Auburn University at Montgomery
History of the IRS
The origin of the IRS can be traced back to the Civil War. In 1862, President Lincoln passed the Revenue Act to raise money to help the country pay for the Civil War’s expenses. It created a Commissioner of Internal Revenue and the Nation’s first income tax. The Revenue Act is an emergency and temporary wartime tax, and was repealed 10 years later, but the Wilson Tariff Act revived the income tax and the Bureau of the Internal Revenue created an income tax division in 1894. In 1895, the Supreme Court of the U.S decided that the new income tax was unconstitutional, because it was a direct tax and not apportioned among the states on the basis of population. Eventually, the income tax division was disbanded in 1895.
Until 1906, with the efforts of President Theodore Roosevelt and his successor William Howard Taft, the income tax act was reformed annually. In February 1913, the U.S government ratified the Sixteenth Amendment to the United States Constitution, which stated: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” (IRS, 2014 February 12)The congress levied a1% tax on a person’s net income above $3000 with a 6% surtax on the incomes of more than $500, 000(IRS, 2013 December 3). Also, the first form 1040 appeared in 1913.
In July of the next year, the First World War started in Europe. America entered the war later, and this caused the top bracket of the income tax to rise 77% to help finance the war effort during these years. After the First World War, the tax rate returned back to the normal rate.
After the World War One, in 1919, the U.S ratified the Eighteenth Amendment, which barred the manufacture, sale or transport of intoxicating drink. Congress passed the Volstead Act and the Commissioner of Internal Revenue was given the right to enforce the Act. In 1933, through prohibition was repealed. The Commissioner of Internal Revenue assumed the responsibility to levy the alcohol tax, and later a tobacco tax was also levied.
In 1939, World War Two begin and lasted until 1945. The “greatest tax bill in American history”---The Revenue Act of 1942 was passed during the war. It increased taxes and the started to levy different categories of tax as the government revenue increased to be able to afford the huge war expenses. This act first introduced the concept of medical and investment expenses deductions. The next year, the Congress passed the Current Tax Payment Act and started to require employers to withhold tax from their employees’ wages. In 1944, Congress passed the Individual Income Tax Act and created the standard deductions on Form 1040.
In 1953, President Eisenhower approved Truman’s plan of reformation and agreed to change the name of the division from the Bureau of Internal Revenue to the Internal Revenue Service. In the following 20 years, The IRS started to adjust the details about the tax levy. For example, they changed the filing due date for individual tax returns from March 15 to April 15. Also they began using technology to keep and organize records. In 1974, Congress passed the Employee Retirement and Income Security Act, which gave the IRS the right to adjust employees’ benefit plans.
In 1986, Congress passed the Tax Reform Act of 1986, whose purpose was to simplify the income tax code, broaden the tax base and eliminate the tax shelters. This Act was deemed the most significant piece of tax legislation in 30 years.
As time progressed, the development of technology accelerated. The IRS began to innovate. They allowed the public to file tax returns with electronic forms. The IRS dealt with tax software venders, but in response, the software venders needed to provide free electronic filling software for the public. The