Taxes, Lawyers, Business & Debt
What is the Internal Revenue Service (IRS)?
The IRS, or Internal Revenue Service, is an agency of the US government, and its responsibility is to collect state and federal income taxes from its residents every year. Most American citizens pay income taxes per annum, although some freelancers and businesses pay theirs quarterly. The Internal Revenue Service is a part of the United States Department of the Treasury. Income taxes are based on a calendar year, with payments due on April 15. It's possible to get an extension on a tax filing, but the request must be filed before the deadline.
The IRS uses a sliding scale to calculate income taxes, with higher-income citizens falling into a higher tax bracket. The tax tables change every year, but in general, the more a person makes the more they pay in income taxes. If a person earns a salary or an hourly wage, an estimated tax is deducted from every paycheck. In a lot of cases, a person can get a refund of what they overpaid, but if they haven't paid enough, they may have to pay the IRS.
The income tax levied by the IRS is based on a person's net income, the amount left when all deductions have been taken. A person below the poverty level may not be liable for income taxes at all, while a relatively low salary can cost someone up to 20% of their income. By this logic, it would make sense that a person who makes millions of dollars per year would pay an even higher percentage- but tax shelters, creative accounting and deductions can result in a big tax break or even a refund.
Before there was the IRS, there was the Bureau of Internal Revenue. The BIR was started in 1862, as a collaboration between Abraham Lincoln and Congress. The first income tax was intended to pay for expenses incurred with the Civil War, and it was supposed to be temporary. It was repealed in 1872, but put back into law in 1894. The statute was challenged by the Supreme Court, but the challenge was struck down. In 1913, the 16th Amendment clarified the language of the income tax, opening the door to continued legislation.
As well as income tax, there are also state taxes paid in some cases. In states with these taxes, the tax is withheld from every paycheck in addition to the regular income tax. State taxes are a lot less than income taxes, and the amount deducted usually satisfies the requirements of the IRS. In 2006, the IRS started an outsourcing program that pays contractors to collect tax debts, paying these agencies a portion of the collections. This practice has drawn widespread condemnation from watchdog groups, who criticize the handing over of personal information of taxpayers.