Everything You Need to Know About IRS Compliance Checks


Top Tax Defenders - All About IRS Compliance Checks

Like a certain Marvel Universe bad guy, the IRS seems inevitable. And most people aren’t Iron Man, not even close. But luckily you don't need superpowers to face a  compliance check.

A compliance check, part of the Federal State Local Employment Tax (FSLET) Compliance Program, is more than a polite chat and less than an audit. Here is what a compliance check means and how you can calmly deal with it.

What Is a Compliance Check?

A compliance check is not the same as an investigation or audit. Instead of reviewing all your books and trying to see if you haven't paid what you owe, the IRS checks to see if you understand and are using various tax forms correctly. 

Such forms include W-2s, W-4s, 1099s, 940s, and 941s. That's it. The IRS does not ask to see your financial records or taxes. You are asked if you understand the forms and whether you have any questions about them.

If you paid an employee or contractor, the IRS might ask if you filed the correct forms for them, too. If you haven’t, you may do so voluntarily. If you do not, the IRS may prepare substitute returns according to Internal Revenue Code Section 6020(b). Or they may decide to perform an audit.

We recommend filing the forms voluntarily. Unlike a compliance check, an audit digs into your records, takes a lot longer, and is a farther ranging investigation than a compliance check.


What Exactly Happens During a Compliance Check?

First off, you are notified by mail. The IRS doesn’t make phone calls to initiate anything. If you receive a call from someone claiming to be the IRS, hang up. Unless you are already involved in an IRS check or audit, it’s a scam.

Before contacting you, the agent tasked with your compliance check reviews a complete history of your personal and business tax summaries.

During a compliance check, you will be asked to show the agent every tax form you use personally or for business. Just a hint, it’s usually small businesses that receive compliance checks.

The IRS is not trying to determine your tax liability at this point. It just wants to know that you are using the right forms and filing your taxes correctly. It’s less invasive than an audit and less resource-heavy for the IRS.

If you are in the process of dealing with back taxes, the IRS may determine your status as one of the following.

  • Not collectible status - the IRS suspends the case for two or three years.
  • Monthly installment candidate - the IRS understands you owe a tax debt and sets you up to pay it in full through monthly payments.
  • Offer in Compromise candidate - the IRS understands there is no way you can pay the full amount and settles for an Offer in Compromise. (You will want a tax professional to help you with this.)

Even though the IRS is just making sure you understand and are using the proper forms, it also knows whether you have filed before and may owe some money.

Why Does the IRS Perform Compliance Checks and Why You?

Believe it or not, the IRS thinks it’s being helpful. The agency is trying to ensure you do your taxes right the first time.

If you file a tax return, the IRS receives a score that tells how your deductions compare to the average. A high score tips them off that there may be a problem, just not one requiring an audit. Yet.

Why are you getting checked? Your return was flagged and, out of everyone whose score was higher than average, you were the lucky one tagged for a compliance check. Still, why you? It might be because of one of the following:

  • You were farther off the mark than others.
  • Your returns are connected to transactions with other taxpayers, such as investors or business partners, and they were flagged for an audit.
  • You have more deductions than the average tax filer or a low gross profit margin compared to your revenue.

Some deductions that tend to spark interest include high auto expenses, high entertainment or travel costs, and no profit from business operations. For some reason, the numbers don’t add up.

How to Deal with a Compliance Check

Well, you do have the right to refuse one. However, the IRS tends to look at refusals as an aggressive move. A more positive reaction would be to enlist someone to represent you, placing a bit of space between you and this Thanos-like entity.

What should you (and your Iron Man) do?

  • Check the math. Mistakes in arithmetic are the most common reason for tax return issues.
  • Make sure every Social Security Number is correct on every form.
  • Look to be sure you signed everything you were supposed to.
  • Finally, go over the entire return to ensure it’s correct.

On the other hand, please avoid the following:

  • Don’t give the agency more or less information than requested. Just the facts, no more or less. If you hide stuff or blab too much, the process gets dragged out, which nobody wants.
  • Don’t give the agency your only copy, or even an original, of your forms. You might not get it back. 
  • Don't forget to ask for copies of everything the IRS asks you to sign and copies of any information they have their files about you.
  • Don’t argue. Get as zen as possible before you do anything. Belligerence just earns you an even closer inspection.


Avoiding a Compliance Check

Just like avoiding an audit, you can keep compliance checks at bay by following all the rules, filing all your tax paperwork on time, and without errors. Pay the taxes you owe in full and on time. If full payment isn't possible, be proactive, and get on an installment plan.

If you’re just bad at math or bookkeeping, hire someone to do it. It’s like insurance; you may never have a problem, but why take a chance? Keep all your records, as suggested by the IRS and most tax professionals. Be neat and organized.

Sometimes, despite all your efforts, your number comes up. Preparation, careful record-keeping, and double-checking everything can shorten a compliance check and keep it from becoming a full-blown audit. Both you and the IRS representative will sigh with relief.

If you need assistance or just have some questions, Top Tax Defenders is here to be your Iron Man.

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