Internal Revenue Service (IRS)

Definition: The department of the government that is responsible for collecting taxes on income that people receive and on profits that corporations earn.Example: John Q. Citizen earned $100,000 last year. This is his gross income. He is married and has three grade-school-aged children. His wife and children represent people who are dependent on him. The government allows for Mr. Citizen to deduct from (ie, reduce) his gross income a few thousand dollars per dependent before the income tax is calculated. He and his wife own a home on which they paid $12,000 interest on their home loan. Mortgage (ie, home loan) interest is also deductible from gross income. The property taxes on his home are $8,000 per year. This will be subtracted from his gross income as well because the Congress has authorized mortgage interest to be tax deductible. The resulting figure is called adjusted gross income, upon which the proper tax rates can be applied. IRS Form 1040 is used to make the calculation, It must be submitted to the IRS by April 15 each year, along with a check for any taxes owed.

Note that we say “rates” because different rates are applied to layers or “brackets” of income.

Corporations have different sets of deductions and tax brackets, but the basic manner in which corporate taxes are computed is the same. Corporations complete Form 1120, which must be submitted by March 15 each year.

Investeach explains: The IRS has come to be disliked by individuals because it is the department of the Federal government that is responsible for taking a portion of their income. Its complicated rules force many citizens to pay professional tax preparers or use tax preparation software to ensure that they pay the correct amount of income tax. Penalties and interest for not paying one’s taxes on time and in the right amount can be severe.

However, much of the dislike of the IRS is misplaced. The IRS carries out the tax laws that Congress passes. It is Congress’ regular passing of so many changes and news rules that has made the income tax laws so confusing.

One other important point is that there has been a recent trend for large American companies to set up portions of their businesses in countries with low income taxes. By passing their sales through their entities in these countries, they are dramatically reducing their tax owed, and denying the IRS and the U.S. Government in general an enormous amount of much-needed revenue. Read more about this issue at U.S. Companies Seek New Tax Havens and Companies Dodge $60 Billion in Taxes Even Tea Party Condemns. The corporations themselves argue that income tax rates for U.S. corporations are higher than those in other countries, and they are doing this to level the playing field with foreign competitors. Congress and the President have tried to crack down on the practice of corporate maneuvers that are mostly done to avoid taxes. See Treasury cracks down on corporate tax ‘inversions’.

Finally, the IRS has a long and interesting history which it chronicles at its web site.

Riddle me this:

1. Besides people, from whom does the IRS collect taxes?
2. Identify three types of expenses a person may have that are deductible from his or her income before taxes are computed?
3. What part of the government is responsible for making the tax laws?
4. On what form do individuals calculate and report their taxes?
5. What is the deadline for people to submit this form?
6. What is the deadline for corporations to submit their tax form?
7. What are many U.S. corporations doing to avoid U.S. income taxes?
8. How has the U.S. responded to these corporate actions?