The Internal Revenue Service (“IRS”) is the tax agency of the United States federal government. The IRS is responsible for collecting taxes and enforcing the laws that govern taxation in the US
The IRS is part of the U.S. Department of the Treasury and is directed by the Commissioner of Internal Revenue. The IRS is in charge of explaining, overseeing and applying the taxation provisions of the Federal tax law.
The Internal Revenue Code is the primary Federal tax law in the United States, and is the governing set of rules for the way in which the government can generate income from taxation of citizens.
How the IRS Works
The IRS works by establishing, within the Internal Revenue Code, a tax that will be assessed to Americans, both those who work in the country and those who are employed abroad.
With respect to income tax of citizens, the IRS process is as follows:
- First, an individual starts by assessing their gross income, including all income generated from working, income earned from interest, pension income and annuities.
- Next, the taxpayer must subtract any applicable adjustments from their gross income, such as alimony, retirement investments, interest penalties assessed on early withdrawal of retirement savings, self-employment tax deductions, applicable moving expenses, and interest paid on education loans. The outcome of the deduction process produces what is called the adjusted gross income (“AGI”).
- The third step after the AGI is determined is to figure out how to claim deductions. There are two possible choices for taxpayers, and each taxpayer may choose whichever option best suits them (usually the option that yields the greater amount of deductions)
- Itemized deductions include, but are not limited to, things like: medical expenses, contributions to charity, mortgage interest, local and state taxes and loss.
- The final step to determining tax liability is to subtract personal exemptions to end up with the total taxable income for an individual.
- Once taxable income is determined, the taxpayer will fall into 6 predetermined tax brackets that will layout the percentage of income that individuals will be liable for.
How to Communicate with the IRS
In order to communicate with the IRS, a taxpayer must submit the correct form stating the reason for communication and the topic of the inquiry. Once received, the IRS will assign a case worker to the inquiry and the issues will be addressed and the taxpayer will be contacted, either by mail, by phone or both.
The caseworker will be responsible only for answering routine and procedural questions and verifying the facts included on the form the taxpayer sent to the IRS.
Communication with the IRS is best done via US Postal Service mail as opposed to fax or phone.
Tax Laws and Code
Primary Sources
Internal Revenue Code (IRC) [Legislative Rulings]: IRC is the only primary source of tax law. Congress makes this law by enacting and amending code sections. Even if court tries to promulgate a rule, it is not controlling because Congress is the authority on this issue. Courts cannot impose a rule but they can interpret the rule, determine what the code was intended to mean.
Treasury Regulations: Regulations are the most important administrative, interpretative source of federal tax law. They interpret the code section such as terms otherwise undefined in the statute and give examples of the scope of code. Under IRC § 7805, the Secretary of the Treasury (the person in charge of making regulations) is given general authority to “prescribe all needful rules and regulations for the enforcement” of the IRC.
Court gives great weight to treasury regulations and will generally uphold the regulations if its interpretation is reasonable [if there is more than one interpretation to a code, courts will follow interpretation offered by treasury regulations unless it is unreasonable].
Legislative regulations are harder to overturn than Treasury dept regulations. Both types are difficult to overturn because courts give deference to Treasury dept regulations. Treasury dept regulations have the force and effect of law unless they are inconsistent with the statute. Treasury dept regulations are not promulgated by congress, only the code is.
Secondary Sources
Pronouncements of the IRS Itself (IRS bulletin (IRB)): Every week the IRS comes out with pronouncements to tell the public what it has been discussing.
Revenue Rulings: IRS considers itself bound by the Treasury Dept.’s
revenue rulings which are published in the IRB. They are willing to stand by their rulings even if they later change them so it is favorable for you to rely on them. If you do rely on the ruling, then they will honor it. However, once they change the rule, you may no longer rely on the old rule and they will not honor it. Changes to rules are prospective, not retroactive. However, factual situation must be the same. If the facts are different, all bets are off and the IRS will not be bound by the ruling. If you challenge a decision, you will pay penalties if you lose. If you challenge the rules and you win, you will not pay anything.
Revenue rulings are formatted as: “79-24.” The first number tells you the year and the second number tells you the ruling number. Revenue rulings are generally the Treasury’s answer to a specific question raised by a taxpayer concerning the taxpayer’s tax liability. They are published to provide precedents for uniform application in the disposition of like cases. These rulings are issued by the national office of revenue service without public hearings. The rulings normally emanate from cases that they think the public needs guidance on. Although they deal with a specific taxpayer, that taxpayer will not be named in the facts.
Cumulative Bulletin (aka Cum. Bull): This is semiannual and contains all of the revenue rulings within that time period. It also contains tax legislation committee reports.
Private Letter Rulings: Private letter rulings are also issued to individual taxpayers upon their request and the taxpayer remains confidential. If the taxpayer’s attorney contemplates entering into a transaction, they can ask in advance of the transaction what position the IRS takes on the transaction. To do this, you write a letter to the IRS and ask for advance blessing for transaction. You may enter into the transaction on reliance of the private letter ruling and will not change position even if they decide later they were wrong.
- In previous type (revenue ruling), the whole world can rely on it, however, in private ruling, only that specific taxpayer may rely on it.
- Under the Freedom of Information Act, the government is required to make private letter rulings available to the public in a way that taxpayer cannot be identified.
Internal Memoranda of the IRS: Chief Counsel’s Office: The IRS can request legal advice from chief counsel & get memoranda on the law.
Judicial Opinions: Courts interpret statutes if there is a dispute as to the intention of congress or the meaning of a word in a statute. If statute is clear, the court cannot ignore it. However, the statute is usually unclear if it gets to the court system in the first place.
Presidential Messages, Congressional Hearings, and Committee Reports: Tax bills must start in the Ways and Means Committee of the House of Reps. which makes a report. Then the bill goes to the Senate Finance Committee which makes a report, and then the bill goes to the Conference Committee which makes their report. The Conference Committee report then is introduced for approval where the House and senate vote in favor of the compromised bill.
Some members of the Supreme Court say that these reports are irrelevant as to intention of Congress, while others (most courts, particularly lower courts) look at reports in determining the intention of congress when there is ambiguity in the statute. They cite to it often.
Note: The United States has a graduated tax system: When individuals make more money, they have to pay more taxes because they have a higher tax rate. The US has always had this type of system.
