IRS: What Is the Internal Revenue Service and What Is Its Role in the United States?

When it comes to taxes in the United States, one name inevitably commands respect—and sometimes caution—among taxpayers: the IRS, short for Internal Revenue Service. This agency, which operates under the U.S. Department of the Treasury, is responsible for collecting federal taxes, enforcing tax laws, and managing the largest tax system in the world.

Beyond being a tax collector, the IRS plays a critical role in the U.S. economy, ensuring the government has the resources to fund programs such as Social Security, defense, healthcare, infrastructure, and education. It also oversees compliance among businesses and individuals, acting as the referee in one of the most sensitive areas of financial life: taxes.

What Is the IRS and What Is Its Purpose?

The IRS is the federal agency in charge of enforcing the Internal Revenue Code, the legal foundation that governs taxation in the U.S. Its functions include:

• Collecting federal taxes from individuals and businesses.
• Processing tax returns and issuing refunds.
• Conducting audits to ensure compliance.
• Publishing official forms such as Form 1040 for individuals and Form 1120 for corporations.
• Implementing tax benefit programs such as credits and deductions.
• Pursuing tax fraud and evasion through its Criminal Investigation division.

Most taxpayers in the U.S. interact with the IRS at least once a year—typically before April 15—when filing their annual tax return.

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A Brief History of the IRS

The IRS traces its roots back to 1862, when President Abraham Lincoln created the Office of the Commissioner of Internal Revenue to raise funds for the Civil War. That was the first federal income tax in U.S. history.

Although the tax was repealed and reinstated several times in subsequent decades, the 16th Amendment to the Constitution, ratified in 1913, gave Congress the permanent authority to collect income taxes.

The name "Internal Revenue Service" was formally adopted in 1953. Since then, the agency has evolved along with the U.S. economy and society. Some key milestones include:

• 1965: Launch of the first toll-free telephone service.
• 1972: Publication of resources in Spanish.
• 1992: Acceptance of the first electronic tax returns.
• 1996: Launch of IRS.gov, now the most-visited tax site in the world.
• 2020 and beyond: Implementation of economic relief programs in response to crises such as the COVID-19 pandemic.

Core Functions of the IRS

The IRS is much more than a tax collection office. Its responsibilities span multiple areas of taxpayers’ financial lives:

• Tax collection: The agency secures over $5 trillion annually in federal revenue, mainly from individual and corporate income taxes.
• Return processing: It receives and reviews more than 160 million individual tax returns each year.
• Refund issuance: It administers refunds totaling over $300 billion annually.
• Audits: A percentage of returns are selected for accuracy checks, either randomly or due to risk factors.
• Social program management: The IRS distributes credits and relief programs, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).
• Fraud investigation: Through its Criminal Investigation (CI) unit, it prosecutes crimes such as tax evasion, money laundering, and corporate fraud.
• Taxpayer education and assistance: It provides online resources, hotlines, and local offices to help citizens understand their obligations.

Common IRS Forms and Returns

The IRS publishes a wide range of official tax forms for individuals and businesses. Some of the most commonly used include:

• Form 1040: Individual income tax return.
• Form 1040-SR: Simplified return for seniors.
• Form W-2: Wage and tax statement for employees.
• Form 1099: Reports non-wage income such as freelance earnings or dividends.
• Form 1120: Corporate income tax return.
• Form 1120-S: Return for S corporations.
• Form 1120-F: Return for foreign corporations doing business in the U.S.
• Form EIN: Application for an Employer Identification Number.
• Form ITIN: Application for an Individual Taxpayer Identification Number, commonly used by nonresidents who don’t qualify for a Social Security Number.

IRS Audits and Compliance

One of the most feared aspects of the IRS is its audits. While the audit rate is relatively low—around 0.4% of individual returns in 2023—the likelihood increases with high income levels, unusual deductions, or discrepancies between taxpayer reports and third-party information.

Audits can be conducted by mail, at an IRS office, or even at the taxpayer’s home or business. Their purpose is to verify that reported income and claimed deductions comply with the law.

In 2023, the IRS completed more than 580,000 audits, resulting in nearly $32 billion in additional recommended taxes.

Budget and Structure of the IRS

With more than 93,000 employees and a budget exceeding $13 billion, the IRS is one of the largest federal agencies. Its organizational structure includes specialized divisions such as:

• Taxpayer services.
• Compliance and collection.
• Support operations and technology modernization.
• Criminal investigation.

The IRS Commissioner—appointed by the President and confirmed by the Senate—leads the institution and is responsible for ensuring the proper application of federal tax policy.

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Why the IRS Matters for Businesses and Entrepreneurs

For any business, particularly foreign companies seeking to operate in the U.S., the IRS is an institution they must deal with. Some key reasons include:

• Obtaining an Employer Identification Number (EIN) to hire employees and file taxes.
• Complying with corporate tax obligations, payroll taxes, and withholdings.
• Accessing tax credits and benefits.
• Properly reporting U.S.-sourced income and, in some cases, worldwide income.

Failure to comply with IRS regulations not only brings financial penalties but also legal consequences that can jeopardize the future of a business.

FAQs About the IRS

What does IRS stand for?
It stands for Internal Revenue Service, the federal tax agency of the United States.

Does the IRS only handle income taxes?
No. It also manages gift taxes, estate taxes, excise taxes, and tax credits.

What happens if I don’t file my taxes with the IRS?
You may face penalties, interest charges, and, in severe cases, legal action for tax evasion.

How can I contact the IRS from outside the U.S.?
The IRS provides international phone lines and online assistance at IRS.gov, including resources in Spanish.

Can the IRS audit foreign companies?
Yes. If they earn income in the U.S., they must comply with U.S. tax laws and are subject to review.

The IRS is not just the U.S. tax collection agency—it is a cornerstone of the country’s economic system. By administering tax laws, it ensures that individuals and businesses contribute to the funding of government programs and infrastructure.

If you are considering setting up a business in the United States, understanding the role of the IRS and how to navigate its requirements is essential. At Openbiz, we help you form your company in the U.S. and manage all the administrative and tax obligations needed to ensure its legal and sustainable operation.

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