Tax Examination and Appeals Series – The Internal Revenue Service’s Basic Organization, Authority, and Sources
This is the first article in a series of articles on tax examination and appeals. The goal of the series is to provide an overview of tax examinations and appeals, provide an overview of what happens at each stage of tax examinations and appeals, and provide tips how to handle each stage.
Under the federal self-assessment system of taxation, every taxpayer liable for any tax (or the collection of any tax) imposed by the internal revenue laws is required to file a return on forms prescribed by the Internal Revenue Service (“IRS”), and to show on those forms information from which the tax liability can be determined. The IRS is responsible for the administration and enforcement of the revenue laws. In order for the IRS to carry out this duty, Congress has granted the IRS very broad authority to “examine any books, papers, records, or other data which may be relevant” to determine the correctness of any tax return, or the tax liability of any person.
Structure and Organization of the IRS
The IRS, which is an organization within the Department of Treasury, administers a nationwide examination program designed to determine the accuracy of tax returns and promote the highest possible degree of voluntary compliance with the tax laws. The IRS has restated its mission as follows:
To provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.
The IRS is organized into four organizational units: (1) Wage and Investment (“W&I”), (2) Small Business/Self Employed (“SB/SE”), (3) Large Business and International (“LB&I”), and (4) Tax Exempt and Government Entities (“TE/GE”). The IRS has 10 campuses, each of which works a nationwide inventory of returns.
(b) Structure of the IRS
(1) Commissioner of Internal Revenue
The office of the Commissioner of Revenue (“Commissioner”) is in the Department of Treasury. The Commissioner is appointed by the President, with the advice and consent of the Senate. The Commissioner must have a demonstrated ability in management. The Commissioner is appointed to a five-year term, and may be reappointed for more than one term.
The Commissioner serves under the direction of the Secretary of the Treasury and, to some extent, the IRS Oversight Board. The Commissioner is responsible for the administration and enforcement of the internal revenue laws pursuant to the delegation of duties and powers from the Secretary, including the power to administer, manage, conduct, direct, and supervise the execution and application of the internal revenue laws or related statutes and tax conventions to which the US is a party, to exercise the IRS’ final authority concerning substantive interpretation of the tax laws, and to recommend to the President a candidate for Chief Counsel.
The Commissioner is also responsible for ensuring that IRS employees are familiar with and act in accord with taxpayer rights, including: (1) the right to be informed, (2) the right to quality service, (3) the right to pay no more than the correct amount of tax, (4) the right to challenge the position of the IRS and be heard, (5) the right to appeal a decision of the IRS in an independent forum, (6) the right to finality, (7) the right to privacy, (8) the right to confidentiality, (9) the right to retain representation, and (10) the right to a fair and just tax system.
(2) Chief Counsel
The President has the authority, with the consent of the Senate, to appoint a Chief Counsel of the IRS. The Chief Counsel is the chief law officer of the IRS and has such duties as may be prescribed by the Secretary of Treasury, including (1) to serve as the legal advisor to the Commissioner and his or her officers and employees; (2) to furnish such legal opinions as may be required in the preparation and review of rulings and technical advice memoranda and the performance of other duties delegated to the Chief Counsel; (3) to prepare, review, or assist in the preparation of proposed legislation, treaties, regulations, and Executive Orders relating to laws affecting the IRS; (4) to represent the Commissioner in cases before the Tax Court; and (5) to determine what civil actions should be brought in the courts under the law affecting the IRS and to prepare recommendations to the Justice Department for the commencement of such actions.
(3) IRS Oversight Board
The IRS Oversight Board consists of nine members, including the Commissioner, the Treasury Secretary, and seven board members, including one who represents federal employees. The IRS Oversight Board is responsible for overseeing the operation of the IRS and has the authority to recommend candidates for Commissioner to the President. The IRS Oversight Board is to provide input and review in the areas of strategic plans, operational plans, management, budget, and taxpayer protection. The IRS Oversight Board also ensures the proper treatment of taxpayers by the IRS.
(4) Joint Committee on Taxation
The Joint Committee on Taxation (“Joint Committee”) is not part of the IRS and consists of five members of the Senate Committee on Finance (three from the majority and two from the minority, to be chosen by the Committee on Finance); and five members from the House Committee on Ways and means (three from the majority and two from the minority, to be chosen by the Committee on Ways and Means).
The Joint Committee investigates the operation and effects of the federal system of internal revenue taxes; investigates the administration of such taxes by the IRS or any executive department, establishment, or agency charged with their administration; investigates measures and methods for the simplification of such taxes, particularly the income tax; publishes for public examination and analysis, proposed measures and methods for the simplification of such taxes; reports from time to time, to the Committee on Finance and the Committee on Ways and Means, and, in its discretion, to the Senate or House of Representatives, or both, the results of its investigations, together with such recommendations as it may deem advisable; and reports at least once each Congress, to the Committee on Finance and the Committee on Ways and Means on the overall state of the Federal tax system, with recommendations with respect to possible simplification proposals and other matters relating to the administration of the Federal tax system.
(c) Operating Divisions of the IRS
(1) Wage and Investment Division (“W&I”)
The largest division of the IRS, the W&I division has the responsibility for examining returns of taxpayers with wage and investment income. This division processes returns that are generally simple, reporting wage and investment income only, almost all of which income is reported to the IRS by third parties. Since most wage earners receive refunds, and most have their tax paid by way of withholding by their employers during the tax year, compliance issues concerning these taxpayers include whether they have properly claimed the number of exemptions, credits, filing status, and deductions.
(2) Small Business/Self Employed (“SB/SE”)
The SB/SE division includes fully or partially self-employed individuals and small businesses (those with assets less than $10 million). This includes taxpayers that also file schedules C, E, or F, as well as partnerships, S corporations, and C corporations. This division also includes estate and gift taxpayers, fiduciary returns, and individual taxpayers with international returns.
(3) Large Business and International (“LB&I”)
The LB&I division includes all corporations, subchapter S corporations and partnerships with assets greater than $10 million, as well as certain high net worth individuals.
(4) Tax-Exempt and Government Entities
The Tax-Exempt and Government Entities division includes exempt organizations, employee plans, and state and local governments.
Appeals is the dispute resolution forum of the IRS. Its mission is “to resolve controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the IRS. Appeals seeks to accomplish this mission by considering taxpayer appeals, holding conferences, and negotiating settlements. Appeals generally is the last administrative opportunity for both the taxpayer and the IRS to resolve a dispute without litigation.
2. Sources of IRS Procedural Rules
There are two primary sources of the IRS’s procedural rules. First, there is the relevant sections of the Code of Federal Regulations. These regulations are amended from time to time to reflect changes to the IRS’ rules. The second primary source is the Internal Revenue Manual (“IRM”). The IRM provides essential information relating to the organization, administration, and operation of the IRS. The IRS also publishes, in the form of revenue procedures, instructions and guidance to taxpayers relating to matters such as obtaining letter rulings, competent authority assistance, and advance pricing agreements. Many revenue procedures are updated at least annually.
3. Overview of Examination Procedures and Policies
(a) Examination of Tax Returns
Most individual and corporate returns are filed with one of the 10 Campuses, where the Campuses’ Examination Branch performs preliminary examinations. The returns are checked for mathematical and clerical errors, and checked against information returns by persons making various payments includible in gross income. All campus examinations are conducted either by telephone or correspondence, and generally involve simple and clear errors and corrections.
Where it is determined that adequate examination of a return can be completed only by the appropriate operating division, i.e., W&I, SB/SE. etc., the return is assigned to that divisions Examination function for office or field examination as may be appropriate. Where the questioned item or items can be resolved between the taxpayer and Examination, the case will be closed based on whatever determination is made by Examination. If not, the taxpayer will be mailed a 30-Day Letter setting forth the determination of Examination.
After receiving the notice of the examination, it is important for the taxpayer to have reviewed their tax return in detail, review the items listed in the notice, and have the records to support the information and positions taken on the tax return. Having the records available at the start of the Examination will provide the taxpayer with the best opportunity to resolve the examination quickly and most favorably to the taxpayer. It is also important to ensure all positions are supportable so that the taxpayer does not prolong the audit where the positions in question have no basis. It is important to work with an experienced tax practitioner to guide the taxpayer through this process, and it is best to get the tax practitioner involved at the beginning.
(b) Appeal of Examination Determination
A taxpayer may generally obtain a review within the IRS of any determination under the appeal procedures. Appeals will be discussed in more detail in a later article of this series.
« Taking Full Advantage of the 2017 Tax Cuts and Jobs Act Key Points to Discuss With Your Clients New to Incapacity Planning for Clients? »