Lawmakers who constitute the U.S. Congress formulate the nation’s tax laws and establish how taxes should be collected, how tax laws must be enforced and how tax refunds, rebates, and credits should be issued. The government collects income taxes, sales taxes, payroll taxes and property taxes from individuals and corporations. The government then uses this money in a number of areas from national defense and social services to education and infrastructure.
The Internal Revenue Service (IRS) is a part of the U.S. Department of Treasury and is the government agency that is entrusted with the function of collecting taxes. All of us end up paying taxes of some kind – whether it’s sales taxes on items we purchase or capital gains on the sale of a home. It is important for all taxpayers to get a good understanding of how taxation and tax laws work in the United States.
Understanding the Basics
IRS regulations essentially provide guidance on how the nation’s tax laws must be applied. The agency also uses letter rulings and revenue procedures to offer guidance in this regard. The IRS can always interpret the tax code in a manner of its choosing. When there is a dispute or disagreement regarding the IRS’s interpretation of the tax code, the federal court system makes the final determination and decides how the law should be correctly interpreted and applied.
The government gets a portion of its revenue from income taxes that are collected throughout the year largely in the form of withholdings on individual paychecks.
On tax day – which typically falls on April 15 and is the deadline for all individual income tax returns to be sent to the IRS – each person who has earned any type of income during the course of the previous calendar year must file a tax return. The calculation on the return should determine whether he or she paid sufficient taxes or, in some cases, overpaid taxes. If you have overpaid your taxes, you will receive a refund from the federal government.
There are two types of income that may be taxed. Earned income includes earnings such as salary, wages, tips, commissions, bonuses, sick pay, noncash benefits, and unemployment benefits. Unearned income that is taxable includes interest, dividends, profit from any assets that were sold, business income, royalties, rental income, winnings from gambling and alimony.
You may be able to lower the amount of income taxes you owe by contributing to a retirement account such as a 401(k) through your employer or through an IRA (if you are self-employed). In addition, you may also take deductions. For example, you may be able to exclude certain kinds of income. Please remember that the new tax code might affect some of the types of deductions you had been factoring on your personal income tax return or your business return.
What If You Owe Money to the IRS?
If you owe money to the IRS, there are a number of ways in which you can pay off your tax debt or at least enter into an agreement that will help you pay it off. Here are some of the ways in which you can pay off your tax debt:
Installment agreements: You can set up payment plans with the IRS. The type of agreement you enter into will depend on how much money you owe and how quickly you can pay the balance. In order to arrange an installment agreement, you need to complete an online payment agreement. You could also seek out a tax expert to assess your situation and identify an ideal solution. You will still pay interest on the payments. The IRS has the right to terminate the agreement if you fail to make the payments.
Short-term extensions: The IRS gives taxpayers up to 120 days to pay off their entire tax balance. In order to do this, you need to call the IRS, or you can have an expert handle it for you. This option is ideally suited for taxpayers who don’t need a whole lot of time to pay their entire tax bill.
Offer in Compromise: This is essentially a way in which you can settle your tax debt for a fraction of what you owe to the IRS. However, the eligibility process can be quite challenging. The IRS will want to see evidence that you cannot pay your tax debt and that you don’t have the ability or income to pay it off.
Loans: You may be able to borrow money from a friend or family member. You may also be able to borrow money on your 401(k) plan. Fees may be involved in such loan agreements. You may be able to use a credit card to pay off your tax debt. While it may be convenient, higher credit card balances could adversely affect your credit score.
Tax laws are complex and you may feel intimidated if you are faced with a tax bill. However, the worst thing you can do is to ignore tax bills or correspondence from an IRS. It would be in your best to contact a tax professional who can offer you advice regarding the best course of action and a quick and positive resolution.