Internal Revenue Code

The Internal Revenue Code provides the framework for the federal tax system, and serves as the foundation for all other components of the tax law. The IRC provides the ultimate authority when it comes to income taxes. This is because the IRC reflects the original statutes that Congress passes and the president signs into law. However, because the IRC often includes very broad tax principles and is riddled with technical legal terminology, it doesn't always provide much guidance to the average taxpayer. This is why Congress authorizes the Department of the Treasury to provide further explanations of the law with Treasury regulations. Treasury Regulations

The Treasury Department drafts numerous regulations for each code section that explain the tax law in more detail and with examples. However, the Treasury has no authority to create new tax law and must always interpret the IRC with Congress' original intentions in mind. But in terms of tax law hierarchy, you can think of these Treasury regulations as second in command. Essentially, the regulations have substantial authority, but in cases where a regulation conflicts or misinterprets a code section, the courts must step in and decide on what Congress' intentions are.

The federal court system is a vital component of the federal tax laws. Federal courts only intervene when there is a dispute between a taxpayer and the IRS as to how a tax law should be interpreted. For example, suppose you own a business and take $100,000 of business expense deductions but the IRS concludes that only $50,000 qualify for a deduction because it claims that some of your expenses don't satisfy the IRC requirement that all business expenses be "ordinary and necessary to the business." In this case, a federal judge can hear the case and decide whether your expenses are