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Internal Revenue Service
IRS
US-InternalRevenueService-Seal.svg
IRS.svg
Agency overview
Formed July 9, 1953 (though the name originates from 1918)
Preceding agency Bureau of Internal Revenue
Jurisdiction Federal government of the United States
Headquarters Washington, D.C.
Employees 101,054 (2008)
Agency executive Commissioner of Internal Revenue, Douglas H. Shulman
Parent agency Department of the Treasury
Website
IRS.gov

The Internal Revenue Service (IRS) is the United States federal government agency that collects taxes and enforces the internal revenue laws. It is an agency within the U.S. Department of the Treasury and is responsible for interpretation and application of Federal tax law.[1] The official U.S. Treasury regulations provide (in part):

The Internal Revenue Service is a bureau of the Department of the Treasury under the immediate direction of the Commissioner of Internal Revenue. The Commissioner has general superintendence of the assessment and collection of all taxes imposed by any law providing internal revenue. The Internal Revenue Service is the agency by which these functions are performed.

26 C.F.R. section 601.101(a).

Contents

Summary

The IRS has its National Capital offices in the greater Washington, D.C. area, and in particular does most of its computer programming in Maryland. It operates various service centers around the country (currently ten; these are the locations to which taxpayers mail their returns); 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 in various locations around the country.

History of the IRS

The IRS has a colorful and interesting history of war, scandal, politics, corruption, and money. How the IRS came to be, and how it has evolved tell an interesting story.

American Civil War - 1861-65

Tensions around the post-colonial tax system led directly to a major conflict between Northern urban states and Southern rural ones. Mix "State's Rights", slavery, nationalism, expansionism, and money together, and the Civil War was no surprise to anyone. [2]

In July 1862, during the Civil War, President Lincoln and Congress created the office of Commissioner of Internal Revenue and enacted an 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.[3]

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, five years after the war, lawmakers allowed the temporary Civil War income tax to expire. The Panic of 1873 happened a year later.

Income taxes evolved, but eventually in 1894, in the midst of a 30-year post-civil-war depression, the Supreme Court declared the Income Tax of 1894 unconstitutional. The US federal government scrambled to raise money.[4]

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

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

This granted Congress the specific power to create a direct income tax on US citizens. By February 1913, 36 states had ratified the change to the Constitution. It was further ratified by 6 more states by March. Of the 48 states at the time, 42 ratified. Connecticut, Rhode Island, and Utah rejected the amendment; Pennsylvania, Virginia, and Florida didn't take up the issue.[5]

A copy of the very first IRS 1040 form, dated 1913, can be found at the IRS website: http://www.irs.gov/pub/irs-utl/1913.pdf

The IRS reinvents itself - 1913-1970

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 their staff, but was still processing 1917 returns in 1919. [6]

Currently, only the IRS Commissioner and Chief Counsel are political appointees selected by the President and confirmed by the United States Senate.

The agency continued to re-invent itself both organizationally, and technologically.

Presidential tax returns - 1973

From the 1950s through the 1970s, the IRS began using cutting-edge technology such as microfilm to keep and organize records. Easy access to this information proved controversial, when President Richard Nixon's tax returns were leaked to the public. His tax advisor 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:

"We went after people for nickels and dimes, many of them poor and in many cases illiterate people who didn't know how to deal with a government agency."

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 only $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 1990, 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 stuck 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.

In 2009, 70% of filers qualified for free electronic filing of federal returns.[10]

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

IRS Free file website

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.[11] In 1953 the name change to the "Internal Revenue Service" was formalized in Treasury Decision 6038.[12]

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.[13] Congress later enacted the Internal Revenue Service Restructuring and Reform Act of 1998.[14] As a result of that Act, the IRS now functions under four major operating divisions: Large & Mid-Size Business (LMSB), Small Business / Self-Employed (SB/SE), Wage and Investment (W&I), and Tax Exempt & Government Entities (TE/GE). 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.[15]

Commissioner

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

Tax collection statistics

Summary of Collections before Refunds by Type of Return, Fiscal Year 2007[16]

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

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. Of the Individual Income Tax, the top 5% of income earners pay 60% of this amount.[17][18]

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 it is owed $354 billion more than it collects.[19]

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.[20]

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 2008, after undercover exposé 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.[21]

Administrative functions

The IRS publishes a huge number of 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. 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.[22]

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 (citation 70 F.R. 57930-57984)[23] 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, and in particular the IRS Criminal Investigation Division (IRS CID), has on more than one occasion been accused of abusive behavior.[24][25][26][27] Statements given in hearings before the Senate Finance Committee criticize the IRS:

[D]oes the IRS correct abuses when they become aware of them? Oftentimes, they do. However, the more important question is, does the IRS cover up occurrences of abuse? The answer is, yes! If the true number of incidences of taxpayer abuse were ever known, the public would be appalled. If the public also ever knew the number of abuses "covered up" by the IRS, there could be a tax revolt.[24]

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.[28]

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.[29] 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.[30]

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.[31]

References

Notes

  1. ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 528. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4. 
  2. ^ http://www.tax.org/Museum/1861-1865.htm
  3. ^ http://www.tax.org/Museum/1861-1865.htm
  4. ^ http://www.tax.org/Museum/1866-1900.htm
  5. ^ http://www.usconstitution.net/constamnotes.html
  6. ^ http://www.tax.org/Museum/1901-1932.htm
  7. ^ http://www.time.com/time/magazine/article/0,9171,945108,00.html
  8. ^ http://articles.baltimoresun.com/2003-12-21/business/0312210282_1_nixon-requard-tax-liability/3
  9. ^ http://articles.baltimoresun.com/2003-12-21/business/0312210282_1_nixon-requard-tax-liability
  10. ^ http://www.cleveland.com/business/index.ssf/2010/02/as_e-filing_turns_20_irs_tryin.html
  11. ^ Form 1040, Individual Income Tax Return for year 1918, as republished in historical documents section of Publication 1796 (Rev. February 2007), Internal Revenue Service, U.S. Department of the Treasury. Form 1040s for years 1918, 1919, and 1920 bore the name "Internal Revenue Service". For the 1921 tax year, the name was dropped, then was re-added for the 1929 tax year.
  12. ^ 1953-2 C.B. 657 (August 21, 1953), filed with Division of the Federal Register on August 26, 1967. Compare Treas. Department Order 150-29 (July 9, 1953).
  13. ^ Official web site of the National Commission on Restructuring the Internal Revenue Service
  14. ^ Pub. L. No. 105-206, 112 Stat. 685 (July 22, 1998).
  15. ^ U.S. Department of the Treasury, Press Release, September 26, 2006
  16. ^ http://www.irs.gov/taxstats/article/0,,id=102886,00.html
  17. ^ 'SOI Tax Stats - Individual Income Tax Rates and Tax Shares'. Yearly statistics at www.irs.gov.
  18. ^ 'New IRS Data Reveals That the Rich Really Do Pay Tax - Lots of It' by John Gaver. Press Release, Actionamerica.org, 9 October 2007.
  19. ^ IRS Commissioner Assailed on 'Tax Gap' by Jack Speer. Morning Edition, National Public Radio, 21 March 2006.
  20. ^ D. Caterinicchia, IRS moves ahead on debt-collection plan
  21. ^ New York Times
  22. ^ Internal Revenue Manual Section 3.28.3.
  23. ^ Federal Register (Volume 70, Number 191), October 4, 2005
  24. ^ a b "Prepared Statement Of Witness Before The Senate Finance Committee Oversight Hearing On The Internal Revenue Service". http://enzi.senate.gov/anon1.htm. Retrieved 2007-06-17. 
  25. ^ Davis, Robert Edwin. "Statement before the Senate Committee on Finance". http://www.senate.gov/~finance/davis.htm. Retrieved 2007-06-17. 
  26. ^ Schriebman, Robert. "Prepared Statement of Robert S. Schrieman Before the Senate Finance Committee". http://www.senate.gov/~enzi/schrieb.htm. Retrieved 2007-06-17. 
  27. ^ Davis, Shelley L. (1997-09-23). "Prepared Statement of Shelley L. Davis Before the Senate Finance Committee Oversight Hearing On The Internal Revenue Service". http://www.senate.gov/~enzi/davis.htm. Retrieved 2007-06-17. 
  28. ^ See 26 U.S.C. § 6331. For case law on section 6331, see Brian v. Gugin, 853 F. Supp. 358, 94-1 U.S. Tax Cas. (CCH) paragr. 50,278 (D. Idaho 1994), aff’d, 95-1 U.S. Tax Cas. (CCH) paragr. 50,067 (9th Cir. 1995).
  29. ^ Katharhynn Heidelberg, " Attorney: IRS should apologize," Montrose Daily Press (Montrose, Colorado), December 28, 2007, at Montrose Daily Press
  30. ^ Katharhynn Heidelberg, "Morans Acquitted on All Counts," Montrose Daily Press (Montrose, Colorado), December 21, 2007, at Montrose Daily Press
  31. ^ David Cay Johnston, August 21, 2004, "2 Ex-IRS Lawyers' Licenses Suspended for Misconduct," New York Times, at New York Times

Further reading

  • Davis, Shelley L.; Matalin, Mary (1997). Unbridled Power: Inside the Secret Culture of the IRS. New York: Harper Collins. ISBN 0-88730-829-5. 
  • Johnston, David Cay (2003). Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everybody Else. New York: Portfolio. ISBN 1-59184-019-8. 
  • Rossotti, Charles O. (2005). Many Unhappy Returns: One Man's Quest To Turn Around The Most Unpopular Organization In America. Cambridge: Harvard Business School Press. ISBN 1-59139-441-4. 
  • Roth, William V., Jr.; Nixon, William H. (1999). The Power to Destroy. New York: Atlantic Monthly Press. ISBN 0-87113-748-8. 

External links


Wiktionary

Up to date as of January 15, 2010

Definition from Wiktionary, a free dictionary

English

Proper noun

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Wikipedia

Singular
Internal Revenue Service

Plural
-

Internal Revenue Service (Abbreviated as: IRS)

  1. The United States government agency that collects taxes and enforces the internal revenue laws.







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