Tax Code

What Is a Tax Code?

A tax code is a federal government document, usually 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.

How a Tax Code Works

In the United States, the U.S. Congress writes the tax laws and sets the rules at the federal level. The Internal Revenue Service (IRS) 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, which is 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 break 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.

Credits (refundable and non-refundable)

Alternative Minimum Tax (AMT) & environmental tax

Definition of gross income (before deductions), including items specifically taxable

Specific exclusions from gross income

Private activity bonds (PAB)

Personal exemptions; dependent defined

Deductions, including interest, taxes, losses, and business related items

Itemized deductions for individuals

Deductions unique to corporations

Non-deductible items, including special rules limiting or deferring deductions

Corporate transactions, including formation, distributions, reorganizations, liquidations (Subchapter C)

Pension and benefit plans: treatment of plans, employers, & beneficiaries

Accounting methods & tax years

Exempt organizations (charitable and other)

Accumulated earnings tax and personal holding companies

Banks: special rules for certain items

Natural resources provisions: depletion, etc.

Trusts & estates: definitions, income tax on same & beneficiaries

Partnerships: definitions, treatment of entities and members, special rules (Subchapter K)

Insurance companies: special rules, definitions

Regulated investment companies (mutual funds) and Real Estate Investment Trusts

Source of income (for international tax)

Tax on foreign persons/corporations; inbound international rules

Foreign tax credit (FTC)

Exclusions of foreign income (mostly repealed)

Taxation of U.S. shareholders of controlled foreign corporations (Subpart F)

Other international tax provisions

Gains: definitions, characterization, and recognition; special rules

Capital gains: separate taxation and special rules

Interperiod adjustments; certain special rules

S Corporations and cooperative associations: flow-through rules

Empowerment, enterprise, and other special zones

Self-employment tax

Withholding of tax on non-residents

Consolidated returns and affiliated groups (corporations)

Estate tax on transfers at death

Gift tax and generation skipping transfers tax

Social security and railroad retirement taxes

Unemployment taxes

Income tax withholding; payment of employment taxes

Excise taxes on specific goods, transactions, and industries

Alcohol, tobacco and firearms taxes and special excise tax rules

Tax returns: requirements, procedural rules, payments, settlements, extensions

Assessment, collection, and abatement; limitations on collection & refund

Interest and non-criminal penalties on underpayments or failures

Other procedural rules

Crimes, other offences, forfeitures, tax evasion

Judicial proceedings

Miscellaneous rules

Special taxes & funds (presidential election, highway, black lung, etc.)

A number of secondary sources, such as the numbered Internal Revenue Service publications, revenue rulings, and mass-market income-tax books, attempt to put the tax code into plain language for taxpayers. The IRS publications are freely available in print or online from the IRS website.

Another secondary source that seeks to interpret the tax codes is the Treasury regulations or Tax regulations, issued by the U.S. Treasury on most tax code sections to provide longer explanations and examples of how the law is used. These regulations are published in Title 26 of the Code of Federal Regulations (26 CFR) and are also available online at the GPO website.

The Electronic Code of Federal Regulations is a continuously updated version of the CFR. Taxpayers can often correctly comply with tax rules by following the guidelines laid out in these secondary publications, but for more complex situations, it may be necessary to consult the tax code directly, to decipher the tax laws.