This entry contains information applicable to United States law only. The federal agency responsible for administering and enforcing all internal revenue laws in the United States, except those relating to alcohol, tobacco, firearms, and explosives, which are the responsibility of the Bureau of Alcohol, Tobacco and Firearms.
The Internal Revenue Service (IRS) is the largest agency in the Treasury Department. By the mid-1990s it had approximately 110,000 employees, 650 office locations in the United States, and twelve offices abroad. The agency processes approximately 205 million tax returns and collects more than $1.2 trillion each year.
The U.S. tax system, which the IRS oversees and administers, is based on the principle of voluntary compliance. According to the IRS, this means "that taxpayers are expected to comply with the law without being compelled to do so by action of a federal agent; it does not mean that the taxpayer is free to decide whether or not to comply with the law."
Duties and Powers
The IRS is responsible for enforcing the Internal Revenue Code (U.S.C.A. tit. 26), which codifies all U.S. tax laws. Basic IRS activities include serving and educating taxpayers; determining, assessing, and collecting taxes; investigating individuals and organizations that violate tax laws; determining pension plan qualifications and exempt organization status; and issuing rulings and regulations to supplement the Internal Revenue Code.
Historically, Congress has given the IRS unique and wide-ranging powers for administering the U.S. tax system and enforcing its laws. For example, while in a criminal proceeding the government has the burden to prove that the defendant is guilty beyond a reasonable doubt, in a tax proceeding the burden is on the taxpayer to prove that he or she does not owe the amount claimed by the IRS. The IRS also has the power to impose civil penalties for any of a number of violations of tax law. These penalties are seldom employed, however, and with respect to penalties, the IRS bears the burden of proving that the penalty is justified.
The IRS has the power to collect large amounts of information on U.S. citizens, companies, and other institutions. The most obvious example of this power is that each year all taxpayers must file tax returns containing detailed financial and personal information. Many organizations are also required to notify the IRS of any payments they make to individuals; the IRS receives approximately 1 billion of these third-party reports annually. The IRS also has the legal authority to order banks, employers, and other institutions to provide information about a taxpayer without having to obtain a warrant from a judge; other law enforcement agencies, such as the Federal Bureau of Investigation and local police forces, must obtain a warrant in such situations.
Another crucial power of the IRS is the ability to withhold taxes automatically from employee paychecks. The IRS was given this authority in 1943, when Congress passed legislation requiring employers to withhold from employees' paychecks the income taxes owed to the government. This withholding requirement was one of several actions taken by the government to increase revenue so that it could meet the huge financial requirements for fighting World War II. Today, automatic withholding accounts for the majority of tax dollars paid to the government, with only a small portion sent in with tax returns by April 15, the IRS's annual tax deadline. Automatic withholding is important to the government because it enables it to receive a steady stream of tax revenue. It is also useful for enforcing voluntary compliance from taxpayers, because the individual's tax burden seems less onerous when taxes owed are subtracted from a paycheck before the check is received.
Organization
The IRS is led by a commissioner, who works in the IRS National Office located in Washington, D.C. The commissioner and his or her chief counsel are appointed by the president and must be approved by the Senate. The chief counsel serves as the chief legal adviser to the IRS. At the next level are regional commissioners, who oversee IRS operations in the four regions into which the country is divided: the Northeast, Southeast, Midstates, and Western Regions. Within the four regions are thirty-three district offices, which are responsible for collecting revenue, examining returns, and pursuing criminal investigations within their geographic area. Also located across the country are ten service centers, five submission processing centers, two computing centers, and twenty-three customer service centers.
In addition to its geographic divisions, the IRS is organized into programs focusing on specific administrative tasks. Several of these, including the Taxpayer Services and Problem Resolution programs, focus on taxpayer assistance and education. Others, including the Examination, Collection, and Criminal Investigation divisions, focus on ensuring taxpayer compliance. Additional IRS programs include Appeals, which attempts to resolve tax controversies without litigation; Statistics of Income, which compiles and publishes data relating to the operation of the Internal Revenue Code; and Tax Practitioner Conduct, which enforces tax laws applying to attorneys, accountants, and taxpayer agents.
History
The IRS was created in 1952, though it was preceded by various other U.S. tax-collecting offices. The IRS's earliest incarnation, the Office of the Commissioner of Revenue, was established by Congress in 1792 in response to Secretary of the Treasury Alexander Hamilton's request that various tariffs and taxes be created to raise money to pay off the United States' 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 four hundred 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 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 four thousand 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 pass 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's 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 forty-one thousand 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 waive penalties 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's 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 sixty-three to thirty-three.
See: Estate and Gift Taxes; Taxation; Tax Court; Tax Evasion.
A tax 
