The most common kind of tax that the IRS collects is personal income tax, which is figured as a percentage of the money an individual earns from employment and investments.
This percentage is calculated according to a progressive tax scale, meaning that the more you earn, the higher a percentage you pay.
For example, if an individual earns $20,000 per year, he or she pays a smaller percentage of that income in taxes than a person who earns $200,000 per year.
Taxes are also applied to corporate income, the money earned by a business.
While personal income tax is calculated according to the total money earned, however, corporate tax is based on a business's net income, or the difference between the total amount of money it took in and the amount of money it spent to run the business.
Individuals and corporations are required by law to report all of their income to the IRS.
The Internal Revenue Service collects several other kinds of taxes.
For instance, employers and employees pay Social Security tax to fund Social Security programs, which provide financial benefits to groups such as retirees and the disabled.
Estate taxes are collected when people inherit property that exceeds a certain value.
An excise tax is a special tax on certain goods and activities, such as gasoline and air travel; and gift tax is applied to the giver, not the recipient, of certain gifts.
The Bureau of Alcohol, Tobacco, Firearms, and Explosives (not the IRS) is responsible for collecting taxes associated with the sale of the products mentioned in its name.
The IRS is authorized to enforce tax laws by various methods.
The most common of these is a civil audit.
If the agency considers an individual or corporate tax return to be questionable, it may conduct an audit, or examination, of the return to verify its accuracy.
In order to make this assessment, it often requests to see the financial records on which the return was based.
During an audit the burden of proof is on the taxpayer, not the IRS.
This means that, if the taxpayer cannot back up his or her tax calculations with the appropriate documentation, the IRS may conclude that the return is inaccurate.
If underpayment of taxes is judged to be accidental, the agency requires the taxpayer to pay the amount still owed.
If, however, the IRS concludes that inaccuracies in the return were intentional (a federal offense), the taxpayer may be subject to jail time, significant fines, or both.
In many cases, if a person is either unwilling or unable to pay a tax debt owed to the IRS, the agency may collect the debt by seizing the person's property and selling it at auction.
The IRS audits a small fraction of all taxpayers.
In 1997, for instance, it audited about 1.
66 million individuals (less than 2 percent of taxpayers).
Nevertheless, the unhappy prospect of being audited at any time is regarded as an effective means of encouraging people to obey tax laws voluntarily.
In addition to its use of these civil audits, the IRS also conducts criminal investigations into cases of suspected tax fraud, money laundering, narcotics-related financial crimes, and other violations of tax laws.