How the Tax Code Works

Taxation is a principle that runs back thousands of years. Taxation has been in use as a way of financing kingdom, communities, and government as far back as history itself. However, the current U.S. tax code as we know it was introduced in 1913. The code has however, been significantly altered and expanded over the years. Every year since 1913, there are tax laws that are altered, added, or removed from the tax code. The tax laws have significantly been altered 28 times since 1913. Major alterations include the Kennedy and the Cater era between 1954 and 1963, the Clinton era, and the more recent Bush tax cuts. Today, the tax law comprises of over 4,500 pages of rules and guidelines.

Congress Makes the Laws

Congress is the federal body that is assigned the role of formulating and passing tax laws that govern the operations of IRS. Congress passes tax laws for different reasons. Some laws are passed for social reasons. For example, a tax law to provide relief to victims of bad weather, such as hurricanes and storms, is intended on helping the victims cope with the catastrophes. On the other hand, Congress passes some laws for political reasons. For example, many laws that provide relief and special treatment to oil companies and media houses are seen as being passed for political reasons. The oil companies provide major funding for political campaigns while media coverage is fundamental when campaigning and for continuous public perceptions and therefore, Congress will normally favor such groups to seek a return favor. Congress also passes laws for economic reasons. Many laws targeted at providing relief to small businesses, such as the bonus accelerated depreciation on cars bought for business use, is targeted at enhancing economic business, especially for small businesses that are fundamental for the American economy. Congress also passes laws to manage a specific economic state. The stimulus package law for example, was targeted at reviving the economy after the economic regression of 2007-2008, while the Bush tax cuts were introduced into the tax code to stimulate the economy after the War in Iraq.

The IRS Interprets and Makes Regulations

Once Congress makes the laws that form the tax code, the IRS then interprets these laws and forms regulations that enable implementation of the modified tax laws. Congress provides power to the IRS to be the primary interpreter of the tax law to present guidelines and regulations to the taxpayers. The IRS tax regulations are much bulkier than the tax code itself and run over 16,000 pages. Besides these regulations, the IRS also provides revenue and letter rulings and revenue procedures to provide further guidance to taxpayers and tax professionals.

The Role of Tax Professionals

The Tax Professionals are comprised of tax advocates, tax preparers, accountants, auditors, and finance consultants. Their primary role in the tax system is to advise and assist taxpayers to understand, apply, and optimize on the tax code. The tax code can be far too vast and too complicated for the average taxpayer. Therefore, these professionals help the taxpayer to plan, apply, and comply with the tax laws and at the same time, take advantage of the opportunities posed by the law. Most taxpayers (over 70%) use the services of a tax professional to prepare and file tax returns. Tax advocates can also help in tax cases escalating to IRS decisions to take a taxpayer to court. Tax professionals also help in negotiating Offers in Compromise and Installment Tax Payments with the IRS.

The Court System

The final authority in the interpretation of tax code is with the court system. The court settles disputes that arise between taxpayers and the IRS in the interpretation of the tax law. They seek to interpret the tax code based on the intent of Congress when it passed the tax law in question. The courts that participate in tax related disputes include Federal district courts, Tax Court, the U.S. Court of Federal Claims, and U.S. bankruptcy courts. For disputes that exceed $50,000.00, a taxpayer can appeal the decision of these courts in a Circuit Court of Appeal and further, with the U.S. Supreme Court.