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Finance | What is the Internal Revenue Service (IRS)? Explore Tax Return and Audit Procedure

What is the Internal Revenue Service (IRS)? Explore Tax Return and Audit Procedure

Internal Revenue Service

Whenever the word “Audit” pops up, individuals tend to break out in a sweat, but having a basic understanding of what does IRS stand for or what is an internal revenue service will give you more clarity on taxation regulations and the importance of auditing, and comfort you with the procedure.  

There are a few audits that are not a big deal, but you will come across others that can seem troublesome at times, that’s where tax professionals or CPAs step in to solve your financial queries. Once you discover the type of tax audit that has been conducted by the IRS you will know or have charity on the things involved in the audit or purpose of the audit. 

Though you must be wondering about the IRS conducting an audit, there could be many reasons - one of the common errors like Math mistakes with calculating taxes, hindrance of your income, or overkilling your round numbers to get a deduction in your tax, can lead you to undergo audit procedure. 

Are you keen to learn more about the Internal Revenue Service? Stay with us, we will walk you through the insights of the audit procedure and solve your queries like What is internal revenue service? How do IRS audits work? And Why was the IRS created? 

  • What is Internal Revenue Service?
  • What does IRS stand for
  • Why was the IRS created?
  • 3 vital elements of the IRS sector
  • How to contact with IRS
  • Why does the IRS audit individuals?
  • Bottom Line

What is Internal Revenue Service?

When it comes to managing finances, people are perplexed by what is Internal Revenue Service. Is the IRS a government agency? Don’t worry, we’ve got you covered!

The Internal Revenue Service is the government agency that has a major role for administering tax laws and to collect regular federal taxes from USA individual citizens and corporate or businesses.  However, the IRS is considered a branch of the US Treasury Department and serves as an assurance that the Treasury Secretary's responsibilities under the Internal Revenue Code Act are met. 

The act was introduced in 1862, and agencies also look after the gifts, excise, estate taxes, and more. The role of the IRS is to conduct audits regularly to ensure taxpayers comply with the tax laws in the USA. In short, the IRS double-checks your accounts or numbers to make sure individuals do not have any dispensaries in their returns. 

At times, you will observe state authorities conducting tax audits. If you are telling the truth in your audit examinations and have all the proof then you do not need to worry. Until and unless you pay your taxes with the right method and do not hide any of your amount earned, nothing is frightening about state or IRS audits. However, individuals who have been hiding their income from the system might have reason to be concerned.

Key Factors to Remember about IRS Audits

  • If you are wondering how the IRS works? Mostly its work involves individual and corporate taxes. 
  • Taxpayers can easily file their taxes electronically, via mail, or in person.
  • The IRS can randomly opt to conduct audits with taxpayers or when they find any irregularities in the number of tax returns. 
  • Taxpayers can contact the IRS by taking an appointment via mail, phone, or in person. 
  • Understanding different types of audits will help you manage your taxes easily.
  • In the case of office audits, often IRS officers ask for an in-person interview to understand and evaluate certain items on your tax returns. 

What Does the IRS stand for?

IRS stands for Internal Revenue Service, an examination or review session to evaluate your accounts information to make sure you are reporting things correctly when you file taxes, whether you are an individual or a corporate business. 

IRS's major role is to assist to meet large taxpayer complaints with tax laws in the USA. On the other hand, to ensure the other half of minor taxpayers pay their fair taxes on time without cheating the tax system. 

Why was the IRS Created?

To understand how do IRS audits work? Why was the IRS created?  let us walk you through the history of the introduction to the IRS back in 1862. In 1933, Congress had the power in its hands to enact income tax laws, 

Covering the way of the Bureau of Internal Revenue. Later, the agency that went through the process of changing its name to the Internal Revenue Service occurred in the 1950s. 

Based in Washington DC, the mission of the agency remains to enforce tax laws and collect federal tax from taxpayers in the United States of America - corporations and individuals. You must be wondering, how do IRS audits work? The procedure is performed by collecting and proceeding with annual tax returns from taxpayers. If IRS officers identify any unusuality in any of the return files, then they will conduct a thorough audit of the individuals or business. 

Additionally, the goal of the IRS is to make sure all the citizens of the USA understand how the federal tax laws work, including with gifts, excise taxes, and estates to save them from surprises if a random audit occurs with them. 

Vital Factors of IRS Federal Taxation

According to IRS, every taxpayer in the USA must be aware of a few regulations and federal tax laws like

  • US taxpayers must meet tax laws that were passed by Congress. 
  • Taxpayers must understand and must fulfill their tax obligations. 
  • IRS was designed to assist taxpayer complaints and make sure other complaints do not hide their income and refuse to pay their taxes correctly. 

3 Vital Elements of the IRS Sector

To help you understand what is the Internal Revenue Service (IRS)? Or how does the IRS audit work? Let us first understand 3 integral elements of tax filing and collection procedure. 

1. Filing Tax

The majority of taxpayers in the USA use Form 1040: US Individual Tax to file their taxes, and individuals who are 65 years old or above may use Form 1040: SR Tax Return for Seniors. These forms are utilized to report your income and determine whether you owe an additional tax or if a refund is due to you.  

However, corporations would use Form 120: US Corporation Income Tax Return to report their earnings and check tax liabilities. Though, there are a few variations in the form for corporations depending on the business types like:

Form for Corporate TaxesCorporation Type
1120-CCorporative Associates
1120-FForeign Corporation
1120-LLife Insurance Company
1120-HHomeowners Associations
1120-SS Corporation

Whether you are a corporate company or an individual, you will be asked to attach an additional form with your main tax filing. This will include schedules, addendums, or documents like W-2 or 1099s. 

2. Pay your Tax

Individual taxpayers have the liberty to pay directly to the IRS via electronic transfer of funds with their bank accounts or can use crest or debit cards. There are other methods to pay your taxes like same-day bank wires or electronic withdrawals when you consider filing your e-returns. If you are a corporate with large return payments, must consider enrolling in and using the Electronic Federal Tax Paying System through a professional. 

Taxpayers can choose to  mail a personal check, cashier’s check, or money order which is payable to the US Treasury. Sounds confusing? Don’t worry, a few details listed below will help you gain clarity on the required details for paying your taxes. 

  • Your name and address
  • Tax year
  • Daytime and phone number
  • Social Security Number 
  • Employer identification number’
  • Notice the number or a tax form

To avoid delays, along with paper forms, the IRS encourages taxpayers to make electronic payments as well. 

Additionally, there’s an available option for taxpayers to make cash payments through in-person appointments. You can call (844) 545-5640 to connect with the IRS Taxpayer Assistance Center available on Monday - Friday and the timings are 7 a.m. to 7 p.m. EST. However, taxpayers must call 30-60 before making cash payments for filing successful taxes. 

Read Also:- Unveiling Max Social Security Tax Cap for 2023

3. Internal Revenue Service (IRS) Audit

The IRS officers would select a portion of tax returns every year as a part of enforcing federal tax law. These audits make sure that every taxpayer submits accurate account information while filing their tax returns that meet the laws. The IRS can randomly choose the tax returns or may categorize portions of returns identified with some unusualities. 

The process of IRS audit procedure is initiated by an auditor whose job is to review the returns thoroughly. Individual taxpayers may either accept the return or can ask for additional review from the IRS. Additionally, IRS audits involve reviewing paperwork and it can be performed through mail or in-person at an IRS office or other location like a taxpayer's home, business, or accountant’s office. 

Though there are determining factors that reflect on who will be selected for the audit, if you meet any of these factors, then you are likely to go through the audit process. 

  • Failing to mention the right amount of your income. 
  • If you claim rental estate as your loss. 
  • If you claim higher than the normal n amount for deductions
  • And more
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How to contact with IRS

If you need help in learning to file your tax, book an appointment with an IRS officer, or have any other concerns, you can get in touch with the IRS through 3 methods. 

1. Mail

If you opt to file your tax return through mail, your resilience state and whether you expect a refund from the IRS will depend on the address you use. However, you can go through the required details of the list mentioned on the IRS website. 

2. Phone or Online

Individuals can contact with IRS by phone at (800) 829-1040 between the working days and timing i.e. Monday-Friday and 7 a.m to 7 p.m (local time zone), and there are other toll-free numbers available for businesses and other purposes. Though, to rhea to the live agent may take some time. 

For an online option, with multiple questions bundled up together, you can opt for the interactive Tax Assistant on the IRS website. 

3. In-Person Contact

Individuals can opt for setting an in-person appointment with an IRS officer through a phone call - mentioned above. Additionally, the IRS website has a page locator wherein, all you need to do is type your ZIP Code to get access to the IRS office location and accurate phone number. 

Read Also:- FICO Score: Understanding Its Importance and Impact

Why Does the IRS Audit Individuals?

The main purpose of conducting a tax audit by the IRS is to minimize the tax gap or decrease the difference between the amount owed by individuals and what the IRS receives. Let us have a closer look at the reason why the IRS may conduct an audit with you or your organization. 

Mathematical Mistakes

A minor calculation mistake or missing out on any digit can cause you some troublesome circumstances. While mistakes are bound to occur, make sure you cross-check your tax returns twice at least for a safer side if you decide to file your taxes on your own. Regardless of the reason for your mathematical error, you will have to pay the fine if the IRS finds mistakes in your return. 

Too Many Donation Claims

If you made your contribution to charity then you are subject to be approved for getting deductions in your tax return. Though note that you must have a few documents as proof to show the validity of the donations, and if you don't have proof don't claim it. 

If you claim a $12,000 contribution on donation for your $40,0000 tax will raise doubt in the eyes of the IRS. 

Using only Round Figures in Your Tax File

When you include all the numbers while calculating your tax, be very precise, putting nice round figures won’t help you. Be as specific as round to be a dollar, and not the nearest hundred. For instance, let’s imagine you are a photographer, and claim a lens - $495,25 as your business expense, round to $495.25 and it should not be $500, nor $495. If you mention a round number of $500 as your expense, the IRS will ask you for proof. 

Deduction with too Many Business Expenses

Reporting too many losses or expenses is both harmful to your tax returns, especially if you are a business. To get your business eligible for the deduction, your expenses either fall under the category of ordinary or necessary expenses made for the business and you must give proof for these expenses. 

For instance, an artist can claim expenses for paint and paintbrush as it meets the expense requirements outlined by the IRS. However, a doctor using the same paint for fun or a hobby cannot claim a deduction because the material won't bring them a profit, which calls for a problem. 

Note: To avoid making such mistakes it is advisable to always consult a CPA or other tax professional to maintain the right tax return practices and get avoided paying penalties from the IRS. 


Bottom Line

When you file a tax return, make sure you are following the regulations and laws enforced by the IRS. IRS audits can seem outrageous but if you file your taxes correctly there’s no room for fear. Also, the changes procedure of paying tax outlined by the IRS has made it more convenient for individuals and corporations. Lastly, make sure to keep all your record and proof secured in the right place in case the IRS knocks on your door for conducting an audit.  

Frequently Asked Questions

Q.1 What is Internal Revenue Service?

The Internal Revenue Service (IRS) is the United States government agency dedicated to administering and enforcing a country's tax laws, collecting taxes, overseeing the tax system, and conducting regular audits. 

Q.2 How to get avoided by getting audited by the IRS?

Since there are no determined criteria by the IRS for conducting audits, you improve your chance of getting fined by maintaining accurate and honest records. Consider reporting all income, and avoid claiming excessive deductions or unusual transactions.