Federal Tax Law: IRS Audits, Tax Fraud, and Dispute Resolution

How the IRS Enforces Tax Law

The Internal Revenue Code (IRC), codified at Title 26 of the United States Code, is the primary source of federal tax law. The IRS, a bureau of the Department of the Treasury, is responsible for administering and enforcing the IRC. The IRS has broad authority to examine returns, assess deficiencies, and collect taxes.

Civil tax penalties include the accuracy-related penalty under IRC § 6662 (20% of the underpayment attributable to negligence, substantial understatement, or substantial valuation misstatement) and the civil fraud penalty under IRC § 6663 (75% of the underpayment attributable to fraud).

Criminal tax violations include tax evasion under IRC § 7201 (felony, up to 5 years imprisonment and $250,000 fine), filing a false return under IRC § 7206 (felony, up to 3 years), and willful failure to file under IRC § 7203 (misdemeanor, up to 1 year). The government must prove willfulness beyond a reasonable doubt.

The IRS Criminal Investigation Division (CI) investigates potential criminal violations of the IRC and related financial crimes. CI special agents have the authority to carry firearms, execute search warrants, and make arrests. Cases are referred to the Department of Justice Tax Division for prosecution.

Options for Taxpayers Facing IRS Action

Offers in Compromise (OIC) under IRC § 7122 allow taxpayers to settle tax debts for less than the full amount owed. The IRS considers the taxpayer's ability to pay, income, expenses, and asset equity. The IRS generally will not accept an OIC if it believes the liability can be paid in full through an installment agreement or other means.

Installment agreements under IRC § 6159 allow taxpayers to pay tax debts over time. Guaranteed installment agreements are available for debts of $10,000 or less, while streamlined agreements cover debts up to $50,000. Larger debts require detailed financial disclosure.

The U.S. Tax Court provides a forum for resolving tax disputes before paying the assessed tax. Taxpayers must file a petition within 90 days of receiving a notice of deficiency. The Tax Court has jurisdiction over income, estate, gift, and certain excise tax cases.

Innocent spouse relief under IRC § 6015 may be available when a joint return understates tax due to erroneous items of the other spouse. Three types of relief are available: traditional innocent spouse relief, separation of liability, and equitable relief.

Errors That Can Worsen Tax Problems