What Is the IRS? The Role of the Internal Revenue Service

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The Internal Revenue Service (IRS) is the federal agency that administers and enforces U.S. tax law. It is a bureau of the U.S. Department of the Treasury, and its core jobs are processing tax returns, collecting tax payments, issuing refunds and checking that taxpayers report and pay what they owe. The “internal revenue” in the name means money raised from taxes inside the country, as opposed to customs duties collected at the border.

What the IRS Does

The agency’s responsibilities fall into a few groups:

• Processing returns. It receives individual, business, trust and estate returns, checks them for math and matching errors, and records the tax due.
• Collecting payments and issuing refunds. It takes in withheld taxes, estimated payments and balances due, and pays refunds when a taxpayer has overpaid.
• Enforcement. It audits returns, assesses additional tax, penalties and interest, and pursues unpaid balances.
• Taxpayer services. It publishes forms, instructions and guidance explaining how federal tax rules apply, and offers phone, online and in-person help.

The taxes it administers go beyond the individual income tax. They include corporate income tax, payroll taxes such as Social Security and Medicare (FICA), federal unemployment tax, estate and gift taxes, and federal excise taxes. In fiscal 2024 the IRS collected more than $5.1 trillion in total revenue.

History of the IRS

The agency’s roots go back to the Civil War. In 1862 President Abraham Lincoln and Congress created the Office of Commissioner of Internal Revenue to collect taxes that paid for the war. In its first year of operation, 1863, it collected $39.1 million.

The modern income tax came with the Sixteenth Amendment, ratified in 1913, which gave Congress the power to tax incomes without dividing the tax among the states by population. The Bureau of Internal Revenue administered the new tax, and the first Form 1040 appeared in 1914. The bureau was renamed the Internal Revenue Service in 1953, and the next year the individual filing deadline moved to April 15.

How the IRS Collects Revenue

Federal tax is largely pay-as-you-go. Employers withhold income tax and payroll taxes from each paycheck and send them to the IRS. People with income that has no withholding, such as self-employment earnings, rental income or investment gains, generally make quarterly estimated tax payments. Corporations also pay estimated tax during the year.

After the year ends, the taxpayer files an annual return, usually due April 15 for individuals. The return totals income, deductions and credits, calculates the actual tax liability, and compares it with everything already paid.

Hypothetical example. Suppose an employee’s employer withheld $6,000 in federal income tax during the year.

• If the return shows a total tax liability of $5,200, the employee overpaid by $800 ($6,000 − $5,200), and the IRS issues an $800 refund.
• If the return shows a liability of $6,500, the employee underpaid by $500 ($6,500 − $6,000), and that $500 is due with the return.

The example leaves out penalties for underpaying during the year, which can apply when withholding and estimated payments fall too far short. Both outcomes are reconciliations, not separate taxes: a refund returns money the taxpayer had already paid in, not a payment from the government.

IRS Tax Returns and Forms

Taxpayers can file by mail or electronically, either through consumer tax software or with help from a paid preparer or accountant. Electronic filing dominates: 92.8% of returns filed with the IRS in 2024 were e-filed, and paper returns take longer to process, which delays refunds. That year the IRS received 163.4 million individual returns and issued 104.8 million refunds totaling $329 billion.

Nearly all individuals file Form 1040, or Form 1040-SR, a version designed for older taxpayers. Supporting documents and schedules fill in the details:

• Form W-2: wages and withholding reported by an employer
• Form 1099 series: other payments, such as freelance income, interest and dividends, reported by the payer
• Schedule A: itemized deductions
• Schedule D: capital gains and losses from selling stocks, property and other assets

Every return is tied to a taxpayer identification number, such as a Social Security number or an employer identification number. Businesses that pay contractors collect that number using a Form W-9 so they can report the payments.

Corporations report income and tax on Form 1120, with variants for particular entities, such as Form 1120-S for S corporations and 1120-F for foreign corporations.

How IRS Audits Work

An audit is the IRS’s review of a return to confirm that income, deductions and credits were reported correctly. Some returns are chosen at random. Others are selected because they are linked to another audited return, such as a business partner’s, or because figures stand out. No single factor guarantees an audit, but items that can draw attention include:

• Reporting less income than third-party forms such as W-2s and 1099s show
• Claiming unusually large deductions, especially business expenses
• Charitable deductions that are large relative to income, or exceed it
• Rental real estate losses

The process starts with a review by an examiner, who may accept the return or refer it for further examination. In that case the taxpayer is notified by mail. An audit may be handled entirely by mail or in person at an IRS office, the taxpayer’s home or business, or an accountant’s office. It mainly involves supporting paperwork: receipts, statements and records behind the numbers on the return.

For fiscal 2023 the IRS reported 582,944 audits, with $31.9 billion in recommended additional tax. It audited 0.44% of individual returns and 0.74% of corporate returns that year. Rates are much higher at the top of the income scale: for returns filed for tax years 2013 to 2021, the IRS audited 8.7% of taxpayers reporting $10 million or more.

A taxpayer who disagrees with an audit result can contest it within the IRS appeals process or in the U.S. Tax Court, a federal court that is separate from the IRS.

How the IRS Is Funded and Overseen

The IRS operates on an annual budget approved by Congress. The appropriation is divided into four accounts: Taxpayer Services, Enforcement, Operations Support and Business Systems Modernization. Money allotted to one account cannot be shifted to another. That structure means, for example, that enforcement funding cannot be moved over to answer phones during filing season. The agency is led by a commissioner and reports to the Treasury Department.

Limitations of the IRS

The IRS’s authority is narrower than many people assume:

• It does not write tax law. Congress sets tax rates, deductions and credits in the Internal Revenue Code. The IRS interprets and applies the code through regulations, forms and guidance.
• It does not collect state or local taxes. State income taxes, sales taxes and property taxes are handled by state revenue departments and local governments, each with its own returns and deadlines.
• Its reach depends on its budget. Service levels and audit coverage rise and fall with congressional appropriations.

IRS vs. Similar Agencies

A state department of revenue (sometimes called a department of taxation) is the state-level counterpart. A U.S. resident may file both a federal return with the IRS and a state return with their state.

Other countries have their own tax authorities. Canada’s equivalent is the Canada Revenue Agency. “Inland Revenue” was the name of the United Kingdom’s tax department until it merged with HM Customs and Excise in 2005 to form HM Revenue & Customs.

The Treasury Department is the IRS’s parent agency, with broader duties that include managing federal finances and debt. The IRS is the part of Treasury that administers taxes.

How to Contact the IRS

The IRS website lists mailing addresses by form type and state. Individuals can call the main help line at (800) 829-1040, Monday through Friday, 7 a.m. to 7 p.m. local time, and separate toll-free numbers serve businesses and other needs. The Interactive Tax Assistant on IRS.gov answers many common questions online, and in-person appointments are available at local IRS offices.

The Bottom Line

Anyone who earns income, runs a business or files a federal return deals with the IRS each year. Matching withholding and estimated payments to actual liability helps avoid a balance due, while accurate reporting and good records make an audit easier to handle. Taxpayers who disagree with an audit result can contest it through IRS appeals or the separate U.S. Tax Court.