The agency has a long history. Its roots go back to the Civil War when President Lincoln and Congress, in 1862, created the Commissioner of Internal Revenue and enacted an income tax to pay war expenses. The income tax was repealed 10 years later. Congress revived the income tax in 1894, but the Supreme Court ruled it unconstitutional the following year.
In 1913, the states ratified the 16th Amendment, which gave Congress the authority to enact an income tax. That same year, the first Form 1040 appeared after Congress levied a 1% tax on net personal incomes above $3,000 with a 6% surtax on incomes of more than $500,000. As the nation sought greater revenue to finance the World War I effort, the top rate of the income tax rose to 77% in 1918. It dropped sharply in the post-war years, down to 24% in 1929, and rose again during the Depression. During World War II, Congress introduced payroll withholding and quarterly tax payments.
In the 1950s, the agency was reorganized to replace the patronage system with career, professional employees. Now, only the IRS Commissioner and Chief Counsel are selected by the President and confirmed by the Senate. The Bureau of Internal Revenue name also was changed to the Internal Revenue Service to emphasize service to taxpayers.
The IRS Restructuring and Reform Act of 1998 prompted the most comprehensive reorganization and modernization of IRS in nearly half a century. The law resulted in the IRS reorganizing itself into four major operating divisions, aligned by types of taxpayers:
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The Wage and Investment Division, serving approximately 116 million taxpayers who file individual and joint tax returns.
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The Small Business/Self-Employed Division, serving approximately 45 million small businesses and self-employed taxpayers.
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The Large and Mid-Size Business Division, serving corporations with assets of more than $10 million.
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The Tax-Exempt and Government Entities Division, serving employee benefit plans, tax-exempt organizations, such as charities and social welfare groups, and governmental entities.
Other divisions include Appeals, Communications and Liaison and Criminal Investigation. The Office of Chief Counsel provides legal services to the agency.
The 1998 law also greatly expanded taxpayers' rights and established a Taxpayer Advocate Service as an independent voice inside the agency on behalf of the taxpayer. The Taxpayer Advocate Service seeks to assist with problems that have not been resolved through normal channels. Each state also has a local taxpayer advocate who reports directly to the National Taxpayer Advocate.
For the 2004 fiscal year, the IRS will have a little more than 99,000 employees (full-time equivalent) and a budget of $10.185 billion.
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