The Internal Revenue Service History

March 20, 2020

Many people assume that the Internal Revenue Service has been around forever. Our country has always collected taxes, and so it seems to follow that we’ve always had some type of enforcement agency. But this isn’t the case. In fact, surprising though it may be, the IRS is just a bit over 100 years old. And it wasn’t until the 1950s that the IRS took on the moniker which it wears today.

Tax Code Enforcement

The IRS is the organization which enforces the provisions of our tax code. If a taxpayer incurs a liability to the federal government, the IRS is in charge of making sure that payment is collected. The IRS has a team of lawyers, consultants and other professionals who keep things running. Because it enforces the tax code, the IRS has the burden of knowing the code inside and out. As the tax code has increased in complexity, this has led the IRS to hire more and more people. The IRS is now far larger than its original size back when it began in the early 20th century. 

An Overview

In this post, we will sketch a brief history of the IRS. This will give our readers a sense of how taxation has developed in our nation. When the IRS was first created, the tax code was comparatively much simpler than it is today. We will start our history a bit before the creation of the IRS, back before we had a federal income tax system. 

The Wilson-Gorman Tariff Act

Prior to the 20th century, the United States did not have a federal income tax system. Our federal government relied on other kinds of taxes to fund its programs. The federal government relied on tariffs, poll taxes, various kinds of excise taxes and so forth. But there was no nationwide income tax system. The federal government first tried to change this near the end of the 19th century with a law called the Wilson-Gorman Tariff Act. This act reduced tariffs, but to compensate, it imposed a federal income tax of 2% on income above a certain level.

Wilson-Gorman Held Unconstitutional

This income tax was promptly struck down as unconstitutional by the United States Supreme Court in a landmark court decision. This court decision determined that a tax on income derived from property, i.e. stocks, bonds, real estate, intellectual property, etc., was a “direct tax” and therefore needed to be apportioned. And because the tariff act did not apportion the income derived from property, the income tax provision in the act failed.  

The 16th Amendment

To overcome this court decision, Congress passed the Sixteenth Amendment. This amendment removed the apportionment requirement. The federal government was then free to implement a nationwide income tax. This is precisely what happened. The Congress passed the Revenue Act of 1913. This act created the layered, progressive income tax system which is so familiar to us today. Immediately after passage of this act, enforcement of the personal income tax laws became necessary. Thus, the first incarnation of the Internal Revenue Service. 

The First 1040 Up to the Withholding Requirement 

The very first Form 1040 was introduced right alongside the creation of the Internal Revenue Service in 1913. At first, the income tax had a top tax bracket of only 7%, and this affected a tiny slice of the population. In fact, only a very small percentage of the population paid any federal income tax in the early years of the system. The purpose of the income tax was to balance out the reduction in revenues from the adjusted tariff rates. There was also a concern about extremely wealthy citizens paying more of a share toward public goods.

Impact of WW I

Matters soon changed. The rate structure was radically altered during the First World War. The top rate skyrocketed, and remained much higher than its original low level, even after the war was over. The year 1942 was another important year in the history of U.S. taxation. In that year, President Franklin Roosevelt passed the Revenue Act of 1942 which dramatically increased the number of citizens subject to income tax. Then, in 1943, Congress created withholding requirements for employers. Employers now had to remit to the Department of the Treasury tax payments on a quarterly basis for employee wages. This was a monumentally significant development. 

The April 15th Deadline Up to the Present 

In 1954, at the height of the Cold War, another important event took place: April 15th became the individual filing deadline. It remains the same up to the present time. There have been quite a few other significant events in the history of the IRS since then. In 1986, for example, a crude form of electronic filing began. This was also the year that President Ronald Reagan signed the Tax Reform Act. This is arguably the most important piece of tax legislation in over three decades. This act codified all existing federal tax laws and contained 300 provisions. In 1992, taxpayers owing money to the IRS could file electronically. The IRS has continued to implement technological changes in step with the wider society. Now, most IRS returns electronic filing is used for most returns. And a large percentage of IRS correspondence takes place online as well.  

Call Us to Discuss More

The IRS has come a long, long way since its beginnings. The organization that started off as a small government agency has grown into a massive entity. The IRS employs a great number of people and collects tax in the trillions of dollars every year. Here at Mackay, Caswell & Callahan, P.C., we understand how the IRS operates. Often, our clients owe back taxes. That brings us into constant contact with the IRS. So we know that negotiating with the IRS can feel overwhelming. If you are struggling with back tax debt, reach out to one of our top New York City tax attorneys today. 

Image credit: GotCredit 

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