Internal Revenue Service

Definition

The Internal Revenue Service (IRS) is the U.S. government agency responsible for tax collection and enforcement of tax laws. It oversees federal income taxation, including individual, corporate, and payroll taxes.

5 Must Know Facts For Your Next Test

1. The IRS requires businesses to report income using either cash or accrual accounting methods.
2. Under accrual accounting, revenues and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged.
3. Small businesses with average annual gross receipts of $25 million or less over the prior three years can choose between cash and accrual accounting for tax purposes.
4. The IRS mandates certain types of businesses, such as corporations with gross receipts over a certain threshold, to use accrual accounting.
5. Accurate financial reporting to the IRS is critical to avoid penalties and ensure compliance with federal tax laws.

Review Questions

• What role does the IRS play in the context of business accounting?
• What criteria determine whether a business can use cash versus accrual accounting according to IRS rules?
• Why might a business be required by the IRS to use accrual accounting rather than cash accounting?

Related terms

Accrual Accounting: An accounting method where revenue and expenses are recorded when they are earned or incurred, not when cash is exchanged.

Cash Accounting: An accounting method where transactions are recorded only when cash changes hands.

Tax Compliance: Adherence to tax laws and regulations set forth by governing bodies like the IRS.