrative appeal or by paying the amount owed and filing a claim for refund.

Taxpayers who receive a Notice of Proposed Assessment should review the proposed changes and determine whether they are accurate. If the proposed changes are incorrect or incomplete, the taxpayer should contact the IRS immediately to dispute the debt.

Notice of Penalty

A Notice of Penalty is sent by the IRS when the agency has imposed a penalty on the taxpayer for noncompliance with tax laws or regulations. The notice informs the taxpayer of the penalty amount and provides them with the opportunity to dispute the penalty through an administrative appeal or by paying the penalty and filing a claim for refund.

Taxpayers who receive a Notice of Penalty should review the penalty and determine whether it is justified based on their compliance with tax laws or regulations. If the penalty is incorrect or unjustified, the taxpayer should contact the IRS immediately to dispute the penalty.

Notice of Levy

A Notice of Levy is sent by the IRS when the agency has seized assets or garnished wages in order to satisfy a tax debt. The notice informs the taxpayer of the levy and provides them with information about their rights to appeal the levy or to request a release of the levy.

Taxpayers who receive a Notice of Levy should review the levy and determine whether it is justified based on their compliance with tax laws or regulations. If the levy is incorrect or unjustified, the taxpayer should contact the IRS immediately to dispute the levy.

Statutory Notice of Deficiency

A Statutory Notice of Deficiency is similar to a Notice of Deficiency, but is issued after the IRS has completed an audit and has proposed changes to the taxpayer’s tax return. The notice provides the taxpayer with the opportunity to dispute the proposed changes in court, either through a petition to the U.S. Tax Court or by paying the additional tax and then filing a claim for refund.

Taxpayers who receive a Statutory Notice of Deficiency should review the proposed changes and determine whether they are accurate. If the proposed changes are incorrect or incomplete, the taxpayer should contact the IRS immediately to dispute the debt.

In conclusion, the IRS communicates with taxpayers through a variety of notices and letters, which inform taxpayers of issues with their tax returns, request additional information or documentation, and impose penalties or other consequences for noncompliance. Some of the most common IRS notices that taxpayers receive include the CP2000 notice, the Notice of Intent to Levy, the Notice of Federal Tax Lien, the Notice of Deficiency, the Notice of Audit, the Notice of Proposed Assessment, the Notice of Penalty, the Notice of Levy, and the Statutory Notice of Deficiency. Taxpayers who receive any of these notices should take immediate action to review the proposed changes, determine whether they are accurate, and dispute any errors or inaccuracies with the IRS.

What Options are Available for Taxpayers Who Cannot Pay their Taxes Owed to the IRS?

When taxpayers are unable to pay the taxes they owe to the Internal Revenue Service (IRS), it can be a stressful and challenging situation. Fortunately, there are several options available for taxpayers who are unable to pay their taxes in full at the time they are due. In this article, we will discuss the different options available for taxpayers who cannot pay their taxes owed to the IRS.

Payment Plan

The IRS offers payment plans, which allow taxpayers to pay their taxes in installments over time. These plans are known as installment agreements. There are two types of installment agreements available:

Guaranteed Installment Agreements

These agreements are available for taxpayers who owe $10,000 or less and have filed all of their tax returns on time for the past five years. The IRS will generally accept a guaranteed installment agreement as long as the taxpayer agrees to pay the balance owed in full within three years.

Streamlined Installment Agreements

These agreements are available for taxpayers who owe $50,000 or less and can pay the balance owed within six years or the remaining statute of limitations, whichever is shorter. The taxpayer must agree to make monthly payments and to pay the balance owed in full before the statute of limitations expires.

To apply for an installment agreement, taxpayers can use the IRS Online Payment Agreement application or fill out Form 9465, Installment Agreement Request.

Offer in Compromise

An Offer in Compromise (OIC) is an agreement between the taxpayer and the IRS to settle the taxpayer’s tax debt for less than the full amount owed. To be eligible for an OIC, the taxpayer must demonstrate that they cannot pay the full amount owed, even through an installment agreement, and that paying the full amount would cause financial hardship.

There are three types of Offers in Compromise available:

Doubt as to Liability: This type of OIC is available if there is doubt that the tax owed is correct.

Doubt as to Collectibility: This type of OIC is available if there is doubt that the taxpayer can pay the full amount owed.

Effective Tax Administration: This type of OIC is available if the taxpayer can pay the full amount owed but doing so would cause financial hardship.

To apply for an OIC, taxpayers can use the IRS Online Offer in Compromise Pre-Qualifier tool or fill out Form 656, Offer in Compromise.

Currently Not Collectible: If a taxpayer is unable to pay their taxes owed and does not have the ability to enter into an installment agreement or an OIC, they may be eligible for Currently Not Collectible (CNC) status. CNC status means that the IRS will temporarily suspend collection actions, such as levies and garnishments, because the taxpayer does not have the ability to pay.

To be eligible for CNC status, the taxpayer must demonstrate that paying the taxes owed would cause financial hardship. The IRS will review the taxpayer’s financial situation, including their income, expenses, and assets, to determine whether they qualify for CNC status.

To request CNC status, taxpayers can call the IRS or send a written request to the IRS explaining their financial situation and inability to pay.

Bankruptcy

In some cases, taxpayers who cannot pay their taxes owed may be able to discharge their tax debt through bankruptcy. To do so, the taxpayer must file for bankruptcy and meet certain criteria, such as having tax debts that are more than three years old and having filed tax returns for the past two years.

Bankruptcy is a serious decision with long-lasting consequences, so taxpayers should consult with a qualified bankruptcy attorney before pursuing this option.

Partial Payment Installment Agreement

A Partial Payment Installment Agreement (PPIA) is a payment plan that allows taxpayers to pay a portion of their tax debt in installments over time. This option is similar to an installment agreement but differs in that the amount owed is not fully paid off by the end of the payment plan. The remaining balance is forgiven by the IRS. This option is available for taxpayers who do not qualify for an OIC or CNC status and cannot pay their full tax debt.

To apply for a PPIA, taxpayers can use the IRS Online Payment Agreement application or fill out Form 9465, Installment Agreement Request.

Request for Penalty Abatement

In addition to owing taxes, taxpayers may also face penalties and interest for not paying their taxes on time. If the taxpayer has a reasonable cause for not paying their taxes on time, they may be able to request a penalty abatement.

Reasonable cause can include circumstances such as:

Serious illness or death of the taxpayer or a close family member

Natural disasters or other unforeseeable events that caused a financial hardship

Errors or delays caused by the IRS

To request a penalty abatement, taxpayers can call the IRS or send a written request to the IRS explaining their situation.

Conclusion

Taxpayers who cannot pay their taxes owed have several options available to them. These options include installment agreements, offers in compromise, currently not collectible status, bankruptcy, partial payment installment agreements, and requests for penalty abatement. Each option has its own requirements and eligibility criteria, so taxpayers should carefully review their options and consult with a qualified tax professional to determine the best course of action for their specific situation.

What is an IRS Offer-in-Compromise, and How Does the IRS Determine Who Qualifies?

An Offer-In-Compromise (OIC) is an agreement between the Internal Revenue Service (IRS) and a taxpayer that allows the taxpayer to settle their tax debt for less than the full amount owed. The OIC program was created to provide taxpayers with a fresh start when they are unable to pay their taxes in full and to ensure that the IRS collects as much of the debt as possible.

While an OIC may seem like an attractive option for taxpayers struggling with tax debt, it is not a solution for everyone. The IRS has strict guidelines and eligibility requirements that must be met before an OIC is accepted.

In this article, we will discuss what an OIC is, how it works, and how the IRS determines who qualifies for an OIC.

What is an IRS Offer-In-Compromise?

An OIC is a legal agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed. The IRS may accept an OIC if they believe it is the most that they can expect to collect from the taxpayer. Acceptance of an OIC requires the taxpayer to agree to certain conditions, such as:

Paying the agreed-upon amount in full and on time

Complying with all tax laws for a set period after the OIC is accepted

Providing accurate and complete information to the IRS

If the taxpayer meets all of these conditions, the IRS will forgive the remaining tax debt and release any liens or levies against the taxpayer.

How Does the IRS Determine Who Qualifies for an OIC?

The IRS uses a formula to determine who qualifies for an OIC and how much the taxpayer must pay. The formula considers two main factors: the taxpayer’s ability to pay and the amount owed.

Ability to Pay

The IRS will first determine the taxpayer’s ability to pay by evaluating their income, expenses, and assets. The IRS will consider the taxpayer’s monthly income, including wages, self-employment income, and other sources of income, as well as their monthly expenses, including housing, food, transportation, and other necessary living expenses.

The IRS will also consider the value of the taxpayer’s assets, including their home, car, bank accounts, and investments. The IRS will use this information to calculate the taxpayer’s Reasonable Collection Potential (RCP), which is the amount that the IRS believes the taxpayer can afford to pay towards their tax debt.

Amount Owed

The IRS will also consider the amount of tax debt owed by the taxpayer. If the amount owed is less than the taxpayer’s RCP, the IRS will generally not accept an OIC.

Calculating the Offer Amount

The offer amount is the amount that the taxpayer offers to pay the IRS to settle their tax debt. The offer amount is calculated by subtracting the taxpayer’s RCP from the amount of tax debt owed.

The IRS has specific guidelines and requirements for calculating the offer amount. The offer amount must be equal to or greater than the taxpayer’s RCP, and it must be paid in full within a set period, usually within two years.

The IRS may also require the taxpayer to make a lump-sum payment of a portion of the offer amount upfront or to make payments over the course of the OIC agreement.

Eligibility Requirements for an OIC

To be eligible for an OIC, taxpayers must meet certain requirements set forth by the IRS. The requirements include:

Taxpayer Must be Current on All Tax Filings and Payments

The taxpayer must have filed all of their required tax returns and paid any taxes owed for the current year.

Taxpayer Must Not Be in Bankruptcy

If the taxpayer is currently in bankruptcy proceedings, they are not eligible for an OIC. Once the bankruptcy is complete, the taxpayer may be eligible for an OIC.

Taxpayer Must Not be in an Open Audit

If the taxpayer is currently under audit by the IRS, they are not eligible for an OIC. The taxpayer must wait until the audit is complete before applying for an OIC.

Taxpayer Must Submit All Required Forms and Documentation

To apply for an OIC, the taxpayer must submit all required forms and documentation to the IRS, including Form 656, Offer in Compromise, and Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC), Collection Information Statement for Businesses.

Taxpayer Must Meet Certain Financial Hardship Criteria

The taxpayer must demonstrate that paying the full amount of their tax debt would cause a financial hardship. Financial hardship criteria may include:

The taxpayer is unable to pay their basic living expenses

The taxpayer has significant medical expenses

The taxpayer has experienced a significant loss of income or property due to a natural disaster, theft, or other unforeseen event.

If the taxpayer meets all of these requirements, they may be eligible for an OIC. However, even if the taxpayer meets all of the eligibility requirements, the IRS may still reject their OIC application.

Reasons for Rejection of an OIC

The IRS may reject an OIC application for a variety of reasons, including:

The Offer Amount is Too Low

If the offer amount is significantly lower than the taxpayer’s RCP, the IRS may reject the offer. The IRS will generally only accept an OIC if it is the most that they can expect to collect from the taxpayer.

The Taxpayer Has Not Provided Accurate or Complete Information

If the taxpayer has not provided accurate or complete information to the IRS, the IRS may reject the OIC application.

The Taxpayer Has Not Filed All Required Tax Returns

If the taxpayer has not filed all required tax returns, the IRS may reject the OIC application.

The Taxpayer Has Not Paid Current Taxes

If the taxpayer has not paid all taxes owed for the current year, the IRS may reject the OIC application.

The Taxpayer Has Not Met the Terms of a Previous OIC

If the taxpayer has previously entered into an OIC agreement with the IRS and has not met the terms of that agreement, the IRS may reject the new OIC application.

Conclusion

An Offer-In-Compromise (OIC) can be an effective way for taxpayers to settle their tax debt with the IRS for less than the full amount owed. However, the IRS has strict eligibility requirements and guidelines for accepting an OIC.

To determine if an OIC is the right option for their situation, taxpayers should consult with a tax professional or seek advice from the IRS. The IRS has resources available to help taxpayers navigate the OIC process, including online tools, publications, and free tax clinics.

How Can a Las Vegas CPA Assist Taxpayers Who Have Tax Issues & Need Tax Relief?

A Las Vegas Certified Public Accountant (CPA) can assist taxpayers who have tax issues in a variety of ways. These professionals have expertise in tax law, accounting, and financial management, and can provide guidance and support to help taxpayers navigate complex tax issues.

Here are some ways that a Las Vegas CPA can assist taxpayers who have tax issues:

Provide Tax Planning and Preparation Services

A Las Vegas CPA can provide tax planning and preparation services to help taxpayers minimize their tax liability and avoid tax problems in the future. They can help taxpayers identify deductions and credits they may be eligible for and advise them on tax-saving strategies.

Represent Taxpayers Before the IRS

If a taxpayer is facing an IRS audit or other tax-related issue, a Las Vegas CPA can represent them before the IRS. They can communicate with the IRS on behalf of the taxpayer, negotiate payment plans or settlements, and help resolve disputes.

Offer Tax Resolution Services

If a taxpayer has a tax debt with the IRS, a Las Vegas CPA can offer tax resolution services to help them resolve the debt. This may include negotiating an Offer in Compromise (OIC) with the IRS, setting up an installment agreement, or helping the taxpayer qualify for Currently Not Collectible (CNC) status.

Provide Financial Planning and Business Consulting Services

A Las Vegas CPA can also provide financial planning and business consulting services to help taxpayers manage their finances and avoid tax problems in the future. They can advise on budgeting, cash flow management, and tax planning strategies to help taxpayers achieve their financial goals.

Offer Tax Education and Training

A Las Vegas CPA can offer tax education and training to help taxpayers understand their tax obligations and avoid common tax problems. They can provide workshops, seminars, and other training programs to help taxpayers learn about tax law and best practices for managing their taxes.

Overall, a Las Vegas CPA can be a valuable resource for taxpayers who have tax issues. They can provide expert guidance, representation, and support to help taxpayers navigate complex tax situations and achieve their financial goals.