Internal Revenue Service

• 1. Introduction

  ›

  The Internal Revenue Service collected approximately $4.7 trillion in a single fiscal year. That figure, from 2023, represents roughly 96 percent of everything the federal government spent to keep itself running. No other institution in American life touches more people, generates more anxiety, or carries more political baggage than the IRS. Yet its origins were an emergency improvisation, its existence was nearly killed by the Supreme Court, and its leadership has recently become a constitutional flashpoint. This is the story of an agency born out of war, repeatedly reformed, and perpetually contested.

• 2. A War Tax That Changed Everything

  ›

  President Abraham Lincoln and Congress passed the Revenue Act of 1862 in July of that year, at a moment when the Union desperately needed money to wage the Civil War. The law created the office of commissioner of internal revenue and established a temporary income tax. It borrowed the model from Britain, which had already moved away from taxing trade and property in favor of taxing earnings directly.

  The rates started modestly. Income over $800 was taxed at 3 percent, which placed most wage-earners outside the system entirely. A sliding scale applied: income between $600 and $10,000 faced a 3 percent rate, while earnings above $10,000 faced 5 percent. By the war's end, 10 percent of Union households had paid some form of income tax, and that revenue amounted to 21 percent of the Union's total war funding.

  The framers of the law called it temporary, and they meant it. In 1872, seven years after the fighting stopped, lawmakers let the tax expire. The experiment had worked, but the country was not yet ready to make it permanent. What it left behind was the blueprint that a future constitutional amendment would eventually make the law of the land.

• 3. The Road to the Sixteenth Amendment

  ›

  Congress tried again in 1894, enacting a new income tax. The Supreme Court struck it down in Pollock v. Farmers' Loan and Trust Co., a ruling that contradicted the Court's own earlier decision in Hylton v. United States. The federal government was left scrambling for revenue.

  The political pressure that followed built across two presidencies. Theodore Roosevelt's election in 1906 brought a populist wave for tax reform, a movement that carried through to his successor William Howard Taft. It was Taft who formally proposed the constitutional amendment in 1909, though ratification would take four more years.

  The tipping point came with the election of Woodrow Wilson in 1912. By February 1913-36 states had ratified the Sixteenth Amendment. Six more followed by March, bringing the total to 42 out of 48 states. Connecticut, Rhode Island, and Utah rejected the amendment outright; Pennsylvania, Virginia, and Florida did not take it up at all. The amendment's language granted Congress the power to tax incomes from whatever source derived, without apportionment among the states by population.

  That same year, the first Form 1040 was introduced. It required filing only from those with annual incomes of at least $3,000. In the first year after ratification, no taxes were actually collected; taxpayers simply completed the form, and the agency checked it for accuracy.

• 4. Wartime Expansion and Prohibition

  ›

  The First World War accelerated what ratification had started. By 1918, a new Revenue Act established a top income tax rate of 77 percent. The IRS workload grew so fast that the agency was still processing 1917 returns in 1919, and it doubled its staff in an attempt to keep pace.

  In 1919, Congress handed the IRS an entirely different assignment: enforcing Prohibition. The agency took on the task of pursuing illegal alcohol sales and manufacturing. That responsibility lasted until 1930, when it was transferred to the Department of Justice. After Prohibition's repeal in 1933, the IRS resumed collecting taxes on legal beverage alcohol. The alcohol, tobacco, and firearms functions were eventually split off in 1972 into what became the Bureau of Alcohol, Tobacco, Firearms and Explosives.

  The Second World War produced another dramatic expansion. A 1942 tax act introduced a wartime surcharge. The number of Americans paying income tax rose from about four million in 1939 to more than forty-two million by 1945. By the war's end, the IRS was processing sixty million tax returns each year, using a combination of mechanical desk calculators, accounting machines, and paper forms.

• 5. Nixon, Watergate, and the Political Audit

  ›

  Richard Nixon directed the IRS in 1969 to audit his political opponents, as well as opponents of U.S. involvement in the Vietnam War. The agency's Activist Organizations Committee, later renamed the Special Services Staff, assembled a target list of more than 1,000 organizations and 4,000 individuals. A White House memo spelled out the logic: "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, refused Nixon's request to audit his political enemies and was fired for it. Thrower's successor, Johnnie Mac Walters, took a different approach. He locked the target list in his safe and delivered it to Congress after the Watergate scandal broke.

  Nixon's own tax returns became a separate controversy. With a salary of $200,000, he paid $792.81 in federal income tax in 1970 and $878.03 in 1971, after deducting $571,000 for donating his vice-presidential papers. Reporter Jack White of The Providence Journal won the Pulitzer Prize for exposing those figures. John Requard Jr., accused of leaking the returns, defended his own work at the IRS in stark terms: "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." The scandal was significant enough that most subsequent presidents voluntarily released their own returns.

• 6. Computerization and Reform

  ›

  The first trial of a computer system for income tax processing took place in 1955, when an IBM 650 installed at Kansas City processed 1.1 million returns. The IRS was authorized to proceed with full computerization in 1959 and purchased IBM 1401 and IBM 7070 systems for its data centers. Social Security numbers became the standard taxpayer identifier in 1965, and by 1967 every return was processed by computer.

  An ambitious follow-up project, the Tax Administration System, aimed to give thousands of IRS offices interactive, real-time terminals. The General Accounting Office killed it in 1978 after preparing a report critical of its weak privacy protections. The IRS moved to the public internet for electronic filing in 1995; by 2002, more than a third of all returns were filed electronically, and that share reached 90 percent by the 2021 filing season.

  The agency's organizational structure changed in parallel. The 1952 reorganization under President Truman replaced politically appointed tax collectors with civil-service directors and decentralized operations into district offices. The Internal Revenue Service Restructuring and Reform Act of 1998 went further, replacing the old geographic divisions with four operating units: Large Business and International, Small Business and Self-Employed, Taxpayer Services, and Tax Exempt and Government Entities. That same law added what it called "10 deadly sins" requiring immediate dismissal of IRS employees found to have committed specified misconduct.

• 7. Structural Stress and Recent Controversy

  ›

  A 2024 study found that every additional dollar spent auditing taxpayers above the 90th income percentile yields more than $12 in revenue. Audits of below-median income taxpayers yield $5. Despite that math, enforcement staffing fell by more than 25 percent in recent years as the agency absorbed budget cuts. From 1991 to 2021, the number of IRS employees per million residents dropped from 451 to 237.

  Identity theft became a persistent drain. A 2013 inspector general's report found that $4 billion in fraudulent 2012 tax refunds had been paid out using stolen Social Security numbers. By 2016, more than 700,000 such numbers had been compromised through breaches of the IRS's online Get Transcript tool. Over 20,000 taxpayers were erroneously marked as deceased in 2022, blocking them from filing or receiving refunds.

  The agency's core technology is also aging. Systems such as the Individual Master File are more than 50 years old and have been flagged by the Government Accountability Office as facing significant risks due to their reliance on legacy programming languages, outdated hardware, and a shortage of skilled staff.

  The most structurally novel development came in October 2025, when the Department of the Treasury announced a new position called Chief Executive Officer within the IRS, created administratively without authorization from Congress. Frank Bisignano, then serving as Commissioner of the Social Security Administration, was named to the role. By January 2026, Bisignano announced that 16 IRS executives would report to him directly, including the Taxpayer Advocate and the acting Chief Counsel. Tax policy experts, members of Congress, and journalists described the arrangement as a functional replacement of the Senate-confirmed commissioner, which they said violated the Appointments Clause of the Constitution.