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History of the Internal Revenue Service

President Lincoln and Congress, in 1862, created the Commissioner of Internal Revenue and enacted an income tax to pay Civil War expenses.

The income tax was repealed 10 years later. Congress revived the income tax in 1894, but the Supreme Court ruled it unconstitutional the following year.

In 1913, the states ratified the 16th Amendment, which gave Congress the authority to enact an income tax. That same year, the first Form 1040 appeared after Congress levied a 1% tax on net personal incomes above $3,000 with a 6% surtax on incomes of more than $500,000. As the nation sought greater revenue to finance the World War I effort, the top rate of the income tax rose to 77% in 1918. It dropped sharply in the post-war years, down to 24% in 1929, and rose again during the Depression. During World War II, Congress introduced payroll withholding and quarterly tax payments.


President Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses. The measure created a Commissioner of Internal Revenue and the nation's first income tax. It levied a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000.

Heeding public opposition to the income tax, Congress cut the tax rate. From 1868 until 1913, 90 percent of all revenue came from taxes on liquor, beer, wine and tobacco.

Income tax repealed.

The Wilson Tariff Act revived the income tax and an income tax division within the Bureau of Internal Revenue was created.

Supreme Court ruled the new income tax unconstitutional on the grounds that it was a direct tax and not apportioned among the states on the basis of population. The income tax division was disbanded.

President Taft recommended Congress propose a constitutional amendment that would give the government the power to tax incomes without apportioning the burden among the states in line with population. Congress also levied a 1 percent tax on net corporate incomes of more than $5,000.

As the threat of war loomed, Wyoming became the 36th and last state needed to ratify the 16th Amendment. The amendment stated, "Congress shall have the 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." Later, Congress adopted a 1 percent tax on net personal income of more than $3,000 with a surtax of 6 percent on incomes of more than $500,000. It also repealed the 1909 corporate income tax. The first Form 1040 was introduced.

The Revenue Act of 1918 raised even greater sums for the World War I effort. It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77 percent.

The states ratified the 18th Amendment, barring the manufacture, sale or transport of intoxicating beverages. Congress passed the Volstead Act, which gave the Commissioner of Internal Revenue the primary responsibility for enforcement of Prohibition. Eleven years later, the Department of Justice assumed primary prohibition enforcement duties.

The IRS Intelligence Unit used an undercover agent to gather evidence against gangster Al Capone. Capone was convicted of tax evasion and sentenced to 11 years.

Prohibition repealed. IRS again assumed responsibility for alcohol taxation the following year and for administering the National Firearms Act. Later, tobacco tax enforcement was added.

The Revenue Act of 1942, hailed by President Roosevelt as "the greatest tax bill in American history," passed Congress. It increased taxes and the number of Americans subject to the income tax. It also created deductions for medical and investment expenses.

Congress adopted the Current Tax Payment Act, which required employers to withhold taxes from employees' wages and remit them quarterly.

Congress passed the Individual Income Tax Act, which created the standard deductions on Form 1040.

President Truman proposed his Reorganization Plan No. 1, which replaced the patronage system at the IRS with a career civil service system. It also decentralized service to taxpayers and sought to restore public confidence in the agency.

President Eisenhower endorsed Truman's reorganization plan and changed the name of the agency to the Internal Revenue Service from the Bureau of Internal Revenue.

The filing deadline for individual tax returns changed to April 15 from March 15.

Computer age began at IRS with the dedication of the National Computer Center at Martinsburg, W.Va.

IRS instituted first toll-free telephone site.

The Alcohol, Tobacco and Firearms Division separated from the IRS to become the independent Bureau of Alcohol, Tobacco and Firearms.

Congress passed the Employee Retirement and Income Security Act, which gave regulatory responsibilities for employee benefit plans to the IRS.

Limited electronic filing began.

President Reagan signed the Tax Reform Act, the most significant piece of tax legislation in 30 years. It contained 300 provisions and took three years to implement. The act codified the federal tax laws for the third time since the Revenue Act of 1918.

Taxpayers who owed money were allowed to file returns electronically.

Congress passed the IRS Restructuring and Reform Act, which expanded taxpayer rights and called for reorganizing the agency into four operating divisions aligned according to taxpayer needs.

IRS enacted reforms, ending its geographic-based structure and instituting four major operating divisions: Wage and Investment Income, Small Business/Self-Employed, Large and Mid-Size Business and Tax Exempt and Government Entities. It was the most sweeping change at the IRS since the 1953 reorganization.

IRS administered a mid-year tax credit program called the Advance Tax Credit Payment. Electronic filing reaches an all-time high, 40.2 million tax returns or more than 30 percent of all returns.

At more than 115,000 people, the IRS has more employees than Microsoft and Intel combined! On top of this, they're actively recruiting and hiring more!

In the 1950s, the agency was reorganized
to replace the patronage system with career, professional employees. Now, only the IRS Commissioner and Chief Counsel are selected by the President and confirmed by the Senate. The Bureau of Internal Revenue name also was changed to the Internal Revenue Service to emphasize service to taxpayers.

The IRS Restructuring and Reform Act of 1998 prompted the most comprehensive reorganization and modernization of IRS in nearly half a century.
The law resulted in the IRS reorganizing itself into four major operating divisions, aligned by types of taxpayers:

The Wage and Investment Division, serving approximately 116 million taxpayers who file individual and joint tax returns. The Small Business/Self-Employed Division, serving approximately 45 million small businesses and self-employed taxpayers. The Large and Mid-Size Business Division, serving corporations with assets of more than $10 million. The Tax-Exempt and Government Entities Division, serving employee benefit plans, tax-exempt organizations, such as charities and social welfare groups, and governmental entities. Other divisions include Appeals, Communications and Liaison and Criminal Investigation. The Office of Chief Counsel provides legal services to the agency. The 1998 law also greatly expanded taxpayers' rights and established a Taxpayer Advocate Service as an independent voice inside the agency on behalf of the taxpayer. The Taxpayer Advocate Service seeks to assist with problems that have not been resolved through normal channels. Each state also has a local taxpayer advocate who reports directly to the National Taxpayer Advocate. In the 2003 fiscal year, the IRS had almost 100,000 employees (full-time equivalent) and a budget of $9.9 billion.
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