How the Internal Revenue Service (IRS) Works

The IRS traces its roots back to 1862 when President Abraham Lincoln created the commissioner of Internal Revenue to collect taxes to fund the war. In 1913, Congress was given the power to enact income tax laws, paving the way for the Bureau of Internal Revenue. The agency, whose name was changed to the Internal Revenue Service in the 1950s, went through a series of changes and reorganization to what it is today.3

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. This is done by collecting and processing annual tax returns from tax filers. The agency aims to help taxpayers understand 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 sharer1

Processing federal tax returns and collecting revenue from individual and corporate taxpayers is one of the main roles of the IRS. In cases where a taxpayer is owed money, the IRS issues tax refunds. For the week ending Feb. 24, 2023, the IRS reported:

• Receiving 45.98 million individual returns
• Processing 45.72 million individual returns
• Issuing 35.14 million refunds totaling $108.20 billion5

The IRS operates on a budget that is approved by Congress. This is divided into four different accounts: TaxpayerServices, Enforcement, Operations Support, and Business Systems Modernization.6 The money allotted to each cannot be reallocated to other sections. The agency requested a budget of $14.1 billion for the 2023 fiscal year and requested that the allocation structure be changed so that money can be moved to support costs in other areas.7

Tax Filing and Collection

Filing Your Taxes

The majority of individual taxpayers use Form 1040: U.S. Individual Tax Return Definition, Types, and Use to file their taxes and those who are 65 and older may use Form 1040-SR: Tax Return for Seniors. These forms are used to report income and determine whether any additional taxes are owed or if a refund is due to the taxpayer.

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

Individual and corporate taxpayers may also be required to complete and attach additional forms to their main filing, including schedules, addendums, and issuer-provided documents, such as a W-2 and/or 1099s.

Taxpayers may file their returns by mail or electronically with special tax preparation software designed for consumer use. Although the agency still accepts paper returns, it strongly recommends that taxpayers file electronically to avoid delays. Keep in mind that the agency does not endorse any particular platform or filing software.8 The number of returns that are e-filed continues to grow, and the overwhelming majority are now filed this way. Keep in mind that taxpayers may also use the services of tax professionals, such as tax preparers or accountants.

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. Businesses that make large payments must enroll in and use the Electronic Federal Tax Paying System.9

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

• Name and address
• Daytime phone number
• Social Security number (SSN) or employer identification number (EIN)
• Tax year
• Related tax form or notice number10

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

Taxpayers may also 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 their payments.11

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, and Kwik Trip. Taxpayers must wait to receive a payment code from the IRS via email, which is presented when making the payment. Keep in mind that there is a limit of $500 per payment.12