- The Internal Revenue Service, better known as ‘The IRS’, is a bureau of the Department of the Treasury charged with collecting taxes, enforcing the nation’s tax laws and administering the Internal Revenue Code.
What is the IRS?
The Internal Revenue Service (IRS) is the US government agency responsible for collecting taxes and enforcing tax codes.
The IRS was originally established in 1862 by President Lincoln when he enacted an income tax to help cover the costs of war.(1) The IRS is also empowered by the 16th Amendment to the constitution, which gives the U.S. Congress the authority to collect an income tax. In 2014, the IRS collected over $3 trillion from taxpayers and processed close to 240 million tax returns.(2)
The Internal Revenue Service primarily deals with individual income taxes and employment taxes; but also regulates corporate, gift, excise, and estate taxes.(3)
Most employers withhold income tax from employees’ paychecks so that they owe a minimal amount or receive a refund when they file their taxes.
Where do my tax dollars go?
Though the IRS was originally established to collect taxes to fund the costs of the Civil War, now the money they collect helps fund many different social programs in the United States. Social Security, Medicare, Medicaid, safety net programs, national defense, veteran benefits and paying off the interest on our national debt are just a few of the places your tax dollars go.(4)
What’s the difference between state and federal taxes?
Taxpayers are responsible for filing both federal taxes and state taxes. Federal taxes go toward federal or national governmental programs while state taxes go to fund programs in the individual’s state of residence.
Federal taxes are the same throughout the country and vary depending on your income bracket — generally, the more money you make, the more you pay in taxes.
State taxes vary from state to state. Most states have a similar system to the federal system in that you pay more if you have a higher income. But this isn’t true in all states: Pennsylvania has a flat tax rate meaning everyone pays the same percentage regardless of income, and seven states impose no state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming).
What does it mean to be audited?
Every year the IRS reviews or audits a certain portion of tax returns. In 2013 they audited slightly less than 1% of individual tax returns. Generally speaking, the more income you earn, the higher your chances are of being audited. People who earn over $200,000 per year have about a 0.7% chance of being audited, and people earning over $1 million per year have a 7% chance of being audited.
Other reasons that you might undergo an audit include failure to declare the proper amount of income, claiming a large number of deductions, or running your own business.
Many people assume that an audit means you’ll end up owing the IRS more money, but that’s not always true. If you are selected for an audit, it doesn’t automatically mean that your taxes were filed incorrectly; it is essentially an added level of review by the IRS.
How can I file taxes?
Today, taxpayers typically have the convenient option of filing their taxes online. In 2015, more than 90% of people filed online. Over 128 million Americans received their tax returns through direct deposit, meaning the funds were deposited directly into their bank accounts.
How can I file for a tax extension?
The IRS allows taxpayers an extension to file their taxes, but in most cases that does not mean an extension for paying. Rather, the IRS expects people to pay the estimated amount due on their taxes by the deadline. Once they file, the individual will then find out if they are entitled to a refund or if they owe more money. There are exceptions for people serving in the military or living outside of the US. More information about extensions can be found at the IRS website.
Another option for filing taxes is the use of a tax preparation company.
What is a tax loan?
Some companies (typically tax preparation companies) offer what is known as a tax loan or a tax refund anticipation loan. Some of these companies will offer a loan worth a percentage of what they estimate that person’s tax refund will be from the state and/or federal government.(5)
How does a tax loan work?
If you file your taxes with a tax preparation company, the company will likely offer you money in the amount of your impending refund, taking out fees for their services. The company will likely give you the money in the form of a prepaid debit card, a check, or they’ll deposit the funds directly into your bank account.(6)
If you pursue this option, the government will send your refund check to the tax preparation company rather than to you. The cost of this loan varies, but usually it’s for more than 10% of the customer’s refund.(7)
What are the alternatives to a tax refund anticipation loans?
There are many low cost and free online tax filing programs available to the public. These programs are intended to make it easier for people to file their own taxes. With this option, you’ll typically wait a bit longer to receive your refund than you would with a tax loan, but you will receive the full amount. Unless you desperately need money, it’s probably a good idea to wait for your tax refund from the government so you can receive the full amount rather than pay a company just to receive it slightly sooner.
- “Brief History of IRS.” IRS.gov. Accessed February 22, 2016. https://www.irs.gov/uac/Brief-History-of-IRS.
- “The Agency, Its Mission and Statutory Policy.” IRS.gov. Accessed February 22, 2016. https://www.irs.gov/about-irs/the-agency-its-mission-and-statutory-authority.
- “Internal Revenue Service.” Investopedia. Accessed February 22, 2016. https://www.investopedia.com/terms/i/irs.asp.
- “Policy Basics: Where Do Our Federal Tax Dollars Go?” Center on Budget and Policy Priorities. March 11, 2016. Accessed February 22, 2016. https://www.cbpp.org/research/policy-basics-where-do-our-federal-tax-dollars-go.
- “Tax Refund Anticipation Loan — RAL” Investopedia. Accessed May 11, 2016. https://www.investopedia.com/terms/t/tax-refund-anticipation-loan.asp.
- “Refund Anticipation Check.” H&R Block. Accessed May 11, 2016. https://www.hrblock.com/financial-services/tax-refund-payment/index.html.
- “Refund Anticipation Loans.” Wisconsin Department of Revenue. Accessed May 11, 2016.
- Bell, Kay. “Tax Refund Loan Alternatives.” Bank Rate. Accessed May 11, 2016. https://www.bankrate.com/finance/taxes/tax-refund-loan-alternatives.aspx.