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How the IRS Works

        Money | Taxes

Federal IRS Growth, Corruption and Reform
In the matter of a few decades, the income tax become increasingly more complex and the BIR struggled to keep up.
In the matter of a few decades, the income tax become increasingly more complex and the BIR struggled to keep up.
FPG/Hulton Archive/Getty Images

Ever since the beginning of the Internal Revenue Service (IRS), taxpayers have suspected it of abusing its power, showing favoritism and invading privacy. In some cases, these accusations have been well-founded. Arguably, however, many of these problems stemmed from the difficult and unprecedented responsibilities Congress put on its shoulders.

As the nation shifted its focus toward Progressive reform politics, it brought fundamental change in the nature of tax law. Using taxes to support the "general welfare" of the nation no longer meant just funding defense and the costs of merely keeping a small federal government running. Now, taxes became an important factor in the health of the economy, curbing the influence of the rich -- people and corporations -- and redirecting that wealth to try to care for society's less fortunate. As taxes grew to meet these goals in this new wave of reform, the BIR soon found itself drowning in work.

Growth and increasing complexity in federal taxes before and during World War I led to many problems. The agency had to grow and organize its administration to interpret and enforce new tax legislation. The BIR quickly fell behind in processing the paperwork. Soon after the war, Congress scaled back taxes, but they were still significant. In the 1920s, a congressional investigation into the BIR found the sources of problems and also evidence of corruption within the agency. 

­Insufficient regulations, a high staff turnover and increasingly complex tax legislation meant that the BIR was not living up to its responsibilities. In addition, the BIR became wrought with instances of favoritism and questionable practices on the part of its agents. Many pointed to suspicious hiring practices as a source of the problem, saying patronage -- not merit -- decided who got jobs there [source: Thorndike].

The BIR implemented some changes to counter the corruption uncovered in the 1920s. Significant reform, however, came in the 1950s. The BIR again struggled to handle increased taxes during World War II, and instances of corruption moved into the national spotlight soon after. Reforms purged the BIR of many officials, got rid of the patronage in hiring and dramatically decentralized the organization of the agency. To emphasize the change of focus as a service to the taxpayer, the agency changed its name to the Internal Revenue Service in 1953 [source: U.S. Treasury].

Reforms didn't end there, however. Despite its efforts in the following decades, the IRS failed to sufficiently modernize and automate tax processing. Coupled with growing political animosity toward taxes and more revelations of corruption, this led to another reform effort in the 1990s [source: Thorndike]. The resulting IRS Restructuring and Reform Act of 1998 reorganized the IRS. The act based much of the reorganization on successful structures in the private sector [source: IRS] It also established an oversight board and a Taxpayer's Bill of Rights. Among other things, this Bill of Right shifted the burden of proof -- in some cases -- to the IRS rather than the taxpayer when disputes arose.

Next, we'll look at what the IRS looks like today, after undergoing these multiple reforms.