What is the 'Internal Revenue Service - IRS'

The Internal Revenue Service (IRS) is a U.S. government agency responsible for the collection of taxes and enforcement of tax laws. Established in 1862 by President Abraham Lincoln, the agency operates under the authority of the United States Department of the Treasury, and its primary purpose includes the collection of individual income taxes and employment taxes. The IRS also handles corporate, gift, excise and estate taxes. People colloquially refer to the IRS as the "tax man."

BREAKING DOWN 'Internal Revenue Service - IRS'

Headquartered in Washington, D.C., the IRS is an expansive organization that services the taxation of all Americans. For fiscal year 2014, the IRS

processed nearly 147.5 million personal income tax returns and more than 2.2 million corporate income tax returns. These types of returns brought the federal government close to $2 trillion of revenue.

E-Filing

Individuals and corporations have the option to file income returns electronically thanks to computer technology, software programs and secure Internet connections. During the 2015 tax filing season, more than 91% of all returns came through this e-file option, which comes to more than 128 million out of 150 million returns from January to October 2015. The number of returns that use e-file has grown steadily since the IRS began that program. By comparison, 40 million out of 131 million returns, or just 31%, used the e-file option in 2001. More than 128 million taxpayers received their returns through direct deposit rather than a traditional paper check in 2015, and the average direct deposited amount was $2,935.

Audits

As part of the enforcement mission of the IRS, the agency audits a select portion of income tax returns every year. For the 2013 tax year, the agency audited approximately 1.4 million income tax returns, or 0.7% of all returns filed. This number breaks down to 0.9% of individual income tax returns and 1.3% of corporate tax returns. Around 71% of IRS audits occur through the mail, while 29% happen in the field.

After rising to a peak in 2010, the number of audits has steadily declined. The amount of funding set aside for tax enforcement declined 5% from 2014 to 2015, which indicates even fewer audits should occur. Reasons for an IRS audit vary, but some factors may increase the odds of an examination. Someone who makes more than $200,000 in one tax year has a 2.71% chance of having an audit. One out of every 13 returns of those earning more than $1 million per year undergo an audit.

Other red flags for an audit include failing to declare the right amount of income, claiming a higher-than-normal amount of deductions, running a small business as self-employed, making large charitable donations compared to income and claiming rental losses. There is no one single factor that determines who does or does not face an IRS audit each year.

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