Many people think that IRS publications are the definitive source of information on how to file your taxes, but this isn't the case. The tax code, a document that's tens of thousands of pages long and that seems to grow each year, is where the actual rules are found. But in addition to being incredibly long, the tax code is not easily deciphered by the average person. Because of this, a plethora of secondary sources have been developed to help make sense of the rules. In this article, we'll lay out the different sources you can consult to understand your income taxes and the pros and cons of using each source.
The Internal Revenue Code, Treasury Regulations and Revenue Rulings
The Internal Revenue Code or "the tax code" contains the official, legally binding tax rules set forth by Congress, and you can find them in Title 26, Subtitle A of the U.S. Code (a government document that lays out the laws of the United States, organized by subject). You can also read this tax code online at the Government Printing Office (GPO) website.
Treasury regulations, also known as "tax regulations", are the U.S. Treasury department's official interpretation of the tax code. These are published in Title 26 of the Code of Federal Regulations (26 CFR) and are also available online at the GPO website.
The main advantage of consulting these sources is that they are provided by the government, so you can be assured that the information in them is correct and will hold up in court. The problem is that there is a lot of information to sort through and it can be difficult to understand. If you don't understand it correctly and you act based on your misunderstanding, then you will still be held responsible for your mistakes.
To gain a better understanding of these rules, you can consult revenue rulings, which are the IRS's official interpretation of the code as it applies to specific situations. However, they do not have the same weight as the code itself or the Treasury regulations. (To get started on your taxes, see 10 Steps To Tax Preparation.)
IRS publications provide IRS interpretations of the tax code summed up in booklets that are available in print or online from the IRS website.
The publications are readily available, free and relatively concise. They are also easier to understand than the tax code itself. However, their explanations may not hold up in court, and for some people, the publications are still quite obtuse.
Attorney Stephen Fishman explains in his book, "Home Business Tax Deductions: Keep What You Earn" (2008), that the way the IRS interprets the law in its publications is "different from how a court might rule on the same issue" and recommends that people avoid relying exclusively on IRS publications for information.
A Phone Call to the IRS
IRS Publication 910: Guide to Free Tax Services, provides many phone numbers for IRS departments along with instructions on how to call them for help with your tax questions. According to this publication, the IRS recommends you have "the tax form, schedule, or notice to which your question relates; the facts about your particular situation; and the name of any IRS publication or other source of information that you used to look for the answer."
While calling the IRS might seem like the ideal solution - what other way can you get personalized tax information straight from the source? - the IRS admits in its publication that it may give you the wrong answer and that you will be held responsible if this happens: "If we should make an error in answering your question, you are still responsible for paying the correct tax."
Its only concession is that "you will not be charged any penalty due to an IRS error." By penalty, they mean the additional amount the IRS sometimes charges those who have underpaid their taxes - you will still be responsible for the back taxes and interest if an audit later determines that you paid less than you should have, even if it was based on advice from the horse's mouth. If you do call, take copious notes, including the representative's name and title, and the time and date of your call. (If you should find yourself in an audit, make sure you read Surviving The IRS Audit.)
Read What the Pros Read
The tax publications that are written for Certified Public Accountants (CPAs), accountants and tax attorneys are some of the most detailed interpretations of the tax code available. These include publications by West, CCH, Kleinrock and Tax Analysts.
However, these sources can be very expensive, and their tone is not geared toward the layman. If you aren't a CPA, accountant, or tax attorney, you may not be able to decipher the content in these expert sources. This means that you might have to approach the experts themselves.
Hire an Expert
Most people who are having trouble with their tax returns will turn to a tax expert. There is an array of choices in this category, but the two that provide the best combination of reliability and affordability are enrolled agents and CPAs. Hiring one of these professionals will save you a lot of time and (hopefully) a lot of headache. To find a tax professional in your area, visit the National Association of Enrolled Agents or the American Institute of Certified Public Accountants.
The downside is that if you do not screen your professionals carefully by asking the right questions, you could end up with one with a very liberal or even abusive interpretation of the tax code that could cost you dearly if you get audited. Further, even among the most ethical and knowledgeable of preparers, different professionals may prepare your returns differently based on their interpretations of the tax code. (To find the best expert for your situation, read Crunch Numbers To Find The Ideal Accountant.)
The best way to guard against these discrepancies is to choose a professional whose interpretation of the tax code is most in line with your own philosophy of tax payment. Are you the type who likes to take deductions aggressively and hope for the best, or would you prefer to err on the side of caution? Any good tax preparer will be able to tell you where they stand. You should also ask how much experience the person has preparing returns similar to yours, especially if your situation is unusual. (For more on how to manage your taxes alone, see Still Time To Cut Your Tax Bill.)
Visit a Volunteer
The IRS's program to assist low-to-moderate-income individuals with their tax returns is called Volunteer Income Tax Assistance (VITA). In this program, the IRS trains volunteers to answer tax questions and prepare tax returns. It even specifically teaches them to handle issues that low-income taxpayers face, like how to claim the earned income credit and the child tax credit. (Find out how these credits can help you save money in Give Your Taxes Some Credit.)
Help is available for free to qualified taxpayers (meaning those whose income does not exceed a certain threshold - generally $51,000 as of 2013). Unfortunately, these tax preparers are not professionals, so they may not always give correct advice. Also, they are only a resource for relatively simple tax returns and cannot help you if you make a lot of money.
Read Consumer Publications
There are many consumer publications designed to educate the average person about tax issues and help them take advantage of all the credits and deductions they are entitled to. The most reliable, up-to-date and widely respected sources of such information includes books published by Nolo, J. K. Lasser, and Ernst & Young.
These books are affordable (generally $25 or less) and easy to find in local bookstores and online (libraries, however, may not have the most recent versions). They are also probably the easiest to understand of all the sources that interpret the tax code.
However, the information you find in these books does not have any force of law and, depending on the author, may sometimes be more hype than substance (remember, if it sounds too good to be true, it probably is).
The rules governing income taxation are incredibly complex, and will continue to be so unless Congress enacts far-reaching income-tax reform. To fully understand what you are required to pay (and what you aren't), consult the most reliable source you can understand and afford. Finally, be aware that there's always a chance an audit could decide that you owe more (or less) than you paid, so keep money in your emergency savings account in case the odds come up against you.