What Does IRS Stand For? Everything You Need To Know About The Internal Revenue Service.

Many Americans and foreigners working or living in the United States only engage with the IRS once a year when they file a federal income tax return and either wait for a refund or transfer money to pay taxes. However, the IRS does a lot more than just collect money and send out refunds.

So, whether you’re familiar or unfamiliar with this government agency, understanding thoroughly about the IRS will definitely help you in your future career. This article will walk you through the IRS, from its name, history, how it works, and the IRS’s importance in our lives. 

What does IRS stand for?

Most of you probably have heard about the IRS several times before, but what does IRS stand for actually? IRS stands for the Internal Revenue Service. 

Although the Internal Revenue Service didn’t get its name until the 1950s, the origins of the agency date back to the Civil War. President Abraham Lincoln created the IRS through the Revenue Act of 1862 and enacted an income tax to help pay for the Union cost of the Civil War, which lasted for ten years before being repealed. 

In 1894, the Wilson Tariff Act reestablished the income tax, but later, in 1895, the Supreme Court ruled the income tax unconstitutional. This meant no income taxes could be collected until three-quarters of the states ratified the 16th Amendment to allow Congress to enact an income tax. This created and established the legality of the first federal income tax program. The first income tax rate was 1% on income over $3,000 and 6% on income over $500,000. 

Tax rates increased to finance World War I, then decreased in the postwar years before rising again during the Great Depression and World War II. Tax withholding was instituted at this time.

The tax collection agency was reorganized in the 1950s, and the Bureau of Internal Revenue became the Internal Revenue Service. The IRS was reorganized again in 1998 to become more consumer-focused. 

What does the IRS do? 

The Internal Revenue Service’s mission, according to its website, is to help America’s taxpayers understand and meet their tax responsibilities and enforce the law with integrity and fairness, and provide top-quality services to achieve these goals. The IRS divides this mission into three distinct responsibilities: 

  • Administer tax laws:  

One of the first and foremost responsibilities of the IRS is to assess and collect taxes on behalf of the federal government. In 2020, the IRS collected nearly $3.5 trillion in taxes, accounting for income taxes, employment taxes, business income taxes, excise taxes, estate, and gift taxes.

Besides collecting taxes, the IRS is also in charge of issuing tax refunds, which an individual or business can claim if they overpay their taxes. In the fiscal year 2020, the IRS processed more than 240.2 million federal tax returns and supplemental documents. 

  • Enforce tax laws: 

An essential part of the IRS’s enforcement mission is to seek and identify those who have underpaid their taxes, whether due to a math error or criminal activity. These examinations can either take the form of correspondence or field examinations. For the 2019 fiscal year, the IRS audited 771,095 tax returns, accounting for 0.6% of individual income tax returns and 0.97% of corporate tax returns. About 73.8% of IRS audits occurred by mail, while 26.2% happened in the field. 

From 2010 to 2018, the IRS examined about 0.63% of individual tax returns and 1% of corporate tax returns for errors. While most errors are likely unintentional, the IRS completed 2,624 criminal investigations in 2020 alone.

There are various reasons that the IRS will undertake an audit, but certain factors may increase the odds of an examination. The chief among these factors is high income. The audit rate for all individual income tax returns in 2018 was 0.6%, but for those who earned more than $1 million in income, it was 3.2%

Running your own business might bring greater risks, too. Individuals who earn between $200,000 to $1 million in one tax year and file a Schedule C (the form for the self-employed) will have a 0.6% chance of being audited. And for those who do not, the chance ranges from 1.4% to 2.8%. 

Some noticeable red flags which could trigger an audit are failing to declare the correct amount of income, claiming a larger number of deductions than usual (especially business-related ones), making abnormally large charitable donations compared to income, and claiming rental real estate losses. No single element determines whether or not you will face an IRS audit each year.

  • Providing services to assist taxpayers:

Another important responsibility of the IRS is to provide services to taxpayers to help them understand and comply with their obligations. There are numerous reasons for an individual, business, or an exempt organization to call the IRS, but the main reason is the need for help with excise taxes, estate taxes, and gift taxes. You can find these services through the IRS website, its telephone helplines, IRS Taxpayer Assistance Centers, and volunteer tax assistance.

Why is the IRS important?

Income tax revenue, along with other tax revenue, pays for a major part of the activities of the United States Government. Taxes are used to fund Social Security, Medicare, Medicaid, national defense, aid for veterans, foreign affairs, etc. Taxes contribute to community development, pay for law enforcement, and support many government services.

The mission of the IRS is to procure these funds from taxpayers through a variety of passive and more proactive means. The IRS’s secondary purpose is to educate taxpayers on the nature of taxes and their obligations. Therefore, the importance of the IRS can’t be understated.

The bottom line

A successful business starts with great knowledge and experience. Now you know what does IRS stand for, its mission and responsibilities, and how it helps keep the government functioning. You can then prepare how to work with the IRS, from filing taxes to preparing for a business audit

Shoeboxed is a smart receipt and expense tracking app that helps businesses track and manage their business expenses. Whether you are a business owner, independent contractor, or freelancer, you can take advantage of Shoeboxed by using this app to scan your receipts, store them online, create expense reports, and get them ready in the event of an audit. 

After scanning your receipts, Shoeboxed will extract the most important data points and automatically categorize them by vendor, the total spent, date, and payment type. We ensure that the extracted data is fully searchable, editable, and human-verified. From there, you can create clear and comprehensive expense reports that include images of your receipts within just a few clicks. Then, you can export, share or print all of the information you need for easy tax preparation or reimbursement.

Shoeboxed even makes sure that the digital versions of your receipts are legibly scanned, clearly categorized, and fully accepted by both the Internal Revenue Service and the Canada Revenue Service in the event of an audit. 

Try Shoeboxed now to get yourself well prepared for the IRS! 

Download our app on iOS or Android

3 Simple Steps to Get Through the Last Month Before Taxes Are Due

We went ahead to compile a list of a few tips which can come in handy as we enter the “oh-I-still-need-to-finish-filing” phase of the tax season.

Tax season is here and most of us are stressing out and trying to get our act together before the April 18 deadline.

Individuals and small businesses like you have found their way to productivity by eliminating paperwork in their day-to-day transactions and quite often, we hear from them about how they tackle the tax season and paperwork woes.

The insights we have gathered from them are simple and effective, with staying paperless and well-organized being the regular takeaway. We went ahead to compile a list of a few such tips which can come in handy as we enter the “oh-I-still-need-to-finish-filing” phase of the tax season (we know you already have a lot of lists to deal with this tax season, so we promise to keep this short).

1. Let D-Day stay on top of your mind

In the rush of work, it’s easy to lose track of time and days. One fine morning when you wake up, all that you are left with are few more days ’till you hit the deadline. To save yourself from the hopeless scramble that ensues, start early.

Make a list of what needs to be done (however small the activity is) and span it across the limited time that you have at hand. Once you have charted this out, the only thing you need to do is to stick to it and not procrastinate.

2. Compile all the required documents

One of the biggest reasons for stress during tax time is not finding your relevant documents in time and sometimes even forgetting to take them into account. To avoid this, the first step of your list needs to be putting together all of the documents.

Look for all of those receipts, investment documents and other records you need for tax filing and consolidate them in one central location. If you are not able to do this in one go, spread this activity across few days and a weekend. Starting off slow when you have enough time is better than doing things in a jiffy right when you wake up to the deadline.

3. Start the e-filing process!

In case you have been filing taxes on your own, after step 2 you are all set to start your e-filing process. And if not, get in touch with a tax preparer to sail through the tax filing process.

The latest guidelines issued by IRS has brought Form 8878 and Form 8879 (Electronic Return Originator authorization forms for individual taxpayers) under the scope of electronic signatures. For the uninitiated, Form 8879 is an IRS e-file signature authorization form that authorizes an ERO to enter the taxpayers’ PINs on individual income tax returns. Form 8878 is an IRS e-file authorization form for application of extension of time to file taxes, that authorizes an ERO to enter the taxpayers’ PINs on Forms 4868 and 2350.

Before, when going by the ERO method, taxpayers had to physically sign these authorization forms either in the ERO’s office or sign the physical copy and send it via mail or fax. But with the recent e-signature guidance, you can now authorize your EROs even remotely by choosing to electronically sign your authorization documents and simply e-mailing them to their tax preparer. (Yes, this method is IRS compliant.)

This not only makes e-filing process hassle-free, quick, and smooth, but it also saves a bit of your money too, which you would otherwise end up spending getting your authorization forms mailed to the ERO.

Using SignEasy to help with e-filing:

All set to get going with eSignatures? Click here to get started with signing documents online for free with SignEasy. SignEasy is also offering an exclusive 30% discount if you upgrade to SignEasy Pro. Use the discount code SHOEBOXED while making the purchase and get unlimited documents to sign, cloud integration, advanced security and much more. Please note the discount can be availed only through purchasing via the web.

Amrita Premrajan is Content Strategist and Marketer at SignEasy. Featured by Google, Apple and loved by 3.5 million users, SignEasy is a cloud-based solution to sign and fill documents from smartphones, tablets and web. SignEasy helps individuals and businesses reduce turnaround times, close deals faster and cut costs by eliminating the cycle of printing, scanning and faxing of paperwork.