Since America’s inception, the Internal Revenue Service has evolved from a feeble, unorganized system, to a powerful electronic-based entity. When viewing a government’s functions, a fundamental element of stability is funding.
All governments in the Unites States must tax citizens to provide public goods, that are necessary for progressing and maintaining a society. Although the history of the tax system in America stems back before our Revolution, the development of the Internal Revenue Service commenced nearly a century afterwards. During the Revolutionary and Civil War periods America’s tax system was fragmented; the levying responsibility was widely left up to individual states. The absence of the Internal Revenue Service created a severe disconnect between streams of revenue and the federal government.
During the U.S. Civil War, the Union was struggling with finances due to mounting war costs. To alleviate the financial burden, President Abraham Lincoln and Congress created the position of Commissioner of Internal Revenue in July of 1862.
The preliminary phase of the Internal Revenue Service was created to quickly raise money, but it was stipulated as a temporary bill, that would only 10 years. The maneuver by the President was seen as a necessary function, an emergency attempt to subdue the extravagant costs that war places on a country. The initial tax rates established during the Civil War fluctuated between 3% and 7.5%, depending on levels of income.
The enforcement and collection methods were ineffective, however, the model carried a progressive element, which is still used in present times. The commissioner position, which was established through the Revenue Act of 1862, still exists today, and is regarded as the genesis of the Internal Revenue Service.
Following the Civil War, America embarked on a massive reconstruction and expansionary period. The infrastructure of America was quickly evolving; railroads and highways were being built to connect the once fragmented country. Although such public projects required massive amounts of funding, congress and various lawmakers allowed the temporary tax to expire in 1872. For the ensuing couple of decades America grew desperate for a steady stream of revenue.
In 1894, following the midst of a war sparked depression, Congress in an attempt to fund the reconstruction effort, reinstated the national income tax. The Income Tax Act of 1894 was again shortly lived, as the Supreme Court through Pollock v. Farmers’ Loan & Trust Company (1895), ruled that the taxation was a form of direct tax which in essence was unconstitutional. During the early stages of the Internal Revenue Service and the federal income tax, the national government was attempting to find an appropriate equilibrium between revenue and maintaining harmony among the citizens.
Following a repeated decade of deficient funding, President Theodore Roosevelt and his successor William Taft strongly recommended the implementation of a constitutional amendment that guaranteed a stabilized tax system levied by the federal government. Through their efforts the 16th Amendment (awarded Congress the power to levy a federal income tax) was published in 1906.
The amendment was ratified in 1913, and established a federal tax system without state inclusion. The Internal Revenue Service (still referred to as the Bureau of Internal Revenue) presided over this federal tax, and instituted a 1% tax on incomes of over $3,000-inflation adjusted this figure is around $68,000 in 2010. Naturally at first, the novel federal tax system was highly unorganized.
No taxes were collected the first year; the Internal Revenue Service simply took a consensus during this time to ascertain the population of taxpayers. In response to rapidly expanding responsibility, the Internal Revenue Service doubled its staff and re-invented itself in terms of technology used, organization, and application.
The Internal Revenue Service, over the subsequent decades, grew more powerful and influential. The IRS instituted forms of sin taxes such, as additional fees placed on alcohol, as well as an intelligence unit to crack down on individuals guilty of evasion or fraud. For the first time in American history the federal tax system was organized, empowered, and effective. 1942-1953 was a monumental period in American tax history. For clarity’s sake the WWII era will be categorized based on year and precedent.
1942-Regarded as the greatest tax bill in American history, the Revenue Act of 1942 increased taxes and the number of Americans subjected to them. The act also created a deduction system for investment of medical expenses.
1943-The Current Tax Payment Act was adopted by Congress, which withheld taxes from employee wages and required employers to remit them quarterly.
1944-Congress and the Internal Revenue Service implemented the Individual Income Tax Act which instituted standard deductions and the 1040 form.
1952-President Truman proposed the Reorganization Plan which instituted a career civil service system for the Internal Revenue Service. The plan decentralized service to taxpayers and attempted to restore public confidence in the agency.
1953-President Eisenhower finalized Truman’s proposal and officially changed the name of the Bureau of Internal Service to the Internal Revenue Service or IRS.
Following 1953, the Internal Revenue Service spawned into an enormous, technologically advanced agency. Throughout the 1970’s the IRS developed and instituted computerized tax systems and customer service departments.
The IRS became its own entity; the Alcohol, Tobacco and Firearms Division separated from the IRS in 1972 to further establish the agency and solidify it’s federal tax responsibilities. The most substantial program instituted during the Baby Boomer generation, which further augmented the powers of the IRS, was the Tax Reform Act of 1986. The bill signed by President Regan, contained over 300 provisions and precisely codified federal tax law.
Presently the IRS is a highly organized agency subdivided into four operating divisions. To meet the needs of the varying forms of taxpayers (individuals, small business, mid to large caps, and non-profits) the IRS was appropriately split in 1998, through the adoption of the IRS Restructuring and Reform Act.
Currently the IRS is predominantly electronically run; more than 50 million tax returns are filed via computers. In 2009, the IRS was home to more than 140,000 employees or the size of Microsoft and Intel combined. Much of America’s success in regards to funding and appropriating public services can be awarded to the establishment of a fully-functional federal tax system.