The federal tax authority in the United States is the Internal Revenue Service, commonly referred to as the IRS. The IRS is responsible for administering and enforcing all internal revenue laws, except those relating to alcohol, tobacco, firearms, and explosives. The IRS is a bureau of the Department of the Treasury and its main purpose is to collect taxes and enforce tax laws.
What does the IRS do?
The IRS has a wide range of responsibilities related to federal taxes. Here are some of the main things the IRS does:
- Processes tax returns – The IRS receives and processes more than 150 million individual tax returns each year. They check for errors, confirm taxes owed or refunds due, and issue refunds.
- Audits tax returns – The IRS audits tax returns to ensure taxpayers are reporting their income accurately and calculating their tax correctly. Audits can be done by mail or in person.
- Enforces tax laws – The IRS enforces tax laws by pursuing taxpayers who evade taxes. This can include levying penalties and interest on unpaid taxes or pursuing criminal charges for tax evasion.
- Collects taxes – The IRS collects all federal income taxes, employment taxes, and estate and gift taxes. It uses various methods to collect unpaid taxes, including liens, levies, and property seizures.
- Issues tax refunds – When taxpayers overpay their taxes or qualify for tax credits, the IRS issues refunds. In 2020, it issued over $454 billion in tax refunds to taxpayers who overpaid.
- Assists taxpayers – The IRS provides assistance to taxpayers in understanding tax laws and meeting their tax obligations. This includes publishing guidance, answering questions, and resolving issues.
- Administers the tax code – The IRS oversees all federal tax laws enacted by Congress. This includes interpreting tax laws, developing regulations, and updating tax forms and publications.
In summary, the IRS administers the nation’s tax system by processing returns, enforcing laws, and assisting taxpayers to help them understand and meet their tax responsibilities.
What is the IRS’s authority?
The IRS derives its authority from the Internal Revenue Code which contains the laws passed by Congress related to federal taxes. Specifically, the IRS has the power to:
- Collect taxes from individuals and businesses
- Conduct audits to review tax returns for accuracy
- Enforce tax laws through legal actions such as levies, seizures, and filing criminal charges
- Assess civil and criminal penalties for violations of tax laws
- Write regulations to interpret and clarify tax laws
- Subpoena taxpayers and third parties for documents relevant to an investigation
This authority allows the IRS to administer and enforce tax laws enacted by Congress. The IRS uses this authority to ensure taxes are paid accurately and timely by taxpayers. Failure to comply with an IRS request made under its authority can result in civil or criminal penalties.
What is the structure and organization of the IRS?
The IRS is organized into four major divisions, each responsible for specific aspects of tax administration:
- Wage and Investment Division – Serves individual taxpayers with wage and investment income.
- Small Business/Self-Employed Division – Serves self-employed taxpayers and small businesses.
- Large Business and International Division – Serves large corporations, partnerships, and international businesses.
- Tax Exempt and Government Entities Division – Serves tax-exempt organizations, government entities, and retirement plans.
Each division is further divided into various operating units that handle specific programs and functions. The main IRS campuses and computing centers that process tax returns are located around the country.
At the top of the organizational structure is the Office of the Commissioner which includes various deputy, associate, and assistant commissioners that oversee critical IRS operations. The IRS also has a National Taxpayer Advocate Service that helps taxpayers resolve issues and advocates for taxpayer rights.
In total, the IRS employs over 70,000 people and has an annual budget of approximately $11.5 billion (as of 2020). It collects over $3.5 trillion in tax revenue each year.
How does the IRS assess and collect taxes?
The IRS uses the following key methods to assess and collect taxes from individuals and businesses:
- Tax returns – Taxpayers file annual returns reporting income, deductions, credits, and taxes owed/refunded. The IRS processes returns and reviews for accuracy.
- Withholding – Employers withhold income tax from employee paychecks. The IRS instructs employers on withholding rates.
- Estimated payments – Taxpayers who owe additional taxes make quarterly estimated payments to the IRS.
- Audits – IRS audits involve reviewing documents and financial information to verify reporting accuracy and proper tax assessment.
- Matching information documents – The IRS matches information returns (W-2s, 1099s) sent by employers and others to individuals’ tax returns.
- Penalties – Failure to file, pay on time, or report accurately can result in civil penalties assessed by the IRS.
If taxes remain unpaid, the IRS may use enforcement methods like liens, levies, asset seizures, and criminal prosecution. The IRS strives to help taxpayers avoid enforcement by providing ample opportunities to comply voluntarily with tax laws.
What are taxpayers’ basic rights and responsibilities?
Taxpayers have the following basic rights when dealing with the IRS:
- The right to be informed, which includes knowing IRS procedures, their rights during audits, and having the IRS explain and justify requests made of taxpayers.
- The right to quality service, including prompt and courteous assistance from the IRS.
- The right to pay only the amount that is legally due, including having payment plans and ombudsman assistance available if unable to pay in full.
- The right to challenge the IRS position and be heard, including questioning IRS decisions and appealing them through the process.
- The right to appeal an IRS decision in an independent forum, meaning arguing your case before the Tax Court, District Court, or Court of Federal Claims if disagreements are unresolved.
- The right to finality, meaning knowing the maximum amount owed and timeframe to challenge/appeal IRS collection actions.
- The right to privacy, which includes having information kept confidential unless provisions allow disclosure.
- The right to confidentiality, meaning current and former IRS employees are restricted from using your tax information disclosed to them.
Along with rights, taxpayers also have basic responsibilities, such as:
- Filing and paying taxes owed accurately and on time.
- Providing accurate Social Security numbers, income, and other information to the IRS.
- Properly maintaining records to support tax amounts reported each year.
- Responding timely to IRS requests for documentation or audits.
- Paying taxes owed and not submitting fraudulent returns.
Fulfilling these responsibilities helps taxpayers voluntarily comply with tax laws and avoid problems with the IRS.
What can trigger an IRS audit?
There are several red flags that may increase a taxpayer’s chances of being audited by the IRS, including:
- High income – Having an annual income over $200k singles/$400k married.
- Unreported income – Omitting income sources like freelance work or rental property.
- Suspicious deductions – Claiming excessive charitable donations or business expenses.
- Math errors – Tax return contains basic calculation mistakes flagging sloppy preparation.
- Profession/occupation – Engineers, taxi drivers and cash businesses are more prone to audit.
- Foreign activity – Having foreign bank accounts or frequent foreign travel.
The IRS uses computerized filters to flag returns with unusual patterns as well as random sampling audits. Some other potential audit triggers include:
- Drastic change in reported income
- Large capital gains or losses
- Claiming education credits approaching the limit
- Business losses continuing year after year
- Deducting 100% of vehicle expenses when not self-employed
Law requires the IRS to audit high-income taxpayers more frequently. But any taxpayer can get audited. Keeping thorough, honest records reduces audit risk. Those selected for an audit should treat it seriously and cooperate fully.
What records should taxpayers keep in case of an audit?
To have documentation ready in case of an IRS audit, taxpayers should keep the following records:
- Tax returns from previous years that have open statutes of limitation (typically 3 years)
- All Forms W-2 and 1099 received as income proof
- Records supporting educational, dependent, medical, charitable, and business expense deductions
- Mortgage and property tax statements if homeowner deductions taken
- Receipts for major purchases if sales tax deduction taken
- Records showing total days traveled outside of hometown if the Foreign Earned Income tax deduction taken
- Records of IRA and other retirement contributions made if deductions taken
- Escrow closing statements and cost basis for home, stocks, or other property if deductions taken for taxes, mortgage interest, or losses
- Business travel logs, vehicle mileage records, invoices, etc. if business expenses deducted
Taxpayers should keep financial accounts, supporting documents, and other tax-related records intact until the 3-year statute of limitations runs out in case the IRS needs them for an audit.
What penalties can the IRS impose for noncompliance?
The IRS uses various civil and criminal penalties to enforce tax laws when taxpayers do not comply. Common penalties include:
- Failure to file penalty – 5% per month of unpaid tax up to 25% if return filed over 60 days late.
- Failure to pay penalty – 0.5% per month of unpaid tax up to 25%.
- Accuracy-related penalties – 20% of underpayment for negligence, disregard of tax rules, substantial understatement.
- Failure to deposit penalty – Up to 15% for not depositing payroll or other taxes.
- Fraud penalty – 75% of the underpayment plus criminal prosecution in severe cases.
The IRS may also use:
- Liens – Legal claim on property for unpaid taxes.
- Levies – Seizure of assets such as bank accounts or property.
- Criminal prosecution – Jail time and significant fines for tax evasion.
Taxpayers facing penalties may request reductions by demonstrating reasonable cause, good faith efforts to comply, or other mitigating factors. Avoiding penalties involves filing/paying timely and maintaining thorough tax records.
How can taxpayers resolve issues with the IRS?
If taxpayers disagree with an IRS decision or need help resolving a tax issue, some options include:
- Call the IRS helpline – Many issues can be resolved through the toll-free customer service line.
- Respond to IRS notices promptly – Errors or deficiencies can often be corrected by providing requested info.
- Request a hearing – Formal appeals allow arguing the case with an IRS agent.
- Submit an Offer in Compromise – Settle tax debts at less than the full amount in certain circumstances.
- Request penalty abatement – Penalties can be abated for reasonable causes like good history of compliance.
- Seek help from the Taxpayer Advocate Service – They assist with resolving problems and navigating disputes.
- Petition US Tax Court – Disputes that remain unresolved may be argued before a judge.
Being honest and cooperative with the IRS facilitates resolution. Taxpayers should respond promptly to all notices and contacts to correct issues early. For disagreements, follow the proper appeals process.
Conclusion
The IRS serves the important function of collecting revenue and enforcing tax laws set by Congress. Taxpayers interact with the IRS by filing returns, responding to audits and requests, and paying taxes owed accurately and timely. Being aware of taxpayer rights and options for resolving issues can help navigate any problems that arise.