Question

How is the structure of the IRS tax code used in tax planning?

Answer 1

A tax code is a federal government document, numbering thousands of pages that details the rules individuals and businesses must follow in remitting a percentage of their incomes to the federal or state government. The tax code is used as a source by tax lawyers who bear the responsibility of interpreting it for the public.

While Congress writes the tax laws and sets the rules at the federal level, it is the Internal Revenue Service (IRS) that implements the set rules and explains how they apply in different scenarios through the tax code. At the state level, these laws are set by a state, local, or county government that uses tax codes to authorize any taxation voted and agreed on. In effect, the tax code, sometimes referred to as the Internal Revenue Code (IRC), is a collection of tax laws enacted by the federal, state, and local government authorities.

Each tax law passed is assigned a code that is added to the collection of existing tax laws in the IRC publication. Since the tax code is not easily understood by the average person, the IRS provides detailed instructions that breaks down each code and how they should be applied. All tax rates, exclusions, deductions, credits, pension and benefit plans, personal exemptions, etc. provided by the IRS are taken from the federal tax codes. The tax codes in the IRC are organized and referred to by sections. For example, Section 1 of the Internal Revenue Code relays the federal income tax on the taxable income of U.S. citizens and residents, and of estates and trusts. Section 11 of the IRC imposes the corporate income tax.