How the IRS Works

Internal Revenue ServiceWhen tax time rolls around, many people experience a gripping fear about whether or not their taxes are accurate and complete. Understanding how the IRS works is one way to alleviate some of its mystery and will help you know what to do if the powerful government agency turns its eye your way.

A Brief History

Following the passage of the Revenue Act of 1862 and subsequent creation of the Commissioner of Internal Revenue’s post, the first income taxes were levied as an antidote to the costs of Civil War. Back then, incomes between $600 and $10,000 paid a 3% tax, while a 5% tax was levied on incomes above $10,000. The Bureau of Internal Revenue provided the ways and means to collect taxes and was the predecessor to today’s Internal Revenue Service.

Organization of the IRS

The Internal Revenue Service falls under the jurisdiction of the Department of Treasury and employs more than 115,000 people. The IRS is based in Washington D.C., with supporting “campuses” across the country. The service is overseen by the Commissioner of Internal Revenue, who is appointed by the president and confirmed by the Senate. The office of Chief Counsel serves as adviser, and a nine-member oversight board ensures taxpayer fairness and reviews the future plans of the IRS. In 2000, the overburdened tax agency was divided into four main divisions: 

1- Wage and Investment income.

2- Small-business/self-employed income.

3- Large and midsize business.

4- Tax-exempt and government entities.

Types of taxes

In 2017, individual income tax (including estate and trust income) provided the highest revenue by far, netting well over $1.4 billion and accounting for 49% of total returns. Business income tax netted just under $3 million with 9.9% of total returns. Employment tax netted 1.1 billion and 37.6% of returns and lesser taxes such as estate, gift, and excise taxes took in $22 million and accounted for .08% of returns

Filing Taxes and Voluntary Compliance

For all its offices and chapters, the IRS still counts on taxpayers to voluntarily report their incomes every year. Employer withholding and audit fears boost the incentive to file on time and honestly. The IRS Appeals Office and Taxpayer Advocate Office aid taxpayers in the event of a dispute with the IRS.

Audits and Taxes Owed

If a tax return is flagged for errors or questionable accounting, or if a taxpayer is randomly selected, an audit may ensue. In the event of an audit, individuals and businesses are encouraged to be in current compliance with tax laws and prepare to disclose financial records. Installment agreements and settlements are not uncommon, and consulting a tax attorney may be the best solution to negotiate terms. To avoid an audit, keep thorough documentation or hire a tax professional.

Filing taxes, whether it’s for business or individual income, doesn’t have to be full of mystery and trepidation. Tax professionals are well-versed in the working of the IRS and can guide the way to avoid pitfalls and maximize your tax savings.

Shift Frequency © 2019 – Educational material

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