15 Facts About the IRS to File Away
The one thing most people know about the Internal Revenue Service is that they don't like it. A recent survey found that only 31 percent of Americans trust the IRS, while other polls show it ranks as the U.S.’s least favorite federal agency. Animosity aside, it’s helpful to know a few facts about the organization that takes so much of your hard-earned money. Here are a few to get you ready for April 18th.
1. PEOPLE HAVE HATED IT FROM THE BEGINNING.
In 1861, the U.S. government under President Lincoln created the first income tax as a way to cover Civil War expenses. It was a 3 percent flat tax on all incomes above $800. But before any taxes were collected, Secretary of the Treasury Salmon Chase pointed out that they’d probably spend more money collecting taxes than the taxes themselves would generate [PDF]. The Revenue Act of 1861 was repealed and replaced with the far more important Revenue Act of 1862. Those who made between $600 and $10,000 a year were subject to a 3 percent tax, while those who made more than $10,000 contributed 5 percent. This ruled out most citizens (Union citizens, that is), but the measure was still deeply unpopular, especially when the rates were increased in 1864. In 1872, amidst costly Reconstruction efforts, the government did away with the income tax provision, choosing instead to collect taxes on beer, liquor, wine, and tobacco. But one of the longest-lasting effects of the Revenue Act of 1862 was that it created the position of Commissioner of Internal Revenue, the forerunner of the IRS.
2. IT HAS A LONG HISTORY OF SCANDALS.
From lowly agents to presidents, those on the inside are too often seduced by the agency’s power. Franklin Roosevelt used the IRS to target enemies like the publisher William Randolph Hearst, while Richard Nixon famously wielded it to investigate his Democratic opponents. Under FBI Director J. Edgar Hoover, the IRS audited the NAACP and civil rights leaders like Martin Luther King, Jr. According to investigative journalist David Burnham, “In almost every administration since the IRS’s inception, the information and power of the tax agency have been mobilized for explicitly political purposes.”
3. A FORMER IRS COMMISSIONER WAS CONVICTED OF TAX FRAUD.
You’d think the head of the nation’s tax-collecting agency would be on top of his finances, no? Well, in 1952 Joseph Nunan Jr. was found guilty of failing to report $86,000 in personal income. Included in this was $1800 he’d won after betting Truman would win the presidency in 1948.
4. IT GOT AL CAPONE CONVICTED.
For years authorities tried to nail the famed Chicago gangster, but nothing stuck. So they turned to the IRS, who put an agent named Frank Wilson on the case. Capone didn’t have a bank account or financial records and was careful to leave no paper trail, making the task monumentally difficult for Wilson and his team. After sifting through more than 2 million documents, Wilson finally came across payments to Capone that hadn’t been listed as income. This led to Capone’s arrest on tax evasion charges, and an 11-year prison sentence.
5. TAX DAY WAS ORIGINALLY MARCH 1ST.
Congress set the due date back in 1913 with the passage of the Sixteenth Amendment, which formalized a nationwide income tax. A few years later, it pushed the date back to March 15th, and in 1955 revisions to the tax code moved the date back again to April 15th (note: this year’s due date is actually April 18th). So why not stick with the original due date? The IRS claims it needed more time to process returns, but tax experts believe that an increase in refunds for the middle class meant the agency wanted to hold onto its money longer and collect interest.
6. IT MISSES OUT ON 15 PERCENT OF WHAT IT’S OWED.
It’s called the tax gap, and it represents the funds that the IRS is owed but never receives due to taxpayers underreporting their income, making filing errors, and so on. The agency receives about $2 trillion annually, and says it misses out on an estimated $385 billion.
7. THE TAX CODE IS MORE THAN 75,000 PAGES LONG.
There’s a reason more and more people are relying on tax software and other services: The tax code is so complex, it makes War and Peace seem like a beach read. And it’s always changing. Between 2001 and 2012, the code was amended 4680 times—or more than once a day.
8. THEY’RE NOT BACKING UP THEIR DATA PROPERLY.
Many home computer users know the importance of backing up valuable information, but apparently the IRS doesn’t. A recent report from the Treasury Department found that the IRS didn’t have sufficient data backup for taxpayer records, nor did it have plans to implement any in the near future. “If the data is not backed up properly, a possibility exists that all taxpayer and management information could be lost and become unrecoverable,” read a press release from the Treasury Inspector General for Tax Administration. The IRS said they plan to comply with the report’s recommendations.
9. YOUR CHANCES OF GETTING AUDITED ARE LOWER THAN EVER RIGHT NOW.
With fewer staffers and resources due to budget cuts, the IRS is performing audits on less than 1 percent of all tax returns. The exception is those individuals making more than $1 million, who have around a 10 percent chance of being audited (since the IRS knows it can make more money from errors on wealthy taxpayers’ returns). Avoid red flags, like overstating deductions and filing by hand, and your chances of getting audited are slim to none.
10. THE EMPLOYEES AREN’T AS UNHAPPY AS YOU’D THINK.
Working for the IRS may conjure images of mind numbing, repetitive tasks and endless rows of cubicles akin to Terry Gilliam’s Brazil. But according to surveys and employee reviews, the agency isn’t such a bad place to work. A survey taken by the Treasury Department several years ago found that 69 percent of IRS employees were satisfied with their jobs, and nearly two-thirds of employees say they’d recommend an agency job to a friend, according to Glassdoor.com.
11. PEOPLE HAVE COME UP WITH SOME INTERESTING CHALLENGES TO TAX LAWS.
Legal challenges to the IRS and national tax laws have been quite colorful over the years. In 1954, a Wichita man named Arthur Porth argued that income tax amounted to “involuntary servitude” and was illegal under the Thirteenth Amendment. In 1969, Gladwin Lamb claimed his income was not taxable because it didn’t come in the form of gold or silver. More recently, tax protestors like Larken Rose have rallied around what’s called the 861 argument, named after the section of the tax code that outlines sources of taxable income, and which claims that only income that comes from “international commerce or foreign possessions” can be taxed. One famous case was actor Wesley Snipes, who cited the 861 argument when explaining why he didn’t pay taxes between 1999 and 2004. He served three years in prison.
12. GOOD LUCK GETTING THEM ON THE PHONE.
The IRS receives more than 100 million phone calls each year from taxpayers seeking help, and around 40 percent are unable to speak with an agent. Budget cuts are mostly to blame, but the agency’s response may only be making matters worse. The Taxpayer Advocate Service, a watchdog group, said the IRS plans to reduce personal assistance further and increase its online presence—a plan that National Taxpayer Advocate Nina Olsen says won’t address complex issues, and will put Americans who don’t own a computer at a disadvantage.
13. FRAUD IS A MAJOR PROBLEM.
Experts estimate tax-refund fraud will bilk the IRS of $21 billion this year—a huge increase from the $6.5 billion taken just two years ago. The agency has moved to address the issue by doubling its fraud prevention staff. But enforcement could prove to be an uphill battle, since all clever fraudsters need to create a fake W-2 is a person’s name, date of birth and social security number. To make matters worse, last month hackers accessed identity information from an IRS web tool aimed at preventing identity theft.
14. E-FILING STARTED BACK IN 1986.
Only five tax preparers agreed to participate in the pilot program. After collecting data from their clients’ returns, they called up an IRS processing center in Cincinnati and transferred everything to a device called a Mitron, which was essentially a tape drive hooked up to a modem. The Mitron then transferred the data to a Zilog supercomputer that processed the returns. The process was time-consuming, but it quickly improved. By 1990, the IRS was receiving more than 4 million returns through the new e-file system.
15. NOW, MORE THAN 90 PERCENT OF TAXPAYERS E-FILE THEIR RETURNS.
The IRS really, really wants you to e-file. It’s about twice as expensive for the agency to process a written return as it is for an online return. And with fewer agents available to input them, it’s more time-consuming as well. Concerns over Internet security had taxpayers wary when e-filing first emerged, but the IRS sped up its refund deliveries and now it’s become the preferred method.
All images courtesy of Getty