What Is the Purpose of Tax Returns?

What Is the Purpose of Tax Returns?
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A federal tax return is a document taxpayers submit to the Internal Revenue Service showing how much money they made in the previous year and how much money they paid in taxes. The purpose is to show that the taxpayer met his legal obligations to pay the government.

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Consider Also​: E-Filing: How to File Your Taxes Electronically, IRS Free File & More

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Showing What You Owe

The main reason the IRS requires most people to file tax returns is that the agency can't keep track of everyone's income and tax liability independently. Since every one of the more than 240 million​ taxpayers for fiscal year 2020 in the United States has a slightly different financial situation, the IRS relies on self-reports of income, assets and taxes paid. The tax return you file each year is a receipt showing how much you earned and how much money you paid the government.

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To work properly, the tax system requires honest self-reporting on tax returns. If too many people lied about their income and tax payments, the government would go broke. Consequently, the IRS audits a small portion of tax returns to make sure taxpayers are telling the truth.

The agency spends most of its time auditing the very wealthy. It audits returns showing incomes over ​$10 million​ almost ​a third​ of the time, but it audits fewer than ​1 percent​ of returns from taxpayers who make less than ​$100,000​.

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Calculating Benefits and Credits

The other major reason for tax returns is that they allow taxpayers to claim any credits, refunds or benefits owed to them by the IRS. Many people pay taxes to the government through a process called withholding. Their employers take a cut each paycheck and mail it directly to the IRS to save employees the hassle.

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The amount of withholding is based on estimates, however, and about 85 percent of people end up paying in more than they actually owed for the year. The IRS give out ​around 122 million​ refunds for fiscal year 2020. Filing a tax return that shows you overpaid on your taxes entitles you a refund.

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Additionally, some taxpayers may qualify for other credits like the Earned Income Tax Credit or the American Opportunity Credit. Filing a tax return is the only way to prove you qualify for these credits and receive your money.

Required Tax Forms

Not everyone is legally required to file a tax return. Depending on your age, marital status and income you may be exempt. However, even exempt people should still usually file a return because they may be eligible for tax credits.

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Most workers can file a return by filling out and submitting a form Form 1040. Completing the form usually requires looking at a document from your employer called a W-2, which states how much money your employer paid you and how much it paid the IRS on your behalf. If you had multiple employers, you'll need a W-2 form from each of them.

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If you made money from interest on a bank account or capital gains from stocks or bonds, you'll need to report that income, too. Self-employed workers typically receive a Form ​1099-NEC​ from individuals and organizations they contracted with.

Consider Also​: What is Form 1099-NEC?

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