What Exactly Is the Internal Revenue Service? (How Does Auditing Work)

 A U.S. government agency called the Internal Revenue Service (IRS) is in charge of collecting taxes and enforcing tax regulations (for example, the wash sale rule).

The agency was founded in 1862 by then-President Abraham Lincoln and works under the jurisdiction of the United States Department of the Treasury. Its principal objective is to collect individual income taxes and employment taxes. In addition, the IRS is in charge of the corporation, gift, excise, and inheritance taxes.

What Exactly Is the Internal Revenue Service? (How Does Auditing Work)

Commissioner Charles P. Rettig, who was appointed to the position by then-President Donald Trump in 2018, will lead the IRS as of November 2021.

He is in charge of a staff of over 80,000 people and a budget of more than $11 billion.

Rettig, a New York University graduate, is the first commissioner since the 1990s to come from a background in tax law rather than corporate management.

The Internal Revenue Service and Its Functions

The IRS, headquartered in Washington, D.C., is in charge of taxation for all American people and businesses. It processed over 240 million income tax returns and other forms for fiscal year (FY) 2020 (October 1, 2019, through September 30, 2020). During that time, the IRS received almost $3.5 trillion in income and provided over $736 billion in tax refunds (including $268 billion in COVID-19 pandemic economic effect payments).

Because of advances in computer technology, software applications, and secure internet connections, individuals and organizations may now submit income tax forms online. Since the IRS launched the program, the number of income tax returns submitted electronically has gradually increased, and the vast majority are now done so. During the fiscal year 2020, roughly 94.3% of all individual returns were e-filed.

In 2001, just approximately 40 million of almost 131 million returns, or about 31%, utilized it.

The average direct deposit amount was $2,851 as of October 2021, and just over 112 million taxpayers got their refunds by direct deposit as opposed to a conventional paper check.

Audits and the IRS

Every year, as part of its enforcement mandate, the IRS audits a subset of income tax returns. The department audited 509,917 tax returns in the fiscal year 2020. This equates to 0.63% of individual income tax returns and 1.0% of corporate income tax returns. Around 72.6% of IRS audits were conducted by mail, while 27.4% were conducted in person.

Following a high in 2010, the number of audits has slowly decreased each year.

• The amount of cash set aside for tax enforcement has decreased by around 30% between 2010 and 2020, implying that even fewer audits are likely.
• The reasons for an IRS audit vary, but some criteria may enhance the likelihood of an audit. The most important of these is increased revenue.
• The audit rate for all individual income tax returns in 2020 was 0.63%. However, it was 9.8% for those earning more than $10 million.

Owning your own company also entails more risks. Non-filers of Schedule C, the form for the self-employed, who earned between $200,000 and $1 million in 2018, had a 0.6% probability of being audited, compared to those who did, who had a 1.4%—roughly double—chance.

Additional red flags for an audit include underreporting income, overclaiming deductions (particularly those tied to a company), making abnormally large charity contributions in comparison to income, and claiming losses on rental real estate.

Every year, no one characteristic decides who faces an IRS audit and who does not.

Contacting the IRS: How to Do It

Via Mail

The IRS can be reached in a variety of ways. If you are submitting a tax return by mail, the address you should provide is determined by your state of residence and whether or not you expect a tax refund. The IRS website contains a list. 

If you are mailing an application or a payment, the IRS website provides a list of mailing addresses according to your needs.

Calling or Going Online

There are other toll-free lines for companies and other reasons, as well as (800) 829-1040, which is available Monday through Friday from 7 a.m. to 7 p.m. Eastern time (ET) for anyone who needs assistance.

However, reaching a real person might be difficult. CPA Amy Northward has deciphered the procedure on her blog, and it entails a lengthy sequence of replies to automated queries. It has been checked for accuracy by Investopedia.

Use the Interactive Tax Assistant on the IRS website for online assistance with a range of questions.

Person to person

At your nearby IRS office, you can also call to make a personal appointment. You may find the location and phone number of the IRS office by entering your ZIP code on the website's locator page.

Making Tax Payments

The IRS accepts payments made by debit or credit cards, electronic bank transfers, and other payment methods. Other options include a same-day bank wire or an electronic money withdrawal when you file your return electronically. To utilize the Electronic Federal Tax Paying System, you must first enroll in it. If you are a business or are making a sizable payment, you can use it.

You have additional options if you do not pay electronically. You can send a personal check, cashier's check, or money order by mail. Make it payment to "U.S. Treasury" and make sure it includes the information listed below:

• Your full name and mailing address
• Phone number during the day
• Social Security number (if filing a combined return, the SSN appears first) or employment identification number
• The fiscal year
• Tax form or notification number related

If you want to pay in cash, you can, but never send cash over the mail. Instead, contact (844) 545-5640, Monday through Friday, 7 a.m. to schedule an in-person appointment at an IRS Taxpayer Assistance Center. to 7 p.m. ET. You should contact us 30 to 60 days before the payment date.

The following businesses accept cash payments from customers: 7-Eleven, ACE Cash Express, Casey's General Stores, CVS Pharmacy, Family Dollar, Dollar General, Walgreens, Pilot Flying J, Speedway, Kum & Go, Stripes, Royal Farms, GoMart, Kwik Trip. This entails first receiving a payment number via email from the IRS, which you must submit when completing your payment. Each payment is limited to $1,000.

When did the IRS get its start?

President Abraham Lincoln founded the IRS in 1862 when he introduced an income tax to fund the Civil War. The tax was repealed in 1872, reinstated in 1894, and deemed illegal in 1895 by the United States Supreme Court. The federal income tax was re-established by the 16th Amendment to the United States Constitution in 1913.

How should I file my tax return?

It is preferable to submit your taxes electronically, which was done by 94.3% of taxpayers in 2020. You can still file a paper return by mail, but doing so will cause your refund to be delayed.

What is the best way for me to pay my taxes?

Electronic transfers using a debit or credit card or directly from your bank account are the most often used method of paying taxes. You can, however, pay by check or money order, or you can pay in person with cash if you prefer.

Is it probable that the IRS will audit my taxes?

Individual tax returns were audited at a rate of 0.63% in 2020. However, your chances improve if you make a lot of money. The percentage for those earning $10 million or more in 2020 was 9.8%. However, no one criteria predict whether or not you will be audited by the IRS.