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
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.)