The IRS & the IRC

IRS = Internal Revenue Service
IRC = Internal Revenue Code

Here are a few shocking revelations regarding the IRS and the IRC I learned while taking Income Tax class at the University of North Texas.

The "Scope" of the IRS is the world and everyone in it.

How can that possibly be?  Does the IRS collect taxes on a German's income?  No..  The code goes on to exclude people based on nationality, residency, and where the income was earned.  So, everyone is subject to he IRC, but Germans living in Germany and earning income in Germany are excluded.  If the scope was not defined as everyone in the world, then Germans living in America and earning income from an American company couldn't be taxed.  And the Government can't stand that.

The IRS' mission statement:

The mission statement of the IRS is the penultimate oxymoron.  Until the mid to late 1990's, said mission statement was, "To enforce voluntary compliance with the Internal Revenue Code."  Re-read that until your head stops spinning - then continue.

I am assured by friends in the IRS that, although the mission statement has been changed, the general attitude is still strong in that direction.

Now, for Government Speak.  The mission statement was changed and now reads something like this (paraphrasing): "To make taxpayers who can afford to pay their income taxes pay those taxes and to help those who cannot pay meet their obligations." 

Istn't that nice?  They'll help you anyway they can.  Why do I call it Gov't Speak?  Because, a) the end result is the same as the original mission statement and b) if you read it carefully, you understand that no matter whether you can afford it or not, you'll still pay.

Of course, the IRS doesn't like tracking down people who owe money; it's a burden on them.  So they first insist that you get a loan of some kind (second mortage, second car loan, pawn stuff, etc.)  And that's a good idea because they'll charge you interest and penalties that are higher than almost any other loan you can get.  BTW, interest and penalties owed to the IRS compound daily.

And if that doesn't work, they'll confiscate your income.  The IRS is not ashamed to leave you with just $125 per week of net income,  They won't suspend your current withholding.  But they will suspend any contributions being made to your retirement fund.

And if they really have to, the IRS will confiscate any retirement savings you have.  If they do, you'll be taxed on the forced withdrawal and (if you're not 55 1/2 yrs old or older) you'll also be forced to pay an additional 10% penalty for early withdrawals.

Advantage:  IRS

Are there two or more different and equally correct calculations for any income you have?  Then the IRC says you must use the larger income number.

Are there two or more different and equally correct calculatinos for any expenses you can declare?  Then the IRC says you must use the smaller expense number.

Did you make an error on a previous year's return?  Then you can amend a return going back five (5) years.

Is the IRS auditing your returns for errors?  They can go back SEVEN (7) years.

Did you have non-business losses for the year (e.g. lose money on the sale of your home)?  You can't deduct those losses, except to the extent that they are offset by gains. 

Do you lose money on your business three or more of the last five years?  Oh, it'll be reclassified as a "Hobby".  None of the expenses related to hobbies are deductible.  NONE.

The IRC &  Negligence:

Remember that "voluntary compliance" phrase back in the missino statement.  That becomes impartant here.  Being a "voluntary" system, the entire burden of correctly calculating your tax liability is on your sholders (like the 'other kind' of stoning).  It also explains why you have to prove your innocence in a court of law.

Since yo're the one who calculates your tax liability, the IRS frequently sues taxpayers in Civil (not Criminal) court.  Specifically, they sue you for Negligence.  Several things happen in Civil Court that don't happen in Criminal Court.  First, you - as the defendant - can be called to the testify on the stand (no 5th amendment here).  Second, you must demonstrate that you have done things correctly (usually to jurors who don't understand the tax code).  Third, in Civil Court, the plaintiff only needs a majority of jurors (7 of 12) to agree with them to win the case (not all 12 as in criminal court).

This is why almost nobody is accused of Fraus by the IRS.  Being a crime, accusing someone of Fraud puts the entire Criminal Burden on them.  But they will do it when the amount owed is very high, it's a high profile case (call Wesley Snipes on that one), and or the tax year in question goes back more than several years (no statute of limitations on Fraud).

The IRS & Negligence

Back to the burden of 'voluntary compliance'.  Since the onus is on you and because it's virtually impossible to fire a gov't employee, the IRS does't really need to dedicate themselve to excellence.  Consequently, when compared to CPAs and Professional Tax Preparation Services (e.g. H&R Block, Jackson-Hewitt), the IRS has the worst record when it comes to interpreting IRC regulations cinsistently score 51 to 55% out of 100.

A Select Few Never Pay Income Taxes:

And I'm not being sarcastic about the uber-wealthy and their Elite Tax Accountants.  Nope ... there's a whole sectin of the IRC where some people have done something special and they are excluded from paying income taxes by name.  I didn't check, but I'll bet $10,000 that you're not listed in that section.  Does that sound fair or ethical?  That doesn't matter ... it's legal.  The constitution gives the legislature that kind of power.

New Powers:

The IRS is now in charge of tracking your insurance -- as in "If you don't get insurance, you will be fined via your tax return.

Final Note:
Has this inpired you to take an income tax class?  Here's a helpful hint.  While your head is spinning and your eyes glaze over trying to interpret the never-ending charts and compound complex sentence structure, keep repeating this mantra:  "We must screw the taxpayer AND make it look fair."  You should do fine.