Established more than two and a half decades ago, the Internal Revenue Service (IRS) plays a pivotal role in managing and operating the U.S. federal tax system. The IRS is in charge of enforcing tax regulations, collecting taxes, processing refunds, and conducting audits among other duties. Its operations significantly influence the U.S.' economic landscape as the revenue it collects funds different government programs, public services, and national operations.
The IRS, initially named the Office of Commissioner of Internal Revenue, was established by President Abraham Lincoln in 1862 to finance the Civil War by collecting taxes. By 1863, a year into operation, it had raised $39.1 million, equivalent to $985.79 million today. The agency was later rebranded to the Internal Revenue Service in 1953, and subsequently, the tax filing deadline was shifted to April 15 in 1954.
Throughout the fiscal year, IRS collects taxes from earnings and income of businesses based on quarterly filings. An annual filing, typically due by April 15, reconciles the amounts paid by every individual and business, and the actual amounts due. In cases of overpayment, a tax refund is issued by the IRS, and if owed, the payment is further included with the annual tax return.
In the 2024 fiscal year, the IRS recorded tax revenue collected, and taxpayers filed returns via traditional mail or electronically using tax software. Tax preparers or accountants were also engaged. Approximately 163.4 million individual returns were submitted, and 104.8 million refunds totaling $329 billion were issued.
Taxes are typically reported via forms like 1040 and 1040-SR for individual taxes and Form 1120 for corporations. Taxpayers often attach additional forms like the W-2 and 1099, provided by their earning sources, while Schedule D reports capital gains, and Schedule A details tax deductions.
As part of its operation, the IRS conducts audits of a percentage of the tax returns each year. The individuals audited are picked randomly or based on connection to other audited returns. In the 2023 fiscal year, the IRS conducted 582,944 audits which suggested $31.9 billion in additional tax.
The IRS operates following a budget approved by Congress divided among multiple categories. The IRS transitioned to the electronic filing method with 92.8% of taxpayers submitting their returns electronically in 2024. Although, it still offers the option to file paper returns via mail. However, this method could delay refunds. The audit rate for individual tax returns stood at 0.44% in 2023.