Close this search box.

Table of Contents

What Is the Internal Revenue Service (IRS)? How Auditing Works


The Internal Revenue Service (IRS) is a U.S. governmental agency responsible for the enforcement of laws related to taxes and the management of tax refunds, among other duties. It oversees the collection of taxes, including income, corporate, and excise taxes, ensuring compliance with the tax laws. Audit in the financial context is a process where financial documents and records of an individual or organization are reviewed and assessed to ensure accuracy and compliance with tax laws and regulations.


Phonetics for your phrase: What Is the Internal Revenue Service (IRS)? How Auditing Works- What: wɒt- Is: ɪz – the: ðə – Internal: ɪnˈtɜː.nəl- Revenue: ˈrev.ə.nuː- Service: ˈsɝː.vɪs- (IRS): aɪ aːr ɛs- How: haʊ- Auditing: ˈɔː.dɪ.tɪŋ – Works: wɜːrksNote: The above phonetic spellings are following the International Phonetic Alphabet (IPA) standard.

Key Takeaways

<ol><li><b>Definition and Function:</b> The Internal Revenue Service (IRS) is a federal agency of the United States government that is responsible for the administration of the nation’s tax laws. It collects taxes and enforces tax laws, in addition to providing tax assistance to taxpayers.</li><li><b>Role in Auditing:</b> The IRS conducts audits to ensure compliance with tax laws and to verify the accuracy of tax returns. These audits can be conducted through the mail, at an IRS office, or at the taxpayer’s home or place of business. They may cover a specific issue on a taxpayer’s return or be more comprehensive.</li><li><b>Takeaways for Taxpayers:</b> While the thought of an IRS audit can be daunting, understanding how the process works can alleviate some concerns. If you are selected for an audit, it is vital to be organized and to have your tax documentation available. It’s also essential to understand your rights as a taxpayer, including the right to representation during the audit process.</li></ol>


The Internal Revenue Service (IRS) is a crucial government body in the United States, responsible for enforcing the internal revenue laws, administering tax regulations, and collecting federal income taxes. Its roles significantly impact the business/financial domain, making an understanding of its operations vital for business owners and financial professionals. A key function of the IRS is conducting audits, which are thorough reviews of financial records and activities, intended to ensure compliance with tax laws and detect any anomalies or fraudulent activities. Auditing processes used by the IRS are essential because they uphold the integrity of the tax system, deter tax evasion, and ensure fair enforcement of tax laws. Consequently, understanding the IRS’s functions and how auditing works is important for improving tax compliance, reducing potential penalties, and promoting the financial health and sustainability of businesses.


The Internal Revenue Service, commonly referred to as the IRS, serves as the revenue service for the United States federal government. It is an agency under the purview of the Department of the Treasury and is primarily responsible for administering and enforcing the tax laws written by Congress. This includes collecting income taxes from individuals and businesses, providing tax assistance to taxpayers, as well as pursuing and resolving instances of fraudulent and erroneous tax filings. The funding collected by the IRS is essential to running the government and providing public services, playing a significant role in supporting the nation’s infrastructure, defense, and societal programs.On the other hand, auditing is a key function that the IRS performs to ensure the accuracy of tax returns and the overall integrity of the financial system. An audit involves an in-depth review of an individual’s or organization’s financial records to verify that the information reported on the tax return is correct and complies with tax laws. The aim of an audit is not just to detect potential tax fraud, but also to identify errors made by taxpayers and educate them on their responsibilities and the need for accurate record-keeping. This can ultimately help prevent future non-compliance, enhancing the effectiveness of tax administration.


Example 1: John’s Tax AuditJohn is an independent contractor who files his taxes as a self-employed individual. He deducted several business expenses on his tax return, including those for his home office, meals, travel, and equipment. One year, the IRS selected him for an audit because the amount of his deductions was high compared to his reported income. During the audit, John had to provide receipts and documents to prove his expenses were necessary for his business. After a thorough review, the IRS accepted his deductions and he didn’t owe any additional taxes.Example 2: ABC Corporation’s Large DeductionABC Corporation took a massive deduction for a charitable donation it made. The IRS flagged this because the donation amount was much larger than what companies of a similar size and revenue usually give. The IRS initiated an audit to investigate the legitimacy of the claim. ABC Corporation was required to provide documents and substantiation for the donation they made to a charity organization. After the review, the IRS found that the donation was in fact legitimate and no further action was necessary.Example 3: Suspected Fraudulent FilingJane and Joe are a married couple who filed their taxes jointly. They didn’t claim any income for the year, despite having an extravagant lifestyle. This discrepancy alerted the IRS and they were audited. The IRS used their auditing powers to investigate the couple’s bank statements and spending habits. As a result, they found undisclosed income. Jane and Joe were charged with tax evasion and required to pay their owed taxes, plus interest and fines.

Frequently Asked Questions(FAQ)

What is the Internal Revenue Service (IRS)?

The Internal Revenue Service (IRS) is a U.S. government agency responsible for the administration of the internal revenue laws. It is part of the Department of the Treasury, and its main responsibility is the collection of individual income taxes and employment taxes.

What are the main functions of the IRS?

The main functions of the IRS include interpreting and enforcing tax laws, collecting federal taxes, processing federal tax returns, and assisting taxpayers in understanding and meeting their tax responsibilities.

What is auditing in the context of the IRS?

Auditing, in relation to the IRS, is a process where the IRS reviews or examines an individual’s or organization’s financial information to ensure all information is correct and follows tax laws. If inconsistencies or irregularities are found, the IRS will take steps to rectify the situation.

How does the IRS determine who to audit?

The IRS uses various methods to select who to audit, including random selection, computer screening, and comparison of tax returns. Documents that don’t add up or certain aberrations can also raise flags for an audit.

What is involved in an IRS audit?

An IRS audit involves a thorough review of financial documents and information. Depending on the type of audit, this may take place by mail, in an IRS office, or at the taxpayer’s home, business, or accountant’s office.

Are there different types of IRS audits?

Yes, there are three different types of IRS audits. These are Correspondence audits (by mail), Office audits (in an IRS office), and Field audits (at taxpayer’s home or business).

How can one avoid an IRS audit?

While being audited can’t be completely avoided, steps can be taken to reduce the risk including being accurate and honest on all tax filings, documenting all income, deductions, and credits, and filing on time.

What happens if discrepancies are found during an audit by the IRS?

If the IRS audit reveals discrepancies, the IRS will propose changes to the tax return which may result in the individual needing to pay additional taxes. In some cases, with substantial errors, penalties and interest may also be assessed.

Can an individual or business dispute an IRS audit finding?

Yes, taxpayers have the right to dispute the findings of an IRS audit. They can appeal both in a court of law and within the IRS. It’s often recommended to seek advice from a tax professional if the intent is to make an appeal.

Related Finance Terms

  • Tax Compliance: This refers to the adherence to local, state and federal laws and regulations related to taxation.
  • Audit Report: A comprehensive document prepared by auditors which provides their opinion on the accuracy of financial records and operations of an organization.
  • Tax Evasion: An illegal activity where an individual or corporation deliberately avoids paying their true tax liability.
  • Tax Audit: A review conducted by the IRS to verify the accuracy of a taxpayer’s return and to ensure they complied with the IRS’s tax laws.
  • IRS Notice: A document sent by the IRS to a taxpayer to communicate about issues related to their taxes, such an upcoming audit or a discrepancy in a tax return.

Sources for More Information

About Our Editorial Process

At Due, we are dedicated to providing simple money and retirement advice that can make a big impact in your life. Our team closely follows market shifts and deeply understands how to build REAL wealth. All of our articles undergo thorough editing and review by financial experts, ensuring you get reliable and credible money advice.

We partner with leading publications, such as Nasdaq, The Globe and Mail, Entrepreneur, and more, to provide insights on retirement, current markets, and more.

We also host a financial glossary of over 7000 money/investing terms to help you learn more about how to take control of your finances.

View our editorial process

About Our Journalists

Our journalists are not just trusted, certified financial advisers. They are experienced and leading influencers in the financial realm, trusted by millions to provide advice about money. We handpick the best of the best, so you get advice from real experts. Our goal is to educate and inform, NOT to be a ‘stock-picker’ or ‘market-caller.’ 

Why listen to what we have to say?

While Due does not know how to predict the market in the short-term, our team of experts DOES know how you can make smart financial decisions to plan for retirement in the long-term.

View our expert review board

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More