What Is the Internal Revenue Service (IRS)? How Auditing Works

WDC NEWS 6 STAFF January 30, 2024

9 8 minutes read

What Is the Internal Revenue Service (IRS)?

The Internal Revenue Service (IRS) is the U.S. agency that administers federal tax laws and collects federal taxes from U.S. individual and corporate taxpayers.

The IRS is the division of the U.S. Treasury Department that is tasked with enforcing the Internal Revenue Code (IRC).

Established in 1862, the agency collects gift, excise, and estate taxes as well as income taxes. The IRS routinely conducts audits to ensure that taxpayers comply with tax laws.

Key Takeaways

The Internal Revenue Service is the U.S. government agency responsible for collecting federal taxes and enforcing the tax laws.
Most of the work of the IRS involves individual and corporate income taxes.
The IRS audits taxpayers randomly or after detecting irregularities in tax returns.
You can contact the IRS by phone, by mail, online, or in person by making an appointment.

How the Internal Revenue Service (IRS) Works

President Abraham Lincoln created the office of Commissioner of Internal Revenue in 1862 to collect taxes levied to fund the Civil War. In 1913, Congress was given the power to enact income tax laws, paving the way for the Bureau of Internal Revenue.

The agency’s name was changed to the Internal Revenue Service in the 1950s, and went through a series of changes and reorganization to what it is today.

Based in Washington, D.C., the agency’s mission is to enforce tax laws and collect federal taxes from all taxpayers in the United States, including individuals and corporations.

The Tax Collecting Process

The process includes collecting estimated taxes from wage earners throughout the year via payroll deductions and collecting quarterly estimated tax payments from businesses based on quarterly tax filings.

An annual filing, usually due by April 15th for the previous tax year, reconciles the amounts paid by each individual and business and the actual amounts owed. If the taxpayer has overpaid, the IRS issues a tax refund. If the taxpayer owes money, the payment is due with the paperwork.

The agency’s website explains how federal tax laws work, including those involving gifts, excise taxes, and estates. According to the agency:

U.S. taxpayers must comply with tax laws that are passed by U.S. Congress
Taxpayers must understand and meet their tax obligations
The IRS is designed to help compliant taxpayers and ensure that those who aren’t compliant pay their share

$4.4 trillion

The amount of tax revenue collected by the IRS in the 2023 tax year. This represents about 99% of the country’s gross receipts.

Processing federal tax returns and collecting revenue from individual and corporate taxpayers are the main roles of the IRS. For the week ending Oct. 27, 2023, the IRS reported:

Receiving 160.49 million individual returns
Processing 161.16 million individual returns
Issuing 104.66 million refunds totaling $319.66 billion

The IRS Budget

The IRS operates on a budget that is approved by Congress. This is divided into four accounts: Taxpayer Services, Enforcement, Operations Support, and Business Systems Modernization. The money allotted to each cannot be reallocated to other sections.

The agency requested a budget of $14.14 billion for the 2024 fiscal year. It also requested that the allocation structure be changed so that money can be moved between accounts as needed.

IRS Commissioner Danny Werfel was appointed as the agency’s 50th commissioner on March 13, 2023.

Tax Filing and Collection

Filing Your Taxes

Nearly all individual taxpayers use either Form 1040: U.S. Individual Tax Return Definition, Types, and Use or Form 1040-SR: Tax Return for Seniors. The forms are nearly identical although the print version of Form 1040-SR uses a larger type font.

The forms are used to report taxable income and determine whether additional taxes are owed or a refund is due.

How Corporations File Their Tax Returns

Corporations use Form 1120: U.S. Corporation Income Tax Return to report their income and tax liabilities. There are variations of the form, depending on the type of corporation, including:

Form 1120-C: U.S. Income Tax Return for Cooperative Associations
Form 1120-F: U.S. Income Tax Return of a Foreign Corporation
Form 1120-H: U.S. Income Tax Return for Homeowners Associations
Form 1120-L: U.S. Life Insurance Company Income Tax Return
Form 1120-S: U.S. Tax Return for an S corporation

Additional Forms for Individuals and Corporations

Many individual and corporate taxpayers also have to complete and attach additional forms and documents to back up the numbers they record on the main forms.

The documents include forms such as the W-2 and the 1099, which are supplied by the companies that paid money to the taxpayer during the year. The companies also submit this information to the IRS, which is why mistakes and omissions in returns may be caught months or years after a return is filed.

Additional IRS forms are supplied by the taxpayer. These include the Schedule D, which is used to report capital gains received from the sale of stocks, properties, and other taxable income sources, and the Schedule A, which records the details of tax deductions claimed by the taxpayer.

Paying Your Taxes

Taxpayers may file their returns by mail or electronically using tax preparation software designed for consumer use. In either case, a taxpayer may also use the services of tax professionals, such as tax preparers or accountants.

Although the agency still accepts paper returns, it strongly recommends that taxpayers file electronically to avoid delays in payment of any money they are due.

The agency does not endorse any particular platform or filing software. E-filed returns are now used by most taxpayers.

Paying Your Taxes

Individual taxpayers can pay their taxes directly to IRS through an electronic transfer of funds from their bank accounts or by using a credit or debit card. Other methods include same-day bank wires or electronic funds withdrawals at the time that you e-file your return with the Electronic Federal Tax Paying System.

The IRS offers payment plans for both individuals and businesses.

Taxpayers may also mail in a personal check, cashier’s check, or money order payable to U.S. Treasury. The following information must accompany the payment:

Just like paper returns, the IRS strongly recommends making electronic payments to avoid any delays.

Can I Pay Taxes in Cash?

Taxpayers may pay in cash by making an in-person appointment at an IRS Taxpayer Assistance Center by calling (844) 545-5640, Monday through Friday, 7 a.m. to 7 p.m. ET. Taxpayers should call 30 to 60 days before they intend to make a payment.

Cash payments are also accepted at the following IRS retail partners: Dollar General, Family Dollar, CVS Pharmacy, Walgreens, Pilot Travel Centers, 7-Eleven, Speedway, Kum & Go, Royal Farms, Go Mart, Rite Aid, Stripes, TAA Operating, Walmart, The Kroger Co., Circle K and Kwik Trip.

Taxpayers must wait to receive a payment code from the IRS via email, which is presented when making the payment. There is a limit of $500 per payment.

The fiscal year of the IRS runs between Oct. 1 and Sept. 30.

Internal Revenue Service Audits

The IRS audits a small percentage of income tax returns every year as part of its enforcement mission. The agency randomly selects taxpayers to audit or singles out those whose returns are related to others that were audited. In other cases, there are red flags in returns that alert the IRS to conduct an audit.

The audit process begins with a review of the return by an auditor. The auditor may either accept the return or request a further review by an examination group. In the latter case, the taxpayer is notified by mail.

The audit involves reviewing paperwork and may be conducted by mail or in person at an IRS office or another location, such as the taxpayer’s home, business, or accountant’s office.

While there is no single factor that determines who gets an IRS audit each year, but there are some red flags that may trigger a review:

Failing to declare the right amount of income
Claiming a higher-than-normal number of deductions (especially business-related ones)
Making disproportionately large charitable donations compared to income
Claiming rental real estate losses

You may also run the risk of being audited if you run your own business or earn a high income.

How Many Are Audited by the IRS?

The IRS reported 708,309 audits as of the end of its 2022 fiscal year. Out of all of these audits, the IRS audited 0.49% of individual returns and 0.84% of corporate returns.

The agency collected $30.2 billion in additional tax revenue as a result of these reviews.

Most audits were conducted by mail (78.4%) while the remainder (21.4%) were conducted face-to-face.

Make sure you keep all your documents in a safe place in case you get audited. The IRS may include your last three years of returns in an audit but may go back further if it notices a significant error. The agency generally doesn’t go back beyond six years.

How to Connect With the IRS

By Mail

If you file a tax return by mail, your state of residence and whether or not you are expecting a tax refund will determine the address that you should use. There is a list on the IRS website.

If you send an application or a payment, there is also a list on the IRS website of mailing addresses depending on your purpose.

By Phone or Online

Individuals can contact the IRS by phone at (800) 829-1040, Monday through Friday, 7 a.m. to 7 p.m. local time. There are other toll-free numbers for businesses and other purposes.

It can take some time and effort to reach a live agent, especially as the tax deadline approaches. The caller first has to respond to a series of automated questions.

For online assistance with many frequently-asked questions, try the Interactive Tax Assistant on the IRS website.

Meeting the IRS in Person

You can set up an in-person appointment by phone at your local IRS office. The IRS website has a locator page into which you enter your ZIP code to get the office location and phone number.

When Was the US Income Tax Established?

Income taxes were only collected periodically for special purposes (usually war) until 1913, when they were made permanent.

The IRS was established in 1862 by President Abraham Lincoln, who instituted an income tax to pay for the Civil War. The tax was repealed in 1872, revived in 1894, and declared unconstitutional by the U.S. Supreme Court in 1895.

In 1913, the 16th Amendment to the U.S. Constitution reinstated the federal income tax.

What Is the Best Way to File My Tax Return?

It’s best to file your taxes electronically, as 93.8% of taxpayers did in the IRS’s 2022 fiscal year. You can still file a paper return by mail, but doing so will delay your receipt of any refund.

How Can I Pay My Taxes?

The most common way to pay taxes is by electronic transfer, either directly from a bank account or through a debit or credit card. However, you can also pay by check or money order, and you can even pay in person—using cash if you wish.

What Are the Chances of Being Audited by the IRS?

The audit rate for individual tax returns was 0.49% in 2022. Your chances go up if you make big bucks. The IRS has audited the returns of 8.5% of the people making $10 million or more between 2012 and 2020.

No single factor determines whether or not the IRS will audit you. Some are randomly selected although others are triggered by departures from the norm, such as a charitable deduction that exceeds the filer’s reported income.

The Bottom Line

If you’ve ever filed a tax return, you should have a pretty basic understanding of what the IRS does. This agency is part of the Treasury and is responsible for collecting taxes and enforcing tax laws.

Given a history that dates back more than a century and a half, the face of the IRS has changed. In its earliest years, tax collectors went door-to-door to collect money to fund the Civil War, it now accepts returns and payments by mail and electronically.

The best way to stay out of trouble is to report your taxable earnings accurately and pay your taxes on time. If you don’t, you run the risk of being fined or audited. And remember: Keep all your records in a safe place in case the IRS comes knocking.

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What Is the Internal Revenue Service (IRS)? How Auditing Works