IRS Compliance Check: Definition, Rules, Penalties, and More

IRS Compliance Check - Verito Technologies

Picture this: You diligently file your taxes, confident in your compliance with the ever-evolving tax code. However, you receive a notification from the IRS one day asking for a compliance check. What can it be all about, and what do you need to do about it?

Like you, many business owners are unaware of the IRS compliance check requirements. In the world of taxation where regulations and obligations intersect, the IRS compliance check emerges as a crucial checkpoint to ensure financial transparency and adherence to tax laws. As we continue exploring diverse financial concepts (WISP, FTC Safeguards Rule, etc.), it’s fitting to delve into this topic that lies at the heart of fiscal responsibility.

Our journey into the depths of the IRS compliance check begins with a simple question: What exactly does it entail? 

From its definition to the rules governing its implementation and the potential penalties for non-compliance, we’re set to unravel the layers of this complex yet vital process. Let’s get started.

What is an IRS Compliance Check?

An IRS compliance check, guided by Title 26 of the Internal Revenue Code, is a unique review to evaluate a taxpayer’s adherence to recordkeeping and information reporting requirements. It is not an investigative endeavor pursuant to section 7605(a) of the IRC, nor does it fall under the umbrella of an audit as defined in section 530 of the Revenue Act of 1978.

Crucially, the compliance check does not directly address determining tax liability for any specific period. Instead, it serves as an educational instrument designed to enlighten taxpayers about their reporting obligations and foster increased voluntary compliance. From the outset, the IRS representative conducting the compliance check explicitly communicates that it is not an audit or examination.

You should also know that:

  • At its core, an IRS compliance check revolves around a detailed review of information forms mandated by the IRS, such as 940s, 941s, W-2s, 1099s, or W-4s. 
  • Throughout this process, the IRS may inquire whether taxpayers comprehend or have queries about the filing requirements associated with these forms. 
  • Additionally, taxpayers might be asked about filing the appropriate forms for individuals receiving payments. In cases where a taxpayer acknowledges a lapse and should have filed the forms, the IRS may encourage voluntary filing. Failure to comply may prompt the IRS to prepare substitute returns under Internal Revenue Code Section 6020(b) or initiate a formal examination.

Limitations of An IRS Compliance Check

Unlike audits or examinations where the IRS may scrutinize why an expense is treated in a particular manner or the classification of a worker, a compliance check refrains from such inquiries. It does not involve the examination of books and records or queries about tax liabilities. If, during the compliance check, the IRS deems an audit or examination necessary, the taxpayer is duly notified before any questions pertaining to tax liability are broached. This ensures transparency and procedural adherence throughout the IRS Compliance Check process.

Penalty for Refusing to Submit to an IRS Compliance Check

It’s crucial for taxpayers to recognize that participation in an IRS compliance check is voluntary, and refusal to engage in this process may not invoke penalties. As an individual taxpayer, you retain the right to decline participation in a compliance check without facing immediate repercussions.

However, you should also know that the IRS maintains the authority to pursue alternative avenues even if a taxpayer opts not to participate in a compliance check. This takes the form of the IRS’s prerogative to initiate a formal investigation, irrespective of the taxpayer’s willingness to undergo the compliance check. Unlike the compliance check, the investigation then carries more weight and may lead to more rigorous scrutiny of a taxpayer’s financial records and activities.

Understanding the balance between your rights as a taxpayer and the IRS’s authority to ensure compliance is pivotal. While participation in a compliance check is voluntary, it’s essential to weigh the potential consequences of refusing against the benefits of cooperation. The decision to engage with the IRS in this context should be made after careful consideration of individual circumstances and legal counsel, if needed.

Frequency of IRS Compliance Check

One of the distinctive features of an IRS compliance check lies in its flexibility and adaptability to the nuances of individual cases. Unlike formal examinations, the frequency of compliance checks is not bound by rigid constraints imposed by Section 7605(b). Instead, the IRS reserves the right to conduct these checks as often as dictated by the facts and circumstances surrounding a particular taxpayer.

The absence of limitations on reopening examinations under Section 7605(b) also means that the IRS can initiate compliance checks without being restricted by predefined intervals. This adaptability allows the IRS to respond promptly to evolving scenarios or emerging patterns to maintain tax compliance.

At its core, several factors may contribute to the decision-making process regarding the frequency of IRS compliance checks. These include:

  • Prior compliance history

Individuals or entities with a history of non-compliance may find themselves subject to more frequent checks as the IRS aims to address potential issues promptly.

  • Changes in financial activity

Substantial changes in financial activity, income patterns, or reporting structures may trigger the need for more frequent compliance checks to verify the accuracy of reported information.

  • Industry-specific considerations

Certain industries or sectors may be subject to heightened scrutiny based on evolving regulations, economic conditions, or emerging trends.


From understanding the nuanced definition of an IRS compliance check to unraveling the distinctive features that set it apart from audits and investigations, this guide equips you with the knowledge needed to navigate this complex terrain. In a world where tax landscapes shift and financial complexities abound, your understanding of compliance checks can empower you to actively preserve the integrity of the fiscal ecosystem. 

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