Have you ever wondered when and how the IRS got its start? I did and so I did a little research.
The IRS traces its origins back to the Civil War. In 1862, President Lincoln signed the Revenue Act of 1862 into effect. This law was intended to help pay for war expenses by establishing a Commissioner of Internal Revenue and the country’s first income tax. It imposed a 3% tax on income between $600 and $10,000 and a 5% tax on income over $10,000. In 1872, after much public disapproval and resistance, Congress allowed the law to expire and so the income tax was temporarily eliminated. According to the IRS website, from 1868 until 1913, 90% of all revenue came from liquor, beer, wine, and tobacco taxes.
In 1894, Congress attempted to reintroduce the income tax by enacting the Wilson Tariff Act and creating an income tax department within the Bureau of Internal Revenue. Congress’s success was short-lived as the Supreme Court ruled the new income tax law unconstitutional one year later in 1895. It reasoned that the income tax constituted a direct tax and, therefore, needed to be imposed in proportion to each state’s population, which it was not (i.e. apportioned). Following the Supreme Court’s decision, the income tax division of the Bureau of Internal Revenue ceased to exist.
In 1909, President Taft encouraged Congress to propose a constitutional amendment that would effectively override the Supreme Court’s decision. The amendment would permit the government to impose an income tax without apportionment. In 1913, the 16th Amendment was adopted, which reads, “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 consensus or enumeration.” Shortly thereafter, Congress enacted a 1% tax on net personal income over $3,000 with a surtax of 6% on income over $500,000. The first Form 1040 was created.
During World War I, the top income tax rate increased to 77% in 1918. After the war, it fell to 24% in 1929, but increased again during the Depression. During World War II, payroll withholding, quarterly tax payments, and the standard deductions were implemented. During the 1950s, the Bureau of Internal Revenue was restructured to employ professional employees and its name was changed to the Internal Revenue Service. In 1998, Congress passed the IRS Restructuring and Reform Act of 1998, which caused the most wide-ranging restructuring since the mid-century. The IRS was split into four divisions, each focused on different taxpayer needs.