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Home > Financial Resource Center Home > Tax Planning > A Brief History of the IRS and U.S. Income Tax

A Brief History of the IRS and U.S. Income Tax

The Internal Revenue Service (IRS) and the income tax seem like monolithic institutions that always have been and always will be around. That, however, is not quite accurate. What we know today as the IRS didn’t exist in any form until 1913. In fact, prior to 1862, there was no income tax in the United States. So how did a country partially founded on rebellion against taxation come to embrace the practice? Here’s the scoop.

The Civil War

At the beginning of the Civil War, the Union was struggling economically. To fund the war without imposing an income tax, the government tried Treasury notes and war bond issues. Unfortunately, the issue of Treasury notes was a complete failure, and sales of war bonds didn’t gain much traction until later years of the war. A little more than a year after the war started and desperately in need of funds, then-President Abraham Lincoln signed the Revenue Act of 1862. The Act instituted the nation’s first income tax and created the Office of the Commissioner of Internal Revenue.

After the Civil War, public opposition forced the repeal of the income tax in 1872. It reappeared briefly in 1894 before again being disbanded in 1895 with the outcome of Pollock v. Farmer’s Loan & Trust Co. The ruling deemed certain types of income tax unconstitutional.

The 16th Amendment

In 1909 then-President William Howard Taft recommended that Congress adopt a constitutional amendment that would overturn the Pollock decision and establish the Bureau of Internal Revenue. Among the rationale he cited to support an income tax was the imposition of oversight on large corporations. He reasoned that, while corporations did a great deal of good, it would be beneficial if they could be held accountable for their transactions by the government, stockholders and the public.

As Congress debated this amendment, they passed the Corporation Excise Tax Act of 1909, which levied a 1 percent income tax on corporate incomes above $5,000.

Revenue Act of 1913

Until 1913, the government’s primary revenue source was through tariffs. Protectionist policy had set tariff rates up to 40 percent¾a significant burden on businesses and consumers.

In October 1913, after the 16th Amendment had been adopted in February, then-President Woodrow Wilson signed the Revenue Act of 1913. Tariff rates were lowered to 25 percent. To make up the difference, a small income tax was imposed. Incomes up to $20,000 were taxed at 1 percent, with an additional 1 percent added again at $50,000, $75,000, $100,000, $250,000 and $500,000. Filers would utilize the first Form 1040 to declare the various sources of their income.

Reorganization

In 1952, then-President Harry Truman proposed a comprehensive reorganization of the Bureau of Internal Revenue. The country was experiencing explosive growth, as was the Bureau. Between 1940 and 1951, the number of tax returns processed each year grew from 19 million to 82 million! To increase efficiency, as well as public confidence in the organization, Bureau positions would no longer be filled through the patronage system. Instead, career professionals would be responsible for local tax administration. The proposed reorganization was endorsed the following year by then-President Dwight Eisenhower and adopted. The Bureau was renamed to the Internal Revenue Service to reflect its dedication to serving taxpayers.

In 1986, the IRS began to accept returns electronically. Today, in the ubiquity of the digital age, everyone is encouraged to file online. In fact, most taxpayers can do so for free! The IRS continues to make progress toward a more efficient and taxpayer-friendly system.

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