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How the IRS Works

        Money | Taxes

IRS Tax Enforcement
The IRS relies largely on voluntary compliance, but the threat of being hounded by a tax collector helps as well.
The IRS relies largely on voluntary compliance, but the threat of being hounded by a tax collector helps as well.
iStockPhoto/Roger Asbury

­The Internal Revenue Service (IRS) reports that it collected $2 trillion in revenue and dealt with $224 million in returns in 2004 [source: IRS]. This is an enormous task, especially considering some people's reluctance to fork over money to the government. So, how does the IRS convince taxpayers to hand over hard-earned cash every year? As is the case with most laws, much of the tax system relies on people's willingness to voluntarily comply. Of course, employer withholding of income tax is one of the most effective tools, but fear of being audited and solicited by tax collectors helps ensure enforcement otherwise.

An IRS audit is an examination of your tax records to make sure you paid all you owed. If the IRS selects you to be audited, it doesn't necessarily mean they suspect you of underpaying your taxes. The possibility of being audited, however, is a good reason to stay honest and make sure you keep good records -- especially of the deductions you claim. A randomized computer selection determines who gets audited, but it isn't entirely random. Some people, including those who are self-employed or often get tips, are more likely to be selected [source: Schmitz].

But getting randomly audited shouldn't be your only fear. If it's clear you've failed to pay all you owe or claim you can't afford to pay your debt, IRS tax collectors might come knocking on your door. They'll assess your situation and decide whether to take a lien on something of value you own to settle your debt to the IRS. In general, if you can't afford to pay your debt to the IRS, collectors are willing to negotiate with you and find a plan that works.

Despite its efforts to successfully enforce taxation, the IRS has faced criticism for inefficient collection. For instance, the IRS reported that it failed to collect about $345 billion in taxes in 2001. Essentially, this is the gap between what taxpayers owed and what they actually paid. As has been the case so many times in its history, the IRS simply doesn't have the manpower to address all of these unpaid taxes [source: Layton]. So, Congress has been making efforts to help the IRS close this gap by outsourcing the work.

In 2004, it implemented the Private Debt Collection Program to do this. Under this program, the IRS uses private debt collection agencies to collect low-profile tax debts. Specifically, the IRS only assigns these private debt collectors delinquent accounts that aren't disputed and that concern debts of less than $25,000 [source: Kelley]. This type of solution isn't unique -- many states also outsource tax collection to private collectors.

The federal program, however, remains highly controversial. Opponents claim that private collectors are less willing to negotiate debt and are prone to using nasty tactics. They also charge that sharing tax information with private collectors violates taxpayer privacy [source: Kelley]. One of the biggest complaints against the program, however, has been cost efficiency. Opponents point to how the program has been costing more than it's pulling in and that the IRS doesn't expect the program to break even until 2010 [source: Layton].

In any case, if you want to avoid problems with the IRS, take a look at the links on the next page and learn more about taxes.