Receive regular updates via email

How the IRS Works

The IRS is one of the most loathed and essential organizations in the country. When the United States was first established, America was wary of taxation and there was no organization set up to collect taxes. When the Civil War was over, the Bureau of Internal Revenue was created. This led to the establishment of the Internal Revenue Service (IRS). Today, the IRS is the country’s tax collecting agency. So how does it work?

Government Organization
The IRS is part of the Department of Treasury, and it employs thousands of employees. A commissioner heads the organization and is selected by the President to serve a five-year term. The President also selects a Chief Counsel to the IRS. This person handles all legal matters relating to the agency. The IRS is primarily located in Washington, D.C.; however, there are regional offices located in cities throughout the United States.

Oversight Board
There is an IRS Oversight Board that is compiled of nine members. These people are responsible for supervising the activities of the IRS and ensuring that audits are performed correctly. They also review and approve budget requests each year. However, they do not have any control over policy changes.

Taxes
During 2013, the IRS collected nearly $2.86 trillion in revenue. They also processed approximately 240 million tax returns and paid refunds totaling $364 billion. The money that they collect is used to pay for government operations.

Audits
Each year, certain businesses and individuals will receive audits on their tax returns. The IRS performs audits to make sure that a business or individual is providing accurate financial information and paying the right amount of taxes. The possibility of a future audit encourages the majority of people to be honest on their taxes. However, paying your taxes on time and honestly does not guarantee that you will avoid an audit. Audits are chosen based on different reasons including some of the following:

  • Random computer selections
  • Mismatching documents or information
  • Transactions involving people who have been audited

Computer System
Since the IRS stores and processes so much information, they need extremely powerful computer systems. According to 2290tax.com, the main IRS computer system handles the majority of their work. This computer or server is used for IRS notices, EIN’s, and SSN’s. It also calculates penalties and determines who gets audited. Another important IRS computer system controls the e-file system. Once the returns are filed, it checks for any errors, issues confirmations, and it backs up the information.

Although most people are wary of the agency, the truth is that the IRS is necessary and extremely efficient. While some view the agency as antiquated, in recent years the agency has aimed to work better with taxpayers, even setting up the Office of Appeals, which helps to resolve tax disputes impartially and out of court.

Are you a saver or a spender?

Figuring out if you are a saver or a spender seems to be a simple proposition. Simply put, if you spend more than your make, then there is no chance that you can be a real saver, since your liabilities will be greater than your assets.

If you have a BBT checking account with a balance that makes you feel good when you look at it, but at the same time you have a credit card bill that is higher than the bank balance, then your are fooling no one but yourself.

Rather than staring at a bank balance, one should think about saving in a more general way. Think of savings as an attitude or a habit that makes it more likely that you have positive financial things happening in your life. Having a savings habit doesn’t guarantee that positive financial outcomes will happen, but it makes it more likely that they are happening in your life.

In the following simple example, imaging that the following money habits or money situations are true:

  • Having a savings account with a high interest rate is better than having one with a low interest rate (note that banks typically give higher rates for accounts with higher balances).
  • Paying off a car loan is not as attractive as owning a car free and clear.
  • Paying off a card in full at the end of a month is better than carrying a balance.
  • Spending less than you make every month is better than having some months where you run out of money or have to dip into your savings.
  • Believing that savings is easy is better than thinking that savings is hard.
  • Saving for a special project or for your health or education is better than not doing so.

Reading about good examples stimulates your mind in one way, and looking at pictures stimulates a different part of you mind. You can check out at the infographic below and the words above and between the two you should be about to figure out what good money habits would work for you.

Savers Vs Spenders Infographic by Newcastle Permanent Building Society