IRS at Work

IRS History

One of the first actions of any new nation is to collect taxes. This was true for the United States when in March of 1791, shortly after George Washington became president, the brand new Congress approved a law establishing a tariff system on selected imports and an internal excise tax on whiskey. In the next year, under the authority of that law, Treasury Secretary Alexander Hamilton established the Office of the Commissioner of Revenue, the predecessor to what is today the Internal Revenue Service.

Washington's tax shortly led to the new nation's first serious tax protest movement -- the Whiskey Rebellion of 1793-1795 that required the dispatch of a ragtag army of about 13,000 federalized state militiamen to suppress.

The Civil War, and the Union's insatiable demand for revenue, led to the re-creation of the Office of the Commissioner of Revenue, that by 1863 included about 4,000 tax collectors. Federal tax collections soared -- from $28.5 million the year before the war to more than $300 million towards its end. One measure helping swell the revenues was the establishment of the nation's first income tax which was sufficiently complex that eight years after Lincoln's assassination it was discovered that in 1864, the then-president had overpaid his taxes by $1,250.

The end of the civil war led to the end of that era's income tax. But in 1894, under heavy political pressure from the populists, Congress approved a modest new income tax. The Supreme Court immediately declared the tax unconstitutional. But broad political pressure for a more muscular federal government led to the ratification of the constitution's Sixteenth Amendment on February 13, 1913: "The Congress shall have the 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."

The creation of the Office of the Commissioner of Revenue in 1862, followed in 1913 by the permanent establishment of the income tax, are two of the three legs that support today's federal tax system. The third leg came in the middle of World War II when Congress approved a law requiring employees to withhold from salaries and wages the taxes owed by their employees.

Following the war, the IRS was engulfed in a massive corruption scandal that touched almost every level of the agency. After extensive Congressional hearings, the IRS underwent a basic re-organization while at the same time, installing what was then considered one of the most advanced computerized management systems in the world.

In the mid-1990s, the overall performance of the IRS -- particularly the way it dealt with individual taxpayers -- again became the subject of widespread public concern. The concern led to the formation of a special IRS study commission, a series of oversight hearing by the Senate Finance Committee and the passage by Congress of the IRS Restructuring and Reform Act of 1998. This law authorized a major spending program to improve the agency’s computers.

Just as significant was a basic change in the IRS’s structure. For many decades, the agency had been divided into scores of different districts along geographical lines. Most taxpayers -- individual, business, farm, corporation and tax exempt -- were processed by the districts where they were located. The 1998 law called for the elimination of this basic geographical system and its replacement by four functional units. In theory, one unit would deal with wage and investment returns filed by individual taxpayers, a second with the returns of small businesses and the self-employed, a third with those of large and mid-sized businesses and the fourth with tax exempt organizations.

In November of 1997, Charles O. Rossotti was appointed the 45th Commissioner of Internal Revenue. His principle responsibility has been to implement the sweeping changes mandated by Congress. In early 1999, Mr. Rossotti published his plan -- Modernizing America’s Tax Agency -- that seemed to envision a very different tax agency. Central to this vision was an increased effort to improve voluntary compliance by increasing all kinds of tax payers services.

As it has developed, however, the sweeping organization changes have undermined the ability of the American people to hold the agency accountable. In an agency with the size and power of the IRS, such oversight is essential. The core problem is that geographic information about how the agency is treating taxpayers in different parts of the country is no longer being collected. Such information is of course needed by IRS managers and Congress to spot serious administrative problems as they occur. (See new findings.)

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