The IRS and the Need for New Electronic Systems

From Bloomberg.com

The tax agency's embrace of IBM in the 1950s helped drive down audit rates. It's still depending on the same code.

Taxpayers who rushed to complete Form 1040 by Tuesday’s deadline can take some comfort from the fact that they’re exceedingly unlikely to get a follow-up visit from the Internal Revenue Service. Over the past 50 years, audit rates have fallen pretty steadily. Today, the average taxpayer has one chance in 200 of getting audited.

The downward trend has led to concerns that the IRS needs more funding to do its job correctly and competently. That’s true, but before Congress throws money at hiring more auditors, it should take aim at the agency’s antiquated computer system. It has helped drive audit rates to all-time lows, but it desperately needs an upgrade.

After the creation of the first permanent income tax in 1913, IRS agents would scrutinize returns by hand, laboriously poring over the numbers, checking the math, and flagging returns that looked suspect. This was insanely time-consuming. It also led to a very high audit rate. One taxpayer in 10 was subjected to a “field examination” from IRS personnel, according to one estimate from 1926.

This was possible because so few taxpayers actually filed Form 1040; most didn’t because their income fell well below the threshold. As government spending increased from the late 1930s onward, more and more Americans found themselves paying income tax. That trend only intensified in the postwar years.

And therein lay a problem: How could IRS agents possibly check so many tax returns, much less run audits on this scale? As audit rates plummeted in the late 1940s, concerns over lost revenue fueled a search for solutions. Conveniently, a means of fixing the problem appeared at that precise moment in history: the computer.

The first mainframe computers may look like dinosaurs now, but they offered a way of reviewing tax returns on a mass scale. In the late 1950s, the IRS began using computers to correlate and compare the information submitted by taxpayers on their 1040 forms with the income figures supplied by employers. In 1959, the Washington Post, capturing the mood of the moment, warned of “brain machines” that would soon audit taxpayer returns; the Wall Street Journal called them “robot revenuers.”

By the early 1960s, the IRS had amassed a staggering amount of computing power in the service of compiling, collating, and auditing returns. The stars of this brave new world consisted of a number of IBM mainframe machines, many of which resided in a nondescript brick building in Martinsburg, West Virginia. This was the heart -- or brain -- of the new order. And it triggered serious warnings that the jig was up.

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