The IRS and Taxes

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The Internal Revenue Service is defined as an agency that collects taxes as well as interprets the Internal Revenue Code within the United States. Essentially, the IRS, as it is frequently referred to, is an encapsulation of both enforcement and the interpretation of instructions given by the United States government. The Internal Revenue Service has an interesting history. Dating back to the time of President Abraham Lincoln, the revenue service has altered the landscape of the structure of taxes.

This paper is presented in two sections. The first section discusses the history of the IRS, Presidents that have been involved with certain acts associated with taxes and major legislation up through the 2000s. The second section will talk about social security benefits and how they are taxable, credits such as the earned income credit, child care and child tax credits, the United States code will be explored in detail and depreciation will be examined.

The History of the IRS

During the Civil War, both President Abraham Lincoln and Congress established what was known as the Office of Commissioner of Internal Revenue. This office was created to enact an income tax as an effect of the expenses associated with the war. Deemed the Revenue Act of 1862, this piece of legislation had a fiscal objective to enforce specific and definitive provisions associated with tax collection. The act created the Office of Commissioner of Internal Revenue; it added a tax on common goods as well as services and also altered what Congress had passed a year prior, which was a three percentage levy on individuals who made a certain amount of money per year. The act established what was known as the excise tax, which is specific to goods and service such as jewelry, liquor and tobacco. Excise taxes were also added to other types of items. The crux of the excise tax was to be a consumer oriented positioning on the American people in order to reinforce a systematic way of fairness. Much criticism has come of the excise tax throughout the years as it is a tax that has commonly dealt a harsh blow to lower income Americans than those who make what is deemed a high income ("Tax History Museum," 2013). The particular act has frequently been considered a watershed moment in both American history and tax regulation.

In spite of the taxes that were established by the Revenue Act of 1862, war expenditures were getting costly and were becoming extremely complex for the country to both finance and handle. Thus, two new laws would be passed in 1864. The first was done in June and it effectively changed taxes associated with goods and services as well as inheritance and business associated taxes. Many legislators noted that this increase in taxes was not good for the American people in terms of fiscal equality and thus, a second bill was passed in July that would impose an additional tax on those Americans who made more than the average American. Congress in other words, was able to examine that certain sectors of the population could be taxed more in accordance with their yearly salaries. They reasoned that the income tax in general was an extremely lucrative revenue source. The taxes associated with the war would be instrumental in America creating a systematic way of banking through two acts known as the National Banking Acts of 1863 and 1864. They "imposed a system of free banking on a national level. State banks were granted national charters and allowed to issue national bank notes" ("Tax History Museum," 2013).

Following the end of the American Revolution and Civil War, taxes had evolved significantly. Lawmakers had allowed the income taxes associated with the war expire in the 1872 and as a consequence of this action, many of the taxes that were instituted afterward were deemed unconstitutional. In 1894, the United States Supreme Court deemed the income tax of 1984 unconstitutional and prompting Congress to return to the drawing board in order to keep America afloat. By 1906, President Theodore Roosevelt had established what became known as tax reform. Roosevelt and his successor, William Howard Taft, saw an opportunity to amend the egregious ways that America was going in its mission to zap revenue from its citizens. Tax reform in essence became a pivotal movement in America as well and would culminate when Woodrow Wilson was elected in 1912 and a ratification of the 16th Amendment took place. The 16th Amendment of the Constitution permits Congress to tax income without allocating those taxes in accordance between the states. The ratification of the 16th Amendment would move the dial on the tax rates that could be imposed on individuals and thus has been considered a major triumph in the Wilson Administration. The ratification would also lead to the massive restructuring of the IRS as well as the creation of the first 1040 form ("16th Amendment to the U.S. Constitution: Federal Income Tax (1913),"2013). The 1040 form is a type of document where citizens of the United States account for their annual income taxes.

Many states frequently expressed their disquietude with the 1040 form. In 1916, President Wilson requested that Congress pass the War Revenue Act of 1914, which came with a several new excise taxes. It has been said that this was the result of the 1040 form complaints that had been received at the time. The new taxes would be advantageous to the United States, however, did not efficiently close the gap that needing closed pertaining to monetary matters. Hence, President Wilson and the Democratic Party in Congress ascertained that a steeper tax was needed to be imposed in order to close the gap. Congress, then pass what became known as the Revenue Act of 1916. The aim of this act was to generate revenue. The act also got rid of the provisions that had been established as a caveat of the 1913 tax regarding the collection at source (“Tax History Museum,” 2013). 

1917 would prove to be a notable year regarding taxes. This particular year allowed Congress to impose a corporate excess profits tax. Simply put, this tax would enforce that both large and small businesses and individuals would have to pay taxes in accordance with the business regulation markers. Irrespective of the changes that were taking place within the tax system, the IRS struggled to deal with them. The newly established taxes were imposed on many different items such as munitions and estates prompting the bureau to expand significantly in its staff to deal with the growing amount of paperwork that were coming in. In the early 1920s, many Republican lawmakers would join up with several Republican presidents in order to "engineer tax cuts in 1921, 1924, 1926 and 1928. [At the time] Andrew Mellon was [known] as the principal architect of the tax reform. The [focus of] the cuts were set about [to] revis[e] the wartime tax system" (“Tax History Museum,” 2013). At the time, there had been much discussion about the Wilson Administration and its approach to taxes and in effect, the Internal Revenue Service. Wilson had encouraged a permanent implementation of the corporate tax and this was not met with enthusiasm. 

Andrew Mellon’s attempts to revise the tax system were done over the course of a seven year period and by the time 1928 approached, “it would become the last time that lawmakers would have a free hand in cutting taxes” (“Tax History Museum,” 2013). The years between 1929 to 1932 were wrought with the effects of the Great Depression. There were many attempts during these years that proposed a dramatic increase in the tax rate structure, however, Ogden Mills who was the Treasurer at the time of the Hoover Administration counseled against such action. Mills "acknowledge[d] that rates must necessarily rise, especially on the richest Americans, [and] emphasized the need for an increase in the number of people paying income taxes in the first place. To question the budget deficit and close the budget gap, Mills suggested tax hikes that would raise about $920 million" (“Tax History Museum,” 2013). This he hoped would aid the American society that had suffered as a result of the Great Depression. Congress ended up adopting these suggestions.

When Franklin Roosevelt took office, he would inherit much of the tax policies that themselves would have long lasting effects on the country. While Mellon wanted to emphasize a different kind of tax system, Mills had essentially created something that was unlike the 1920s. The progressive methodology had capsized and the Republicans were able to capitalize on the tax system and overall structure. Hence, Franklin Roosevelt, in order to successfully aid in fixing what many believed was nothing more than a cutting approach rather than a revenue raiser, had to join forces with those who had been close advisors of President Hoover and create regressive taxation (“Tax History Museum,” 2013). 

This would cause several different shifts in the operations of the IRS. After adding more to their staff, by the time the 1950's approached, the IRS started utilizing technology such as microfilm in order to ensure proper organization of records. In addition to this, dramatic change would take place when the name was officially changed to the Internal Revenue Service. Also, the structure of hiring and overall recruitment would shift as well with both the commissioner and chief counsel positions being selected solely by the president and then confirmed by the Senate. The 1960s saw the rise of overt machinations and scandals associated with the IRS. The decade would begin with the Ideological Organizations Project, which was created at the request of the Kennedy Administration. This specific project was targeted to investigate the suspect right wing foundations like churches and their tax-exempt status. In the 1970s, President Richard Nixon was impeached for high crimes as a consequence of using the IRS in a personal manner. Known as the Watergate Scandal, "the House of Judiciary Committee found that President Nixon [was] in violation of his constitutional oath faithfully to execute the office of President of the United States acting personally and through his subordinates and agents, endeavored to cause, in violation of the constitutional rights of citizens, income tax audits or other income tax investigations to be initiated or conducted" (Andrew III, 2002; "Articles of Impeachment," 2013). Many have explored this scandal significantly and profoundly noted it as a threat to American political culture and the foundation of the Internal Revenue Service's operations and ability to enforce taxation on the American citizens. 

Throughout the 1980s, much of the IRS' focus was on updating its ways of collection. The bureau underwent a significant reorganization. There were several different tax legislations that were passed during the 1980s, “which included the Crude Oil Windfall Profit Tax of 1980s, which created temporary excise tax[es] on crude oil profits and created several business energy tax credits; the Economic Recovery Tax Act of 1981, which reduced marginal tax rates 23 percent over [a] three year [period] and [provided] savings incentives; Social Security Amendments of 1983, which accelerated scheduled increases in OASDI [Old Age, Survivors and Disability Insurance Program], the Deficit Reduction Act of 1984, which increased excise taxes, depreciable life of structures from 15-18 years and placed time value of money limitations on accounting rules; the Tax Reform Act of 1986, which lowered [the] marginal tax rate to twenty eight percent [and] enlarged the standard deduction to $5,000 for married couples and increased [both the] individual exception to 2,000 dollars and also raised [the] earned income tax credit; [and] the Family Security Act of 1988, [which] extended the debt recompense stipulation, tightened eligibility for the dependent care credit and obliged taxpayer identification numbers for children” (“Major Enacted Tax Legislation, 1980-1989," 2010). While these are a few ingredients of the major tax legislation that was passed during the 1980s, they are significant pieces that lend themselves to the changes that were made regarding the IRS and its focus on tax collection.

During the 1990s, one of the major pieces to be enacted was the Internal Revenue Service Restructuring and Reform Act of 1998. In 1986, there was a reestablishment of the Internal Revenue Code. This particular one altered the core functioning associated with the Tax Reform Act of 1986. President Ronald Reagan and Congress sought to abridge the income tax code with this particular act. The IRC as it often known as was categorized into certain sections and subsections in accordance with the types of taxes that the American citizenry can be taxed on (i.e. gift taxes, payroll taxes, etc.) ("105th Congress Public Law 206," n.d.). The Internal Revenue Service Restructuring and Reform Act of 1998 effectively became law in July of that year. Highlights of the act were that it provided tax reprieve in the type of “long term capital gains holding period cutbacks, motivations for education, clauses in accordance with estate and gifting taxes, it expanded the privileges associated with tax and refund calculations correlated with interests, created a different set of criteria for IRS audits, expanded rights of levies, liens and seizures, and offers of installment contracts and negotiations. The IRS was also affected on an internal level with the passage of the act - specifically it created an oversight board [that] oversee[s] certain IRS plans and practices; a reorganization of the service into operation[al] units; new rules for making third party contracts; new rules for employees identifying themselves to taxpayers; and statutory notices of deficiency" ("13.1.2  Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98)," 2013). 

Beginning in the year 2000, the IRS would become more technological friendly to the American citizenry. In the year, 2003, the IRS collaborated with vendors who created tax software thereby making it easier for the general public to file online. As of the year, 2009 more than 3/4th of the population was noted as filing online (“IRS,” 2013). Much of the history of the IRS was contained within the 20th century. While there have been notable technological shifts in the ways in which the IRS operations, there has been a nominal amount of legislation passed since the year 2000. The foundational shift in the operations of the IRS was explicitly changed as a result of RRA98, which was passed in 1998.

Credits, Depreciation and Other Facets of Tax

Tax Credits

Over the years, the IRS has instituted certain credits that individuals can take to reduce their tax burdens. There are many different types of credits that individuals can take on their tax return such as the earned income credit, the child care credit, the child tax credit, social security credit and other credits. In general tax discourse, tax credits are typically expressed as the amount of money that reduces the entire tax owed. It has been reasoned that the federal government allows for tax credits in order to promote certain types of behavior among the populace.

Literature often categorizes tax credits as being refundable or nonrefundable. Refundable credits are typically utilized in a calculated manner, while nonrefundable credits are the preponderance of tax credits, that can decrease the quantity of federal income tax to nothing, but nothing will be refunded to the individual as a result of this type of credit. The types of tax credits include: the adoption tax credit; the child tax credit, the homebuyer credit, the making work pay credit, the American Opportunity credit, the earned income credit, and the credit for excess Social Security withholding, (“What Are Tax Credits?" 2013), among others. 

The adoption tax credit is a type of credit that has helped families in offsetting the often soaring cost of adoption. The credit was created in 1997 and it applied to all forms of adoption. It was made a permanent credit as of the year 2013, but is not regarded as a refundable credit. The credit does not benefit lower income families or those of a modest nature, which is why many organizations have sought to try and persuade Congress to change the ability to refund aspect of the credit. The IRS holds that the child tax credit as being a credit for "someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship and residence. To qualify, a child must have been under age 17 - age 16 or younger - at the end of 2010. The child tax credit has several limitations that include a ceiling associated with the credit if an individual's gross income is higher than a certain amount, as well as the fact that the credit is limited by the amount of income tax that is currently owed. If the amount of your child tax credit is greater than the amount of income tax you owe, you may be able to claim [what is known as] the Additional Child Tax Credit" (Whittenburg and Altus-Buller, 2005; "IRS," 2013). Another significant tax credit that is often talked about is the earned income tax credit. 

Throughout the years, the earned income tax credit has offered researchers and theorists an opportunity to explore the different effects that it has on tax policy and the roles of antipoverty. This particular credit was created in response to the negative income tax that happened during the 1960s and the 1970s. Researchers have examined that the NIT as it was often referred to, was the capstone of financial prospect as it was produced to thwart the effects of poverty at the time. President Lyndon Johnson, however, did not like the NIT and thus it was never adopted. The earned income tax credit at present is a type of respite credit that individuals who make a low income can take. It was established as a result of the Social Security tax. According to Hotz (2003), the way individuals receive the EITC is to file a regular tax return and then subsequently fill out what is known as "the six-line schedule EIC [whose sole purpose is to] gather information about qualifying children" (Hotz, 2003). This tax credit is also noted as being refundable therefore; the government pays out the credit whether the individual has any kind of liability associated with their federal taxes. The EITC also has qualifying rules per IRS rules.

The Child and Dependent Care Credit is a specific type of credit that as of March 2011 could be taken if an individual paid another to care for their child. The IRS lists ten things pertaining expressly to claiming the credit. These include: “the care has to have been for more than one person who is the age of 12 or younger; the individual who allowed for another to care for them has to be taken care of financially; the individual filing for the credit has to be either single, the head of their household, if they are married and filing jointly or a widow with a child that they can claim as a dependent. The credit has been stated to be anywhere up to 35 percent of the expenses that qualify for it. This of course is solely dependent upon the gross income after adjustments” ("IRS," 2013). New homebuyers have the opportunity to take advantage of certain credits as well.

The Internal Revenue Service allows individuals who have purchased a home for the first time to take a credit as well. The credit has been analyzed as an efficient way to reduce the bill associated with the taxes that are owed. As of January of 2011, the IRS stated that they refund the credit irrespective of whether the credit was more than, the actually tax that was owed or if no tax was owed. There are specific benefits that are outlined on the IRS website pertaining to first time homebuyers who are also military or work for the federal government. These benefits include the ability to take the credit for an additional year. The IRS lists detailed instructions on how to claim the credit. Governmental legislation extended the credit in the 2009 for those individuals who had the same home if they had purchased another home that they would now be living in. The Making Work Pay credit came as a result of the American Recovery and Reinvestment Act in 2009. The credit essentially allows for those who are working to “receive a tax credit of roughly $400. Most individuals who work benefited significantly from the credit; given the proviso that also allowed for those who were married and filing joint returns to receive up to about $800 in credit.” The IRS stipulates that in order for individuals to be able to take the credit on their tax return, they have to file a separate document pertaining to the return and send/file at the time they do their actual 1040 form ("IRS," 2013). In addition to allowing credits for individuals and businesses, the IRS also allows credits for students.

The credit for students is known as the American Opportunity Tax Credit. This was enacted as a part of the American Recovery and Reinvestment Act of 2009. The act stated that there would be an increase in the Hope Scholarship Credit, which was extended to 100% qualified tuition, course materials as well as fees. It also stated that a portion (40% specifically) of the credit would be refundable and that the credit itself was subject to what is known as “phase out for individuals who had an adjusted gross income more than $80,000 annually.” A phase out is defined as a type of reduction that occurs once a certain ceiling has been reached based on certain qualifications or requirements ("IRS," 2013).

Social Security was a program that was established in 1935. It is financed directly through the Federal Insurance Contributions Act. The program was endorsed under the Franklin Roosevelt Administration during his first term. The endeavor of Social Security was to constrict the seepages that were frequently explored to be menacing issues such as scarcity and redundancy in addition to old age. The program would establish unemployment benefits, assistance to disadvantaged families on a transitory basis, Medicare and Medicaid, and other programs (Attarian, 2001). Within the scope of tax credits, the IRS permits a credit known as the credit for excess Social Security withholding. 

The majority of employers generally withholds a certain portion of your wages and allocates that toward Social Security. Thus, this credit allows taxpayers to take a credit if they meet certain criteria. The amount of a person's wage that is subject to the Social Security tax fluctuates on an annual basis. The IRS puts the maximum amount on the 1040 instructions so that taxpayers understand how much they are in effect, due in credits. The common thought behind Social Security tax is that an employer usually takes close to six percent of the amount of money made on either a weekly, monthly or biweekly basis. This credit is considered refundable as it is directly applied to the Social Security program (Attarian, 2001). 

The United States Code

When examining federal tax law, it is essential to begin with the Internal Revenue Code. The code is referred to in Title 26. There are 11 sections of the Title that include information on income taxes, estate and gift taxes, employment taxes, certain excise taxes, taxes associated with alcohol and tobacco, procedure and administration, the Joint Committee on taxation, financing of presidential election campaigns, the trust fund code, the coal industry health benefits and group health plan requirements. The tax code was first compiled in the late 1930s and significant revisions were made in 1954 and in 1986. There is a vast amount of complexity with the tax code. There have been multiple efforts by Congress to use the tax code to stimulate economic growth and in social welfare matters. Congress has the ability to change the tax code as the individuals in both the House of Representatives and the Senate writes the laws associated with tax. Hence, the IRS is the sole dynamic that enforces and reinforces that tax code under Title 26. Filing and paying income taxes is considered a voluntary mechanism. This allows for individual autonomy and regulation when calculating what they owe. While the conceptualization of paying federal taxes is deemed voluntary, Title 26 does indicate that paying is not voluntary as much as some believe it to be. The IRS has the right to begin a process of monetary collection. As a result of the tax code, there is also a stipulation regarding individuals who deliberately exploit it. The IRS has the ability to come after them and perform investigations. History has recorded that the IRS does go after both corporations and individuals who evade taxes through faulty record keeping and filings that are deliberately inaccurate (Whittenburg and Altus-Buller, 2005; "TITLE 26—INTERNAL REVENUE CODE," n.d.). The tax code has been and continues to be heavily criticized. 

Prior to the many changes in the tax code, in "The Need for a New United States Code" by Richard S. Angell, he wrote that there is a significant need for the code to be more descriptive and defining. The criterion for the types of aspects noted in the code itself are not various and do not aid in assessing what needs to be assessed. He studied the current code in place and offered up suggestive advice for the code to be more evidentiary than it is (Angell, 1956). While the article was written in 1956, it still provides validation of the many distinctions associated with the code itself. In other words, the code has many diverse and extensive elements that individuals often find taxing and too intricate to read. If Angell's (1956) were put into place in today's time, individuals would not have such a difficult time understanding it. That does not necessarily mean that it is grave in its application of the law and the topic of the paper, but it does present the question as to why hasn't the code been changed to be easier to both read and understand? When examining the IRS and its many different facets, the concept of depreciation is often brought up. 

Depreciation

Depreciation is generally discussed in tax deduction discourse. The definition of a tax deduction is a certain item that can be applied to an individual's tax return in order for the amount of tax needed to be paid, to be lowered. Individuals can take deductions in accordance with the rules of the Internal Revenue Service. Deductions can be taken on everything from business expenses to vehicles. There are limits however per IRS rules that stipulate what can and cannot be deducted on a business and individual tax return (“IRS,” 2013). Within the context of depreciation, many businesses and individuals opt to take deductions in the form of depreciation. 

Depreciation allows the individual paying taxes to recover what they paid for a particular piece of property. This type of deduction is allowed to be taken for deterioration and wear and tear of property. Most types of property that are tangible fall into the category of being allowed to be deducted on a tax return such as buildings and equipment. Other items such as copyrights and patents can also be used as a deduction. The IRS contends that in order for a taxpayer to be able to take the depreciation deduction, they must adhere to certain requirements that include owning the property; the property must be able to have life left in its and the property should be either involved in business or producing a form of income in some form or fashion (“IRS,” 2013). The basic foundation of depreciation is that it can be utilized as a deduction on an individual or business tax return because the income taxes that are required are lowered for that year. 

American Understanding

The American understanding of the tax structure is a voluminous, yet multifaceted one. Individual taxpayers have come to ascertain that they must pay taxes and that certain credits and/or deductions are potentially due them because of this. The tax system, while profoundly debated in certain corners of economics, finance and law, was created to assist in revitalizing the country during one of the most perilous wars in American history. That is not to say that it does not need adjustments or additions, as nothing is perfect. The tax system though has been an effective recourse, by and large, for revenue generation and that was the optimum reason as to why it was created.

References

Andrew III, J. A. (2002). Power to Destroy: The Political Uses of the IRS from Kennedy to Nixon (1st ed.). Lanham, MD: Ivan R. Dee.

Angell, R. S. (1956, October). The Need for a New United States Code. The Liberty Quarterly, 26(4), 318-330.

Articles of Impeachment. (2013). Retrieved from http://watergate.info/impeachment/articles-of-impeachment

Attarian, J. (2001). The Roots of the Social Security Myth [Essay]. Retrieved from http://mises.org/pdf/asc/essays/attarian.pdf

Hotz, V. J. (2003). The Earned Income Tax Credit. In R. A. Moffitt (Ed.), Means-Tested Transfer Programs in the United States (pp. 141-197). Chicago, IL: University of Chicago Press.

IRS. (2013). Retrieved July 18, 2013, from IRS website: http://www.irs.gov/

Major Enacted Tax Legislation, 1980-1989. (2010). Retrieved from http://www.taxpolicycenter.org/legislation/1980.cfm

105th Congress Public Law 206. (n.d.). Retrieved from http://www.gpo.gov/fdsys/pkg/PLAW-105publ206/html/PLAW-105publ206.htm

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13.1.2 Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98). (2013). Retrieved July 19, 2013, from IRS website: http://www.irs.gov/irm/part13/irm_13-001-002.html

TITLE 26—INTERNAL REVENUE CODE [TITLE]. (n.d.). Retrieved from U.S. House of Representatives website: http://uscode.house.gov/pdf/1997/1997usc26.pdf

What Are Tax Credits? (2013). Retrieved July 19, 2013, from Intuit Inc. website: http://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/What-Are-Tax-Credits-/INF14393.html

Whittenburg, G. E., & Altus-Buller, M. (2005). Income Tax Fundamentals. Independence, KY: Thomson South-Western.