What Is the Internal Revenue Code of 1986?

The Internal Revenue Code of 1986 is the foundation of federal tax law in the United States. This comprehensive body of law, formally known as Title 26 of the United States Code, contains the rules for all federal taxes, including income, estate, gift, and employment taxes. The Internal Revenue Service (IRS), a bureau within the U.S. Department of the Treasury, is the agency that implements and enforces the Code.

While the name points to the Tax Reform Act of 1986, the Code is a dynamic document. The 1986 act was a major overhaul of the previous 1954 Code, intended to simplify the tax system and broaden the tax base. Before the first codification in 1939, federal tax laws were a disorganized collection of separate Revenue Acts. Congress chose to redesignate the amended law as the Internal Revenue Code of 1986, and all subsequent tax legislation, such as the Tax Cuts and Jobs Act of 2017, has been incorporated as amendments to this version.

The Structure of the Tax Code

The Internal Revenue Code (IRC) is organized with a distinct hierarchy to make the vast amount of information navigable. The broadest categories are Subtitles, lettered A through K, which group the law into general subject areas like income taxes or group health plan benefits. Each Subtitle is divided into Chapters, which focus on more specific topics.

These Chapters are then segmented into Subchapters, Parts, and sometimes Subparts, before arriving at the most fundamental level of the law: the Section. Sections are the specific, individual provisions of the law and are the part of the Code most frequently cited. For instance, the definition of gross income in Section 61 is found by navigating through Subtitle A (Income Taxes), Chapter 1 (Normal Taxes and Surtaxes), Subchapter B (Computation of Taxable Income), and Part I (Definition of Gross Income).

This methodical organization ensures that related provisions are grouped together. For example, the rules for partnerships are located in Subchapter K of Chapter 1, while the regulations for S Corporations are found in Subchapter S. Understanding this framework helps taxpayers and professionals locate the specific legal authority that governs a particular tax situation.

Key Areas Affecting Taxpayers

The Internal Revenue Code is vast, but several key areas directly impact most individuals and businesses. These are organized within the Code’s subtitles, which function as the main divisions of tax law. Each subtitle addresses a different type of federal tax or a distinct aspect of tax administration.

Subtitle A – Income Taxes

This is the largest part of the Code, governing the income taxes paid by individuals, corporations, trusts, and estates. Core concepts defined here include gross income, which Section 61 broadly defines as “all income from whatever source derived.” This section establishes the starting point for tax calculations.

Subtitle A also details the deductions taxpayers can take to reduce their taxable income. For example, Section 162 allows for the deduction of ordinary and necessary business expenses, while Section 163 governs the deductibility of interest payments. It also outlines tax credits, which are direct reductions in tax liability, such as the Child Tax Credit detailed in Section 24. This subtitle also contains the complex rules for how profits from the sale of assets, known as capital gains, are taxed.

Subtitle B – Estate and Gift Taxes

This portion of the Code deals with taxes on the transfer of wealth. The estate tax applies to the transfer of property at death, while the gift tax applies to transfers made during a person’s lifetime. These taxes are unified, with a single exemption amount that applies to both gifts and bequests.

For 2025, the federal estate and gift tax exemption is $13.99 million per individual, meaning these taxes affect only a small percentage of the population. The purpose of these provisions is to tax large transfers of assets from one generation to the next. The rules within Subtitle B detail what constitutes a taxable gift, how assets are valued for estate tax purposes, and what deductions are permitted.

Subtitle C – Employment Taxes

Subtitle C contains the rules for taxes related to employment, often referred to as payroll taxes. The Federal Insurance Contributions Act (FICA) taxes, authorized under Chapter 21, fund the Social Security and Medicare programs. These taxes are split between the employer and the employee.

The Social Security tax is levied on wages up to an annual limit of $176,100, while the Medicare tax is applied to all wages without a limit. Subtitle C also includes the Federal Unemployment Tax Act (FUTA) under Chapter 23. This tax is paid by employers and is used to fund state unemployment insurance programs.

Subtitle F – Procedure and Administration

While other subtitles define what is taxed, Subtitle F explains how the tax system operates. It governs the “rules of the game” for both taxpayers and the IRS. This section outlines the entire process of tax administration, from filing a return to resolving disputes.

Key provisions include the requirements for filing tax returns and the rules governing IRS audits, appeals, and collection actions. Chapter 68 specifies the penalties for failure to file or pay, such as the penalty under Section 6651. This subtitle also establishes the statutes of limitation—the time limits for the IRS to assess additional tax, which is three years under Section 6501, and for taxpayers to claim a refund.

The Relationship Between the Code and IRS Regulations

The Internal Revenue Code and Treasury Regulations have a distinct, hierarchical relationship. The Code is the law passed by Congress, but its language can be technical and lack practical detail. To bridge this gap, the Department of the Treasury, through the IRS, issues Treasury Regulations. These regulations are the official interpretation of the Code and provide guidance on how to comply with its provisions.

They function like an instruction manual, translating the complex legal language of the statute into more detailed rules and examples. For instance, where a Code section might state a “reasonable” expense is deductible, the corresponding regulation may provide tests and examples to define what qualifies as reasonable. Regulations are published in Title 26 of the Code of Federal Regulations (CFR) and have the force and effect of law, provided they are a valid interpretation of the statute.

The process of creating these rules involves several stages. The Treasury may first issue Proposed Regulations to solicit public feedback. In some cases, Temporary Regulations are issued that are effective immediately but typically expire after three years. Once the review process is complete, the Treasury issues Final Regulations. This separation of duties is a core aspect of tax administration: Congress writes the law, and the executive branch explains and implements it.

How the Code is Amended

The Internal Revenue Code is amended through the legislative process. The U.S. Constitution grants the power of taxation to Congress, and tax legislation must originate in the U.S. House of Representatives. A proposed tax bill is typically drafted and debated in the House Ways and Means Committee before moving to the full House for a vote.

Once a bill passes the House, it is sent to the U.S. Senate, where it is reviewed by the Senate Finance Committee. The Senate may approve the House version or draft its own. Often, the House and Senate pass different versions of the same tax bill, which requires the formation of a Conference Committee with members from both chambers to negotiate a single, unified bill.

This reconciled version of the bill must then be passed by both the House and the Senate before it is sent to the President for approval. The President can sign the bill into law, making it part of the Internal Revenue Code, or veto it.

Accessing and Citing the Code

For those who wish to view the text of the Internal Revenue Code, reliable and free online resources are available. The U.S. House of Representatives Office of the Law Revision Counsel provides the most current version of the entire United States Code, including Title 26. Another widely used resource is the Legal Information Institute (LII) at Cornell Law School, which offers a searchable and user-friendly version of the Code.

When referencing a specific part of the tax law, a standard legal citation format is used for clarity. A typical citation looks like this: 26 U.S.C. § 162. The number “26” refers to Title 26, the location of the Internal Revenue Code within the United States Code (U.S.C.). The “§” symbol means “section,” and “162” indicates the specific provision, which in this case covers trade or business expenses.