Internal Revenue Service
The Internal Revenue Service is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax law. It is an agency of the Department of the Treasury and led by the commissioner of Internal Revenue, who is appointed to a five-year term by the president of the United States. The duties of the IRS include providing tax assistance to taxpayers; pursuing and resolving instances of erroneous or fraudulent tax filings; and overseeing various benefits programs, including the Affordable Care Act.
The IRS originates from the Office of Commissioner of Internal Revenue, a federal office created in 1862 to assess the nation's first income tax to fund the American Civil War. The temporary measure funded over a fifth of the Union's war expenses before being allowed to expire a decade later. In 1913, the Sixteenth Amendment to the U.S. Constitution was ratified, authorizing Congress to impose a tax on income and leading to the creation of the Bureau of Internal Revenue. In 1953, the agency was renamed the Internal Revenue Service, and in subsequent decades underwent numerous reforms and reorganizations, most significantly in the 1990s.
Since its establishment, the IRS has been largely responsible for collecting the revenue needed to fund the United States federal government, with the rest being funded either through the U.S. Customs and Border Protection or the Federal Reserve. The IRS faces periodic controversy and opposition over its methods, constitutionality, and the principle of taxation generally. In recent years, the agency has struggled with budget cuts, under-staffed workforce, outdated technology and reduced morale, all of which collectively result in the inappropriate enforcement of tax laws against high earners and large corporations, reduced tax collection, rising deficits, lower spending on important priorities, or further tax increases on compliant taxpayers to compensate for lost revenue. Research shows that IRS audits raise revenue, both through the initial audit and indirectly by deterring future tax cheating. According to a 2024 study, "an additional $1 spent auditing taxpayers above the 90th income percentile yields more than $12 in revenue, while audits of below-median income taxpayers yield $5."
it saw a 15 percent reduction in its workforce, including a decline of more than 25 percent of its enforcement staff. During the 2023 fiscal year, the agency processed more than 271.4 million tax returns including more than 163.1 million individual income tax returns. For FY 2023, the IRS collected approximately $4.7 trillion, which is approximately 96 percent of the operational funding for the federal government; funding widely throughout to different aspects of American society, from education and healthcare to national defense and infrastructure.
History
American Civil War (1861–1865)
In July 1862, during the American Civil War, President Abraham Lincoln and Congress passed the Revenue Act of 1862, creating the office of commissioner of internal revenue and enacting a temporary income tax to pay war expenses.The Revenue Act of 1862 was passed as an emergency and temporary war-time tax. It copied a relatively new British system of income taxation, instead of trade and property taxation. The first income tax was passed in 1862:
- The initial rate was 3% on income over $800, which exempted most wage-earners.
- In 1862 the rate was 3% on income between $600 and $10,000, and 5% on income over $10,000.
Post Civil War, Reconstruction, and popular tax reform (1866–1913)
After the Civil War, Reconstruction, railroads, and transforming the North and South war machines towards peacetime required public funding. However, in 1872, seven years after the war, lawmakers allowed the temporary Civil War income tax to expire.Income taxes evolved, but in 1894 the Supreme Court declared the Income Tax of 1894 unconstitutional in Pollock v. Farmers' Loan & Trust Co., a decision that contradicted Hylton v. United States. The federal government scrambled to raise money.
In 1906, with the election of President Theodore Roosevelt, and later his successor William Howard Taft, the United States saw a populist movement for tax reform. This movement culminated during then-candidate Woodrow Wilson's election of 1912 and in February 1913, the ratification of the Sixteenth Amendment to the United States Constitution:
This granted Congress the specific power to impose an income tax without regard to apportionment among the states by population. By February 1913, 36 states had ratified the change to the Constitution. It was further ratified by six more states by March. Of the 48 states at the time, 42 ratified it. Connecticut, Rhode Island, and Utah rejected the amendment; Pennsylvania, Virginia, and Florida did not take up the issue.
Post 16th Amendment (1913–present)
Though the constitutional amendment to allow the federal government to collect income taxes was proposed by President Taft in 1909, the 16th Amendment was not ratified until 1913, just before the start of the First World War. That same year, the first edition of the 1040 form was introduced. A copy of the 1913 form can be viewed online and shows that only those with annual incomes of at least $3,000 were instructed to file an income tax return.In the first year after the ratification of the 16th Amendment, no taxes were collected. Instead, taxpayers simply completed the form and the IRS checked the form for accuracy. The IRS's workload jumped by ten-fold, triggering a massive restructuring. Professional tax collectors began to replace a system of "patronage" appointments. The IRS doubled its staff but was still processing 1917 returns in 1919.
Income tax raised much of the money required to finance the war effort; in 1918 a new Revenue Act established a top tax rate of 77%.
In 1919 the IRS was tasked with enforcement of laws relating to prohibition of alcohol sales and manufacture; this was transferred to the jurisdiction of the Department of Justice in 1930. After repeal in 1933, the IRS resumed collection of taxes on beverage alcohol. The alcohol, tobacco and firearms activities of the bureau were segregated into the Bureau of Alcohol, Tobacco, Firearms and Explosives in 1972.
A new tax act was passed in 1942 as the United States entered the Second World War. This act included a special wartime surcharge. The number of American citizens who paid income tax increased from about four million in 1939 to more than forty-two million by 1945.
In 1952, after a series of politically damaging incidents of tax evasion and bribery among its own employees, the Bureau of Internal Revenue was reorganized under a plan put forward by President Truman, with the approval of Congress. The reorganization decentralized many functions to new district offices which replaced the collector's offices. Civil service directors were appointed to replace the politically appointed collectors of the Bureau of Internal Revenue. Not long after, the bureau was renamed the Internal Revenue Service.
In 1954 the filing deadline was moved from March 15 to April 15.
The Tax Reform Act of 1969 created the Alternative Minimum Tax.
In 1969, Richard Nixon directed the IRS to audit his political opponents, as well as opponents of US involvement in the Vietnam War. The IRS's Activist Organizations Committee, later renamed the Special Services Staff, created a target list of more than 1,000 organizations and 4,000 individuals. A White House memo said that "What we cannot do in a courtroom via criminal prosecutions to curtail the activities of some of these groups, IRS can do by administrative action." The then commissioner Randolph W. Thrower resisted Nixon's request to audit his political enemies and was later fired. Thrower's successor, Johnnie Mac Walters chose to lock the list in his safe and deliver it to the Congress after the Watergate Scandal broke out.
By 1986, limited electronic filing of tax returns was possible.
The Internal Revenue Service Restructuring and Reform Act of 1998 changed the organization from geographically oriented to an organization based on four operating divisions. It added "10 deadly sins" that require immediate termination of IRS employees found to have committed certain misconduct.
Enforcement activities declined. The IRS Oversight Board noted that the decline in enforcement activities has "rais questions about tax compliance and fairness to the vast majority of citizens who pay all their taxes". In June 2012, the IRS Oversight Board recommended to Treasury a fiscal year 2014 budget of $13.074billion for the Internal Revenue Service.
On December 20, 2017, Congress passed the Tax Cuts and Jobs Act of 2017. It was signed into law by President Trump on December 22, 2017.
In the three decades since 1991, the IRS had a substantial decrease in the number of employees per million residents, decreasing from 451 to 237. A decrease of.
Presidential tax returns (1973)
From the 1950s through the 1970s, the IRS began using technology such as microfilm to keep and organize records. Access to this information proved controversial, when President Richard Nixon's tax returns were leaked to the public. His tax advisor, Edward L. Morgan, became the fourth law-enforcement official to be charged with a crime during Watergate.John Requard Jr., accused of leaking the Nixon tax returns, collected delinquent taxes in the slums of Washington. In his words: "We went after people for nickels and dimes, many of them poor and in many cases illiterate people who didn't know how to deal with a government agency." Requard admitted that he saw the returns but denied that he leaked them.
Reporter Jack White of The Providence Journal won the Pulitzer Prize for reporting about Nixon's tax returns. Nixon, with a salary of $200,000, paid $792.81 in federal income tax in 1970 and $878.03 in 1971, with deductions of $571,000 for donating "vice-presidential papers". This was one of the reasons for his famous statement: "Well, I'm not a crook. I've earned everything I've got."
So controversial was this leak, that most later US presidents released their tax returns. These returns can be found online at the Tax History Project.