The Internal Revenue Code of 1986 (IRC) is a fundamental piece of U.S. tax legislation passed by Congress. The IRC details what income is subject to taxation, the rates at which different types of income are taxed, and the permissible deductions from taxable income. The law forms the backbone of federal tax regulations in the United States and serves as the primary guide for both individual and corporate taxpayers.
Structure and Components of the IRC
Key Sections of the IRC
- Gross Income: According to IRC § 61, gross income includes “all income from whatever source derived,” unless specifically exempted by law.
- Deductions: IRC § 162 allows deductions for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.
- Credits: IRC provides various tax credits, such as the Earned Income Tax Credit (EITC) under IRC § 32.
- Tax Rates: Updated periodically through legislation, with current structures set forth in multiple sections.
Types of Taxes Imposed
- Individual Income Taxes: Governed primarily by Subchapter A.
- Corporate Taxes: Detailed in Subchapter C.
- Estate and Gift Taxes: Outlined in Subchapter B.
- Excise Taxes: Described in various other sections.
Amendments and Tax Reform Acts
The IRC has been significantly amended by numerous tax reform acts over the years, including:
- Tax Reform Act of 1986: Simplified the tax code, reduced tax rates, and eliminated many tax shelters.
- Taxpayer Relief Act of 1997: Introduced new credit options and tax reductions.
- Tax Cuts and Jobs Act of 2017: Lowered corporate tax rates, altered individual tax brackets, and modified deductions.
Interpretation and Enforcement
Court Cases
Numerous court cases have shaped the interpretation of the IRC. Landmark decisions include:
- Commissioner v. Glenshaw Glass Co. (1955): Expanded the definition of gross income.
- Indopco, Inc. v. Commissioner (1992): Clarified what constitutes a deductible business expense.
Regulations and Revenue Rulings
The Internal Revenue Service (IRS) issues regulations and revenue rulings to interpret and provide guidance on applying the IRC:
- Regulations: Detailed rules clarifying ambiguous terms in the IRC.
- Revenue Rulings: Official IRS interpretations on how the law applies to specific sets of facts.
Revenue Procedures
Revenue procedures outline the IRS’s practice and procedures for internal management:
- Rev. Proc. 2020-1: Details the process for obtaining letter rulings.
Historical Context
The IRC of 1986 marked a pivotal reform aimed at simplifying and reorganizing the tax structure. It replaced the Internal Revenue Code of 1954 and incorporated subsequent changes to better reflect the economic conditions and policy priorities of its time.
Applicability and Special Considerations
Individuals
Taxpayers must report all forms of income and adhere to regulations regarding deductions. Specific considerations for individuals include:
- Reporting wages and other income
- Claiming allowable deductions
- Applying for tax credits
Corporations
Corporations must navigate complex regulations regarding income calculations, deductions, and credits. Key considerations include:
- Compliance with detailed record-keeping requirements
- Structuring transactions to minimize tax liability within legal bounds
Comparisons and Related Terms
Income Tax
Income tax is a key component of the IRC, requiring regular filing of returns by individuals and businesses to report income received.
FICA (Federal Insurance Contributions Act)
Separate from the IRC, FICA taxes fund Social Security and Medicare programs and apply to earned income separate from gross income considerations in the IRC.
FAQs
What is the purpose of the IRC?
What are some major amendments to the IRC?
How does the IRS interpret the IRC?
References
Summary
The Internal Revenue Code of 1986 is the cornerstone of U.S. federal tax policy, extensively detailing taxable income, deductions, credits, and tax rates. Amended by various tax reform acts, the IRC is interpreted through regulations, revenue rulings, and procedures issued by the IRS. It has been shaped by historical developments and continues to impact all taxpayers, both individual and corporate.
