Internal Revenue Code

• The Internal Revenue Code (IRC) is the absolute authority on all federal tax laws. Every other source of law is somehow based on the legislation within each code section. The IRC contains the original language that the U.S. Congress and President approved. However, these code sections often provide broad tax concepts that are not helpful to the average taxpayer when filling out a tax return. For example, the code section that authorizes the deduction of business expenses only requires that the expense be "ordinary and necessary" to the business. For this to be helpful to the average taxpayer, a more detailed explanation is necessary. This is where Treasury Regulations come in.
  
  

Treasury Regulations

• If the IRC is first in command, then consider Treasury Regulations as second. Essentially, the U.S. government authorizes the Department of Treasury to clarify the IRC for taxpayers by drafting more detailed explanations. This doesn't mean that the Treasury writes its own tax law; rather, the regulations it issues must adhere to the broad guidelines of each code section. The regulations cover each code and provide thorough explanations of the law and illustrate its application with various examples. Each regulation number will correspond to the appropriate code section.
  
  

Court Decisions

• Various federal courts throughout the country, such as the U.S. Tax Court and Federal District Courts, have authority to decide disputes between taxpayers and the IRS. Although judges take no part in drafting any tax laws, their decisions carry substantial authority. As thorough as the sources of tax law may be, there are still many gray areas where a judge needs to determine what the correct application of the tax law is. In some cases where the issue is novel, the judge's decision in effect becomes tax law. For example, suppose a taxpayer takes a business deduction but the IRS disallows it because it believes the expense is not necessary to the business. If there is no clear definition of what "necessary" is, the judge's interpretation can be used by other taxpayers to support similar tax positions.
  
  

IRS Materials

• The IRS has no lawmaking authority and must always adhere to the tax laws. However, the IRS issues numerous publications and documents that provide guidance to taxpayers. And even though it's not law, a taxpayer can rely on what the IRS publishes. For example, the IRS issues numerous publications on the itemized deductions you can claim and you can rely on this information when filling out your Schedule A.