Congress writes the tax laws, which become part of the Internal Revenue Code (IRC), or tax code for short. The tax code is amended every year; presently, it's over 4,500 pages long.
Part of the reason the tax code is so big is that many tax laws are passed for purposes other than raising money. A social goal using a tax law, for example, is Congress's attempt to alleviate the housing problem by giving tax breaks to those who invest in low income housing. Similarly, an economic goal is found in allowing rapid tax writeoffs to buyers of new business equipment to stimulate manufacturing. And there are purely political reasons for tax laws. Many special interest groups, such as oil companies, horse breeders, broadcasters, insurance companies, and even major league baseball clubs, have gotten tax laws passed that are designed to give them special treatment. These special provisions of the tax code outnumber the laws of general application.
Congress has given the IRS the power, in the first instance, to interpret the tax code through a series of IRS regulations. These regulations are expanded versions of some tax code provisions with illustrations of how the law is applied in different situations. (Not every provision of the tax code has a corresponding regulation.) The regulations are about four times the length of the tax code itself. The IRS also publishes revenue rulings, revenue procedures, and letter rulings, which provide guidance in much the same manner as the regulations.
There are thousands of situations where it is not clear exactly how the tax law should be applied. In these gray areas, disputes often arise between the IRS and the taxpayer. This is where the tax professionals earn their keep -- by fitting the tax code most advantageously to a client's case.
The IRS does not have the final say on interpreting the tax code. The federal court system, composed of the U.S. Tax Court, federal district courts, the U.S. Court of Federal Claims, and U.S. bankruptcy courts, all have the power to decide, on a case-by-case basis, how Congress intended the tax laws to be applied. And if more than $50,000 is at stake, a taxpayer can appeal a tax court decision to a circuit court of appeal, and in rare cases to the U.S. Supreme Court.