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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.

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.

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, 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.

What if You Can’t Pay Taxes Owed?

It is close to the due date
for taxes and you just prepared your return and realize that you owe
more money than you can pay. This year, more than ever, taxpayers
are coming up short on the taxes they owe. Since this is such a common
problem, you can be assured there are many options available for you.

The first thing you need to
do, even if you know you can’t
pay your taxes owed, is to send in your completed tax return. The penalty for not filing
is more than the penalty for not paying. Once you have your taxes
filed then you can figure out what you are going to do about payment.
Below are some of the most common solutions for paying for taxes when
you cannot afford to pay. The right option for each person varies
depending upon their unique financial situation.

Find the Money Elsewhere

Many times you could easily
get together enough money to pay off taxes by thinking outside of the
box a little. Some options to pay in full when you don’t have
the money are the following:

  • Credit Cards
  • Home equity loan
  • Friends and Family
  • Pay advance from
  • Sell old items on

Some of these options should
be used wisely. Even if you can borrow money, sometimes there could
be a better option. Consider some of the below options before borrowing

IRS Installment Agreement

This is a very common mechanism
to pay back IRS taxes owed. The IRS will allow individuals to pay taxes
off in monthly increments (including interest) if they can pay off the
tax amount owed in 3 years or less. To apply for an installment
agreement you will need to fill out IRS form 9465 with the IRS. This
agreement will allow you to have money taken right out of your bank
account that will go towards the taxes you owe. This is a better
method to use than using a credit card because the interest rates are
typically lower.

Financial Hardship/Uncollectible

If you cannot qualify for an
installment agreement, you may be able to get determined uncollectible
by the IRS. This will temporarily put you back on good terms with
the IRS and prevent the IRS from taking any actions against you.
They will check back every so often to see if your financial situation
has improved enough for you to pay back the taxes you owe.

Offer in Compromise

This is typically a last resort
option. The IRS will only consider this option if they think it
is very unlikely they will ever collect the taxes you owe. Under
this method you will pay a lump sum offer to the IRS for taxes owed.
The amount paid is typically much lower than the actual amount owed.
To apply for this you will be required to fill out a personal financial
statement and submit IRS form 656 to the IRS to be considered.
Very few of these filings are actually accepted and it is highly recommended
to consult a tax professional before attempting to make this type of

Picking the right method to pay back taxes is important. If the problem goes ignored, penalties and interest on unpaid amounts will add up very quickly. If you need help with taxes and help with picking the best resolution method, you should consult with
a tax resolution firm.

Tax Returns and Found Money

We have an odd attitude towards tax returns and pretty much any money we get from the government. As this money falls outside the limits of our regular salary, it usually hasn’t been allotted to pay any particular bills, and isn’t needed for day-to-day expenses. So, what do we do with it? We spend it with the same attitude we would towards a lottery win.


Let’s dissect this choice into a few important points.

Where does a tax return come from? While it seems like a large lump sum, a tax return is actually a return of money that you overpaid to the government. It means that the government got a hold of your money and held it for months until you filed a return to get it back. This money isn’t found, it was yours to begin with.

Why do we blow the money? Not all of us do, but the problem with tax returns is that they are the gateway to spending more. Perhaps you use your tax return for a vacation, but then need to pay for extra airport taxes and fuel fees from your regular money. Or perhaps the tax return is a payment towards a home renovation, but you need to pay the balance of the amount yourself.

What is our best use of that money? Since a tax return is viewed as “found money”, many people don’t put much thought into how they can spend it to best benefit themselves. While a vacation can be the most benefit, maybe saving the money so that you can replace an aging car when the time comes, or using the money to pay down debt is better. Just because you receive money you weren’t counting on doesn’t mean you shouldn’t maximize the value you get for it.

So, whether it is a tax return or some other type of found money, you need to think carefully on what you do with it. Don’t get caught up in the giddiness of having extra money, instead, treat it like any other paycheck and use it in whichever way benefits you the most.