When most Americans hear “IRS,” they may think of tax season, audits, or the annual stress of filing tax returns. However, the Internal Revenue Service (IRS) is more than just a seasonal presence in our lives. As a critical U.S. government agency under the Department of the Treasury, the IRS plays a vital role in enforcing federal tax laws, ensuring that everyone contributes their fair share to the nation’s well-being. This blog post delves into the history, organisation, functions, recent developments, and controversies surrounding the IRS, providing a comprehensive overview of this essential institution.

Explanation

The Internal Revenue Service (IRS) is the primary agency responsible for collecting federal taxes and enforcing tax laws in the U.S. As part of the Department of the Treasury, the IRS overseas tax collection, provides taxpayer assistance and administers programs like the Affordable Care Act. It plays a critical role in funding government operations.

Established in 1862 to support Civil War efforts, the IRS has evolved over time, with significant changes like the 1953 renaming from the Bureau of Internal Revenue. The IRS processes millions of tax returns annually, including over 271 million in 2023, and collected about $4.7 trillion that year, which funds essential programs across the country.

Despite its crucial function, the IRS has faced challenges such as reduced staffing, outdated technology, and budget cuts. These issues have impacted its ability to enforce tax laws effectively, particularly against high earners and corporations. In 2018, the IRS experienced a 15% reduction in its workforce, affecting its enforcement capabilities.

Nonetheless, the IRS remains a vital institution, collecting the revenue needed to support federal operations, from education to infrastructure.

What is the IRS?

The Internal Revenue Service (IRS) is a division of the U.S. Treasury Department responsible for enforcing the Internal Revenue Code (IRC), administering federal tax laws, and collecting taxes from both individual and corporate taxpayers in the U.S. The IRS manages the collection of income, gift, excise, and estate taxes, and regularly conducts audits to ensure compliance with tax regulations.

History of the IRS

President Abraham Lincoln established the Office of Commissioner of Internal Revenue in 1862 to collect taxes for the Civil War. In 1913, Congress gained the authority to pass income tax laws, leading to the formation of the Bureau of Internal Revenue. The agency was renamed the Internal Revenue Service (IRS) in the 1950s.

Key Historical Milestones of the IRS

American Civil War (1861–1865):

• In July 1862, during the Civil War, President Abraham Lincoln and Congress passed the Revenue Act of 1862, establishing the office of Commissioner of Internal Revenue and creating a temporary income tax to fund war expenses.
• Initial tax rates were:
  • 3% on income over $800.
  • 3% on income between $600 and $10,000.
  • 5% on income above $10,000.
• By the war’s end, income taxes provided 21% of the Union’s war revenue.

Post-Civil War & Reconstruction (1866–1913):

• After the war, the income tax expired in 1872.
• The 1894 income tax was ruled unconstitutional in Pollock v. Farmers’ Loan & Trust Co.
• The populist tax reform movement grew with Presidents Theodore Roosevelt and William Howard Taft, culminating in the 1913 ratification of the 16th Amendment, allowing federal income taxes without state apportionment.

Post-16th Amendment Era (1913–present):

• The first federal income tax form (1040) was introduced in 1913.
• During World War I, a top tax rate of 77% was implemented to fund war efforts.
• In 1952, after tax evasion scandals, the IRS was reorganized, replacing politically appointed collectors with civil service employees.
• In 1954, the filing deadline was moved to April 15.
• The Tax Reform Act of 1969 introduced the Alternative Minimum Tax.
• In 1986, electronic filing was introduced.
• The Internal Revenue Service Restructuring and Reform Act of 1998 reorganized the IRS into four operating divisions and introduced stricter employee conduct rules.

Modern Developments:

• Enforcement activities declined in recent decades, leading to concerns about tax compliance.
• The 2017 Tax Cuts and Jobs Act was passed, significantly reforming the tax code.
• The number of IRS employees per million residents dropped from 451 in 1991 to 237 in 2021.

Presidential tax returns (1973)

From the 1950s to the 1970s, the IRS adopted new technologies like microfilm to manage records, which became controversial when President Nixon’s tax returns were leaked. Nixon paid minimal taxes in 1970 and 1971 despite a high salary, sparking public outrage and his famous defence, “I’m not a crook.” The leak increased transparency, leading many future presidents to release their tax returns.

Computerization (1959–present)

By the end of WWII, the IRS handled 60 million tax returns annually using mechanical calculators and punch cards. In 1955, it tested its first computer system, and by 1967, all returns were processed by computers. E-filing began in 1995; by 2021, 90% of returns were filed electronically. The IRS closed many paper processing centres as e-filing grew. Fraudulent tax refunds became a significant issue in 2012, prompting reforms. The IRS also faced challenges managing Obamacare and identity verification, with privacy concerns leading to the abandonment of facial recognition for taxpayer identity in 2022.

The current organization of the IRS

The Internal Revenue Service (IRS) is structured to efficiently manage its vast responsibilities in administering and enforcing the nation’s tax laws. The organisation is designed to ensure adequate oversight, taxpayer assistance, and law enforcement. Here is an overview of the critical components of the IRS:

• Large Business and International (LB&I)
• Small Business/Self-Employed (SB/SE)
• Wage and Investment (W&I)
• Tax Exempt & Government Entities (TE/GE)

Previously known as the Large and Mid-Size Business division, LB&I received its current name on October 1, 2010.

IRS Headquarters and Operations

The IRS is headquartered in Washington, D.C., with key operations conducted across the U.S. The IRS processes both paper and electronic tax returns at its centers in Austin, Texas; Kansas City, Missouri; and Ogden, Utah. The agency also runs computer centers in Detroit, Michigan; Martinsburg, West Virginia; and Memphis, Tennessee, which handle various data and operational tasks.

Leadership

The current Commissioner of Internal Revenue is Daniel Werfel, who took office on March 13, 2023. He succeeded Douglas O’Donnell, who served as Acting Commissioner following the end of Charles P. Rettig’s term on November 12, 2022. Since its establishment in 1862, the IRS has seen 50 Commissioners and 28 Acting Commissioners.

Notably, no commissioner has served more than five years and one month since Guy Helvering, who held the position for ten years until 1943. The most recent commissioner to serve the longest term was Doug Shulman, appointed by President George W. Bush, who served for five years.

Deputy Commissioners

Two Deputy Commissioners support the Commissioner:

1. Deputy Commissioner for Operations Support: Oversees support functions, promotes efficient business practices, and ensures proper management of customer service, tax law enforcement, and financial operations. This position assists the Commissioner in directing the IRS’s policies and strategic objectives.
2. Deputy Commissioner for Services and Enforcement: Manages the IRS’s four operating divisions and ensures the agency meets its mission of providing quality service and helping taxpayers meet their obligations.

Office of the Taxpayer Advocate

The Taxpayer Advocate Service is an independent office within the IRS designed to assist taxpayers in resolving disputes with the agency. Led by Erin M. Collins, the office also works to identify systemic issues within the IRS.

Independent Office of Appeals

The Independent Office of Appeals aims to help taxpayers resolve disputes without litigation through an informal process. Its mission is to resolve tax controversies impartially. Appeals resolutions can take anywhere from 90 days to a year, depending on the complexity of the case. Donna C. Hansberry currently serves as the office’s chief.

Office of Professional Responsibility (OPR)

The Office of Professional Responsibility (OPR) oversees the conduct of tax practitioners, such as attorneys, CPAs, and enrolled agents, who practice before the IRS. OPR investigates instances of misconduct, including failure to file tax returns, and can impose various penalties. The acting director of OPR is Elizabeth Kastenberg.

IRS Criminal Investigation (CI)

The IRS Criminal Investigation (IRS-CI) division investigates criminal violations of the U.S. Internal Revenue Code. These investigations focus on financial crimes, including tax-related identity theft, money laundering, terrorist financing, and other crimes that affect tax administration. The division is led by the Chief of Criminal Investigation, appointed by the IRS Commissioner.

Tax Assistance Programs

The IRS also runs programs aimed at assisting taxpayers:

1. Volunteer Income Tax Assistance (VITA): Offers free tax help to individuals with low-to-moderate income, persons with disabilities, and those with limited English proficiency.
2. Tax Counseling for the Elderly (TCE): Focuses on providing free tax assistance to individuals aged 60 and older.

Both programs are supported by trained volunteers who receive IRS-certified training through the Link & Learn Taxes online platform, which offers e-learning material for volunteer tax preparers.

Through its reorganization and comprehensive support functions, the IRS continues to improve its ability to serve taxpayers, resolve disputes, and uphold tax law enforcement. These divisions and offices work in tandem to ensure the agency fulfills its mission of providing high-quality service to the public.

IRS Structure

The Internal Revenue Service (IRS) is a crucial government agency responsible for administering federal tax laws and ensuring compliance. The organizational structure of the IRS is designed to manage various taxpayer categories, services, and enforcement activities efficiently. 

The IRS’s structure includes multiple divisions focused on taxpayer segments, ensuring specialized and effective service. By organizing itself into these specialized divisions and offices, the IRS aims to manage its responsibilities effectively. 

This structure allows the IRS to provide excellent taxpayer service tailored to each segment’s needs while enforcing the nation’s tax laws fairly and with integrity. This complementary approach ensures the IRS can efficiently assist individual filers while maintaining a strong focus on complex corporate and international tax matters.

Here’s an overview of its key divisions and leadership roles:

Key Leadership:

• Commissioner of Internal Revenue: Heads the IRS and oversees all divisions and operations.
• Deputy Commissioner for Services and Enforcement: Directs taxpayer services and enforcement activities, ensuring tax law compliance.
• Deputy Commissioner for Operations Support: Manages internal operations and administrative functions.

Divisions:

1. Large Business and International Division: Focuses on administering tax laws for businesses with assets exceeding $10 million and oversees international tax compliance.
2. Small Business/Self-Employed Division: Manages tax laws for small businesses and self-employed individuals, ensuring accurate tax reporting and compliance.
3. Wage and Investment Division: Handles tax laws related to individual wage earners and provides services to facilitate accurate tax returns and payments.
4. Tax Exempt and Government Entities Division: Administers tax laws for governmental entities and tax-exempt organizations, including pension plans and nonprofits.
   • Employee Plans: Oversees pension plan tax laws.
   • Exempt Organizations: Determines and monitors tax-exempt status for qualifying organizations.

Enforcement and Compliance:

• Collection: Focuses on collecting delinquent taxes and securing overdue tax filings.
• Examination: Reviews taxpayer returns to ensure compliance with tax responsibilities.
• Return Integrity and Compliance Services: Detects and prevents improper refunds.
• Criminal Investigation Division: Investigates criminal tax law violations, financial crimes, and cyber tax schemes, both domestically and internationally.

Customer Assistance:

• Customer Assistance, Relationships, and Education: Assists taxpayers in understanding and fulfilling their tax obligations.
• Customer Account Services: Manages the processing of taxpayer returns and other account-related services.

Support Services:

• Operations Support: Provides centralized services for internal management.
• Technology Operations and Investigative Services: Manages the IRS’s information technology infrastructure and supports criminal investigations.

Other Key Offices:

• Office of Online Services: Manages online tools and resources for taxpayers.
• Office of Professional Responsibility: Oversees standards for tax professionals.
• Whistleblower Office: Handles claims involving tax fraud reported by whistleblowers.

Additional Leadership and Support Roles:

• Chief Information Officer: Oversees IT strategy and systems management.
• Chief Privacy Officer: Ensures the protection of taxpayer data.
• Chief Procurement Officer: Manages procurement and contracting services.
• Chief Financial Officer: Manages IRS finances and budgeting.
• IRS Human Capital Officer: Oversees employee development and workforce management.
• Chief Diversity Officer: Ensures diversity and inclusion within the IRS.
• Chief Counsel: Provides legal guidance and interpretation of tax laws.
• National Taxpayer Advocate: Advocates for taxpayer rights and resolves systemic issues affecting taxpayers.

Appeals and Legal Oversight:

• IRS Independent Office of Appeals: Provides an avenue for taxpayers to resolve disputes outside of litigation, ensuring fair and impartial tax law application.

This structure allows the IRS to balance taxpayer services, compliance enforcement, and internal operations, ensuring that tax laws are administered efficiently across a broad spectrum of taxpayer needs.

The IRS (Internal Revenue Service) plays a vital role in managing the United States’ tax system, offering a variety of programs designed to assist taxpayers effectively. Through these initiatives, the IRS aims to help individuals navigate their tax responsibilities while ensuring compliance with tax laws. Here’s an overview of key programs and services provided by the IRS:

Programs Offered by the IRS

• Free Tax Help Programs: The IRS operates several free tax assistance programs, including:
  • Volunteer Income Tax Assistance (VITA): This program offers free tax help to low-to-moderate income individuals, people with disabilities, and those who speak limited English. Volunteers trained by the IRS provide personalized assistance to ensure accurate tax filing.
  • Tax Counseling for the Elderly (TCE): TCE provides free tax assistance to individuals aged 60 and older, focusing on issues related to pensions and retirement.
• Free Filing Options:
  • IRS Free File: Taxpayers with an Adjusted Gross Income (AGI) of $79,000 or less can file their federal tax returns for free using commercially available software through the IRS Free File program. This option is ideal for those comfortable with online filing who may not require in-depth assistance.
• Outreach and Education Programs:
  • The IRS offers a range of educational resources and outreach initiatives to inform taxpayers about their rights and responsibilities. This includes comprehensive information regarding tax laws, potential deductions and credits, and guidance on filing requirements.
• Payment Options for Taxes Owed:
  • For those who owe taxes or exceed the AGI limit for free filing, the IRS provides various payment methods. These options include electronic payments via the IRS website, direct debit from a bank account, or payment by credit card (though processing fees may apply). Furthermore, taxpayers facing financial hardships may qualify for installment plans to manage their tax liabilities.

How IRS Divisions Assist Taxpayers

The IRS is organized into multiple divisions that cater to different segments of taxpayers, ensuring specialized and effective service delivery. This structure allows the IRS to address the unique needs of individuals and organizations while enforcing tax laws with integrity. Key divisions include:

• Wage and Investment Division: Focuses on individual taxpayers, offering assistance with tax filing and processing returns.
• Small Business/Self-Employed Division: Provides resources and compliance support specifically tailored for small business owners and self-employed individuals.
• Large Business and International Division: Addresses tax issues for large corporations and multinational enterprises, managing complex international tax matters.
• Tax-Exempt and Government Entities Division: Oversees tax-exempt organizations, government entities, and retirement plans to ensure compliance with applicable tax regulations.

What the IRS Does for You

Beyond its role in collecting taxes, the IRS provides numerous services that benefit taxpayers. Here’s a closer look at some critical functions of the IRS:

• Collects Taxes and Issues Refunds: The IRS is responsible for collecting taxes from both individuals and businesses to fund government operations. It efficiently processes millions of tax returns each year, both electronically and on paper. If a taxpayer has overpaid, the IRS ensures a prompt and secure refund process.
• Conducts Audits for Fairness: The IRS performs audits to verify the accuracy of tax returns and ensure compliance with tax laws. These audits help identify underreporting and fraudulent activities, promoting fairness within the tax system. Audits may occur randomly or in response to discrepancies in tax filings, maintaining trust in the overall tax framework.
• Provides Resources and Education: The IRS offers a wealth of educational resources to help taxpayers understand their obligations and rights. This includes detailed information on tax laws, available deductions, credits, and the intricacies of the filing process. Additionally, free tax preparation assistance is available for low-income individuals and seniors.

How to Contact the IRS for Help with Your Taxes

The IRS provides multiple avenues for taxpayers to obtain assistance tailored to their needs:

• Mail: Taxpayers can send correspondence to specific IRS offices based on the issue at hand. The IRS website lists appropriate mailing addresses for various inquiries.
• Phone: The IRS operates toll-free phone lines for general inquiries, specific tax questions, and filing assistance. Taxpayers can find contact numbers for different types of taxpayer needs on the IRS website.
• Online Services: The IRS website offers a range of online resources, including tools to check refund statuses, make electronic payments, and access downloadable tax forms.
• In-Person Appointments: For complex tax issues requiring face-to-face assistance, taxpayers can schedule appointments at their local IRS office. It’s essential to check the IRS website for scheduling details and necessary documentation.

Tax Collection Statistics and Outsourcing

The IRS collects trillions of dollars annually, with income taxes forming the most significant portion of this revenue. This highlights the scale and critical role of the IRS in funding government operations. To enhance efficiency, the IRS occasionally outsources collection and tax-assistance services, helping to manage its workload and improve service delivery to taxpayers.

Administrative Roles and Responsibilities within the IRS

Effective administration is crucial for the IRS to function smoothly. These roles involve managing personnel, developing clear policies, overseeing budget and finance, and implementing technology solutions. Here’s a closer look at these essential administrative responsibilities:

• Managing Personnel: The IRS employs a comprehensive strategy to build a skilled and motivated workforce. This includes attracting top talent through recruitment, providing ongoing training, evaluating performance, and fostering a positive work environment by addressing employee concerns.
• Developing Policies: The IRS establishes clear and up-to-date policies to provide consistent guidelines for its operations. This involves creating policies that align with the agency’s mission while adhering to federal laws. Effective communication of these policies to employees is crucial for compliance and understanding.
• Overseeing Budget and Finance: Managing the budget and finances is vital to ensure the IRS has the resources needed to fulfill its mission. This includes proposing annual budgets, monitoring spending, preparing financial reports, and conducting audits to maintain the accuracy of financial records.
• Implementing Technology Solutions: The integration of technology is essential for enhancing the IRS’s capabilities and improving service delivery. This involves developing a technology strategy, maintaining IT systems that support tax processing, and ensuring cybersecurity to protect taxpayer data. The IRS continually explores new technologies, such as advanced data analytics and artificial intelligence, to improve its operations.

Recent Developments: Crypto Tax Reporting Guidance

With the rise of cryptocurrencies, the IRS has issued new guidance on how these digital assets should be reported on tax returns. This emphasis ensures that crypto transactions are properly documented and taxed. Taxpayers must report all cryptocurrency activities, including buying, selling, exchanging, or receiving crypto as payment. To facilitate compliance, the IRS has added a specific question about crypto transactions on Form 1040. Additionally, the IRS has provided detailed rules for valuing cryptocurrencies and calculating gains or losses.

To enforce compliance, the IRS is ramping up audits targeting cryptocurrency transactions. Failure to report such activities could result in penalties or legal consequences. However, recognizing the evolving landscape of cryptocurrency, the IRS is also conducting educational programs to help taxpayers understand their tax obligations related to digital assets.

Future Challenges for the IRS

• Increasing Complexity of the Global Economy: As businesses expand globally, the IRS faces challenges in tracking and taxing multinational corporations. Issues such as transfer pricing and profit shifting require sophisticated strategies to ensure proper tax collection, especially with the rise in cross-border e-commerce.
• Gig Economy: The gig economy complicates tax reporting and withholding responsibilities. The IRS must enhance reporting mechanisms and taxpayer education to ensure that gig workers accurately report their income and meet tax obligations.
• Technological Advancements: With a growing reliance on digital systems, the IRS must prioritize the security and privacy of taxpayer data to prevent breaches. Integrating advanced technologies like AI and machine learning will be essential for improving efficiency and accuracy in tax administration.

Opportunities for Reform and Modernization

• Tax Policy Reform: Simplifying the tax code can reduce complexity, making it more accessible for taxpayers. Addressing loopholes can lead to a fairer tax system.
• Modernising Tax Administration: Investing in updated IT infrastructure can enhance the IRS’s capacity to process returns, detect fraud, and improve taxpayer services.
• Enhancing Compliance and Enforcement: Utilising big data analytics can help the IRS identify non-compliance patterns and coordinate efforts with tax authorities worldwide to tackle global tax evasion.
• Improving Taxpayer Services: Expanding educational programs and leveraging technology can enhance customer service, helping individuals and businesses understand their obligations and utilise available credits and deductions effectively.

In summary, the IRS offers a range of programs and services aimed at supporting taxpayers while maintaining the integrity of the tax system. By understanding these offerings and the IRS’s role, taxpayers can navigate their tax responsibilities more effectively.

FAQs

What does the IRS do?

The IRS (Internal Revenue Service) in the United States collects taxes and enforces tax laws.

What is the IRS short for?

IRS stands for Internal Revenue Service.

What is the complete IRS form in India?

In India, the IRS stands for Indian Revenue Service. It is a civil service under the Government of India primarily involved in collecting and administering various direct and indirect taxes.

What is the IRS in Canada?

In Canada, the IRS refers to the Canada Revenue Agency (CRA), which is responsible for administering tax laws for the Government of Canada and most provinces and territories.

How many IRS were in Canada?

There is no specific number of “IRS” in Canada as the term IRS is not commonly used there. Instead, the Canada Revenue Agency (CRA) oversees tax administration nationwide.