The Internal Revenue Service (IRS) is the division of the U.S. Treasury Department tasked with enforcing the Internal Revenue Code (IRC), administering federal tax laws, and collecting federal taxes from U.S. individual and corporate taxpayers. The IRS collects gift, excise, estate, and income taxes and routinely conducts audits to ensure that taxpayers comply with tax laws.
Key Takeaways
- The Internal Revenue Service (IRS) is the U.S. government agency responsible for collecting federal taxes and enforcing tax laws.
- Most of the work of the IRS involves individual and corporate income taxes.
- The IRS audits taxpayers randomly or after detecting irregularities in tax returns.
An Insight into the History of the Internal Revenue Service (IRS)
President Abraham Lincoln created the Office of Commissioner of Internal Revenue in 1862 to collect taxes levied to fund the Civil War. In 1913, Congress was given the power to enact income tax laws, paving the way for the Bureau of Internal Revenue. The agency’s name was changed to the Internal Revenue Service in the 1950s.
An Overview of IRS Revenue Collection
The IRS collects estimated taxes from wage earners throughout the year via payroll deductions and quarterly estimated tax payments from businesses based on quarterly tax filings. An annual filing, usually due by April 15th for the previous tax year, reconciles the amounts paid by each individual and business and the actual amounts owed.
If the taxpayer has overpaid, the IRS issues a tax refund. If the taxpayer owes money, the payment is due with the annual tax return. U.S. taxpayers must comply with tax laws passed by Congress and meet tax obligations.
4.4 trillion
The amount of tax revenue collected by the IRS in the 2023 tax year represents about 99% of the country’s gross receipts.
Simplifying Tax Returns
Taxpayers may file their tax returns by mail or electronically using tax preparation software designed for consumer use. A taxpayer may use the services of tax professionals, such as tax preparers or accountants. Nearly all individual taxpayers use Form 1040 or Form 1040-SR. In 2023, the IRS received 162.0 million individual returns and issued 105.7 million refunds totaling $334.9 billion.
Many individuals complete and attach additional forms and documents to support the numbers they record on the main forms, including W-2 and 1099, supplied by the companies that paid money to the taxpayer. Schedule D is used to report capital gains received from the sale of stocks, properties, and other taxable income sources, and Schedule A records the details of tax deductions claimed by the taxpayer.
Corporations use Form 1120 to report their income and tax liabilities. There are variations of the form, depending on the type of corporation, including:
- Form 1120-C: U.S. Income Tax Return for Cooperative Associations
- Form 1120-F: U.S. Income Tax Return of a Foreign Corporation
- Form 1120-H: U.S. Income Tax Return for Homeowners Associations
- Form 1120-L: U.S. Life Insurance Company Income Tax Return
- Form 1120-S: U.S. Tax Return for an S corporation
Decoding IRS Audits
The IRS audits a percentage of income tax returns annually as part of its enforcement mission. The agency randomly selects taxpayers to audit or singles out those whose returns are related to others audited. While there is no single factor that determines who gets an IRS audit each year, there are some red flags that may trigger a review:
- Failing to declare the right amount of income
- Claiming a higher-than-normal number of deductions (especially business-related ones)
- Making disproportionately large charitable donations compared to income
- Claiming rental real estate losses
The audit process begins with a review of the return by an auditor. The auditor may either accept the return or request a further review by an examination group. In the latter case, the taxpayer is notified by mail. The audit involves reviewing paperwork and may be conducted by mail or in person at an IRS office or another location, such as the taxpayer’s home, business, or accountant’s office.
The IRS reported 708,309 audits as of the end of its 2022 fiscal year. Out of all these audits, the IRS audited 0.49% of individual returns and 0.84% of corporate returns.
Reaching Out to the IRS
A list of mailing addresses for the IRS is available on the IRS website. Individuals can contact the IRS by phone at (800) 829-1040, Monday through Friday, 7 a.m. to 7 p.m. local time. There are other toll-free numbers for businesses and other purposes. For online assistance, try the Interactive Tax Assistant on the IRS website. In-person appointments are also available at a local IRS office.
The Funding of the IRS Explained
The IRS operates on a budget approved by Congress. This is divided into four accounts: Taxpayer Services, Enforcement, Operations Support, and Business Systems Modernization. The money allotted to each cannot be reallocated to other sections. IRS Commissioner Danny Werfel was appointed as the agency’s 50th commissioner on March 13, 2023.
The Best Method to File a Tax Return
It’s best to file taxes electronically, as 93.8% of taxpayers did in the IRS’s 2022 fiscal year. Individuals can still file a paper return by mail, but doing so will delay refunds.
Chances of a IRS Audit and What to Expect
The audit rate for individual tax returns was 0.49% in 2022. The IRS has audited the returns of 8.5% of people making $10 million or more between 2012 and 2020. Individuals may be randomly selected and others triggered by departures from the norm, such as a charitable deduction that exceeds the filer’s reported income.
Conclusion
The IRS emerged to collect money to fund the Civil War. The Internal Revenue Service is part of the U.S. Department of the Treasury, enforces and administers federal tax laws, and operates within a budget approved by Congress.
Related Terms: tax refund, audit process, tax liabilities, gross receipts.
References
- Internal Revenue Service. “Historical Highlights of the IRS”.
- Internal Revenue Service. “The Agency, Its Mission and Statutory Authority”.
- FiscalData. “How Much Revenue Has the U.S. Government Collected This Year?”
- Internal Revenue Service. “Filing Season Statistics for Week Ending Dec. 29, 2023”.
- Internal Revenue Service. “Instructions for Form 1120, U.S. Corporation Income Tax Return”, Pages 2-3.
- Internal Revenue Service. “IRS Audits”.
- Internal Revenue Service. “2022 Data Book”, Pages 33-34, 46.
- Internal Revenue Service. “Where to Send Non-Return Forms (Applications and Payments)”.
- Internal Revenue Service. “Let Us Help You”.
- Internal Revenue Service. “Interactive Tax Assistant (ITA)”.
- Internal Revenue Service. “Contact Your Local IRS Office”.
- Internal Revenue Service. “Werfel Begins Work as 50th IRS Commissioner”.
- Internal Revenue Service. “2022 Data Book”, Page 2.
- Internal Revenue Service. “How to File”.
- Internal Revenue Service. “2022 Data Book”, Page 33.
