How to Understand The Tax Code

People often think that publications from the Internal Revenue Service (IRS) are the best place to learn about the tax code, but this is not true. It is the Internal Revenue Code (IRC) that contains the actual rules. Additionally, the IRC is not easily decipherable by the average person, since it is thousands of pages long—the IRC was approximately 2,600 pages long in 2014.

In order to fill in the gaps, taxpayers have also been provided with a variety of secondary sources. In addition to helping taxpayers understand how much taxes they owe on their income, these sources will also help them determine which tax credits and deductions they are eligible for.

What You Need To Know

• US income taxes are extremely complex.
• Taxpayers can find a variety of information about what they must pay, and what tax credits and deductions might be available to them.
• The Internal Revenue Code (IRC), Internal Revenue Service (IRS) publications, calling the IRS, consulting books for tax professionals, hiring a tax professional, seeking volunteer tax assistance through VITA, and consulting books geared towards consumers are some of the sources.

IRC vs. Treasury Regulations vs. Revenue Rulings

Taxpayers can view the IRC on the Office of the Law Revision Counsel website, which contains the official, legally binding tax rules established by Congress.

Generally, Treasury regulations are the official interpretation of the tax code by the U.S. Treasury Department. Title 26 of the Code of Federal Regulations (26 CFR) contains these regulations, which can also be found online at the U.S. Government Publishing Office (GPO).3

Taxpayers can be sure that the information contained in these sources is correct since they are provided by the government. There is, however, a disadvantage that there is a lot of information and it can be difficult to comprehend it. It is still your responsibility to know the correct information if you don’t understand a rule or regulation correctly and decide to file your income taxes on the basis of your own misunderstanding.

A revenue ruling is the IRS’s official interpretation of the code based on specific facts. They are easier for taxpayers to understand, but they are not as legally binding as the Internal Revenue Code or Treasury regulations.

Consult the IRS Publications

Tax code interpretations are provided by IRS publications in booklets that can be purchased in print or accessed online from the IRS website.

Despite being readily accessible, free, and relatively concise, the publications are still a bit challenging for some individuals to understand.

Contact the IRS

There are phone numbers for IRS departments and instructions on how to call them if you have questions about your tax return in “IRS Publication 910: Guide to Free Tax Services.” Before calling one of these numbers, the IRS recommends having the form, schedule, or notice to which your question relates; the facts about your particular situation; and the name of any IRS publications or other sources of information you used to search for the answer.6

You might think calling the IRS would be the perfect solution, but it warns taxpayers that if they provide you with incorrect information, you are still responsible: “If we make an error in answering your question, you are still responsible for paying the correct tax.” Even if you were advised by a representative of the IRS to pay less than you should have, you will still be liable for the back taxes and interest if an audit later determines you paid less than you should have.

In the event of an IRS error, you will not be charged a penalty. If you do call, make copious notes, including the representative’s name and title, along with the time and date. A penalty is an additional amount the IRS charges for people who have underpaid their taxes.

Tax Professionals’ Consult Texts

Among the most detailed interpretations of the tax code available are those published by CCH and Tax Analysts, which are sold to Certified Public Accountants (CPAs), accountants, and tax attorneys.

It may be difficult to understand the content of these expert sources if you aren’t a CPA, accountant, or tax attorney. These expert texts can be extremely costly to buy, and they are not meant for a lay audience. They are highly technical, so if you aren’t an accountant, accountant, or tax attorney, you may have difficulty understanding the content.

Invest in a tax professional

When you have trouble filing your taxes, you are likely to consult a tax professional. Enrolled agents as well as Certified Public Accountants (CPAs) offer reliable and affordable advice. Even if it is an additional expense, hiring a tax professional may save you time. The National Association of Enrolled Agents and the American Institute of Certified Public Accountants can help you find a tax professional near you.

Hire a professional, but be aware that—if you do not screen them carefully by asking the right questions—you might end up with someone with a very liberal, or even abusive, interpretation of the tax code. If you are audited, you will pay dearly for this. Although even the most ethical and knowledgeable tax preparers may interpret the tax code differently, it’s important to remember that different professionals may prepare your returns differently.

To avoid these discrepancies, choose a professional whose interpretation of the tax code closely matches your own philosophy of tax obligations. Do you prefer to take advantage of deductions aggressively and hope for the best, or do you prefer to take precautions? An experienced tax preparer will be able to articulate their stance so you can see if it matches up with your own vantage point. Particularly if your tax situation is unusual, you may also want to ask how much experience the person has preparing returns similar to yours.

Obtain free income tax assistance from a volunteer

Those with low-to-moderate incomes can get assistance with their tax returns through the IRS’s Volunteer Income Tax Assistance (VITA) program. Taxpayers can ask questions about their taxes and get their taxes prepared by volunteers trained by the IRS. The program focuses on helping low-income taxpayers understand what possible advantages the tax code may offer for individuals in their situation, like how to claim the earned income credit (EITC) and child tax credit.

For tax year 2022, individuals with income less than $58,000 may qualify for free assistance through VITA. Individuals may qualify based on their income. VITA’s tax preparers are volunteers, and many may not have professional tax training, so they may not always offer the best advice. In addition, their training is generally only designed to help with relatively simple tax returns8.

Texts for Consumers

Tax publications are available to help the average taxpayer learn about income tax issues, as well as ensure they take advantage of all the deductions and credits they deserve. The books published by Nolo, J. K. Lasser, and Ernst & Young are among the most reliable, up-to-date, and widely respected sources.

In local bookstores and online, these books are easy to locate and are generally affordable (usually $25 or less). Libraries may have copies of these books, but they may not be the most recent versions. These books are probably the easiest to understand of all the credible sources that attempt to interpret the tax code for individual taxpayers.

Please remember, however, that information in these books does not constitute legal advice.

Conclusion

U.S. income tax laws are incredibly complex, so it is crucial that taxpayers consult the most reliable source of information they can understand and afford in order to fully understand what they are required to pay (and what they aren’t). If you’re ever audited, there’s always the chance that you’ll have to pay more than you thought you had to. A savings account for emergencies may be useful in this situation.