The History of the IRS: The U.S.'s Most Important Tax Agency

In this post we explore the history of one of the most recognized U.S. federal entities in the world How was the U.S. tax system formed? 

The IRS (Internal Revenue Service) is the U.S. government entity in charge of tax collection and enforcement of tax laws; it is also responsible for the interpretation and application of federal tax laws.

Now we will learn about the history of taxes in the United States, the implications they had in their political and historical processes and the creation, of course, of the IRS. 

Taxes and Revolution 

Let us begin by explaining that taxation without representation was the seed of the American Revolution, that is, the punitive taxes that Great Britain imposed on American lands were strongly questioned by the colonists, since they had no voice in parliament. On July 4, 1776, the Declaration of Independence broke ties with England.

‍Evolution and establishment of taxation 

However, it was not until February 21, 1787, that Congress approved a Constitutional Convention to revise the Articles of Confederation, which dictated: "Congress shall have the power to lay and collect taxes, duties, imposts, and excesses, to pay the debts and provide for the common defense and general welfare of the United States." On September 2, 1789, the Treasury Department was created. 

Wars and taxes

Wars have been determinant in the collection of taxes. For example, to pay for the War of 1812, Congress passed new internal taxes on refined sugar, carriages, distilleries and auctions; it reestablished the office of Commissioner of Revenue to collect them. 

Likewise, on July 1, 1862, President Lincoln signed the second Civil War revenue measure into law, collecting excise taxes and establishing a permanent internal revenue system. 

On the other hand, the Roosevelt administration hoped to pay for the costs of World War II through increased taxes. The Revenue Act of 1942 increased most existing taxes and introduced the Victory Tax (a 5% surcharge on all net income over USD $624 with a postwar credit).

Private information 

Former U.S. President James Garfield introduced a bill to make tax information private. On July 14, 1870, Congress passed a revenue act stating, "No collector shall permit such returns of income or any part thereof, except general statistics, to be published in any manner whatsoever."

First Federal Income Tax (Income Tax) 

On February 25, 1913, the 16th Amendment became an official part of the Constitution, granting Congress constitutional authority to levy corporate and individual income taxes. Also, in 1914, the famous four-page Form 1040 was created for the new income tax. Tax payments were due on June 30.

Prohibition and Taxation 

In 1919 Congress passed the National Prohibition Enforcement Act which, as the name implies, prohibited the manufacture, sale and use of intoxicating beverages throughout the United States. The Bureau of Internal Revenue was designated by the government to enforce that law for which it hired and trained hundreds of prohibition agents to enforce the law and created a new intelligence unit to ferret out corrupt prohibition agents and bootleggers.

As a result of this dynamic, American gangster Al Capone, in 1931, was investigated and indicted for income tax evasion and violation of the Volstead Act. He was convicted and sentenced to 11 years in federal prison, plus a $50,000 fine. He was ordered to pay USD $215,000 plus interest on back taxes.

Payroll Withholding (Payroll)

Former President Franklin D. Roosevelt signed the Social Security Act into law in 1935. Employees at the time originally paid 1% of the first $3,000 of their wages to fund benefits. This laid the groundwork for modern payroll withholding and the unemployment compensation program. 

We blogged about the latter: Here's how payroll works in the United States.

Creation of the Internal Revenue Service (IRS) and technological evolution

Former President Harry S. Truman called for a comprehensive reorganization of the Internal Revenue Service in 1952. The agency officially became the Internal Revenue Service (IRS) on July 9, 1953. During the 1950s, this agency issued written and printed communications using the U.S. Postal Service, and in addition to that, it started a "Teaching Taxes" educational campaign explaining the correct use of forms and their filing. 

By 1962, the IRS introduced automated data processing, processing up to 680,000 characters per second. This modernization of the IRS also introduced in 1966 the free telephone network, which little by little began to be more friendly to deaf and hard of hearing people, and by the beginning of the 70's the entity began to offer tax information in Spanish. 

To simplify "the income tax code", in 1986 the U.S. Congress passed the Tax Reform Act, which was intended to change the interaction with taxpayers by giving way to electronic filing (implemented in 1991) and the application of new technologies for tax processing. 

Digital tools and online payments 

At the beginning of the 2000s, the IRS implemented different tools aimed at innovating and simplifying the taxation process:

Other tools such as the IRS Student Assistance Tool have simplified the internal processes of the entity, even reaching cell phones, when, in 2011, the first mobile application was launched. 

This technological adaptation has been very well received by the Americans, since the transparency of the information, as well as the easy access to it, have made this entity to be recognized worldwide for its rigor and transparency.