The Internal Revenue Service has been shaped by a long constitutional and legislative history. Its origins were traced to the Commissioner of Internal Revenue and the Bureau of Internal Revenue, both created under the Revenue Act of 1862 to manage Civil War taxation, which included income tax along with tariffs and excise taxes. Permanence was secured through the Revenue Act of 1913, enacted after ratification of the 16th Amendment, which authorized Congress to levy direct income taxes. Congress’s authority and responsibility were extended to individuals and corporations, with reliance on the Internal Revenue Code for statutory guidance. An animating philosophy of equitable taxation was reinforced by coordination with GAAP, ensuring consistency in financial reporting and compliance across the national economy.
Precursor Authority – Tariffs And Excise Taxes
However, before the adoption of income taxation, government revenue in the United States was primarily derived from tariffs on imported goods and excise taxes on domestic products such as liquor, tobacco, and luxury items. These indirect taxes were considered less intrusive, though they often placed disproportionate burdens on consumers and farmers. During the 19th century, wartime needs intensified reliance on such measures, particularly in the Civil War, when escalating costs demanded broader fiscal strategies. The Revenue Act of 1862 introduced the first federal income tax, marking a shift from reliance on trade-based revenue.
Revenue Act of 1862
Desperately, the Revenue Act of 1862 was enacted during the Civil War to secure funding for Union expenses, and through it, established the foundations of the modern Internal Revenue Service. A Commissioner of Internal Revenue was appointed, and the Bureau of Internal Revenue was created within the Treasury Department to administer excise and income taxes. A progressive income tax was imposed, with rates from 3% to 5% depending on income levels, while excise duties were extended to liquor, tobacco, and luxury goods. The Act institutionalized federal tax administration, and although it was later repealed, a temporary wartime measure, the administrative framework endured, first, via the Wilson-Gorman Tariff Act, and evolving into the Internal Revenue Service recognized today.
Wilson–Gorman Tariff Act
Income tax of 1894 was enacted through the Wilson–Gorman Tariff Act, which combined tariff reductions with the introduction of a 2% tax on incomes over $4,000. Proceedings for its implementation were carried out by the Bureau of Internal Revenue, with authority delegated to the Commissioner of Internal Revenue. However, the tax was challenged in the courts. In Pollock v. Farmers’ Loan & Trust Co. (1895), the Supreme Court ruled that the 1894 income tax was unconstitutional because it was a direct tax not apportioned among the states, as required by Article I, Section 9 of the Constitution. This decision effectively repealed the tax and highlighted constitutional limits, ultimately leading to the ratification of the 16th Amendment in 1913.
Article 1, Section 9 of The Constitution
Retrospectively, Article I, Section 9 of the U.S. Constitution was drafted in 1787 to impose restrictions on congressional authority, particularly in matters of taxation and fiscal control. Direct taxes were required to be apportioned among the states according to population, thereby limiting arbitrary imposition by Congress. Export taxes were prohibited, ensuring that goods leaving any state could not be burdened by federal levies. Also, ex post facto laws were forbidden, amongst other provisions. Money was permitted to be drawn from the Treasury only through lawful appropriations, and statements of receipts and expenditures were mandated. These provisions reflected a philosophy of restraint and accountability in federal taxation.
16th Amendment
The restrictions of Article I, Section 9 prompted the 16th Amendment. The amendment was ratified on February 3, 1913, and through it, Congress was granted explicit constitutional authority to levy and collect taxes on incomes without apportionment among the states or regard to census enumeration. This amendment was adopted after earlier attempts at federal income taxation had been struck down by the Supreme Court, most notably in Pollock v. Farmers’ Loan & Trust Co. By its ratification, a permanent foundation was provided for the Revenue Act of 1913, which established a modern income tax system. Enabling the extension of authority to individuals and corporations.
Revenue Act of 1913
Following ratification of the 16th Amendment the Revenue Act of 1913 was enacted, which granted Congress constitutional authority to levy income taxes without apportionment among the states. Through this Act, a permanent federal income tax system was established, replacing reliance on tariffs and excise duties as primary sources of government revenue. A normal tax of 1% was imposed on net incomes above exemptions, while surtaxes ranging from 1% to 6% were applied to higher incomes, with a top rate of 7% on incomes exceeding $500,000. Tariff rates were reduced significantly, shifting fiscal dependence toward direct taxation. The Act institutionalized progressive taxation, extended authority over individuals and corporations, and laid the foundation for the modern Internal Revenue Service.
Internal Revenue Service (IRS) Relation to The Treasury Department
Later on, under Section 7801 of the Internal Revenue Code (IRC,) first codified in 1939 with subsequent revisions, administration and enforcement of internal revenue laws were vested in the Secretary of the Treasury, with authority delegated to the Internal Revenue Service. The Internal Revenue Service was placed under the general supervision of the Secretary, ensuring that policy direction and oversight were maintained at the highest executive level. Under Section 7803, the position of Commissioner of Internal Revenue was established, appointed by the President with Senate confirmation, and charged with executing the laws under the Secretary’s supervision.
Authority and responsibility for tax collection from individuals and corporations were thereby centralized, with statutory dependence placed on the Internal Revenue Code, while accountability was reinforced through hierarchical coordination with the Treasury Department. Specifically, the Internal Revenue Service was empowered to assess, collect, and enforce compliance with tax obligations imposed on both individuals and corporations. Authority was exercised through regulations, audits, and penalties, while reliance was placed on accounting standards and coordination with GAAP to ensure consistency in financial reporting. This framework institutionalized equitable taxation and centralized fiscal responsibility.
IRC Philosophy
Striking a progressive tone, the philosophy behind exemptions and credits was shaped by principles of fairness and economic balance, as taxation was intended to reflect ability to pay while encouraging socially beneficial behaviour. Exemptions were designed to shield basic income levels from taxation, ensuring that subsistence earnings were not unduly burdened. Credits were introduced to reduce liability for specific activities, such as education, childcare, or investment, thereby promoting broader policy goals. Through these mechanisms, equity is reinforced by recognizing differences in taxpayer circumstances, while incentives are embedded to stimulate economic growth and social welfare. Dependence is placed on the Internal Revenue Code for statutory authority, and consistency is maintained through coordination with accounting frameworks.
GAAP Coordination
Once more, coordination with GAAP is a necessary framework to ensure consistency between financial reporting and tax administration. The Internal Revenue Service is required to rely on accounting principles recognized under GAAP when interpreting income, expenses, and corporate disclosures, so that taxable amounts can be aligned with standardized financial statements. Through this dependence, comparability across industries was reinforced, and compliance was facilitated by reducing discrepancies between statutory requirements and accounting practices. So, the Internal Revenue Code provides the legal foundation, while GAAP supplies the technical structure for measurement and recognition. By this coordination, equitable taxation is promoted, transparency is enhanced, and accountability is maintained within both corporate governance and individual financial reporting.
Conclusion
Briefly, the Internal Revenue Service evolved through constitutional and legislative milestones. Early U.S. revenue relied on tariffs and excise taxes until the Revenue Act of 1862 introduced income tax and created the Bureau of Internal Revenue under a Commissioner. The 1894 income tax, enacted via the Wilson–Gorman Tariff Act, was struck down in Pollock v. Farmers’ Loan & Trust Co. as violating Article I, Section 9. This led to the 16th Amendment in 1913, granting Congress authority to levy income taxes, followed by the Revenue Act of 1913, establishing a permanent system. Oversight was vested in the Secretary of the Treasury under the Internal Revenue Code, with fairness ensured through exemptions, credits, and coordination with GAAP.
By Richard Thomas
