The IRS has a lot of power to investigate whether or not taxpayers accurately fill out their federal income tax return. This broad power has been granted to the IRS because tax reporting is essentially done on the honor system, in that each taxpayer fills out his return as he sees fit. Therefore, if the IRS did not have the ability to closely examine each return, it would be too easy for fraudulent or inaccurate returns to be filed, resulting in a broken tax collection system.
While the IRS’s investigative power is vast, it is not without limits set by the Internal Revenue Code (IRC), the Constitution, and other sources of law. This chapter will describe what the IRS can and cannot do in determining whether your return needs to be modified, thereby affecting your tax liability.
Under the IRC, the IRS has the power to determine the accuracy of a tax return by the following methods:
- Examining records
- Taking testimony under oath
- Issuing administrative summonses to compel evidence, if necessary
- Generally, the IRS initially will request that you voluntarily share any information it is seeking. The request is made through an information document request (IDR), which lists a description of all the documents the IRS needs from the taxpayer. There is a wide array of documents the IRS might request from you, including but not limited to bank statements, bills, employment and salary information, proof of other sources of income, and business records. More often than not, taxpayers comply with these requests, if possible, hoping to end the audit as quickly as possible.
However, you are not required to disclose any information simply at the request of the IRS. If there is certain information (such as records or testimony) you choose not share for any reason, the IRS must issue an administrative summons to compel you to produce said information. The IRS cannot enforce a summons on its own, though; it must get an order from the federal court to have you produce the information.
The Supreme Court has listed four necessary criteria for when a court should grant an enforcement order for an administrative summons. If any of the following requirements are not met, the summons should not be granted and you should not be compelled to produce the information in question:
The IRS investigation will be conducted pursuant to a legitimate purpose.
- The inquiry may be relevant to the legitimate purpose.
- The information sought is not already within the IRS’s possession.
- The administrative steps required by the IRC have been followed; in particular, that the IRS, after investigation, has determined the investigation to be necessary and has notified the taxpayer in writing of said necessity.
- The four requirements listed above are not difficult for the IRS to meet while looking for information during an audit. The federal court has simplified these four requirements to essentially a test of “whether the inspection sought would throw light upon the correctness of the taxpayer’s returns.” Therefore, if the IRS lacks information that it feels would further its investigation as to the accuracy of a tax return, it will likely be able to compel you to share said information.
If the federal court issues an enforcement order of an administrative IRS summons, you must comply with the summons. Refusal to comply can have grave consequences, such as contempt proceedings or even criminal prosecution.
If you receive an IRS Audit Letter or IRS Summons, call us immediately at 877-TAX-JAMS.