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 (such as the wash sale rule). 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, including mutual funds and dividends. People colloquially refer to the IRS as the "tax man."
- Founded in 1862, the Internal Revenue Service (IRS) is a U.S. federal agency responsible for the collection of taxes and enforcement of tax laws.
- Most of the work of the IRS involves income taxes, both corporate and individual; it processed nearly 141 million tax returns in 2018.
- Nearly 90% of tax returns are filed electronically.
- After peaking in 2010, IRS audits have been on the decline each year.
How the Internal Revenue Service (IRS) Works
Headquartered in Washington, D.C., the IRS services the taxation of all American individuals and companies. For the 2019 fiscal year (Oct. 1, 2018 through Sept. 30, 2019), it processed more than 250 million income tax returns and other forms. During that period the IRS collected more than $3.5 trillion in revenue and issued more than $452 billion in tax refunds.
Individuals and corporations have the option to file income returns electronically, thanks to computer technology, software programs, and secure internet connections. The overwhelming majority do so. During fiscal year 2019, nearly 89.1% of all individual returns made use of the e-file option.
The number of income taxes that use e-file has grown steadily since the IRS began the program. By comparison, 40 million out of nearly 131 million returns, or nearly 31%, used the e-file option in 2001.
Although the Internal Revenue Service (IRS) recommends filing tax returns electronically, it does not endorse any particular platform or filing software.
How Powerful Is The IRS?
The IRS and Audits
As part of its enforcement mission, the IRS audits a select portion of income tax returns every year. For the 2019 fiscal year, the agency audited 771,095 tax returns or 0.5% of all returns filed. This number breaks down to 0.6% of individual income tax returns and 0.9% of corporate tax returns (excluding S corporations). Around 73.8% of IRS audits occurred through correspondence, while 26.2% happened in the field.
After rising to a peak in 2010, the number of audits has steadily dropped each year. The amount of funding set aside for tax enforcement has declined 15% from 2010 to 2018, which indicates even fewer audits should occur.
Reasons for an IRS audit vary, but some factors may increase the odds of an examination. Chief among them: higher income. In 2018, the audit rate for all individual income tax returns was .6%, but for someone who made more than $1 million income, it was 3.2%.
And running your own business carries greater risks too. Individuals making between $200,000 and $1 million in one tax year who don't file Schedule C (the form for the self-employed) have a .6% chance of being audited, vs. 1.4%—basically double—for those who do.
Other red flags for an audit include failing to declare the right amount of income, claiming a higher-than-normal amount of deductions (especially business-related ones), making disproportionately large charitable donations compared to income and claiming rental real estate losses. No single factor determines who does or does not face an IRS audit each year.