Internal Revenue Service

The IRS was created in 1952, though it was preceded by various other U.S. tax-collecting offices. The earliest incarnation of the IRS was the Office of the Commissioner of Revenue, which was established by Congress in 1792 in response to the request by Secretary of the Treasury ALEXANDER HAMILTON that various tariffs and taxes be created to raise money to pay off the U.S. Revolutionary War debt. Trench Coxe of Pennsylvania was the first person to hold the office. By creating the Office of the Commissioner of Revenue, Congress delegated its constitutional power to "lay and collect taxes, duties, imposts, and excises" to the Treasury Department, which has retained the power ever since (art. 1, § 8, U.S. Constitution).

By the time THOMAS JEFFERSON became president in 1801, the internal revenue program had grown to employ 400 revenue officials, who enforced a wide variety of tax regulations, including taxes on distilled spirits, land, houses, and slaves. Jefferson, a Democrat who fiercely opposed Hamilton and his FEDERALIST PARTY programs, abolished the entire system and relied instead on taxes assessed on imported items for government revenue. When the WAR OF 1812 increased the government's needs for funds, taxes were reimposed on items such as sugar, carriages, liquor, furniture, and other luxury items. At the war's end, all internal taxes and collection offices were abolished, and CUSTOMS DUTIES again became the primary source for government revenue.

When the Civil War broke out in 1861, President ABRAHAM LINCOLN faced a financial crisis because the government needed much more money to finance the war effort than could be raised through customs duties. To address this problem, Congress passed sweeping new tax measures, including the Civil War Revenue Act of August 5, 1861, which authorized the country's first INCOME TAX and imposed a direct tax of $20 million apportioned among the states. The Revenue Act of July 1, 1862, created a wide variety of new taxes. To oversee their collection, Congress created the Bureau of Internal Revenue under the secretary of the treasury. This office, which represents the first form of the modern internal revenue collection system, administered the tax system by dividing the country into 185 collection districts. The commissioner was given the power to enforce tax laws through both seizure and prosecution. George S. Boutwell of Massachusetts was the first commissioner of internal revenue. Boutwell was initially assisted by three clerks. By January 1863 the office had grown to employ nearly 4,000 people, most of whom worked in the field as revenue collectors or property assessors.

When the Civil War ended in 1865, the government's need for revenue was greatly reduced. Taxes were scaled back, the income tax was eliminated, and customs duties again became a sufficient source for federal funds. With the subsequent rise of industrialism and growth of populist political ideas, however, many citizens wanted the government to take a more active role and therefore lobbied for a reestablishment of the income tax to provide greater revenue. Most of the support for an income tax came from southern and western states. Most of the opposition came from the wealthier states whose citizens would be most affected by an income tax—Massachusetts, New Jersey, New York, and Pennsylvania.

After many attempts Congress finally passed a modest income tax in 1894. The Supreme Court quickly ruled it unconstitutional on the ground that it violated the constitutional provision requiring that federal taxes be apportioned equally among the various states. Supporters of the income tax overcame this hurdle in 1913, when Wyoming became the thirty-sixth state to ratify the SIXTEENTH AMENDMENT to the Constitution, giving Congress the power to collect taxes without regard to state APPORTIONMENT. That same year Congress enacted the first income tax act under the amendment, and the income tax became a permanent feature of the U.S. tax system.

The passage of the Sixteenth Amendment marked the beginning of an era of significant expansion for the Bureau of Internal Revenue. The establishment of the Personal Income Tax Division greatly increased bureau staff, and many new taxes were imposed to finance WORLD WAR I, thus requiring new bureau divisions and programs. As the bureau's responsibilities continued to multiply, operations became more inefficient and disorganized. In the 1920s, for example, the national office of the bureau was housed in a dozen different buildings located all around the metropolitan Washington, D.C., area. Tax returns became backlogged, tax FRAUD and evasion were rampant, and an extensive patronage system enabled politically appointed collectors to operate unchecked, outraging their civil service staffs. Beginning in 1945 Congress and the Treasury Department began efforts to overhaul the whole tax collection system. In 1952 the Bureau of Internal Revenue was reorganized and given a new name: the Internal Revenue Service. This new moniker was intended to emphasize the agency's focus on providing service to taxpayers. Patronage was eliminated, and power was decentralized, with the states being divided into seven regional districts through which all return processing, auditing, billing, and refunding would be administered.

Since 1952 the IRS has continued to undergo major changes and reorganizations. Advancements in technology have had a tremendous effect on IRS operations, beginning with the opening of the automatic data processing system

in Martinsburg, West Virginia, in 1962. This system revolutionized the collection and audit process by enabling the IRS to maintain a master file of every taxpayer's account. More recent technological applications have changed the way taxpayers interact with the IRS. In 1995, for example, more than 14 million individuals and businesses used the IRS electronic filing program to submit their tax returns. Another approximately 685,000 taxpayers in ten states filed their tax return using their touch-tone telephone. Taxes were also paid electronically, with more than 41,000 businesses making more than $232 billion in federal tax deposits by electronic funds transfer.

Over the years the IRS has faced continuing pressure from Congress and the public to adopt more reasonable enforcement policies, to provide better service to taxpayers, and to protect private information more carefully. In an attempt to protect taxpayers' rights, Congress in 1988 passed the TAXPAYER BILL OF RIGHTS (Pub. L. No. 100-647, tit. VI, §§ 6226–6247, 102 Stat. 3730–3752 [Nov. 10, 1988]), which outlines the rights and protections a taxpayer has when dealing with the IRS. Included are the right to have penalties waived if the taxpayer follows incorrect advice given by the IRS, the right to request relief when tax laws result in significant hardship, and the right to attorneys' fees in cases where IRS employees violate the Internal Revenue Code to the detriment of the taxpayer.

In 1995 the IRS administrative structure underwent a major reorganization. The seven regions that had been established in 1952 were reduced to four, and management was consolidated, decreasing the number of districts within those regions from 63 to 33.

The IRS came under close examination from Congress in the late 1990s following a series of allegations from taxpayers of improper behavior by IRS agents. In September 1997, over three days of televised hearings, the U.S. Senate Finance Committee heard a litany of horror stories: taxpayers gave accounts of ruined lives, and IRS agents described a culture of lawlessness that included forgeries, spying, shakedowns, and cover-ups. The dramatic testimony capped a six-month committee probe into IRS misconduct.

The first to testify in the open hearings were taxpayers, from business owners to an elderly priest, who told the panel how unfair IRS audits had led to DIVORCE, BANKRUPTCY, and, in some cases, years of fighting inflexible rules to correct the agency's mistakes. Others said they paid the IRS large sums rather than fight and risk jeopardizing their businesses. Tom Savage, a 69-year-old Delaware construction company owner, told lawmakers that he paid $50,000 in fines despite the fact that the JUSTICE DEPARTMENT told the IRS that levying him was wrong. Another taxpayer, Nancy Jacobs of California, said that the IRS mistakenly assigned her husband a taxpayer identification number belonging to someone else but that she and her husband paid the agency $11,000 to stop enforcement actions in order to save her husband's optometrist practice.

IRS whistle-blowers also testified. Sitting behind screens with their voices garbled electronically to conceal their identities, they accused IRS management of several questionable practices: illegally snooping on private tax data, preying on vulnerable taxpayers, and unduly focusing collection efforts on lower- and middle-class taxpayers. Their chief allegation was that management evaluated employees based on their collection performance. Agents were pressured, they said, to seize as much taxpayer property and assets as possible, in violation of IRS policy and federal law. Jennifer Long, the only agent not to testify behind a curtain with a voice distortion mask, said that agents ignored cheating by friends and by those with resources to fight an audit. Statistics showed that the audit rate for people with annual incomes of more than $100,000 declined from 11.41 percent to 2.79 percent between 1988 and 1995. During that same period, the audit rate for people with annual incomes of less than $25,000 nearly doubled, from 1.03 percent to 1.96 percent.

In 1998, Congress passed the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA), Pub. L. No. 105-206, 112 Stat. 685 (codified in scattered sections of 26 U.S.C.A.), to overhaul operations within the IRS. Title I reorganized the structure and management of the IRS with three sections designed to improve taxpayer treatment. The act directed the commissioner to discard the IRS organizational structure, which had previously run operations through local, regional, and national offices. In its place the commissioner was required to substitute organizational units serving taxpayers with similar tax obligations, such as individuals, small businesses, large businesses, and nonprofit organizations.

The IRSRRA created the Internal Revenue Service Oversight Board, which operates within the Department of the Treasury. The Oversight Board contains nine members, including the secretary of the treasury, the commissioners of the IRS, six civilians, and one federal government employee appointed by the president with the advice and consent of the Senate. The board's general responsibility is to oversee the IRS "in its administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws." Although the board may not view the tax returns of individual taxpayers and, therefore, cannot rectify individual taxpayer abuse, IRSRRA commands the board to ensure that the IRS treats taxpayers properly.

Under the IRSRRA, the commissioner of the IRS must terminate agency employees who engage in a list of forbidden conduct that includes the following: failing to obtain required signatures before seizing homes, personal belongings, and business assets to satisfy tax deficiencies; making a false statement under oath concerning a taxpayer's case; violating a taxpayer's constitutional or CIVIL RIGHTS; falsifying or destroying documents to conceal IRS mistakes; committing assault or BATTERY on a taxpayer; violating the tax laws or regulations for the purpose of retaliating against or harassing a taxpayer; and threatening to audit a taxpayer to extract a personal benefit. Although a loophole allows the commissioner to take personnel action other than termination at his sole discretion, he may not delegate that authority to any other officer.

Title III of IRSRRA contains a Taxpayer Bill of Rights, also designed to reduce taxpayer abuse. Most notably, it shifts the burden of proof in most tax cases to the IRS. Previously, taxpayers sued by the IRS had the burden of proving that their tax calculation was correct. Under IRSRRA, if a taxpayer keeps the appropriate records, cooperates during IRS investigations, and presents "credible evidence" to support his or her tax calculation, the IRS has the burden of proving the calculation is wrong. The requirement that the taxpayer show credible evidence has proven difficult in some cases. For example, in Higbee v. Commissioner, 116 T.C. No. 28 (2001), the U.S. TAX COURT held that the testimony of the taxpayer and a document from a small-claims courts showing damages to a piece of property, which he alleged entitled him to a deduction, did not constitute credible evidence to shift the burden of proof to the IRS.

The Taxpayer Bill of Rights also regulates IRS collection efforts and helps specific groups of taxpayers who might lack power to protect themselves. Some evidence suggests that IRSRRA reduced taxpayer abuse shortly after its enactment. By March 1999, property seizures were down 98 percent from levels two years prior; GARNISHMENT of paychecks and bank accounts were down 75 percent; and liens, which ensure that a tax is paid when property is sold, were down 66 percent. Critics, however, contend that these figures reflect reduced, not better, enforcement efforts caused by IRS employees' fear of losing their jobs for violating the IRSRRA. Moreover, other evidence, addressed in a 2002 article in the New York Times, suggests that IRS agents are more likely to subject wage earners to heavy scrutiny over tax returns than they are businesses, trusts, and partnerships.