By Sarah Skinner, Esq, LLM and Lauren Olan, Esq
The formation of the Bureau of the Internal Revenue Service (later renamed the Internal Revenue Service in 1953) was a seemingly very permanent solution to the temporary problem of funding the Civil War. It became a staple of US government overreach and granted the ability to serve as the judge, jury, and executioner for all things tax, an absolute subversion of a balance of powers as outlined in the constitution (it bears mention of the supreme law of the land). Due to the power of the IRS to garnish wages, levy property, shut down your business, and otherwise rob you of life as you know it, the IRS rules by fear. “The power to tax is the power to destroy” Daniel Webster / John Marshall (McCulloch v. Maryland). Later, with the introduction of withholdings for social security and unemployment, it seemed like the IRS was, by chance pretending to have the interests of taxpayers in mind. The IRS has made some efforts to apply technology but does so at the frustratingly slow pace of government. Despite all efforts and all additional hoops, taxpayers are expected to jump through; taxpayers are still plagued with glacial processing times and automated phone systems that only provide a lack of ability to get through to a real person. Of the 282 million calls placed with the IRS in 2021, only 11.35 percent were answered. Then when an increasingly jaded IRS employee does answer, the chances of actual, helpful service are slight. The IRS has been given too much power, and its customer service is abysmal. Now, with the passage of the Inflation Reduction Act, an estimated 87,000 new IRS agents will be added. Will the 87,000 new IRS agents improve efficiency or merely improve the IRS\’ ability to harass ordinary taxpayers?
1. US Income Taxes: A Permanent Solution to a Temporary Problem.
US Income taxes were supposed to be an emergency temporary provision.
The Revenue Act of 1861 included a personal income tax as a way to help pay for the Civil War and turned out to be a flop. Enforcement proved problematic, and the Revenue Act of 1861 raised very little money.
The Revenue Act of 1862 created the Bureau of Internal Revenue to “solve” the enforcement issue. Congress established the Office of the Commissioner of Internal Revenue under the Department of the Treasury. On July 17, 1862, George S. Boutwell became its first commissioner.
In 1863, the Bureau of Internal Revenue’s first year, the Bureau of Internal Revenue collected $39.1 million. The power of the Bureau of Internal Revenue was further broadened with the Revenue Act of June 30, 1864, which authorized the Bureau of Internal Revenue Commissioner to compromise all suits “relating to internal revenue” to abate outstanding assessments and to refund taxes subject to current regulations. After this broadening of power, the Bureau of Internal Revenue could not only interpret the tax regulations as it saw fit on a day-to-day basis but (short of Congress passing revised tax law which the Bureau of Internal Revenue would again be empowered to interpret as it sees fit) no other government agency or party was given an opportunity to serve as a check on the power of the Bureau of Internal Revenue. The day the Revenue Act of June 30, 1864, was passed marked the beginning of significant danger for US Citizens as it marked the day the Bureau of Internal Revenue became the constitutionally unencumbered and all-powerful in tax matters.
Instead of terminating in 1866 as originally planned, the Revenue Act did not expire until a decade after the war had ended. However, the income tax was revived in 1894 with the Wilson-Gorman Tariff Act. The next year, the Supreme Court declared the income tax provision of the Wilson-Gorman Tariff Act unconstitutional. In this ruling, the Supreme Court concluded that the income tax violated Article I of the Constitution. Thus, if the federal government wanted to grant itself the power to impose an income tax, a constitutional amendment would be necessary.
Then the 16th Amendment was passed in 1913. It granted congress the ability to “lay and collect taxes on incomes, from whatever source derived.” The Bureau of Internal Revenue established a Personal Income Tax Division and Correspondence Unit to address public concerns about its enforcement. Additionally, the Bureau of Internal Revenue established a special division to prepare opinions interpreting internal revenue laws.
Income tax was only meant to be a solution to a temporary problem: funding needed for national security. Instead, with the passage of the 16th amendment, it became a permanent “solution” to the temporary problem of the government needing additional funds for wars. Then, the government began to rely on the funds collected as a result of income taxes. So much so that by the arrival of the World Wars, the income taxes already collected weren’t considered enough.
The 1942 Revenue Act not only sharply increased most existing taxes, it also introduced something called “the Victory tax.” The Victory Tax was a 5 percent surcharge on all net income over $624. In addition to increasing individual’s income taxes, the 1942 Revenue Act also lowered exemptions. The aim of the 1942 Revenue Act was to fund at least half of the cost of World War II. It only funded 43 percent.
The Bureau of Internal Revenue lasted from the passage of the 16th amendment in 1913 until July 9, 1953. President Harry Truman called for a comprehensive reorganization of the Bureau of Internal Revenue in 1952, and on July 9, 1953, the agency officially became the Internal Revenue Service (IRS).
2. Bureau of Internal Revenue Message to Public: “The Power to Destroy.”
The Bureau of Internal Revenue launched a “special nationwide public education program” in 1917, attempting to “popularize war taxes.” In this effort, the Bureau of Internal Revenue attempted to appeal to national pride and patriotism. However, the Bureau of Internal Revenue solidified its negative reputation two years later when Congress passed the National Prohibition Enforcement or Volstead Act (prohibiting the sale and use of intoxicating beverages) on October 17, 1919, and designated the Bureau of Internal Revenue as the enforcement Agency.
The Bureau of Internal Revenue demonstrated its power to the nation when a Bureau of Internal Revenue Intelligence Unit investigation led to the 1931 indictment of famed gangster Alphonse ‘Al’ Capone on federal tax evasion and violations of the Volstead Act. Ultimately, Al Capone was sentenced to 11 years in federal prison, a $50,000 fine, and ordered Al Capone to pay $215,000 plus interest on back taxes. Al Capone’s federal tax evasion sentence was a much stronger “public relations campaign” than the campaign launched in 1917. The message heard by the American people was not that paying taxes to the Bureau of Internal Revenue was a matter of national pride and patriotism. No, the message heard by the American people was that the Bureau had the power to destroy . . . and the rule by fear officially began.
3. The Introduction of Social Security and Unemployment: We’re From the Government, and We’re Here to Help.
President Roosevelt signed the Social Security Act into law on August 14, 1935. Originally, employees paid one percent of the first $3,000 of their salaries to finance these benefits. The Social Security Act required that the Bureau of Internal Revenue begin a new system of tax withholding, which the Bureau of Internal Revenue was then supposed to collect and turn over to the Social Security Trust Fund. The Social Security Act also created an unemployment compensation program, laying the foundation for modern payroll withholding.
To quote Ayn Rand (“Government Financing in a Free Society,” The Virtue of Selfishness, 116):
In a fully free society, taxation – or, to be exact, payment for government services – would be voluntary. Since the proper services of a government – the police, the armed forces, the law courts – are demonstrably needed by individual citizens and affect their interests directly, the citizens would (and should) be willing to pay for such services, as they pay for insurance.
Volunteerism is the keystone of a free society and the clear distinction between being governed and being ruled. The Bureau of Internal Revenue’s involvement with social security and unemployment withholdings could be said to have improved the public perception of the Bureau of Internal Revenue. After all, at the end of the day, the people derive long-term benefit from these funds. If given the choice, many may opt into these government-provided services. However, this choice was taken away from the people, and many would prefer that they receive a paycheck unencumbered by these withholdings so that they have more funds available to plan for their future how they see fit.
If people were free to choose to opt into the program, there would be an inherent check on how the program was run. If individuals found an issue with the program, the government would either need to address the issue or face losing contributors. As it stands, individuals have good reason to doubt the effectiveness of the program but have no way to refuse participation.
The recent 2021 Social Security Trustees report found that starting in 2034, retirees will only receive part of their Social Security benefits if issues with the social security program go unaddressed by Congress. Though social security will exist after 2034, retirees are estimated only to receive 78% of their full benefit starting then.
Currently, the payroll tax rate for Social Security is 6.2%, meaning employees pay 6.2%, and employers also pay 6.2%. If you are self-employed, you are stuck with paying the entire payroll tax rate of 12.4%. Unlike contributions to an individual retirement account, the social security withholdings do not go into a Social Security fund allocated just for that individual. Instead, 85% of the withholdings from current workers are paying for the benefits of all current retirees. Then, the other 15% goes towards a trust fund that pays benefits to people with disabilities and their families. The result? Current workers, who have been paying into the system their entire working life, are then left to rely on 85% of the contributions from those working at the time they retire. To make matters worse, due to the decline in the birth rate after the baby boom period, there are fewer and fewer workers to pay retirees.
4. Adaptation of the IRS to Modern Times: Outdated Technology v. The Modern World
In 1959, the IRS attempted to modernize its data processing by installing an automatic data processing system (which entered full operation by January 1962). In 1962, in an attempt to decrease processing times, an IRS Service Center employee made a special table that he believed could reduce how long it takes IRS employees to sort through individual paper-filed returns.
In 1978, the IRS began using a Remittance Processing System (RPS) and mail sorting system in its service centers. Whereas the manual sorting process had a top speed of only 1,200 pieces an hour, the automated system sorted 22,000 pieces of mail per hour with 98 percent accuracy. The automated processing feature was the IRS’ last attempt at decreasing processing times until the passage of the Tax Reform Act of 1986.
The Tax Reform Act of 1986 marked the beginning of a transition away from paper tax filings to electronic filings. However, it wasn’t until 1991 that the IRS officially started electronic filing. The ability to electronically file an amended return wasn’t introduced until 2020, with the processing time staying the same at up to 16 weeks.
The IRS was again restructured due to the passage of the IRS Restructuring and Reform Act of 1998. In 2000, the IRS created four major business divisions, each aligned to a specific group of taxpayers.
The IRS didn’t have the ability to provide forms and other publications online until 1994. The National Technical Information Service (NTIS) established FedWorld, an online locator service for federal forms, in 1992. Two years after that service began, NTIS launched a bulletin board system to support the IRS. This gave the IRS the ability to provide forms and publications online.
The IRS’ official online presence began in 1996 with “The Digital Daily.” The Digital Daily website eventually evolved into IRS.gov.
Using its website, the IRS launched:
- a withholding calculator (2001);
- a where’s my refund tool (2002);
- an electronic installment agreement application (launched in 2002 and became the online payment agreement in 2006);
- a free file service (2003);
- a transcript delivery system to get client tax records (2004);
- a taxpayer local assistance office locator (2005);
- a sales tax deduction calculator (2007);
- The electronic PIN signatures (2008);
- Free Application for Federal Student Aid (collaborated with Department of Education to make, launched 2010);
- The IRS2Go app to check the status of refunds and returns (2011);
- a direct pay service (launched in 2013 to allow an online method for federal tax payments); and
- IRS Online Account, a self-service app that shows the amount owed and the past two years of payment history (2016).
Despite these updates, the IRS is filled with outdated technology – with significant portions of the IRS’ budget being spent on maintaining anachronistic IT. The IRS operates some of the most outdated IT systems in the federal government. The IRS Individual Master file used today has been in operation since the 1960s. It is also common for the IRS to lose files in its chasm of digital data.
Despite the inefficiencies of the IRS’ online presence and its habit of losing data during processing (resulting in the submission of duplicates), the IRS still refuses to get up to date with the times. For example, Power of Attorney forms are required to be either mailed via snail mail or faxed. No matter which one of those two options you choose, once you are finally able to chat with a live person (more on the hurdles you have to jump through to be able to do that are below), they seldom, if ever, have the Power of Attorney form on file. The kinder of the overburdened employees will give you a direct fax number and put you on a brief hold until they receive it. The more frustrated and impatient, overburdened employees will hang up on you, punishing the caller for the inefficiencies of their data processing systems. Even the kinder employee will make you aware that they can only hold for so long before they are required to hang up.
Also, in denial of the current times, the IRS refuses to conduct business over email. Perhaps, if matters were assigned to individual employees from the beginning and all correspondence went to one person, there would be less of an issue with data loss. Better yet, the IRS should attempt to modernize its automation to serve as a basis for portal-based communications.
This portal could expand on the modernizations of the IRS Online Account first launched in 2016, archiving scans of all documents associated with the account submitted to the IRS; documents submission online via portal could timestamp submissions, provide processing estimates, windows and communicate issues in real-time, with the identifying number of the servicing employee working, and the client could request that the IRS contact the client and choose from an anticipated time window. Better yet, the IRS should launch a practitioner portal where, after a Power of Attorney is accepted, information pertaining to the client and the matter specified in the Power of Attorney would be displayed.
5. Communications with the IRS: Can I Talk to a Real Person Please?
In the 1950s, the IRS primarily interacted with taxpayers via mail. It wasn’t until 1966 that the taxpayer service telephone line was first piloted. In theory, this should have been the beginning of a real step up in service to taxpayers (who are “involuntary customers” and who have a lot at stake in resolving whatever tax issue that is prompting them to reach out for help). Quality phone service is essential for taxpayers.
The IRS is known for notoriously long wait times to speak with a representative with very few lines offering a callback option if wait times are long (the under-reported income line, for example, will sometimes offer an option to enter your number and have the IRS call you back, however, other times the line will reject the call and have you try again later). Other lines, such as the paid practitioner line, will rarely (if ever) accept phone calls except from 7 am to 7:05 am. If you do, by some stroke of luck, get through, then it will tell you to expect a wait of between 15 and 30 minutes but then proceed to keep you on hold for at least an hour. Calls during any other time will likely result in a message regarding high call volumes and a request that you call again during the next business day. This is for a line for paid practitioners only.
One of the reasons the IRS cited for its characteristically unprofessionally long wait times was that the IRS was receiving numerous calls for matters which the IRS did not consider live support necessary for. The IRS\’s solution to this issue was to attempt to improve call fielding efforts. The end result, the IRS said, would be an improved customer experience. On paper, this doesn’t seem like a horrible idea. In practice, it has been. The increased call fielding efforts have resulted in an increasingly complex automated phone menu system, more adequately described as a maze, that makes it even harder to perform basic tasks that could be more quickly addressed by a real-life competent person.
Once you get through the hurdle of the phone menus designed to give you every reason under the sun why you may consider hanging up, waiting for an unpredictable amount of time (even if they give you an estimated wait window, it is rarely an adequate depiction of how long you will actually wait), the surprise hang-ups that occur while on hold, and you finally make it through to a real-life person it is a 50/50 shot whether you will actually be adequately assisted. Most of the time, the representative will look for any reason to hang up on you or just generally have an unhelpful and poor attitude that makes the interaction not only far from pleasant but hopeless in the grand scheme of things. So, in summary, not only do we have a greatly feared organization publicly known for its ability to ruin lives, but this organization does not even run an adequate phone line staffed with competent professional representatives. The IRS has been given too much power, and it lacks the skill or capacity to utilize it properly.
6. 282 Million Calls Placed With the IRS in 2021: Only 11.35 Percent Answered
Lately, access to telephone support has gone from bad to worse. During 2021, in the midst of COVID response-related challenges, the IRS received 282 million calls. Of those 282 million calls, only 32 million were ever answered. That is only 11.35 percent – the lowest percentage of accepted calls in history. That is simply not acceptable.
Employees who are too busy to answer the phones are then unable to address the paper backlog resulting in further processing delays, which then prompts taxpayers to call back later to ask about the status of their returns, further swamping the phone lines and further pulling employees away from return processing. This perpetuates a spiral of delay.
Efforts to get through to the IRS also puts severe stress on the resources of firms providing tax services. These firms are trying to reach prompt resolutions for their clients but have issues even getting through to an IRS employee who can get the nerve-wracking robotic notices to stop being sent to a client’s house. Being on hold and waiting for a person to pick up serves as just enough of a distraction to derail productivity in other areas.
IRS delays have so seeped into tax culture that an entire industry has sprung up to assist tax practitioners in getting through to the IRS. These services use automated technology to continuously dial IRS phone lines until they are finally about to get through on behalf of their customers. For those paying for this service (which is about $1,000 per month), it is incredibly satisfying not to have to deal with the stress of finding the right time window when the phone line won’t reject your call, unreasonable long hold times, and surprise hang-ups. This frees up mental resources to focus on finding a resolution to the problem at hand. However, this new industry further strains IRS phone lines making it harder for people not paying for this service to get through.
7. IRS Employees: How Can We Not Help You Today?
The IRS is filled with employees who don’t adequately understand every aspect of the IRS. Usually, they are only familiar with their own department (if that). It is not uncommon to be on the phone with an employee who does not know how to address your issue and who does not know who to direct you to. This leads to situations where a caller is constantly passed off to another employee. To make matters worse, many post-COVID hires were not properly trained and would often give callers the wrong information and the wrong solutions to their problems.
IRS employees are a special breed of employees, much unlike employees in the private sector. IRS employees are normally unmotivated – which is a stark juxtaposition to the callers they interact with on a day-to-day basis. These callers’ money, and lives as they know it, are at stake. The IRS has the power to garnish your wages, levy your assets, and even close down your business. Despite the severity of the situation for the taxpayers, IRS employees are normally apathetic at best and aggressively unhelpful at worst. Whether these attitude issues are due to burnout from poor work conditions or simply the decision of the employee not to do their job that day, I’m sure the answer depends on the employee. No matter the reason, this is not an issue that taxpayers and the practitioners trying to help these taxpayers should have to deal with.
On rare occasions, you can reach a decent and capable human on the other end of the phone. These are usually the new hires that are not yet jaded and completely sucked of their motivation to do their job with a basic level of competence. If you are lucky enough to get one of these individuals on the phone, it is like a breath of fresh air. It doesn’t quite make up for all the hurdles you had to jump through, but it means the time you spent jumping through the hurdles was not a complete and utter waste.
8. Inflation Reduction Act: Is This the Solution?
The exact number of IRS hires due to the IRA is still yet to be determined, but current estimates are at 87,000 new agents. The 87,000 figure comes from a 2021 Treasury Department estimate of the level of hiring needed to maintain (not improve) IRS efficiency. With an estimated 50,000 IRS agents getting ready to retire, this would amount to an increase in IRS manpower of only 37,000 agents. With the additional manpower, will customer service improve?
In an effort to improve taxpayer service, Treasury Secretary Janet Yellen has announced plans to hire 5,000 new customer service representatives before the next filing season. Even Jane Yellen has recognized that “[f]or too long, IRS Tax Assistance Centers have been massively understaffed and under-resourced.” With the addition of 5,000 new customer service representatives, she states that “every single center will be fully staffed.”
For this plan to be effective, the 5,000 new customer service agents would need to be adequately trained and willing to help. Many of these hires will be entry-level customer service representatives who may not have a good understanding of the tax system. A large issue in the years following COVID was getting an employee on the phone who wouldn’t give you the wrong answer or send you to the wrong place. The influx of new entry-level customer service representatives will usher in a new period of “learning curve time” where customer service agents will be less than helpful as they are still learning how to provide adequate service. Further, these new customer service agents will need to have a willingness to help – which will largely depend on their job satisfaction. A positive customer service experience depends on happy employees. If you are not given adequate training and are not given adequate tools to be successful, you are likely to become frustrated with your job. Those that have the option to leave for a better-paying private sector job will, and those that remain are more likely to become jaded and thus even less helpful to taxpayers.
The IRA has allotted $80 billion to the IRS, $45.6 is designated for enforcement. Encompassed within the enforcement budget is a couple of things: (1) new agents, (2) additional legal support, and (3) investments in technologies that aid IRS investigations.
The new law calls for more IRS hiring. The new hires will likely lead to an increase in audit activity as well, but this would not occur until after the IRS had time to train the new IRS agents to conduct compliance audits. The increased staffing of enforcement agents will also lead to a need for enforcement agent support positions. When these positions would be filled, if at all, is unclear. An increase in enforcement positions without the appropriate support roles indicates the likelihood that current inefficiencies will continue if not worsen.
The portion of the money allocated to legal enforcement also extends to additional legal support, such as providing $150 million to Tax Court. It has not yet been announced what technologies the IRS will invest in to aid in their investigations. The IRS has announced that its objective is to close what it estimates as a $600 billion “tax gap” between what is owed in taxes and what is actually paid.
Taxpayers can expect increased enforcement efforts, increased audits, and (very likely) a continuation of poor customer service. The IRA\’s additional funding of the IRS is unlikely to improve anything for taxpayers except their likelihood of being audited. With the lack of support staff to assist the enforcement agents, new IRS agents are likely to be overworked. Then, with the focus on closing a $600 billion tax gap, new IRS agents are likely to feel pressured to take on more audits than they likely have the time to dedicate adequate effort on. The IRA is not a solution.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.