What Is the Internal Revenue Service?

History

The Internal Revenue Service (IRS) was originally called the Bureau of Internal Revenue and was run by the Commissioner of Internal Revenue. The Bureau and the Office of Commissioner were established by Congress when the Revenue Act of 1862 was enacted to raise much-needed funds to pay for the Civil War. The first Commissioner of Internal Revenue was Massachusetts statesman George S. Boutwell. By 1953, the Bureau of Internal Revenue was officially known as the Internal Revenue Service. Its employees became part of the federal civil service system, except for the Commissioner and Chief Counsel who are appointed by the President and confirmed by the Congress.

The purpose of the Internal Revenue Service is to collect taxes that the federal government levies against American citizens and businesses. The various taxes, which include individual and corporate income taxes, estate taxes, excise, and payroll taxes, amount to over trillions of dollars annually. "External" revenue, such as duties and tariffs, are collected by other agencies. For the most part, the taxes collected by the IRS go to support general government programs. The payroll tax, however, is dedicated to funding Social Security and Medicare obligations. For most employees, taxes are withheld by the employer and are paid directly to the IRS. Self-employed individuals may have to pay estimated taxes quarterly.

The way in which taxes are collected per se doesn't distinguish the IRS from other tax collecting agencies throughout the world. It's the complexity of the tax laws in the United States, however, that causes the IRS to be engaged in many other important activities for taxpayers, especially in terms of providing advice on what is taxable and at what rate. There are a host of guides, bulletins, publications and in specific cases what are known as private letter rulings to help guide taxpayers, professional tax preparers, and tax attorneys through the complex Internal Revenue Code and the hundreds of pages of regulations that have been adopted by the IRS over the years. In case of a dispute, there is even a special Tax Court to resolve issues with the IRS.

The most common misconception is that the IRS is involved in tax policy, not just tax collection. The tax rates, and what is taxed, are determined by the Congress as signed into law by the President of the United States. The IRS' sole function is to interpret these laws, to assist taxpayers in meeting their obligations under the Internal Revenue Code, and to collect taxes as expeditiously as possible. In addition, states, local governments, and cities have their own tax structures. The IRS does not get involved in any state tax issue other than those that may affect a deduction to federal income taxes.

State income tax paid in the prior year is one of the more commonly overlooked deductions. If you have sufficient medical expenses to itemize your deductions, you can include these deductions as well as your transportation to and from doctor's offices, health facilities or hospitals, mileage, tolls, and parking fees. There are a host of deductions that are business related that warrant close attention if the taxpayer is self-employed, has considerable job-related, unreimbursed out-of-pocket expenses, or works at home. As is the case with all tax related issues, a trip to a tax professional may well be worth the investment -- and the fee paid to this professional is also deductible.

It's important to file your income tax returns on time even if you cannot pay the entire amount of taxes due and owing. Pay as much of your taxes as you can when you file your return, or you may be putting yourself at risk for penalty fees. The IRS exists to collect taxes as quickly and efficiently as possible. That means they have several options for a taxpayer who has difficulty paying his taxes by the annual due date of April 15. These options include extensions, installment payments, a temporary delay or an offer in compromise. The key, however, is to communicate with the IRS as soon as possible. The IRS has many civil and criminal options at its disposal to enforce the internal revenue laws of the United States. If there has been no effort to contact the IRS and arrange payment, an "enforced collection action" may be commenced. This action usually begins with what is called a Notice of Levy, which allows the IRS to seize real and personal property of the taxpayer. The IRS may also attach wages. Such an action will seriously damage the taxpayer's credit score and create problems with other creditors who expect payment on indebtedness.