IRS History: Beginnings
After gaining independence from Britain, Americans were wary of abusive taxes and didn't even grant the federal government authority to enforce taxation at first. Under the Articles of Confederation, the federal government could request taxes from states, but this was essentially voluntary. When this system proved to be ineffective, the framers of the U.S. Constitution made sure that that Congress could indeed "lay and collect" taxes.
But even then, it didn't require an agency to collect these taxes. The states were responsible for collecting federal taxes on goods like sugar, liquor and tobacco. For decades, Americans had to pay taxes on various domestic products (excise taxes), imports (custom taxes) and exports (tariffs), but didn't have to pay any portion of their incomes to the federal government.
This all changed with the onset of a national crisis: the Civil War. To pay for this war, President Abraham Lincoln pushed the nation's first income tax, along with high excise taxes, which Congress passed in 1861. Although modest by current standards, the 3 and 5 percent income tax on people with over $800 and $10,000 in annual income, respectively, meant an enormous increase in tax revenue. Enforcing and collecting so much tax required an entire agency, so this is how the first federal tax collection agency — the Bureau of Internal Revenue (BIR) — was born [sources: Treasury.gov, Tax History Museum].
This income tax that necessitated the BIR was short-lived, however. While taxpayers stomached steep taxes in wartime, tolerance dwindled after peace was restored. Taxes decreased significantly, and the income tax expired by 1872. Meanwhile, the BIR had shrunk, but stuck.
Some years later in 1895, Congress tried to pass an income tax again. But the Supreme Court quickly declared it unconstitutional because the Constitution only allowed direct taxes to be imposed in proportion to state population. Clamor to change this provision eventually won out, and in 1913, Congress passed the 16th Amendment, which says that Congress has the power to lay and collect taxes. Those who earned more than $3,000 were taxed at 1 percent.
Although it started small, the income tax dramatically grew in the coming years due to war and Congress's responses to drastic economic fluctuations. In addition, Congress also passed a tax on corporations during this period. This translated into an enormous increase in revenue that the BIR would be responsible for collecting.
Significant growing pains accompanied this unprecedented growth. The BIR was unprepared for the influx in responsibility it would face in the 20th century.