12/24/2022
In the United States there are a variety of government institutions charged with establishing internal order. Perhaps the most famous, and feared, is the IRS or Internal Revenue Service.
Because of its importance for permanent and temporary residents, we will review its origin and some of its basic aspects.
What is the Internal Revenue Service?
In a nutshell, the IRS represents a government agency that is in charge of enforcing laws related to taxes and the collection of taxes.
It was established in 1862 by then President Abraham Lincoln and operates under the supervision of the U.S. Treasury Department.
The Internal Revenue Service is also responsible for administering federal tax regulations issued by Congress. For this reason, it has three main functions: taxpayer service, return processing and enforcement of the statutes. In addition, it acts as an investigative agency to prevent state fraud.
This agency had its origin in the Civil War, as an initiative to raise funds. The first taxes were 3% for those earning $600 to $10,000, and 5% for those earning more.
Although the Supreme Court ruled (1894) that it was illegal, taxation was ratified by the 16th Amendment to the Constitution in 1913.
How does the Internal Revenue Service work?
The Internal Revenue Service is headquartered in the U.S. federal capital (Washington DC). From there it manages everything related to taxes assigned to individuals and corporations.
By fiscal year 2021, this agency collected more than $4.1 trillion in taxes, of which $2.3 trillion was collected from individual taxpayers and more than $400 billion from corporations and businesses.
We know that law enforcement tends to focus the efforts of this federal agency. In fact, the Tax Policy Center reported that this agency devoted 40% of its 2018 budget to this work. Of that percentage, 83% went to audits and investigations and the remaining 17% to oversight tasks.
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It is fair to say that the function of the IRS is not only focused on tax collection and reporting. This institution is also in charge of managing subsidies for lower-middle income families using the Afordable Care Act, the Earned Income Tax Credit and educational loans that help the underprivileged.
Additionally, the activities of the Internal Revenue Service are often framed in aspects such as:
- Conducting criminal investigations.
- Collecting and processing tax returns.
- Overseeing the management of some retirement plans.
- Serving as a guide for taxpayers to comply with the law.
- Ensuring that individuals and businesses pay taxes.
Electronic Tax Filing
The IRS itself is automated, making it easier for individuals and businesses to file electronically. The use of digital forms has seen a steady increase since their initial implementation in 2001. Taking 2019 data, 89.1% of all individual returns were executed under this mode.
According to 2019 figures, at least 92 million taxpayers received their refunds through direct deposit instead of the usual check. During this period, the average amounts were $2,975.
It is important to note that the IRS does not sponsor any electronic platform to conduct the corresponding returns.
Internal Revenue Service Audits
Part of the IRS's core mission is related to audits of annual tax returns. The percentage of occurrence for 2019 was divided into 0.97% on businesses and 0.6% on individuals. Of these inquiries, 73.8% were done by regular mail and the remaining 26.2% with field agents.
After peaking in 2010, audits have been gradually declining each year. In large part, this is due to a lower allocation of funds for the operation and staffing of this agency. This has caused enforcement to be down at least 15% from 2010 to 2018.
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Individuals who tend to be more likely to be audited are those who generate more income. On average, someone earning more than $1 million has a 3.2% greater chance of being summoned by the IRS, compared to 0.6% for those who receive less income.
The same is true when owning or being a partner in a business. Those who have income of $200,000 - $1 million during the tax year are 1.4% more likely than those who do not file Schedule C (self-employment) on their return.
Other red flags that lead to an examination often include: reporting higher than normal deductions, making disproportionately high donations, failing to report the correct amount of income, and insuring the loss of money from real estate rentals.
Español: Qué es el Internal Revenue Service (IRS)