Internal Revenue Service – The History of the IRS
The beginnings of the Internal Revenue Service (IRS), originate back during the American Civil War. Now, it wasn’t because they were greedy men, it was because war is expensive, and the President and Congress needed some way to help pay for it.
The original conceit for raising money was to force an import tariff, property tax and an income tax on every person living in the United States. President Abraham Lincoln and Congress passed the Revenue Act of 1861, and thus created the first Federal income tax.
The Revenue Act of 1861, imposed a flat 3% tax on those who made over $800, but the main problem was, there wasn’t a proper mechanism of enforcement. The goal of the Revenue Act of 1861, was to raise about $50 million in revenue, but it failed to do so, because the enforcement of the Revenue Act was so poor.
The Civil War raged on and it still needed to be funded. The income tax portion of the 1861 bill was repealed, before any citizen actually participated. President Lincoln and the Congress of 1862, brought into existence a new bill called, The Revenue Act of 1862 and the bill was passed and signed into law on the 1st of July, 1862.
The Revenue Act of 1862, had several new provisions to try and rectify the problems encountered with the original 1861 bill. There were three key portions that would play an important role in doing so.
The first was, the establishment of the office of the Commissioner of Internal Revenue. The Commissioner was selected by the President and was in charge of all the formalities in the assessment and collection of taxes. These formalities included such things as, preparing instructions, forms, regulations, licenses and the distribution of such materials. It would be the Commissioners imperative to make certain that taxes were collected. This would be the basis, in which, the modern incarnation of the IRS is founded on.
The second was, the burdening of excise taxes on the majority of every day goods and services. Many luxury items like tobacco, liquor, jewelry, and pianos were all taxed. More common items also received the same treatment, such as, newspapers, patented medicines and a variety of services. In addition to taxing common day items and peoples, corporations, banks, insurance companies and other such institutions were required to report their earnings and receipts, to ensure they were all taxed appropriately.
The third, adjustment to the income tax provision created in the Revenue Act of 1861. While the original bill, had only a flat 3% tax on incomes over $800, the new Revenue Act of 1862, ushered in a new progressive income tax system. Residents who reported an annual income of less than $600 paid no taxes. Residents reporting an income within $600 – $10,000, paid a 3% tax and those earning more than $10,000, paid a 5% tax.
Perhaps the most important portion on the Revenue Act of 1862, was section 92, which stated, the taxes on incomes imposed will be paid on or before the 13th day of June, 1863, and every year after that until the year 1866. This essentially means that the taxes put on the residents on America, were only supposed to last for 4 years.
Even though section 92 existed in the Revenue Act of 1862, the bill continued to be active until 1972, as much of the public and Congress agreed, transitioning into peace and reconstruction would require public funding.
In 1894, Congress approved a new flat rate income tax, but it was struck down as unconstitutional by the Supreme Court. The Supreme Courts reasoning was that, the direct tax violated a provision in which direct taxes must be apportioned between the states on basis of population.
In 1906, President Theodore Roosevelt began a movement for tax reform. President William Taft continued it and pushed for a constitutional amendment for tax reform and it wasn’t until President Woodrow Wilson was elected, that the movement gained critical mass.
In 1913, due to political pressure to form a more powerful Federal government, the Constitution’s Sixteenth Amendment was ratified so that, Congress would have the power to impose and collect taxes on incomes, no matter what kind of sources they came from and without apportionment among the states and without having to do or operate around censuses or enumerations. This new amendment would supersede the Supreme Courts earlier ruling.
It would be in 1913, that the first 1040 forms were introduced and the permanent formation of the Bureau of Internal Revenue was established.
Just as the Revenue Act of 1861 and 1862, was enacted to help with the Civil War effort, the Revenue Act of 1918 was passed to help with World War I efforts.
In 1919, after the United States ratified the 18th Amendment, prohibiting alcohol, Congress also passed the Volstead Act. This would give the Commissioner of Internal Revenue the additional duty of enforcing Prohibition until 1933, when Prohibition was repealed.
In 1931, President Theodore Roosevelt, passed what he would call, “the greatest tax bill in American history.” It introduced such things as medical deductions, but also raised taxes for some Americans.
Up until 1952, the Bureau of Internal Revenue operated on a patronage appointment system. President Harry Truman created what he called his Reorganization Plan No. 1, that would remove the old patronage system and in its place put in a civil service system.
In 1953 President Eisenhower would put Truman’s plan into effect and change the name of the Bureau of Internal Revenue to what it is now known as today, the Internal Revenue Service. The only appointed positions still at the IRS currently are, the Commissioner and the Chief Counsel, whom are both selected the by the President and also confirmed by the Senate.
Since the 1950s to current day, there has been several more minor and some more significant reforms, in both in the operating structure of the organization and regulatory reform for the taxpayers. Perhaps the largest being the Tax Reform Act of 1986, which had over 300 provisions.