Internal Revenue Service
(Excerpted from Federal Agency Profiles for Students, published by Gale and available in Opposing Viewpoints Resource Center: Critical Thinking. Free trial.)
- Parent Organization: Department of the Treasury
- Founded: July 1, 1862
Primary functions
The most important assignment of the IRS is to collect personal and corporate income taxes. All eligible citizens are expected to voluntarily comply with the tax laws, and to that end the IRS works to advise the public of their rights and responsibilities. Once a citizen or corporation has filed a tax statement with the IRS, the agency must determine the accuracy of the document. If the filer does not comply or submits inaccurate or fraudulent information, the IRS administers and enforces tax laws. Enforcement usually imposes penalty fees, but legal disputes in the case of extreme tax fraud can also result in prison sentences.
A primary document of the IRS is the Internal Revenue Code, which explains regulations and supplements tax forms created for the public. In addition, IRS personnel are constantly engaged in preparing and issuing rulings and regulations to supplement the provisions of the Internal Revenue Code.
By April 15 of every year, citizens mail in approximately 200 million claims of taxes from the previous year to the IRS. Throughout the year, the IRS is busy resolving taxpayer complaints and providing taxpayer service and education. Among its basic services are the description of pension plan qualifications and granting tax-exempt organization status, to religious or nonprofit organizations.
History
The IRS, initially named the Bureau of Internal Revenue, was created in 1862 in response to the need for increased revenue for the War Department during the Civil War. During the early years of independence, taxation was a very sensitive issue and did not have strong constitutional support. The original states were reluctant to give the federal government the power to tax, and the taxation debate put the states and the federal government at odds. From the moment of U.S. independence, states wanted the right to determine taxation without the burden of a federal system.
Initially fees were assessed for government operating costs but many states paid late or not at all. A tariff system of fees on imported goods was used to raise the necessary revenues for federal government expenses, and tariffs were raised when more funds were needed. In some cases, as in the War of 1812, taxes were imposed to fund a war, then quickly repealed at the war's end. The tariff system was also controversial, however, as it affected regions of the United States differently. In fact, the tariff system became a major component of the North-South conflict, erupting later into the Civil War.
Just one year after the start of the Civil War, support for the Bureau of Internal Revenue was sufficient to impose a series of taxes including excise taxes, stamp taxes, commodities taxes, and license and legal document taxes.
The legislative branch was then responsible for determining the type and amount of tax Americans would pay. Taxation was termed progressive, regressive, or proportional. Progressive taxation collects a progressively higher percentage rate from higher income. Regressive taxes collect a larger percentage of taxes from citizens with middle income. Proportional taxes collect the same percentage rate of all incomes. The earliest income tax levied by the federal government exempted the first $600 dollars of income. Income between $600 and $10,000 was taxed at three percent and income over $10,000 was taxed at five percent. While these figures have changed over time, the basic structure of income taxes in the U.S. remains progressive.
As tax law grew more complex, the impact of taxation on the economy became evident in the way it promoted or retarded certain kinds of investment, spending, and corporate fiscal management. Economists and politicians began to formulate tax policy as a way of manipulating the economy. Especially during the nineteenth century, tax policy became a method of social and economic engineering. Tax policy was debated and implemented as a mechanism for ensuring the well-being of the wealthy and middle classes and ultimately for improving the distribution of wealth. In times of prosperity the income tax was quickly reduced or eliminated but it would be revived during economic depression.
World War II and postwar years
World War II also had an important impact on taxation. At the close of the war, when Allied nations were unable to produce the goods for import from which tariff revenues were derived, legislators increase reliance on the income tax to fund the growing federal government. During this period Congress passed the Revenue Act of 1942, which contained 208 pages of tax law and was 15 times as long as a previous act passed in 1913. The majority of the 1942 act was written to deal with the fiscal and economic consequences of earlier tax legislation. Corporations and individuals unhappy with income tax laws were devoting more resources to finding loopholes, working political favors into tax law, and increasing the number and kinds of deductions to provide savings. Lists of tax codes, meaningless to the uninitiated could reduce the impact of income tax for those who could manipulate the system to their advantage.
Modernization and reform