What Is the Internal Revenue Service (IRS) & What Does It Do?

KEY TAKEAWAYS

• The Internal Revenue Service (IRS) is a U.S. federal agency. It is responsible for collecting taxes and the enforcement of tax laws within the United States.
• The majority of the work that the IRS does involves both corporate and individual income taxes. 
• It’s important to make sure that your business is fully in line with the rules and regulations of the IRS. This is to avoid audits and potentially large fines.

What Is the Internal Revenue Service (IRS)?

The Internal Revenue Service (IRS) is an American government agency in charge of tax revenue collection and tax law enforcement.

Abraham Lincoln established the organization in 1862. The agency is governed by the U.S. Department of the Treasury. Its main objective is to collect employment and federal income taxes. Some of the federal income taxes include individual, corporate, gift, excise, and inheritance taxes.

How the Internal Revenue Service Works

The IRS, which has its main office in Washington, D.C., handles all income taxation for businesses and individuals in the United States. It handled more than 261 million tax returns and other forms during the fiscal year 2021. 

The IRS generated more than $3.5 trillion in revenue during that time and distributed more than $600.1 million in tax refunds. 

Thanks to computer technology, software, and safe internet connections, both individuals and organizations have the option of filing income tax forms electronically. Since the IRS launched the program, the number of income tax returns that use e-file has steadily increased, and the vast majority are now submitted this way. Nearly 90 percent of all individual returns during FY 2021 used the e-file option.

However, if you compare that to the number in 2001, roughly 40 million out of nearly 131 million returns, or little under 31 percent, used it.

What Taxes Does the Internal Revenue Service (IRS) Manage?

The IRS manages the following taxes:

• Employment income taxes: The tax you pay on the money you earn from employment. 
• Individual income taxes: The tax imposed on the earnings of an individual during the year, including wages, salaries, dividends, interest, and other income.
• Corporate taxes: Tax on a corporation’s profits.
• Gift taxes: The tax charge on gifts of cash or property made by one living person or business to another.
• Excise taxes: Indirect levies on the consumption or sale of particular goods, including alcohol, cigarettes, and energy.
• Inheritance taxes: Inheritance tax is imposed on a decedent’s estate, which includes their assets, money, and things.

What Are the Most Common IRS Notices?

The IRS has a large number of notices that they send out to taxpayers. We’ve picked out a selection of some of the more common ones with a short explanation of what they mean:

• CP10: This will be sent when there has been a miscalculation on your return. These changes could impact the estimated tax payment you want to be applied to the next year. 
• CP14: This notice is sent by the IRS when you owe money on unpaid taxes. 
• CP49: This notice tells you that the IRS used your partial or whole tax refund to pay a tax debt. 
• CP90: You are being informed by this notice that the IRS intends to seize certain assets for unpaid taxes.
• CP297A: This is a notice stating that the IRS levied your assets for unpaid taxes and your right to a hearing.
• CP523: This notice advises you that you have defaulted on your agreement and that the IRS intends to revoke your installment agreement (payment plan) and seize your assets.
• 668D/LP68: This informs you that the IRS has lifted an existing levy on you.

Summary

The IRS is a government agency that handles all forms of taxation within the United States of America. Since the rise of the internet, it’s become much easier to file your taxes online. The IRS website has a wealth of information that you can use to help you make sure that your taxes are filed correctly.

It’s vital that you understand your tax commitments. If you are found to be underpaying or avoiding your taxes, the IRS can hit you with large penalties and possibly criminal action. 

For any further information, visit the IRS website.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.