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 services the taxation of all Americans. For fiscal year 2016, it processed more than 244 million income tax returns, including both individual and corporate tax returns. During that period the IRS collected more than $3.3 trillion in revenue and issued $426 billion in tax refunds.

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 2016 tax-filing season, 92% of all returns came through this e-file option, which comes to more than 131 million out of  more than 152 million returns. The number of returns that use e-file has grown steadily since the IRS began that program. By comparison, 40 million out of nearly 131 million returns, or nearly 31%, used the e-file option in 2001. As of April 2017, more than 81.6 million taxpayers received their returns through direct deposit rather than a traditional paper check, and the average direct deposited amount was $2,932.

Audits

As part of the enforcement mission of the IRS, the agency audits a select portion of income tax returns every year. For the 2015 tax year, the agency audited approximately 1.2 million income tax returns, or 0.6% of all returns filed. This number breaks down to 0.7% of individual income tax returns and 1.1% of corporate tax returns (excluding S corporations). Around 71% of IRS audits occurred through the mail, while 29% happened 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 has declined 20% from 2010 to 2016 which indicates even fewer audits should occur. Reasons for an IRS audit vary, but some factors may increase the odds of an examination. In 2016, someone who made more than $200,000 in one tax year has a 1.7% chance of facing an audit. A taxpayer with over $1 million income per year faced a 5.8% chance of being audited. 

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 single factor that determines who does or does not face an IRS audit each year.

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