The Internal Revenue Service (IRS) is the agency of the U.S. Department of the Treasury responsible for collecting income taxes from individuals and businesses within the country. In addition to tax on income, the IRS collects several other kinds of taxes for the government, including Social Security, estate, excise, and gift taxes (they are not responsible for collecting revenue derived from the sale of alcohol, tobacco, or firearms). The agency's other responsibilities include enforcement of U.S. tax laws, distribution of forms and instructions necessary for the filing of tax returns, and provision of counseling for businesses and individuals subject to its regulations.

The IRS, which is a part of the U.S. Department of the Treasury, was first created by Congress in 1862. In the first years of the IRS, its money-gathering activities were very modest. Until the Civil War, the United States gathered approximately as much money from customs duties as it did from taxation, and the federal government's financial needs were slight because it offered few programs for its citizens. In 1913 IRS responsibilities increased with the introduction of the federal income tax system. Since that time, the government has imposed steadily higher taxes on its citizenry to pay for national defense, social programs, transportation and other infrastructure, and other aspects of modern American society. As internal revenue gathering increased in scope during the past century, the Internal Revenue Service saw similar growth. The IRS, which employed approximately 86, 000 workers in the mid-1990s, was reorganized in 2000 into four operating divisions: wage and investment; small business and self-employed; large and mid-size business (those with assets greater than $5 million); and tax exempt and governmental entities. Further information on these divisions can be found on the official IRS web site ( ).

The Internal Revenue Service processes more than 180 million tax returns on an annual basis. On a small percentage of these returns, the IRS performs a more detailed tax return examination called an "audit." If an individual or business is audited, the IRS representative conducting the examination typically asks for proof of the various deductions and exemptions claimed on the tax return. Depending on how the audit unfolds, the IRS agent may ultimately decide that additional taxes are owed (or, less frequently, that the taxpayer actually paid too much). Taxpayers who object to these audit findings have the option of appealing to an independent division within the IRS specifically created to deal with such cases. If negotiations still do not satisfy the taxpayer, appeals can be filed in U.S. Tax Court or other federal courts, depending on the nature of the case.


The Internal Revenue Service sponsors several different programs designed to help entrepreneurs and small business owners fulfill their revenue reporting and taxpaying obligations. These include the Small Business Tax Education Program (STEP), which is designed to help small business owners maneuver through the plethora of business tax issues that they face.

Other recent IRS initiatives have met with opposition from small business groups, however. For example, IRS regulations requiring businesses that paid more than $50, 000 in employment taxes in 1995 to file federal payments electronically—and implementing heavy penalties for those not in compliance—deeply angered many small business owners. The IRS's new Market Segment Specialization Program (MSSP) has also been a subject of some controversy within the small business community. The MSSP is described as a research initiative intended to provide the IRS with a greater understanding of the typical structure and operation of several dozen kinds of small businesses. The initiative, which arose as a result of studies that indicated that independent business owners had a relatively high rate of noncompliance with tax laws, is designed to ultimately provide auditors with greater understanding of how each business is conducted and the compliance problems that they sometimes have. While supporters argue that the MSSP will give the IRS greater insights into the tax difficulties that small businesses face, critics contend that the program could ultimately result in tougher audits for small businesses.


The rapidly changing face of technology and communications has presented small businesses and multinational corporations alike with a wide array of challenges. The Internal Revenue Service has not been immune to these changes. Indeed, the agency has struggled to modernize its operations, especially in the realm of computers. The IRS recently announced that it is considering outsourcing its tax-return data entry after replacing some aging computers. According to Computerworld, IRS priorities now include finding an interim solution to the data input situation and solving remittance processing problems.


Faulkner, Crystal. "IRS Expanding 'Customer Service' to Businesses." Business Courier-Cincinnati/Northern Kentucky. August 18, 2000.

Griffin, Cynthia E. "Audit Alert: The Key to Surviving an IRS Audit, Know the Rules." Entrepreneur. July 1997.

Guttman, George. "IRS Finishing Up New Strategic Plan." Tax Notes. November 27, 2000.

Hodges, Susan. "Getting Wired for the IRS." Nation's Business. October 1996.

Machlis, Sharon. "Newly Candid IRS Has Year 2000 Fix, Mulls Outsourcing." Computerworld. February 10, 1997.

Stern, Linda. "The IRS's New Focus on Small Business." Home Office Computing. April 1994.

Tax Guide for Small Business. Washington: Internal Revenue Service, n.d.

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