What Is the Internal Revenue Service (IRS)? Definition & History

The Internal Revenue Service has its own group of enforcers whose responsibility is to ensure that the tax code is upheld.


What Is the Internal Revenue Service?

The Internal Revenue Service, better known as the IRS, is the U.S. government agency responsible for collecting taxes from individuals and businesses, enforcing tax laws, and processing tax filings each year. It is also one of the oldest bureaus in operation, tracing its origins to the formative years of the republic.

The Constitution grants Congress the power to tax, and that authority is enacted under the Internal Revenue Code, which is part of federal law. The code breaks down how much tax can be levied on individuals and businesses, and how tax can be collected. It details taxes on income, employment, estates, as well as excise taxes on alcohol and tobacco.

Still, states can implement their own tax codes and can levy separate taxes on income, property, and sales to generate revenue for their own budgets. Some states, such as Connecticut and Texas, have no income tax but rely on other types of taxes for revenue.

A Brief History of the IRS

In 1787, Congress outlined its power to levy and collect taxes that would help pay off debt and “provide for the common defense and general welfare of the United States.” In 1789, the Department of Treasury was founded, but a predecessor to the IRS wouldn’t be established until 1862, when the Office of the Commissioner of Internal Revenue under the Treasury Department was created. In its first year of operation in 1863, $39.1 million in taxes were collected, which covered about half of the federal budget.

The first federal income tax on corporations and individuals was established in 1913 under the 16th Amendment, and a year later, Form 1040 was introduced to help simplify the process of filing income taxes by the June 30 (and in later years, March and April 15) deadline each year.

In 1935, the foundation for the modern payroll withholding system was introduced. In 1953, the Bureau of Internal Revenue was reorganized and formally renamed the Internal Revenue Service. In 1955, April 15 was set as the annual deadline date for tax filing. In 1962, the IRS became more efficient with automated data processing, and five years later, an automated federal tax system was introduced. Paper-based filing gave way to electronic filing with the Tax Reform Act of 1986. By 2019, more than 90% of 150 million individual returns would be filed electronically.

Starting in 2001, the IRS began to go digital, and by 2016, taxpayers would be able to check the amount they owed online. The IRS says that it leverages new technology and data analytics “to detect and combat sophisticated evasion techniques and facilitate timely audits and collection investigations.”

What Does the IRS Do?

The core of the IRS’s responsibility is to collect taxes. Taxes are an important part of generating revenue for the government, which sets the federal budget that pays for programs that build roads, maintains the military, and provides services, such as healthcare, for its citizens. Without tax collection, the government wouldn’t be able to perform many of its functions, such as paying salaries to government employees, funding the enforcement agencies that protect U.S. borders, or paying for assistance to Americans in need.

Collect Revenue

The IRS is tasked with collecting revenue from taxes on individuals and businesses. At the company level, taxes are withheld from workers by their employers to ensure that taxes are collected properly throughout the calendar year.

Enforce the Tax Code

The IRS has its own officers who enforce the tax code to ensure that taxpayers are in compliance. History is rife with instances in which officers of the bureau rein in violators of the tax code who tend to underreport or fail to file returns. For example, in 1919, the Bureau of Internal Revenue hired hundreds of prohibition agents to uncover violations of the sale of alcoholic beverages. In 1931, in one of the most celebrated cases of tax evasion, mobster Al Capone was arrested.

Perform Audits

The IRS can perform audits on individuals or companies to ensure that all information reported on an income tax filing is accurate. Incorrect data or incomplete tax returns can trigger an audit.

What Challenges Does the IRS Face?

Since the early days of the founding of the U.S., payings taxes has been contentious. Some politicians in recent years have sought to abolish the IRS by shifting tax collection responsibilities entirely to state governments.

The IRS also faces its own internal challenges. As the number of filers continues to increase, the size of its budget has decreased, so the bureau is worried that it may not have enough workers available to handle the processing as well as enforcement of the tax code.

The IRS also needs to continually improve its digital platform to ease the facilitation of collecting taxes.

Frequently Asked Questions (FAQ)

The following are answers to some of the most common questions investors ask about the Internal Revenue Service.

Why Does the IRS Set April 15 as the Tax Deadline?

The IRS set April 15 as the deadline for tax filing in 1955. For a couple of decades prior to that, the deadline had been set at earlier dates, March 15 and March 1. By extending the deadline by another month, the government reportedly was able to hold onto the withholding for a little longer.

How Much Does the IRS Collect From Taxes?

In 2021, the IRS collected approximately $4 trillion in tax revenue, representing about 96% of the total gross receipts of the U.S. That helped to pay for the U.S. government’s spending of $6.8 trillion, which translated into a deficit of $2.8 trillion.

How Many Federal Tax Returns Does the IRS Process?

In 2021, the IRS processed 269 million returns, of which the majority were individual and estate and trust income tax filings. The bureau issued almost 600.1 million refunds amounting to more than $1.1 trillion.

How Many People Work for the IRS? What Is Its Budget?

There are about 80,000 employees at the IRS, which operates on a budget of more than $12 billion.

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