A Brief History of the IRS
As a tax preparer it’s good to know how the Internal Revenue Service came into being. Here’s a brief history of the IRS.
Bureau of Internal Revenue
The IRS has a long history, starting in 1862 when President Lincoln joined Congress to create the office of Commissioner of Internal Revenue. This was accomplished to enact an income tax that would fund the Civil War. While there were other organizations designed to collect duties and tariffs, the Internal Revenue Service, then called the Bureau of Internal Revenue, was instituted to collect income tax. Ten years after its creation, the income tax was deemed unconstitutional and the bureau was disbanded.
The Significance of the 16th Amendment
In 1894 Congress tried to reinstitute income tax, but the following year it was again deemed unconstitutional in the Pollock v. Farmers’ Loan & Trust Co. ruling because the direct taxes had not been allocated according to population among the states.
In order to remedy this problem Congress created the 16th amendment and in 1913 Wyoming ratified the amendment, providing the three-quarter majority of states required to amend the Constitution. That same year the first Form 1040 was released.
War Efforts Funded by Income Tax
To fund World War I, income tax rose to 77%. Following the war and preceding the Great Depression, income tax dropped to 24%. However, during World War II Congress introduced payroll withholdings and quarterly payment of income tax.
Renaming and Reorganizing
In the 1950s the organization’s name changed to the Internal Revenue Service. Career and professional employees were hired in place of the patronage system which had appointed individuals to select positions. Even today, only the IRS commissioner and chief counsel are appointed by the president and approved by the Senate.
Other Key Dates
1972 - The Bureau of Alcohol, Firearms and Tobacco separated from the IRS and became an independent bureau.
1974 – Congress passed the Employee Retirement and Income Security Act, which made the IRS responsible for regulating employee benefit plans.
1986 - Electronic filing, in a limited capacity, began.
1986 – The Tax Reform Act was signed by President Reagan and became the most significant piece of tax legislation in 30 years and took three years to implement. It also marked the third of the federal laws codified in the history of the IRS.
1992 – Taxpayers owing delinquent payments were allowed to file electronically.
1998 – The IRS Restructuring and Reform Act of 1998 encouraged the most extensive reorganization of the IRS since the 1950s. As a result, the IRS developed four major divisions including the Wage and Investment Division, the Small Business/Self-Employment Division, the Large and Mid-Size Business Division, and the Tax-Exempt and Government Entities Division. They also instituted the Taxpayer Advocate Service to represent the needs and concerns of the taxpayer.
While that’s a condensed history of the IRS, it should give you a better idea of the organization’s evolution and overall purpose.
References
“Brief History of IRS.” Internal Revenue Service
“Historical Highlights of the IRS.” 20 September 2007. Public Accounting, Tax & Financial Services since 1957.
“Internal Revenue Service.” Wikipedia.
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