The IRS was established in 1862 to fund the Civil War

The Internal Revenue Service did not exist for the first 73 years of the United States. Before 1862, the federal government relied on tariffs and land sales to pay its bills. When the Civil War began and spending exploded, Congress needed a new source of money fast. On July 1, 1862, President Abraham Lincoln signed legislation creating the Office of the Commissioner of Internal Revenue — the direct ancestor of today's IRS.

That first income tax was temporary. It was meant to last only as long as the war. The tax applied only to people earning more than $600 per year, which excluded most working Americans at the time. Even so, it was controversial. Many people had never paid a direct tax to the federal government before, and the idea of the government knowing what they earned felt like an invasion of privacy.

When the Civil War ended in 1865, the income tax did too. Congress let it expire in 1872. For the next 16 years, the federal government went back to collecting tariffs and excise taxes on goods like whiskey and tobacco. The income tax seemed like a historical footnote.

Key Takeaways

  • The IRS was created in 1862 as the Office of the Commissioner of Internal Revenue to pay for Civil War expenses through an income tax.
  • The original income tax was temporary and expired in 1872 after the war ended, affecting only the highest earners.
  • The income tax returned permanently in 1913 after the 16th Amendment allowed Congress to tax income without apportioning it among the states.
  • The IRS has grown from a small wartime agency into a permanent federal bureau that now processes hundreds of millions of tax returns annually.

Why the income tax came back in 1913

In 1894, Congress tried to bring back the income tax without amending the Constitution. The Supreme Court struck it down in 1895, ruling that a direct tax on income had to be apportioned among the states based on population — a rule that made an income tax impractical. For 18 years, the income tax remained illegal.

That changed when enough states ratified the 16th Amendment in 1913. It gave Congress the power to "collect taxes on incomes, from whatever source derived, without apportionment among the several States." Within weeks, Congress passed a new income tax law. This time it was meant to be permanent. The IRS, renamed and reorganized, became the agency responsible for collecting it.

The 1913 tax was also small at first — only about 3 percent of the population paid it, mostly the wealthy. But it grew. By the time the United States entered World War I in 1917, income tax rates had climbed sharply. After that war ended, rates came down but the tax stayed. It had become the government's main source of revenue, and it has remained so ever since.

How the IRS changed after 1913

For the first few decades, the IRS was a lean operation. Most people filed their taxes on a single sheet of paper. The agency had a handful of regional offices and processed returns by hand. Taxpayers often negotiated their tax bills directly with IRS agents — there was no standardized calculation, and the process was slow and unpredictable.

The Great Depression and World War II transformed the IRS again. During the war, the government needed to tax millions of ordinary workers, not just the wealthy. In 1943, Congress introduced withholding — the system where your employer deducts taxes from your paycheck before you receive it. This made it possible to collect taxes from tens of millions of people without overwhelming the IRS with paperwork. Withholding is still how most Americans pay their federal income tax today.

After the war, the IRS continued to grow. It opened more offices, hired more agents, and developed new procedures. In the 1960s and 1970s, the agency began using computers to process returns and detect fraud. By the 1980s, the IRS had become a large federal bureau with tens of thousands of employees and the power to audit returns, pursue collections, and prosecute tax crimes.

The IRS structure today

The IRS is now a bureau of the Department of the Treasury, headed by a Commissioner appointed by the President and confirmed by the Senate. It has regional offices across the country and a headquarters in Washington, D.C. The agency processes more than 150 million individual tax returns each year, along with millions of business and corporate returns.

The IRS is divided into several divisions. The Wage and Investment Division handles returns from individuals and families. The Small Business/Self-Employed Division works with sole proprietors and partnerships. The Large Business and International Division handles corporate returns and international tax matters. A separate Criminal Investigation Division pursues tax fraud and other financial crimes.

Despite its size, the IRS's budget has not kept pace with inflation over the past 15 years. The agency has fewer employees now than it did in 2010, even though the number of returns filed has grown. This has affected how quickly the IRS can process returns, answer phone calls, and respond to taxpayer inquiries.

What changed between the 1862 version and now

The original 1862 income tax was a wartime emergency measure with a straightforward goal: raise money quickly. It had a single tax rate and applied only to the highest earners. There was no standard form — taxpayers straightforward reported their income in a letter to the tax collector.

Today's income tax is vastly more complex. The tax code runs to thousands of pages. There are different rates for different income levels, deductions for specific expenses, credits for certain situations, and special rules for different types of income. The IRS publishes hundreds of forms and instructions. Most people now use software or hire accountants to prepare their returns because the rules are too intricate to navigate alone.

The reason for this complexity is that Congress has used the tax code to encourage certain behaviors — saving for retirement, buying a home, paying for education, having children — and to discourage others. Each of these goals adds rules and exceptions. The result is a system that bears little resemblance to the straightforward wartime tax of 1862.

Why the IRS's history matters to you

Understanding when and why the IRS was created helps explain why it works the way it does. The agency was built to collect taxes from millions of people efficiently, and that remains its core mission. The withholding system, the standard forms, the filing important date — all of these exist because the IRS had to process enormous volumes of returns quickly.

The IRS's history also explains some of its current challenges. The agency was designed for a paper-based system and has been modernizing its technology for decades, but the process is slow and expensive. The complexity of the tax code — which Congress, not the IRS, created — means that the agency spends significant resources answering questions and processing amended returns. When you file your taxes, you are interacting with an institution that has been evolving for 160 years.

Frequently Asked Questions

Did the IRS exist before 1862?

No. The federal government did not have an income tax or an agency to collect one until the Civil War. Before 1862, the government funded itself through tariffs on imported goods and excise taxes on items like whiskey and tobacco.

Was the original income tax permanent?

No. The 1862 income tax was created as a temporary wartime measure and was allowed to expire in 1872 after the Civil War ended. The income tax did not return until 1913, after the 16th Amendment made it constitutional.

Why did the income tax need a constitutional amendment?

The Supreme Court ruled in 1895 that a direct tax on income had to be apportioned among states based on population, which made an income tax impractical. The 16th Amendment, ratified in 1913, removed this requirement and allowed Congress to tax income directly.

When did withholding start?

Withholding began in 1943 during World War II. Before that, most people paid their taxes in a lump sum. Withholding made it possible for the government to collect taxes from millions of ordinary workers without overwhelming the IRS.

Has the IRS always been part of the Treasury Department?

The IRS has been part of the Treasury Department since its creation in 1862. It was originally called the Office of the Commissioner of Internal Revenue and was renamed the Internal Revenue Service in 1953.