What Is the Internal Revenue Service (IRS)?
The Internal Revenue Service (IRS) is the federal agency that collects tax revenue for the federal government. It’s the entity that’s behind all those deductions in your pay and those quarterly estimated tax payments you make if you’re self-employed. The IRS has rules you must follow and, if you choose not to, you can face some pretty stiff consequences.
But that’s just the big, broad picture. Learn who the IRS really is, what it does, and other important considerations.
What Is the IRS?
The IRS is the federal agency that enforces tax laws that Congress enacts. Some of the agency’s duties include:
- Collecting and processing tax returns that individuals and businesses file
- Making sure you pay any taxes that are due
- Issuing refunds if you overpaid taxes during the year
- Overseeing certain retirement plans
- Conducting criminal investigations
- Guiding you through all these issues in a friendly, helpful manner
What Does the IRS Do?
The enforcement arm of the IRS might be its busiest. The Tax Policy Center reported in May 2020 that the agency dedicated nearly 40% of its 2018 budget to enforcement, and 83% of that 40% funded tax audits and investigations. The other 17% paid for investigations and oversight.
But IRS involvement in the lives of Americans doesn’t begin and end with collecting taxes. The agency is also in charge of managing various tax credits and subsidies for low- and middle-income families, like the Earned Income Tax Credit, subsidies under the Affordable Care Act, and education tax credits that help put you or your children through college.
Who Owns the IRS?
The IRS is a bureau of the U.S. Department of Treasury and considers itself a “tax administrator” that works under the direction of the Secretary of the Treasury. So rather than be “owned” by the Treasury, the IRS more so “works for” the Treasury.
The IRS has repeatedly argued that, even though Congress did not create the IRS through an act, it is a government agency. It cites the 1971 Supreme Court case Donaldson v. the United States, in which the court ruled the IRS is allowed to administer internal revenue laws as an agency would. Also, the IRS points out that the U.S. Code grants the Secretary of the Treasury full authority to enforce tax law and to appoint an agency to do so.
The President appoints the IRS Commissioner, who is the chief executive of the IRS. The Senate must approve the appointee, a process that’s been in place since the 1950s. Commissioners serve five-year terms and are responsible for overseeing all operations of the IRS from processing tax returns and enforcing tax laws to the collection of taxes.
When Did Federal Income Tax Start?
Income tax has its origin in the Civil War. President Abraham Lincoln signed income tax into law and created the “Commissioner of Internal Revenue” in 1862 to raise revenue for the war effort. That first income tax was 3% on incomes from $600 to $10,000, and 5% on incomes over $10,000. That tax didn’t last long, however. It was repealed 10 years later, in 1872. Congress brought the income tax back 22 years later via the Wilson Tariff Act of 1894 but that wasn’t permanent, either. The Supreme Court ruled one year later that the tax was unconstitutional.
Then, the 16th Amendment was ratified in 1913 when three-quarters of Americans formed a majority to amend the Constitution to allow the government to impose an income tax. The first Form 1040 tax return came into being a year later. The first personal income tax was 1% for incomes above $3,000 and 6% for incomes of more than $500,000.
Then came World War I and another war effort. Congress hiked the top tax rate to an incredible 77%, where it remained for 11 years. The rate dropped to 24% by 1929, only to increase again in response to the Great Depression.