The IRS is in the business of collecting money and it has some advantages that other money collectors don't have.
Your employer submits a report of your income each year to the IRS. If you are self employed, your vendors or others send the IRS a 1099 misc. form. The bank sends the IRS a 1099 INT form if your bank account draws interest.
The bank, your employer and those you do business don't want to disclose your private info to the IRS, they are simply required to. As a result, the IRS knows where you work, what type of business you own, and where you bank.
Sometimes the IRS learns more about you because you have spoken to an IRS representative and provided your information either in writing or verbally. You may have even mailed the IRS a check at some point in the past that is now being used to locate where you bank.
Once in a while an IRS inquiry will appear on a credit report. The IRS is allowed to look at a credit report in order to search for sources of money. (See I.R.M 188.8.131.52.5)
Sometimes the IRS just doesn't have any information. Maybe you don't bank or your bank account doesn't draw interest. Maybe people you do work for, don't file 1099s or aren't required to. In situations like this, the IRS may assign a local person to investigate the situation. This person is called a revenue officer and they will, if assigned to your case, find where you live and knock at the door in attempt to get this financial information from you.
So now we know how the IRS knows about you…the real question is, what does the IRS do with this information?
First, if you haven't filed returns for a few years, the IRS will use the reported information to create tax returns for you called IRS substitute returns.
Second, it will use the information it gathers to garnish wages and levy accounts.
If self employed or working as a subcontractor, the IRS can only levy what the company you are doing work for owes you at the moment the levy is received. There is no continuing levy on pay that is based on a 1099 or subcontractor relationship.
But…if you are employed, paid wages, and have taxes withheld from your paycheck, the IRS can garnish your check continuously by submitting one levy notice to your employer. That garnishment won't stop until certain conditions are met.
Disclosure of Information to the IRS can be a good thing.
Most IRS collection matters require you to fully disclose all of your assets, banking info, income etc. in exchange for a resolution of the problem and a hold on collection activity. However, if the IRS didn't have the information you provided to it before, and you don't reach a resolution, then you will have given it a roadmap making it much easier for them to collect.
When you have an IRS tax debt, you need to know what information the IRS already knows about you and what more you need to disclose if anything to get the result you desire. You may want to try to settle the debt in an offer in compromise, you may want to challenge the IRS' substitute returns by filing correct returns, you may want to consider bankruptcy or other options.