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Internal Revenue Service

Internal Revenue Service Building on Constitution Avenue in Washington, D.C..

The Internal Revenue Service (IRS) is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue. The IRS is responsible for collecting taxes and the interpretation and enforcement of the Internal Revenue Code.

Contents


Summary

The IRS has its headquarters in the greater Washington, D.C. area, and does most of its computer programming in Maryland. It currently operates five service centers around the country (in Austin, TX; Cincinnati, OH; Fresno, CA; Kansas City, MO; and Ogden, UT), at which returns sent by mail are received. These centers do the actual tax processing; different types of tax processing take place in various centers (such as the distinction between individual and business tax processing). The IRS also operates three computer centers around the country (in Detroit, Michigan; Martinsburg, West Virginia; and Memphis, Tennessee).[1]

History

American Civil War (1861 65)

In July 1863, during the Civil War, President Abraham Lincoln and Congress created the office of Commissioner of Internal Revenue and enacted a temporary income tax to pay war expenses (see Revenue Act of 1862). The position of Commissioner exists today as the head of the Internal Revenue Service.

The Revenue Act of 1862 was passed as an emergency and temporary war-time tax. It copied a relatively new British system of income taxation, instead of trade and property taxation. The first income tax was passed in 1861:

  • The initial rate was 3% on income over $800, which exempted most wage-earners.
  • In 1862 the rate was 3% on income between $600 and $10,000, and 5% on income over $10,000.
  • In 1864 the rate was 5% on income between $600 and $5,000; 7.5% on income $5,000 $10,000; and 10% on income $10,000 and above.

By the end of the war, 10% of Union households had paid some form of income tax, and the Union raised 21% of its war revenue through income taxes.[2]

Post Civil War, Reconstruction, and popular tax reform (1866 1900)

After the Civil War, Reconstruction, railroads, and transforming the North and South war machines towards peacetime required public funding. However, in 1872, seven years after the war, lawmakers allowed the temporary Civil War income tax to expire.

Income taxes evolved, but in 1894 the Supreme Court declared the Income Tax of 1894 unconstitutional in Pollock v. Farmers' Loan & Trust Co.. The federal government scrambled to raise money.[3]

In 1906, with the election of President Theodore Roosevelt, and later his successor William Howard Taft, the United States saw a populist movement for tax reform. This movement culminated in February, 1913, with the ratification of the Sixteenth Amendment to the United States Constitution:

This granted Congress the specific power to create a direct income tax. By February 1913, 36 states had ratified the change to the Constitution. It was further ratified by six more states by March. Of the 48 states at the time, 42 ratified it. Connecticut, Rhode Island, and Utah rejected the amendment; Pennsylvania, Virginia, and Florida did not take up the issue.[4]

A copy of the very first IRS 1040 form, dated 1913, can be found at the IRS website[5] showing that only those with incomes of $3,000 (adjusted for inflation, the equivalent of $68,612 in 2011) or more were instructed to file.

The IRS reinvents itself (1913 1970)

People filing tax forms in 1920. In the first year after ratification of the Sixteenth Amendment, no taxes were collected--instead, taxpayers simply completed the form and the IRS checked it for accuracy. The IRS's workload jumped by ten-fold, triggering a massive restructuring. Professional tax collectors began to replace a system of "patronage" appointments. The IRS doubled its staff, but was still processing 1917 returns in 1919. [6]

Presidential tax returns (1973)

From the 1950s through the 1970s, the IRS began using technology such as microfilm to keep and organize records. Access to this information proved controversial, when President Richard Nixon's tax returns were leaked to the public. His tax advisor, Edward L. Morgan, became the fourth law-enforcement official to be charged with a crime during Watergate.[7]

John Requard. Jr., accused of leaking the documents, collected delinquent taxes in the slums of Washington. In his words:

He admits he saw the returns, but denies he leaked them. When asked if he would have leaked the documents, he said: "I probably would have said, 'Yes, I'm in'."[8]

Reporter Jack White of The Providence Journal, won the Pulitzer Prize for reporting about Nixon's tax returns. Nixon, with a salary of $200,000, paid $792.81 in federal income tax in 1970 and $878.03 in 1971, with deductions of $571,000 for donating "vice-presidential papers".[9] This was one of the reasons for his famous statement: "Well, I'm not a crook. I've earned everything I've got."

So controversial was this leak, that most later US Presidents released their tax returns (though sometimes only partially). These returns can be found online at the Tax History Project.

Modernization and the Internet (1970 present)

After microfilm, the 1960s onward saw massive computerization efforts.

In 1995, the IRS began to use the public Internet for electronic filing. Since the introduction of e-filing, self-paced online tax services have flourished, augmenting and sometimes replacing tax accountants to prepare returns.

In 2003, the IRS struck a deal with tax software vendors:

  • The IRS would not develop online filing software.
  • In return, software vendors would provide free e-filing to most Americans.[10]

In 2009, 70% of filers qualified for free electronic filing of federal returns.[11]

In 2010, more than 66% (98 million) of tax returns are expected to be filed electronically.

History of the IRS name

As early as the year 1918, the Bureau of Internal Revenue began using the name "Internal Revenue Service" on at least one tax form.[12] In 1953, the name change to the "Internal Revenue Service" was formalized in Treasury Decision 6038.[13]

Current organization

The 1980s saw a reorganization of the IRS. A bipartisan commission was created with several mandates, among them to increase customer service and improve collections.[14] Congress later enacted the Internal Revenue Service Restructuring and Reform Act of 1998.[15]

As a result of that Act, the IRS now functions under four major operating divisions: Large Business and International division (LB&I), the Small Business/Self-Employed (SB/SE) division, the Wage and Investment (W&I) division, and Tax Exempt & Government Entities (TE/GE) division. Effective October 1, 2010, the name of the Large and Mid-Size Business division changed to the Large Business & International (LB&I) division.[16] The IRS also includes a criminal law enforcement division (IRS Criminal Investigation Division). While there is some evidence that customer service has improved, lost tax revenues in 2001 were over $323 billion.[17]

Commissioner

Douglas H. Shulman is the current Commissioner of Internal Revenue.

Taxpayer Advocates

The Office of the Taxpayer Advocate, also called the Taxpayer Advocate Service, is an independent office within the IRS responsible for assisting taxpayers in resolving their problems with the IRS, as well as identifying systemic problems that exist within the IRS. The current United States Taxpayer Advocate, also known as the National Taxpayer Advocate, is Nina E. Olson.

Tax collection statistics

New York City field office for the IRS. Summary of Collections before Refunds by Type of Return, Fiscal Year 2007[18]

Type of Return Number of Returns Gross Collections
to the nearest million US$
Individual Income Tax 138,893,908 1,366,241,000,000
Employment Taxes 30,740,592 849,733,000,000
Corporate Income Tax 2,507,728 395,536,000,000
Excise Taxes 989,165 53,050,000,000
Estate Tax 55,924 24,558,000,000
Gift Tax 286,522 2,420,000,000
Total 173,351,839 2,691,538,000,000

For fiscal year 2009, the U.S. Congress appropriated spending of approximately $12.624 billion of "discretionary budget authority" to operate the Department of the Treasury, of which $11.522 billion was allocated to the IRS. The projected estimate of the budget for the IRS for fiscal year 2011 was $12.633 billion.[19] By contrast, during Fiscal Year (FY) 2006, the IRS collected more than $2.2 trillion in tax (net of refunds), about 44 percent of which was attributable to the individual income tax. This is partially due to the nature of the individual income tax category, containing taxes collected from working class, small business, self employed, and capital gains. The top 5% of income earners pay 38.284% of the federal tax collected.[20][21]

Recently, the IRS has altered its policies. The current Service plus Enforcement equals Compliance motto mirrors its recent increase in investigations of abusive tax schemes.

As of 2007, the agency estimates that the United States Treasury is owed $354 billion more than the amount the IRS collects.[22]

Outsourcing collection and tax-assistance

In September 2006, the IRS started to outsource the collection of taxpayers debts to private debt collection agencies. Opponents to this change note that the IRS will be handing over personal information to these debt collection agencies, who are being paid between 29% and 39% of the amount collected. Opponents are also worried about the agencies' being paid on percent collected, because it will encourage the collectors to use pressure tactics to collect the maximum amount. IRS spokesman Terry Lemons responds to these critics saying the new system "is a sound, balanced program that respects taxpayers' rights and taxpayer privacy." Other state and local agencies also use private collection agencies.[23]

In March 2009, the IRS announced that it would no longer outsource the collection of taxpayers debts to private debt collection agencies. The IRS decided not to renew contracts to private debt collection agencies, and began a hiring program at its call sites and processing centers across the country to bring on more personnel to process collections internally from taxpayers. As of October 2009, the IRS has ceased using private debt collection agencies.

In September 2009, after undercover expos videos of questionable activities by staff of one of the IRS's volunteer tax-assistance organizations were made public, the IRS removed ACORN from its volunteer tax-assistance program.[24]

Administrative functions

The IRS publishes tax forms which taxpayers are required to choose from and use for calculating and reporting their federal tax obligations. The IRS also publishes a number of forms for its own internal operations, such as Forms 3471 and 4228 (which are used during the initial processing of income tax returns).

In addition to collection of revenue and pursuing tax cheaters, the IRS issues administrative rulings such as revenue rulings and private letter rulings. In addition the Service publishes the Internal Revenue Bulletin containing the various IRS pronouncements. The controlling authority of regulations and revenue rulings allows taxpayers to rely on them. A private letter ruling is good for the taxpayer to whom it is issued, and gives some explanation of the Service's position on a particular tax issue.[25]

As is the case with all administrative pronouncements, taxpayers sometimes litigate the validity of the pronouncements, and courts sometimes determine a particular rule to be invalid where the agency has exceeded its grant of authority. The IRS also issues formal pronouncements called Revenue Procedures, that among other things tell taxpayers how to correct prior tax errors. The IRS's own internal operations manual is the Internal Revenue Manual, which describes the clerical procedures for processing and auditing tax returns in excruciating detail. For example, the IRM contains a special procedure for processing the tax returns of the President and Vice President of the United States.[26]

More formal rulemaking to give the Service's interpretation of a statute, or when the statute itself directs that the Secretary of the Treasury shall provide, IRS undergoes the formal regulation process with a Notice of proposed rulemaking (NPRM) published in the Federal Register announcing the proposed regulation, the date of the in-person hearing, and the process for interested parties to have their views heard either in person at the hearing in Washington, D.C., or by mail. Following the statutory period provided in the Administrative Procedure Act the Service decides on the final regulations "as is," or as reflecting changes, or sometimes withdraws the proposed regulations. Generally, taxpayers may rely on proposed regulations until final regulations become effective. For example, human resource professionals are relying on the October 4, 2005 Proposed Regulations[27] (citation 70 F.R. 57930-57984)[28] for the Section 409A on deferred compensation (the so-called Enron rules on deferred compensation to add teeth to the old rules) because regulations have not been finalized.

Criticism

Allegations of abuse

The IRS has on more than one occasion been accused of abusive behavior.[29][30][31][32] Testimony was given before a Senate subcommittee that focused on cases of overly aggressive IRS collection tactics in considering a need for legislation to give taxpayers greater protection in disputes with the agency.

A statement given in hearings before the Senate Finance Committee criticized the IRS:

Congress passed the Taxpayer Bill of Rights III on July 22, 1998, which shifted the burden of proof from the taxpayer to the IRS in certain limited situations. The IRS retains the legal authority to enforce liens and seize assets without obtaining judgment in court.[33]

Michael Minns was the defense lawyer in a case against the IRS on behalf of James and Pamela Moran, after an initial indictment in what Minns asserts was an IRS smear campaign that virtually canvassed the taxpayers' own hometown and surrounding area.[34] The original indictment was associated with the Morans' involvement with a tax shelter provider, Anderson's Ark & Associates. The Morans were eventually acquitted in the case.[35]

Minns also had previously asserted that the behavior of two IRS attorneys at law, Kenneth McWade and William A. Sims, constituted legal misconduct and recommended them for disbarment. Following an investigation, the law licenses of the IRS attorneys were duly suspended for a two-year period after a federal court ruling found that the two had indeed defrauded the courts in connection with 1,300 tax shelter cases. In 2003, the United States Court of Appeals for the Ninth Circuit concluded that the IRS lawyers had corruptly agreed with certain taxpayers that no tax collection actions would be taken against them in return for testimony against other taxpayers. The court also asked why the IRS had not punished the two.[36]

Notes

Further reading

External links

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