History of the Internal Revenue Service

Believe it or not, the Internal Revenue Service did not come over to this country on the Mayflower with the Pilgrims. The agency’s history goes back to 1862, when Congress and President Lincoln created the position of the Commissioner of the Internal Revenue and enacted the first income tax to pay for the Civil War. After that tax was repealed on the ground that it was a direct tax and not apportioned among the states on the basis of population, Congress revived the income tax in 1894, but the Supreme Court determined that it was unconstitutional.

At the beginning of the twentieth century, the Sixteenth Amendment to the Constitution was ratified by the states. Thereafter, Congress had the authority to enact an income tax, which imposed a one percent tax on net personal incomes above $3,000 with a six percent surtax on income of more than $500,000.

Increased revenues were needed to finance World War I, and the top income tax rate rose to 77 percent in 1918. The rate sharply decreased after the war to 24 percent, but it rose again during the Depression.

During the time of prohibition, the Commissioner of the Internal Revenue had the primary responsibility for its enforcement. Eleven years later, this enforcement responsibility was transferred to the Department of Justice. But after the repeal of prohibition, the IRS again assumed responsibility for the taxation of alcohol and for administering the National Firearms Act. Later, the IRS began to enforce the tobacco tax.

The Revenue Act of 1942 increased both taxes and the number of individuals subject to the income tax. It also created deductions for medical and investment expenses. A year later, Congress enacted a law requiring income tax withholding and estimated tax payments.

The agency was reorganized in the 1950s. It replaced its original patronage system with the current system of career professional employees. After this reorganization, the only IRS employees selected by the President and confirmed by the Senate are the IRS Commissioner and Chief Counsel. At that time, the agency changed its name from the Bureau of the Internal Revenue to the Internal Revenue Service in order to emphasize service to taxpayers.

The computer age reached the IRS in 1961 with the dedication of the National Computer Center in West Virginia, but it was not until 1986 that limited electronic filing began.

In 1998, the most comprehensive reorganization and modernization of the IRS occurred. Under the IRS Restructuring and Reform Act of 1998, the IRS ended its geographic-based structure and was reorganized into the following four major operating divisions:

• The Wage and Investment Division, which serves the millions of taxpayers who file individual and joint tax returns


• The Small Business/Self-Employed Division


• The Large and Mid-Size Business Division, which handles corporations with assets of more than $10 million


• The Tax-Exempt and Government Entities Division, which serves employee-benefit plans, tax-exempt organizations such as charities and social welfare groups, and governmental entities

In addition to the structural reorganization, the 1998 law greatly expanded the rights of taxpayers by establishing a Taxpayer Advocate Service (TAP). The TAP is an independent voice within the IRS that acts on behalf of the taxpayer. It tries to help taxpayers with problems that have not been resolved through normal channels. In addition, each state has a local taxpayer advocate who reports directly to the National Taxpayer Advocate.