The Making of the IRS: ‘Nobody Likes a Tax Collector’

Robert Goulder and Joseph Thorndike of Tax Notes explore tax collection throughout U.S. history, from tariffs to tax returns, and how the past has shaped Americans’ perception of tax.

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Credits
Hosts: Robert Goulder, Joseph Thorndike
Executive Producer: Paige Jones
Producer: Jordan Parrish
Editors: Christopher Trigo, Carolyn Kuimelis

Transcript

SPEAKER_00 0:00

Nobody likes a tax collector. That's millennia of truth behind that.

SPEAKER_01 0:04

Nobody likes paying taxes.

SPEAKER_00 0:05

Nobody likes somebody else failing to pay their taxes. And we rely on the IRS to stop that from happening.

SPEAKER_02 0:18

Hello and welcome to the podcast. I am your host, Bob Goulder, a contributing editor with Tax Notes. Joining me is my colleague Joe Thorndike, the tax history guy over at Tax Notes. Joe runs our tax history project. That's where you can find all sorts of things, a timeline of major tax historical events, and a fascinating catalog of all publicly available presidential tax returns. Serious topic, though, today, Joe. How did we end up with a federal tax agency that we have today, right? It didn't just come out of nowhere. Now I know some of the history right after the Constitution was ratified. They had the Treasury Department and they appointed this really interesting guy to run it, Alexander Hamilton. But if I'm correct, the IRS didn't come around until the 1950s. Okay. So that is a century and a half after Alexander Hamilton. So what was going on back then? Who was collecting taxes in the early American Republic?

SPEAKER_00 1:21

You're right. There was no internal revenue service until 1953. But there were definitely federal tax collectors, right? Of one kind or another. So to start at the beginning, uh, you know, the uh founders get together and they create this new plan for government and the constitution, and the constitution starts working, and they get out there and they pass a law. Uh, the second law ever passed by the new Congress was, in fact, a revenue bill, right? They had to actually fund this new government. And what do they do? They pass a tariff law, because that's what people thought was going to be the main source of federal revenue. They're going to tax goods as they're imported into the U.S. Someone has to collect those. So they create a custom service at the same time, right? And and we still have a customs bureau today. And the customs apart, the customs service, along with the Coast Guard, uh is enforcing these new tariffs, these new taxes on imported goods. You need a Coast Guard because all this stuff is coming in by sea. And so you got to prevent smugglers, you got to have somebody out there in ships to stop them. But um, but they also have these customs collectors in major cities, and and that's our revenue service for a long time. So then we skip ahead a few years. And someone like Alexander Hamilton and his the other Federalist Party members, they think, well, we got to make good use of all these powers to tax that the Constitution gave us. And the Constitution says we can use tariffs, and everyone thinks that's gonna be mostly what we use, but they also say we can impose internal taxes. And this would be like an excise tax on a product, like say whiskey. Or it might be um a federal property tax, because you can, in fact, at the federal level, tax land and houses the same way our localities do right now. They give the federal government this power and then they say, okay, let's let's make good use of this. We're going to impose a few of these excise taxes. They impose one on whiskey famously, which eventually ends up, you know, irritating some farmers in western Pennsylvania. But they also impose a federal property tax in 1798, and they create a department of the federal government to collect this stuff. It's in the Treasury Department, but they appoint a commissioner of the revenue. His the first one's name is Tench Cox. And these people all work for him and they're and they're all around the country. They're they create revenue districts. You know, I think there are like 14 originally. They create a whole bunch of revenue districts and they're staffed with people who are out there assessing things, assessing how much tax people owe, and then collecting that tax. And these are the first sort of, this is the first real tax agency in the way we think of it, right? If the Internal Revenue Services are is the organization that now collects internal taxes, this this was this was the 1790s version of that. And and that lasted up until 1802, when the opponents of the Federalists, the they were called Democratic Republicans at the time, and it was really Thomas Jefferson and his friends, they hated the internal taxes. So when Jefferson gets elected president, a very quick thing that they do is they get rid of all the internal taxes, and while they're at it, they fire the commissioner of revenue and all the people who work for them.

SPEAKER_02 4:20

It sounds like the external taxes, the tariffs, are tolerated a lot better than the internal ones.

SPEAKER_00 4:26

I think that's right.

SPEAKER_02 4:27

Is it because they were used to paying them when they were a colony?

SPEAKER_00 4:30

Yeah, I mean, there are precedents for all these taxes, but I think that tariffs were generally regarded as sort of a reasonable, traditional, normal way for governments to raise their money. And so when they decided how we're going to raise money for the new government, that was where they looked first, because this was the stuff that was best tolerated. You wouldn't necessarily think that, because you know, we, you know, throwing the tea into Boston Harbor, that was about an import tax. But but it is just a fact that these tariffs were better tolerated. They were also really easy to collect because there are only a certain number of places where things get imported into the colonies, right? There are only a certain number of ports. So all you got to do is put a big customs house in that port, staff it up with a bunch of people. That's a lot easier than trying to collect things around the country. Now, when they impose like the whiskey tax, they got to go to the whiskey producers, right? Everywhere. Who are a lot of them in western Pennsylvania? That was the frontier in those days. And they go out there and they got to find the guys with the stills. They got to say, How much are you producing? Show me your records, show me your vats of whiskey, whatever it is, uh barrels, I guess, of whiskey, and uh show me your books, you know, show me how much you've sold and everything. That's very invasive. People don't like that kind of thing. And for a lot of reasons, they felt that this was unfair. Why whiskey? Why not something else? Why why are you picking on us? That sort of thing.

SPEAKER_02 5:44

And it sounds like uh internal taxes could be subject to like concealment, right? If you hide it out in the shed or the barn, maybe they won't find it. Right. Whereas how are you going to conceal, you know, it's a lot harder import?

SPEAKER_00 5:56

It's a lot harder to conceal an import because it's just coming into those few places. So you can sort of like you can get the tax police on the job pretty easily. It's a lot harder to do when you're when you're you know walking through farms looking for people who are who are distilling whiskey. All right. Yeah, it wasn't really all that well tolerated. Um, and and in fact, those farmers in western Pennsylvania revolted uh in the whiskey rebellion famously, last for a few years, and the federal government crushes it with an army. Oppression. Because that's what it takes. Ultimately, taxes are collected at the point of a gun. Uh at some level. Get used to it. That there's somewhere back there, there's a threat. We're gonna make good on this. And and that's what and that's what the federal government did, and we ended up still having a lot of people.

SPEAKER_02 6:37

I guess it did wonders for compliance. The army's gonna come in and crush you. Speaking of being crushed, we had the war of 1812, and if I understand history, the British troops sailed right up the Potomac, got off in Washington, D.C., burned down the Treasury building. Did that have an effect on our revenue capacity or not so much?

SPEAKER_00 6:53

Well, not so much burning all the buildings in DC, but wars have a way of changing taxes, right? And and how so? So, especially when you're relying heavily on a tariff, and at this point, at the start of the War of 1812, we were relying solely on tariffs, really. Tariffs don't do very well in a war because at least in those days, everything's coming in by sea. There are navies out there who are trying to intercept that stuff that's being shipped around. It disrupts trade and it reduces trade. And so tariffs, which are dependent on the volume of trade, they do less well during a war. Then the second thing that happens in a war is you need a lot more money because you got to buy guns, you got to buy bullets, you gotta buy cannons, all that sort of stuff. You've got to pay soldiers, and they need a lot of extra money. Okay, and the tariffs underperforming at the same time, right? So, what do they do?

SPEAKER_02 7:40

So you need more revenue and you're getting less of it from your traditional.

SPEAKER_00 7:43

Right. And just raising tariffs, so that can sort of make it better, but it can't really fill fix the whole problem. So, what happens? They look back at those internal taxes, the ones that were so unpopular before, and they're like, well, they may be unpopular, but we need them again. So, uh, in the War of 1812, they recreate a lot of those internal taxes, they impose a bunch of excises on things again, and they hire all those tax collectors back. There's a new commissioner of revenue, he hires new supervisors and new assessors of revenue all around the country. So they rebuild this bureaucracy of tax collection. And that that bureaucracy successfully collects these wartime taxes. Meanwhile, those tariffs are still coming in, right? The customs guys are getting them. But they they rebuild the internal tax system and they hold on to it until the end of the war. And then what do you think they do? Then they fire them all. They fire them all.

SPEAKER_02 8:32

All right, there is a pattern here.

SPEAKER_00 8:34

Coming out of the war of 1812, we get rid of all the internal taxes and we go back to just relying on tariffs, and that's all we do until the Civil War. We have no federal tax collection agency, internal tax collection agency until the Civil War.

SPEAKER_02 8:48

All right, Civil War, you got to pay for the Union Army. A lot depends on it. And the same scenario, you've got tariffs, but the tariffs are not doing so well.

SPEAKER_00 8:57

Um, and and and you know, there's been a lot of argument about tariffs these years anyway. The intervening years high, should they be low? And they're at a point where they're kind of low going into these war years. They raise tariffs quickly, but uh as soon as the war begins, but it's not enough. And so Congress does what Congress does in these situations. They say, Well, what are we gonna do? We've got to raise more money.

SPEAKER_02 9:16

And what do they come up with?

SPEAKER_00 9:17

Uh, they come up with a whole bunch of things. So they come up with excise taxes again, right? Like, and not just whiskey and tobacco this time, but a whole range of things. They have hundreds of excise levies. It's there's so many, it's almost like a national sales tax, but it's levied one-on-one. And so they try that. And then they say, and hey, what about that old property tax that we used a few times in the beginning of this century? We could we could use one of those again. We're gonna tax land and and like buildings on the land, that sort of thing. So that's another internal tax. And then in a really bold move of tax innovation, they say, and let's try an income tax. We've never had one of those, but those British have been using them for a while. So let's us try an income tax. So that's when it started. It starts in 1861. Congress passes a law and says, Let's have an income tax. And then what happens? Nobody does anything to collect it. How? Well, we don't really have a tax collection agency. Congress has authorized that kind of an agency. Treasury doesn't hire anybody, so it goes for a whole year, nobody collects anything. And then in 1862, they actually make it happen for real. They pass another income tax law. This time they say, We're gonna create a Bureau of Internal Revenue that's gonna collect this stuff. It's gonna have a commissioner of internal revenue. His name was George Boutwell, the very first one. He was a politician from Massachusetts. And he takes over this new agency. He has like four people working for him originally. They hire, again, you got to collect these internal taxes, you got to have people all around the country. Yeah. So they hire a whole bunch of people in revenue districts around the nation. They hire assessors. These are the people who go and look at your books and say, Oh, here's how much money I think you made and how much I think you're gonna owe in income taxes, for instance. Then they hire collectors who knock on your door and say, Okay, well, here's what we're planning on collecting from you, and then actually do the collecting. This is a lot of people, it's a lot of staff. And so uh this Bureau of Internal Revenue scales up really quickly. Uh, and under the press of a war, you make that stuff happen, right? They very quickly build this Bureau of Internal Revenue nationwide in the Union, you know, all throughout the Union. And nobody's calling it the IRS, no one's calling it, they're calling the Bureau of Internal Revenue, not the Internal Revenue Service. It's just a little tweak, and they won't get to that service thing until the 1950s. All right.

SPEAKER_02 11:32

So then the war ends. What happens to this income tax? I'm guessing, based on our prior discussion, that as soon as the war is over, people are realizing those internal taxes are kind of unpopular. Do they want to go back to tariffs?

SPEAKER_00 11:44

So they do go back to tariffs. Um, and they do get rid of the income tax. In 1872, Congress just lets it expire. It's true. The tax, uh, the the excise taxes to some degree, but the income tax in particular really not popular. It's because of all that intrusive, they used to call it inquisitorial enforcement, where if you think it's bad enforcing a whiskey tax where you got to go look through people's like barns to look for stills, it's much worse with an income tax because you're looking for, you're looking for dollars and cents, you're looking for numbers on a page to figure out how much people earned. And that can be really hard to find and really involves tearing apart their financial records. And people don't like that. That was considered inquisitorial worse to help with that task of trying to figure out what people's income was. They they basically enlist everyone in the country to be a tax collector. And they say, What we're gonna do is we're gonna take what you owe, Bob, you owe a thousand dollars, and we're gonna put that up on the uh on the courthouse door. We're gonna nail a list of everybody's taxes due in public. In public. And we're gonna ask the newspapers to publish it. So all your neighbors will be able to look at it, and then your neighbors will be like, wait a minute, Bob Wade makes way more money than that. I know I he's got a new plow. There's no way he could have that if he was only making this much.

SPEAKER_02 13:02

Neighbor versus neighbor.

SPEAKER_00 13:03

So the idea was that your neighbors would rat you out to the IRS or the Bureau of Internal Remember, excuse me, and say, uh, this can't be right. You should take a harder look at this person. So this is making everybody into a tattletale. Well, you can imagine that's a little irritating for a lot of people. That made the tax unpopular, along with just having to actually pay it, made it unpopular. And so in 1872, they let it go. Um, but they don't this time get rid of the federal tax agency. They say, you guys are still going to need to collect a couple of internal taxes, mostly just taxes on alcohol and tobacco, uh, because these are the excise taxes that make the most money. They're also well tolerated. Now by that point, they're sort of quasi-traditional. And people think we can justify this as a tax on something that's optional, maybe even a little sinful. And so they hold on to the whiskey, uh, to the alcohol and the tobacco taxes. And then the IRS, the Bureau of Internal Revenue, I make this mistake all the time too, tends to focus on uh their efforts on that, and especially on collecting alcohol taxes, which are still burdensome. You know, they're still tracking people through the mountains of West Virginia uh looking for stills, and that and that occupies a lot of time.

SPEAKER_02 14:12

Better than looking at 1040s, I guess.

SPEAKER_00 14:14

Yeah, at least for the time being.

SPEAKER_02 14:15

So uh the income tax goes away, but it sort of comes back, right? You get the progressive era, you get the 1890s, and they bring back the income tax. And it's declared unconstitutional the following year.

SPEAKER_00 14:27

Yeah. So um a lot of people sort of miss the income tax when it's gone, especially the people who weren't paying it. And they are agitating to bring it back in the 1880s and the 1890s. In 1894, they actually convince Congress it's like a tax swap, essentially. They're gonna what they're hoping for is that we'll raise some more money from income taxes. That'll allow us to reduce uh the tariff, which a lot of people didn't like because they saw it as a consumption tax that was regressive. So let's have this progressive income tax. They bring it back in 1894, and then the Supreme Court says, no, no, unconstitutional. Even though we have previously said that the Civil War income tax was fine, we now find that this one is not fine. It's unconstitutional. You're gonna throw out the whole thing. So they throw out the income tax in 1895. They've already received a lot of tax returns uh to pay that tax. They burn the tax returns, which I kind of love. Yeah. And it takes a while before the income tax reappears again. Because, you know, the movement doesn't end, right? They're still all those agitated people, and they want to have to amend the constitution, right? Well, they might have been able to do it without that, but that was the clearest way to shut the Supreme Court up, right? Yeah. Is just pass a constitutional amendment that says nope, income taxes are good. And they do that. Even before that, they impose a they managed to impose a corporate income tax with some fancy legal framing uh that passes constitutional muster, and the Bureau of Internal Revenue creates a new division to collect this corporate income tax, the returns of which, incidentally, were public records that could be inspected. Four years later, they um they create uh the individual income tax, and the Bureau of Internal Revenue creates a new division to take care of that. Um, and we have now returned, you know, our uh we've we've opened a new chapter uh in the fiscal history of the country with this income tax at its center, still collecting tariffs, still collecting excises, but the Bureau of Internal Revenue has a whole new job collecting all of these new income taxes of various kinds.

SPEAKER_02 16:23

All right. Now I wanted to talk to you about the popular mythology of the uh tax collectors in say like the 1920s. There's this idea that they're they're running around carrying machine guns or almost like a quasi-military force because they're going after bootleggers and folks. But why weren't tax collectors involved in enforcing prohibition in in the first place? Well, why why isn't that for the FBI?

SPEAKER_00 16:46

Yeah. Well, so I think the answer to that is that it was a kind of obvious role for the Bureau of Internal Revenue because they were already doing a lot of enforcement around excise taxes on alcohol. So literally they were, you know, used to carrying guns around looking for illegal alcohol operations. And that's essentially what the prohibition enforcement is about. So when it when it comes time uh to pass the enabling laws, which actually um enforce the prohibition amendment, they're gonna turn to the Bureau of Internal Revenue and say, you guys do the enforcement on this. And you know, they did have help. It was not exclusively them, but they had primary responsibility for enforcing prohibition. And it became uh, you know, as famous, as you say. Like, you know, that the most famous tax uh avoider of all times was Al Capone. And he was convicted of tax evasion because he was selling all of this alcohol and yet not paying taxes on the income that he made from it. Because that's the deal about the income tax. Even if the source of your income is illegal, you still owe taxes on it.

SPEAKER_02 17:47

So Al Capone could go around and murder people in Chicago, but he went to jail for not paying taxes.

SPEAKER_00 17:53

Right. Now the FBI might come for you if they're if you're murdering people, but if you're not paying taxes on your illegal income, the Bureau of Internal Revenue will come for you. And that's how he actually went to jail because it was easier to prove at the time. And also a federal crime. Um, so you could you could have the feds enforce it clearly instead of a lot of murders which are enforced at the local level. So that's yeah, it's a it's a weird role for the for the Bureau of Internal Revenue for the for these like tax collectors, yeah, but really one of their most famous.

SPEAKER_02 18:21

Well, part of it is just that it sounds like they knew who the perpetrators were. Yes. There you go. Familiarity. Right. By the time of the 1930s, uh, we get the Great Depression. By the 1940s, we get FDR in the White House. During that time, it seemed like there was a expansion in both the scope and the mandate of the federal government. It was being asked to do more and more. Uh, how did the Bureau of Internal Revenue keep pace with that?

SPEAKER_00 18:46

All right, so there is actually an important innovation in the 1930s when um we introduced social security tax innovation. A tax innovation or a tax collection innovation even more. Congress creates the social social security system, um, you know, these old age pensions, and they fund it with a special tax. That special tax they decide is going to be collected directly from paychecks. We're not gonna file, you know, and I don't file social security tax returns. Nobody does. Instead, our employers take the money right out of our paycheck and send it to the federal government on our behalf. That's called withholding. Now, there had been withholding before. They had done some withholding during the Civil War, even. And again, in the early years of the income tax in the 19 teens, they would did a little bit of withholding. Didn't really stick because those financial intermediaries, the the people, the banks or the employers doing it, they don't really like that job. They don't like being deputized as tax collectors. Uh, but in 1935, they bring back this that they they establish this social security tax and they need to collect tax from a huge number of new people very quickly. And they're like, the only really decent way to do this is with a withholding mechanism. So that's the big thing that happens in 1935. Fast forward a few years to World War II. The income tax has expanded dramatically. Again, a war. We need lots of revenue. Are the old ways holding up? Not really. So what they do that time is instead of creating a new tax, they say we're gonna take the income tax, which used to be paid by like five to ten percent of the population.

SPEAKER_02 20:15

Small percentage of the population.

SPEAKER_00 20:16

Rich people. Yeah. And they say, for the first time, we're gonna ask non-rich people to pay income taxes as well. We're gonna add millions of new people to the role. The number of tax income taxpayers went from like seven million just before World War II started to like 42 million at the end of the war. So dramatically, yeah. And how are we gonna get these people to pay? Same sort of thinking as went into Social Security. If we ask them all to file returns about this and figure it all out on their own, they're gonna be logistical problems with that. So we're gonna withhold this money from them. Now, they are gonna have to file returns anyway. But they're not gonna have to save up all their money over the course of the year and then send in a great big check. Instead, we're gonna use those employers again to keep that money out of their paychecks and then just send the money directly to the federal government for us. So they introduced withholding in 1943 for these millions of new taxpayers. And the income tax, meanwhile, is being transformed, as they often say, from a class tax to a mass tax.

SPEAKER_02 21:14

The class being the absolute people. Yeah. I mean mass being everything.

SPEAKER_00 21:18

There were a couple of tax professors who at the time actually described the change, saying the income tax changed its morning code for overalls.

SPEAKER_02 21:25

Well, that's an incredible efficiency when you think about just the number of taxpayers they have to deal with.

SPEAKER_00 21:30

Probably couldn't have been done without it, in fact. Like because the the fear was this they're gonna have all these millions of new people have to pay, and they're not gonna remember to save money over the course of the year. And the end of the year, they're gonna file that return and they'll be like, oh my god, I haven't got it.

SPEAKER_02 21:44

I I haven't got this money.

SPEAKER_00 21:45

What am I gonna do? And the Treasury Secretary, the Treasury Department thought this was a real problem too. And the Treasury Secretary, Henry Morgenthal, looks at his aides at one meeting and he says, What are we gonna do if we have to arrest five million people for not paying their taxes? So withholding was the Answer to that.

SPEAKER_02 22:00

Finally, after World War II, we get to the 1950s, the transition from Roosevelt to Truman to Eisenhower. And finally, was it 1952, 53, thereabouts? We finally get the IRS.

SPEAKER_00 22:13

Now, is it just a rebranding or uh no, it's a restructuring. So um, there is a great big scandal at the IRS in the early 1950s. I love a good scandal. Tell me. Yeah, um, sort of comes to light in California, and then it moves the investigation moves to Congress, and Congress starts looking hard at the agency. And what they discover is that there's a ton of corruption, that people are taking payoffs from taxpayers. So it's like blatant corruption. And they put a lot of I put a bunch of people on trial, they fire a bunch, um, they get some resignations, but they also put a few people on trial, including a former commissioner. And so this is a big deal, as you might imagine, find wholesale corruption. Those collectors of internal revenue scattered all around the country turn out to be a big problem. They're presidentially appointed, they think they're pretty cool, and consequently don't really feel like they're answerable to many people. They turn out to be a problem. So they say, we got to rebuild the agency, we got to reconstruct it in some way where this won't happen again. They get rid of all those collectors, and a lot of those field staff who are presidentially appointed, they get rid of them and they simultaneously sort of like centralize and decentralize the agency, but they they try to just professionalize the whole thing and reorganize it in a way that'll make it less prone to sort of like petty political corruption in these collectors' offices. And so this big reconstruction, this this redesign of the agency gets pushed through in the 1950s. It's it's really bipartisan. And as a part of that, they decide to rename the agency the Internal Revenue Service. So we finally get the name. But it's worth recalling that that is the same agency that Congress established in 1862. So the the IRS as we know it today does not date from the 50s. It dates from the 1860s. It's just that we decided to change its name part way through.

SPEAKER_02 23:56

That explains a lot. So moving on to the 1970s, the Nixon era. There is a whole lot going on with Nixon, but part of it that I'm interested here is what he was doing with the IRS. Yeah. Not for his personal taxes. That's his own shenanigans.

SPEAKER_00 24:11

Personal taxes are part of the story, actually. All right. Explain. All right. So he's doing a lot of things with the IRS. Most famously, he created an enemies list, or his aides created an enemies list. And the idea was that they were going to use the Internal Revenue Service to harass and make life difficult and possibly prosecute enemies of the administration.

SPEAKER_02 24:32

You just pick people he doesn't like and have them audited.

SPEAKER_00 24:35

Take a hard look at them, see if we can find problems, you know, and if we find problems, then we can go after them, we can at least threaten them. This is a weaponization of the tax collection process in the U.S. And it's quite self-conscious, it's quite brazen within the uh White House. The IRS does resist this to some degree, but it raises the specter of corruption and of misuse and malfeasance at the IRS. And it does come to light during the Watergate investigation. When they're off investigating this break-in, they they discover all this stuff about ways in which the president and his aides had tried to misuse the IRS. So that gets Congress worried. At the same time, this is his personal stuff. Nixon is not really following the letter of the law or the spirit of the law or really any part of the law. When it comes to his own taxes, he makes uh a bunch of claims on tax returns that are really unsupportable and in some cases involve forged documents. And he gets in a lot of trouble for his personal tax returns. Turns out he ends up owing like half a million dollars in back taxes to the federal government, uh, which is a lot of money in 1973. Nixon has a lot of these problems. And and one of the things that they discover is that the IRS audits the president in the middle of this and they're like, Oh, all good, thumbs up, your returns look terrific. Then somebody who doesn't work for the IRS actually takes a look, the um Joint Committee on Internal Revenue Taxation. These experts take a look and they're like, no, actually, he owes half a million dollars. Wow. So the IRS clearly dropped the ball uh when it came to auditing their own boss. What this really spawns is certain changes in the way the IRS operates, but even more, a change to the way we handle taxpayer information. They decide to crank down on the protection of taxpayer information. And they won't let and this is to prevent like that weaponization of the IRS against enemies. Like if you can't share tax return data with the White House, well then the White House won't really be able to weaponize very well. They do make those changes in 76.

SPEAKER_02 26:24

Now there's another, I don't know if scandal is the right word, but when we get to the 1990s, I'm old enough to remember this. We had the Roth hearings. There was all sorts of congressional oversight. There were these allegations about IRS agents engaging in tactics that maybe weren't legitimate. Uh there were stories of witnesses coming in to testify with, you know, voice altering uh equipment and you know masks over their face or black curtains and stuff to shield their anonymity. What was going on in the 90s? Was it really a scandal?

SPEAKER_00 26:55

So I think the answer is yes, but maybe not everything it was made out to be, right? That the IRS was uh overzealous in certain instances and and running roughshod over taxpayers and and their rights at times. There were real complaints to be made, and they were certainly being made. It's also true that attacking tax collectors is generally pretty good politics, especially this is becoming more and more true in the 1990s. And so there were a number of politicians uh who I think realized they could score political points uh if they went after the agency hard. So they did. They convened a lot of hearings, they were very theatrical, like you say, like voice-changing devices and whatever to it was quite dramatic. Yeah, to make it to make it look exciting. So they do hold these hearings and they do uh they they do develop a another reconstruction plan for the IRS, and the first one since the 1950s. And these changes are the biggest since the 1950s. So, you know, we have certain signposts in like the development of the agency, and one would be its creation in 1862. Another would probably be uh that re that that reform in the 1950s when they when they rebuild it, and then this is the next one, and and it is a pretty significant change. It's a they they put a lot more emphasis on taxpayer rights and they create uh institutions to try to protect those rights, including the Office of the Taxpayer Advocate, uh, which is a new position at the IRS dedicated to looking up for the rights of individual individual taxpayers.

SPEAKER_02 28:22

An important office.

SPEAKER_00 28:23

So I think that this is an important moment, and it is, I think, partly a real one and partly a manufactured one. It's it's both.

SPEAKER_02 28:30

Okay, Joe, final question. I want to ask you about today, 21st century. When I think about the IRS, the words that come to mind are resource constraint. Frankly, for for decades now, it seems that Congress has been intentionally defunding the IRS, it just doesn't have the budgetary resources that it arguably needs to do its job. How is the agency coping with that?

SPEAKER_00 28:54

Well, I think not well, right? So since the 90s, the IRS has been struggling to, I think, get the funding that it needs. And it's had intermittent moments where it's it's had its funding boosted, but more generally, its funding has been on decline, especially when you're accounting for the fact that the U.S. population is increasing over this period and inflation is rising. So uh the budgets are not being increased to keep pace with that. That means that the IRS has fewer and fewer employees trying to do the same job, trying to do new jobs. A lot of the time we pass we pass new benefits in Congress and we have the ask the IRS to administer them. And and there isn't that the agency has not had the resources to do that while also keeping up with like the regular tax enforcement that they're supposed to do, you know, sort of looking over people's tax returns and making sure that they're not cheating or making innocent mistakes, but mistakes all the same. That agency hasn't had the resources to do that. That was a long process of like two decades, at least two decades. And and then uh there's an effort in the Inflation Reduction Act uh in the Biden administration to give to sort of breathe new life into the agency by giving it more adequate funding. And they come up with something like$80 billion, yeah, new funding for the agency, uh phased in over a bunch of years. And the idea is we're gonna let the agency catch up so it can do a better job with its core mission, especially, of assisting taxpayers in filing their returns and enforcing the tax laws that are on the books. And that was like a pretty reasonable idea for a resource-constrained agency, but you can't constrain the works of a future Congress. And so the problem was is that that$80 billion sounded like a great idea to the Democrats who were running Congress at the time, sounds like a much less good idea to the Republicans who are running Congress now. And so a lot of that$80 billion has been clawed back, has been reduced. And and the agencies also had just mass firings along with a lot of other parts of the federal government. So it's even Are you talking about Doge? Yes, and and whatever replaces Doge. And but you know, in general, the Trump, the second Trump administration's effort to shrink the federal uh workforce has definitely hit the IRS. Meanwhile, they're not going to get the money that they were hoping for, that they thought that they would get from the influence.

SPEAKER_02 31:07

Well, what if they can't do their job?

SPEAKER_00 31:09

I mean, they will find a way to do some portion of their job, but if they don't do their job well, then we don't enforce our taxes well. And and the question is, do people hate the IRS so much that they don't care if the taxes are tax laws are enforced well? Or do people get angry when they say, hey, the people most likely to cheat who are going to make the most money out of this are going to be rich people who are gonna try to avoid taxes, who can afford to hire all those expensive lawyers and accountants to help them legally avoid taxes, or at least not transparently illegally avoid taxes, but but that uh you know wouldn't pass muster if the IRS were really looking hard at it. And and I and I think that the politics of this are not clear yet. They haven't played out because I do think it's true. Nobody likes a tax collector. No. That's millennia of truth behind that. Nobody likes bank taxes, but nobody likes somebody else failing to pay their taxes. And we rely on the IRS to stop that from happening. So I think both those are powerful political things, and we might well but we're still waiting to see how that how that plays out in contemporary politics.

SPEAKER_02 32:12

So you can't really predict what the IRS is going to look like, say in another 25 years.

SPEAKER_00 32:16

Uh I can't. I just I can predict that we will not be done arguing about it.

SPEAKER_02 32:20

There you go. And there you have it. Thank you so much for tuning in. And I wanted to add that this series is being produced by Jordan Parrish. It is edited by Chris Trigo and Carolyn Cumulus. And the executive producer is Paige Jones. Thank you and see you next time. Tax Analyst Inc. does not provide tax advice or tax preparation services. Nothing in the podcast constitutes legal accounting or tax advice. A full disclaimer is included in the transcript.