[ Pobierz całość w formacie PDF ]
make decisions each and every day and must live with their consequences.
The accumulation of these individual preferences leads to the aggregate
impacts described in the succeeding chapters.
This chapter provides an overview of the choices these taxpayers and
others like them have in challenging a post audit assessment by the IRS.
Each choice has costs and benefi ts and, while each particular situation is
unique, one can examine some general factors that are taken into account by
each type of taxpayer. The chapter considers these choices from the initial
administrative appeal through each particular trial court. The conclusion
ponders the meaning of these choices in assisting fairness and justice. Ideally,
the forum choice system should work to ensure all taxpayers, regardless of
wealth, an appropriate forum. Ultimately, a sense of fairness can also lead to
greater compliance in a system that depends on voluntary reporting of tax
liability. Does the most affordable option offer the smallest chance of success?
If so, it calls into question the fairness of the choices and compliance.
THE NEED FOR TAX FORUMS
In a typical year, taxpayers fi le over 100 million individual tax returns under
a system of reporting called quasi voluntary (Daily, 1992 p. 1/7; Freeland,
Lind, and Stevens 1977, p. 971). This reporting system assumes that the vast
majority of taxpayers do in fact comply, but the quasi voluntary assessment
places a tremendous burden on the taxpayer and sometimes mistakes oc-
cur through error and sometimes through deliberate dishonesty. To counter
these mistakes, the IRS examines a certain number of returns for error in
a process known as an audit.
Trained IRS officials conduct the audits out of district offices located
throughout the fifty states. The IRS uses numerous procedures and formulas
to determine whom to audit and many different types of audits. The most
COURTS AND THE IRS 19
common type is the correspondence audit. This type of audit usually occurs
because of computer matching discrepancies. For example, a taxpayer might
fail to include income that the IRS fi nds on a corresponding 1099 form.
Most often, the taxpayer will receive a notice of the adjustment and, unless
contested, there is little more for the taxpayer to do then sign the correspon-
dence form and remit the additional tax owed. The IRS can be wrong and
the taxpayer can send appropriate documents justifying the initial return.
The next type of audit is known as the offi ce audit. This type of au-
dit is usually conducted by less experienced examiners and again involves
discrepancies in the tax return. Similar to the correspondence audit, here
the taxpayer has to prove, through documentary evidence, reported income
and claimed deductions.
The fi eld audit is the most extensive audit and is conducted by the
most experienced tax examiners. In this procedure, the auditor goes to the
offi ce or home of the taxpayer to examine the books and records, although
the taxpayer can bring the requested documents to the IRS offi ce. Usually
this will result in greater tax liability.
The IRS uses many different processes for selecting a return for one of
these types of audits. Perhaps the most well known is the statistical analysis
known as the DIF scoring system. The DIF or discriminate function system
is computed by a comparison of tax returns of the same type or category
and specifi cally singles out returns likely to produce more revenue after the
audit (Johnston 1996). The IRS does not reveal the exact formula, but seeks
outliers in similar income categories in which the deductions do not match
or equal similar returns. For example, a sole proprietor who fi les a Schedule
C return and claims an inordinate number and amount of deductions might
fi t the DIF profi le. One researcher argues that the DIF is unlikely to activate
if a taxpayer claims less than forty-four percent of adjusted gross income in
Schedule A deductions or no more than fi fty-two percent of revenue for a
Schedule C fi ler (Johnston 1996). A supplemental program started in 2002
and known as UI DIF also calculates the probability of unreported income
on a tax return (Shafi roff 2004). In addition, the IRS uses system matching
systems, special programs that target particular occupations or businesses,
evidence of criminal activity and informant tips, tax returns that have had
prior trouble, and sometimes random audits.
The matching or information reporting program is another computer-
based program the IRS uses to select returns for audits based on discrepancies
between reported income and deductions and other information that the
[ Pobierz całość w formacie PDF ]