How the IRS Works: Returns, Audits, and Collections
Key takeaways
- The IRS processes more than 160 million individual returns a year and collects about 96 percent of federal revenue, most of it through paycheck withholding.
- In 2025 the agency lost about a quarter of its workforce, cycled through several leaders, and ended its free Direct File program before the 2026 filing season.
- Well under 1 percent of individual returns are audited, most of them by mail, with higher rates at the top of the income scale and among low-income workers claiming the Earned Income Tax Credit.
- Unpaid taxes bring notices, penalties, and interest, then payment plans or settlements, and finally liens, levies, and even passport revocation. Evasion is a felony.
- Taxpayers can contest an audit in the Tax Court without paying first and can get free help from the Taxpayer Advocate Service.
- Federal courts blocked the IRS from sharing taxpayer addresses with immigration enforcement, a ruling an appeals court upheld in September 2026.
The Internal Revenue Service is the federal agency most Americans deal with directly every year. It administers a tax code written by Congress, collects the money that funds most of the government, and enforces the law through audits, collections, and criminal investigations.
This guide explains how filing, audits, and collections work, what rights taxpayers have, and the debates over funding, enforcement, and privacy that have reshaped the agency since 2022.
Most returns are chosen for audit by computer scoring and by matching returns against the W-2s, 1099s, and other information employers, banks, and brokers report. Most audits are handled by mail and question a single item. The IRS generally has three years after filing to audit, six for large omissions of income, and no limit for fraud. Recent data show well under 1 percent of individual returns audited, with higher rates for the highest earners and for low-income workers claiming the Earned Income Tax Credit, a pattern a 2023 study found fell hardest on Black taxpayers. The 2022 Inflation Reduction Act funded more audits of high earners, but Congress later clawed back much of the money and the 2025 workforce cuts reduced the number of auditors.
Unpaid taxes bring a series of notices, along with penalties and interest. Most people who cannot pay set up an installment agreement, and some qualify to settle for less through an offer in compromise. If a debt stays unpaid, the IRS can file a public lien, levy wages and bank accounts after a final notice, and ask the State Department to revoke the passports of people owing more than about 60,000 dollars, adjusted for inflation. Taxpayers can request a Collection Due Process hearing before a levy. The IRS generally has ten years to collect. Willfully refusing to file or pay is a crime, and tax evasion is a felony investigated by IRS Criminal Investigation and prosecuted by the Justice Department.
A Taxpayer Bill of Rights, written into law in 2015, lists ten rights, from being informed to appealing IRS decisions in an independent forum. The Taxpayer Advocate Service, an independent office inside the IRS, helps people facing hardship or stuck cases for free. Disputes can go to the IRS Independent Office of Appeals and then to the Tax Court, where taxpayers can contest a bill without paying first, or to a district court or the Court of Federal Claims after paying. Tax returns are confidential under Section 6103 of the tax code. In April 2025 the IRS agreed to check addresses for immigration enforcement. A federal judge blocked the arrangement in November 2025, found in February 2026 that the IRS had unlawfully shared about 42,000 addresses, and the D.C. Circuit upheld the block on September 8, 2026.
Supporters of a larger IRS budget point to a tax gap the agency estimates at roughly 700 billion dollars a year in taxes owed but not paid, say audits of high earners return several dollars for each dollar spent, and want better phone service and free filing. Critics say the agency has a history of political misuse, from the Nixon era to the 2013 screening of tax-exempt applications, that more audits burden honest taxpayers and small businesses, and that the tax code should be simplified instead. The 2025 cuts were defended as overdue efficiency and criticized as a threat to service and revenue. Privacy advocates and immigration enforcement officials disagree over when taxpayer data may be shared.
Most people with income above the standard deduction must file a return by April 15, and an extension to October 15 delays the filing but not the payment. Employers withhold tax from paychecks, and self-employed people pay estimated taxes four times a year. Refundable credits such as the Earned Income Tax Credit and the child tax credit can produce refunds larger than the tax withheld. Free filing is available through private software partners and volunteer clinics, but the IRS's own Direct File program, tested in 2024 and 2025, was not offered in 2026. The 2026 season, which opened January 26, was the first to apply new deductions created by the July 2025 budget law, including those for tips and overtime pay.
The IRS is a bureau of the Treasury Department that processes more than 160 million individual returns and tens of millions of business returns a year and collects about 96 percent of federal revenue, most of it withheld from paychecks before it ever reaches the agency. Congress writes the tax law, the Treasury and IRS write the regulations that interpret it, and the IRS answers questions, processes returns, pays refunds, and enforces the law. Its commissioner normally serves a five-year term. In 2025 the agency lost about a quarter of its workforce through buyouts and layoffs, went through several acting leaders, and in late 2025 the Treasury placed it under a new chief executive role.
See which government taxes what in who taxes what, where the money goes in where your tax dollars go, or the court that hears tax disputes in specialized federal courts.