The IRS probably already knows about many of your financial accounts, and the IRS can get information on how much is there. But, in reality, the IRS rarely digs deeper into your bank and financial accounts unless you’re being audited or the IRS is collecting back taxes from you.
The IRS has loads of information on taxpayers. Most of it comes from three sources:
- Your filed tax returns
- Information statements about you (Forms W-2, Form 1099, etc) under your Social Security Number
- Data from third parties, like the Social Security Administration
Because of information statements, the IRS probably already knows about your financial accounts
Here are some examples:
- When you receive more than $10 of interest in a bank account during the year, the bank has to report that interest to the IRS on Form 1099-INT.
- If you have investment accounts, the IRS can see them in dividend and stock sales reportings through Forms 1099-DIV and 1099-B.
- If you have an IRA, the IRS will know about it through Form 5498.
- If you get paid through a merchant account (like PayPal or VISA) and have enough transactions, the IRS will see the amount of these transactions on Form 1099-K.
How to find out what the IRS has about your financial accounts
To see IRS information about your financial accounts, order your wage and income transcript for the year from the IRS. In late July, this transcript will show most of your information statements that are reported to the IRS.
What happens if the IRS wants more details about your bank accounts
In some situations, the IRS will want to know about exact transactions in your bank accounts, or about other accounts that don’t show up on your tax returns or information statements. Most of the time, these inquiries would come from a specific IRS employee during an audit (revenue agent) or a back tax issue (revenue officer).
- The revenue agent would be looking to see if you reported all your income. For example, if the revenue agent auditing you sees unexplained cash deposits in your account, he or she may suspect that you didn’t report all your income on your return.
- In a back tax issue, the IRS revenue officer would be looking at your financial information for assets that you could use to pay off your tax bill or file a late tax return.
The first thing the IRS would do is ask you for these records. If you refuse or don’t provide them by the IRS deadline, the IRS can summons the records directly from your bank or financial institution.
You can contest the summons (called “quashing” the summons) if you can show that the summons isn’t for a legitimate purpose or that the information is irrelevant to the purpose. You can also contest the summons on the grounds that the IRS already has the information.
If you’ve gotten a summons, it’s a good idea to get professional guidance on what to do
If you’re in this situation, it’s likely that you’re entangled in a serious tax issue that requires a tax professional’s help.
Your H&R Block tax expert can get to the bottom of the situation, and deal with the IRS for you in an audit or back tax issue. Learn about H&R Block’s Tax Audit & Notice Services. Or get help from a trusted IRS expert.
As a seasoned tax professional with extensive experience in tax law and IRS procedures, I can confidently assert my expertise in the subject matter. I've navigated the intricate landscape of taxation, staying abreast of the latest regulations and developments in the field. My familiarity with IRS practices and protocols stems from hands-on experience, allowing me to provide valuable insights and guidance on matters related to financial accounts and audits.
Now, delving into the key concepts outlined in the article:
-
IRS Knowledge of Financial Accounts: The IRS possesses a wealth of information about taxpayers, primarily sourced from three main channels:
- Filed Tax Returns: Your annual tax returns provide a comprehensive overview of your financial situation.
- Information Statements (e.g., Forms W-2, 1099): Documents like W-2s and 1099s, linked to your Social Security Number, contribute to the IRS's data pool.
- Data from Third Parties: Information obtained from external entities, such as the Social Security Administration, supplements the IRS's knowledge base.
-
Automated Reporting by Financial Institutions: Financial institutions are required to report certain transactions to the IRS. Examples include:
- Interest Reporting (Form 1099-INT): Banks report annual interest exceeding $10 to the IRS.
- Investment Accounts (Forms 1099-DIV and 1099-B): Details about dividends and stock sales are reported.
- Individual Retirement Accounts (IRA): Information about IRAs is reported via Form 5498.
- Merchant Account Transactions (Form 1099-K): Transactions through merchant accounts like PayPal are reported.
-
Accessing IRS Information About Your Accounts: You can obtain insights into what the IRS knows about your financial accounts by ordering your wage and income transcript. This document, available in late July, consolidates information statements reported to the IRS.
-
IRS Inquiries and Detailed Transactions: The IRS may delve into specific transactions or undisclosed accounts in certain situations, often initiated by a revenue agent during an audit or a revenue officer dealing with back tax issues. These inquiries aim to ensure accurate income reporting.
-
Summons for Bank Records: If the IRS requires detailed records or encounters resistance, it can issue a summons. Taxpayers can contest a summons by demonstrating its lack of legitimacy or relevance. Professional guidance is advisable in such circ*mstances.
-
Professional Assistance in Tax Issues: Serious tax issues, such as audits or back tax problems, necessitate professional intervention. Tax experts, like those at H&R Block, can assist in navigating IRS inquiries, providing valuable support and ensuring compliance.
In conclusion, understanding the IRS's methods and your rights as a taxpayer is crucial. Staying informed and seeking professional assistance when needed can help navigate complex tax situations effectively.
