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The Scope of Federal Income Tax Law

Pursuant to ratification of the 16th Amendment to the U.S. Constitution in 1913, Congress was given the power to collect a tax on “incomes, from whatever source derived, without apportionment among the states, and without regard to any census or enumeration.” Under the Internal Revenue Code, all residents and citizens of the United States are subject to a federal income tax. Income is broadly defined under the Internal Revenue Code, and can include payment for goods or services, profits from the sale of property, and benefits received from the cancellation of a debt. Under the Internal Revenue Code, corporations as well as individuals are subject to income tax.

The Sources of Federal Income Tax Law

The U.S. Constitution—Before ratification of the 16th Amendment, an income tax did not exist. All power granted to Congress to enact income tax laws comes from the 16th Amendment.

The Internal Revenue Code: The Internal Revenue Code provides the basic laws governing the collection of income tax by the federal government. (The Code also covers payroll, gift, estate and excise taxes).

Internal Revenue Service (IRS) Regulations: As with all statutes, the provisions of the Internal Revenue Code are subject to interpretation, and require more detailed explanations to allow individuals and businesses to know how to comply. The regulations issued by the IRS provide interpretation and explanation, and have the force and effect of law.

Revenue Rulings: When the IRS considers the application of the Code to a specific set of facts, IRS officials may issue a revenue ruling, designed to give authority and direction in similar situations in the future. For judges, however, these rulings are only considered persuasive authority, and not legally binding.

Letter Ruling: A letter ruling is an IRS agent’s position to a taxpayer on a particular set of facts. A letter ruling binds the IRS, but is only persuasive authority for judges.

Case Law: Tax law can also originate in the courts. When federal appeals courts are charged with resolving federal tax law issues—the interpretation of a provision of the Code, or of a regulation, the opinions they issue have precedential value:

  • Federal Income Tax LawThe U.S. Tax Court: Jurisdiction for an action in this court exists in Washington, D.C., and any appeals are to the U.S. Court of Appeals. The taxpayer may sue before paying any tax.
  • Federal District Court: Jurisdiction for an action in this court exists in the taxpayer’s district and allows for jury trial. The taxpayer must pay tax first and then sue for a refund.
  • Claims Court: Jurisdiction for an action in this court exists anywhere in the U.S.; any appeals are to the U.S. Court of Appeals for the Federal Circuit. The taxpayer must pay tax first and then sue for a refund.

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