Tips for Understanding the Tax Code

Many people think that publications by the Internal Revenue Service (IRS) are the definitive source of information about how to file your income taxes, but this actually isn't the case. The tax code, also called the Internal Revenue Code (IRC), is where the actual rules are published. Unfortunately, in addition to being thousands of pages long–in 2014, the IRC was approximately 2,600 pages long–the IRC is not easily decipherable by the average person.

To fill in the gaps, a plethora of secondary sources have also been developed to help taxpayers make sense of the rules regarding their income taxes. These sources are intended not only to help taxpayers understand how much taxes they owe on their income but also to understand what tax credits and deductions they are entitled to.

Key Takeaways

  • The rules governing how income is taxed in the U.S. are incredibly complex.
  • There are many sources of information that are intended to help taxpayers understanding the rules about what they are required to pay, and what tax credits and tax deductions they may be eligible for.
  • Some of these sources include the Internal Revenue Code (IRC), Internal Revenue Service (IRS) publications, calling the IRS, consulting texts for tax professionals, hiring a tax professional, seeking volunteer tax assistance through VITA, and consulting texts for a consumer audience.

The Internal Revenue Code (IRC) vs. Treasury Regulations vs. Revenue Rulings

The IRC contains the official, legally-binding tax rules that have been set forth by the U.S. Congress. Taxpayers can view the tax code online on the website for the Office of the Law Revision Counsel.

Treasury regulations–also referred to 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 on the website for the U.S. Government Publishing Office (GPO).

The advantage of consulting these sources is that they are provided by the government, so taxpayers can be assured that the information contained in them is correct. The disadvantage is that there is a vast amount of information and it can be difficult to understand. If you don't understand a rule or regulation correctly, and you make a decision regarding filing your income taxes based on your own misunderstanding, you will still be held liable for knowing the correct information.

Revenue rulings are the IRS's official interpretation of the code as it applies to specific situations. They may be easier to decipher for taxpayers, but they do not have the same legal bearing as the IRC–tax code itself–or the Treasury regulations.

Consult IRS Publications

There are IRS publications that provide interpretations of the tax code. They are summed up in booklets that are available in print or to access online on the IRS website.

The publications are readily available, free, and relatively concise. They are also easier to understand than the tax code itself. However, for some people, the publications are still quite obtuse.

Make a Phone Call to the IRS

The document called "IRS Publication 910: Guide to Free Tax Services" provides phone numbers for IRS departments, in addition to instructions about how to call them for help with your tax questions. Before you call one of these numbers, the IRS recommends that 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 an ideal solution, the IRS offers this disclaimer to taxpayers–if they provide wrong information to you, you will still be held responsible: "If we should make an error in answering your question, you are still responsible for paying the correct tax." 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 a representative at the IRS.

However, you will not be charged any penalty due to an IRS error. A penalty from the IRS is an additional amount the IRS sometimes charges to those who have underpaid their taxes. If you do call, take copious notes, including the representative's name and title, and the time and date of your call.

Consult Texts for Tax Professionals

The publications that are published for an audience of Certified Public Accountants (CPAs), accountants, and tax attorneys are some of the most detailed interpretations of the tax code available. Some of these publishers include CCH and Tax Analysts.

However, these texts can be very expensive to purchase, and they are not written for a layperson audience. They are highly technical, and if you aren't a CPA, accountant, or tax attorney, it may be hard to grasp the content in these expert sources.

Hire a Tax Professional

Most people who are experiencing difficulties with their tax returns will end up consulting a tax professional. Enrolled agents and Certified Public Accountants (CPAs) are both reliable and affordable sources of information. Hiring a professional may save you some time, even if it is an additional expense. To find a tax professional in your area, visit the National Association of Enrolled Agents or the American Institute of Certified Public Accountants.

One possible disadvantage of hiring a professional is that—if you do not screen them carefully by asking the right questions—you could end up with a professional who applies a very liberal, or even abusive, interpretation of the tax code to your financial situation. This can cost you dearly if you get audited. However, it's important to keep in mind that even amongst the most ethical and knowledgeable of tax preparers, different professionals may prepare your returns differently based on their interpretations of the tax code.

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 obligations. Are you the type who prefers to opt for deductions aggressively and hope for the best, or would you prefer to err on the side of caution? An experienced tax preparer will be able to articulate their stance so you can see if it matches up with your own vantage point. You may also want to ask how much experience the person has with preparing returns similar to yours, especially if your tax situation is unusual.

Seek Volunteer Income Tax Assistance

The IRS has a program for providing assistance to low-to-moderate-income individuals with their tax returns. This program is called Volunteer Income Tax Assistance (VITA). Volunteers specifically trained by the IRS help taxpayers answer their tax questions and prepare their tax returns. There is a special emphasis in this program on helping low-income taxpayers understand what possible advantages the tax code may include for individuals specifically in their situation, like how to claim the earned income credit (EITC) and the child tax credit.

Help is available for free to qualified taxpayers. Individuals typically qualify based on their income; for tax year 2022, if your income does not exceed $58,000, you may qualify for assistance through VITA. The tax preparers that work for VITA are volunteers, and they may not have professional-level tax training, so it's possible they may not always give correct advice. In addition, their training is typically only intended to help with relatively simple tax returns.

Consult Texts for a Consumer Audience

There are many consumer publications that are intended to educate the average taxpayer about income tax issues, and help them take advantage of all the credits and deductions they are entitled to. Some of the most reliable, up-to-date, and widely respected sources include 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. While libraries may have copies of them, they may not be the most recent versions. Of all the credible sources that attempt to interpret the tax code for individual taxpayers, these books are probably the easiest to understand.

However, it's important to remember that information you find in these books does not have any legal bearing.

The Bottom Line

The rules governing how income is taxed in the U.S. are incredibly complex. In order to fully understand what you are required to pay (and what you aren't), it's recommended that taxpayers consult the most reliable source of information they can understand and afford. Finally, if you are ever in a situation where you are audited, there's always a chance you may be required to pay more than you thought you had to. In the event that this happens, you may want to keep some money in an emergency savings account.

Article Sources
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  1. Tax Foundation. "How Many Words are in the Tax Code?"

  2. U.S. House of Representatives Office of the Law Revision Council. "26 USC Subtitle A: Income Taxes From Title 26—Internal Revenue Code."

  3. U.S. Government Publishing Office. "Code of Federal Regulations: Title 26 Internal Revenue."

  4. Internal Revenue Service. "Understanding IRS Guidance - A Brief Primer."

  5. Internal Revenue Service. "Homepage."

  6. Internal Revenue Service. "IRS Tax Publications in Large Print," Download "Publication 910: IRS Guide to Free Tax Services," Page 53.

  7. Internal Revenue Service. "IRS Tax Volunteers."

  8. Internal Revenue Service. "Free Tax Return Preparation for Qualifying Taxpayers."

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