Internal Revenue Service (IRS)

Predecessor Institutions to the IRS

On August 5, 1861, the Revenue Act of 1861 imposed an apportioned real property tax, and the first federal income tax, to finance the prosecution of the Civil War. The income tax portion was a flat tax, but the federal government did not establish the infrastructure to collect it before July 1, 1862, when the Revenue Act of 1862 superseded this act with a progressive scheme of taxation and withholding requirements for employers. The 1862 act also created the Bureau of Internal Revenue (BIR), a federal agency for collecting the tax, under the leadership of a commissioner of internal revenue. Due to the unpopularity of the tax, and changing budgetary needs of the government, this legislation underwent almost annual amendments through 1870, and in 1872, Congress allowed it to expire.

In 1894, Congress passed the Wilson Tariff Act, which reinstated the income tax, and created a dedicated income tax division within the BIR. However, 1 year later, in Pollock v. Farmers'Loan & Trust Co., the Supreme Court struck down the new tax as unconstitutional because it was a direct tax and not proportionate to the respective populations of the states. With the tax defunct, the BIR dismantled the income tax division.

In 1909, President Taft promoted a constitutional amendment to authorize the federal government to impose income taxes directly, without the sort of apportionment requirement that the Supreme Court had raised in its ruling in the Pollock case. That same year, Congress enacted a 1% tax on net corporate incomes exceeding $5,000. With Wyoming's ratification of this 16th Amendment to the Constitution in 1913, Congress acquired the power to enact a broadbased income tax. It repealed the corporate income tax of 1909, and it imposed an income tax on natural persons of 1% of net personal income exceeding $3,000, with a surtax of 6% for incomes greater than $500,000. That year marked the publication of the first Form 1040, a tax form for individuals for reporting their income and calculating and remitting this tax.

The Revenue Act of 1918 codified and systematized the tax laws then in force and created a progressive income tax scheme with a marginal rate of 77% for the BIR to administer, largely to finance the nation's effort in World War I.

The following year, a sufficient number of states ratified the 18th Amendment, rendering illegal the manufacture, sale, transportation, importation, or exportation of alcoholic beverages, and this began the Prohibition era. The responsibility of enforcing Prohibition fell on the commissioner of internal revenue, pursuant to the Volstead Act, which Congress passed in 1919. It would be more than one decade before the Department of Justice would assume this duty. In the meantime, the BIR participated in law enforcement activities, including an undercover operation through its intelligence unit that gathered evidence for the eventual conviction of gangster Al Capone.

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