How The IRS Works: Part 1 of 2

Even the most enlightened American must wonder every year, “why am I paying taxes?” While acknowledging that some taxes are unavoidable, the question becomes does federal and state income tax fall into this category. It is true that every civilized, developed society has taxes but loathing the taxman is as inevitable as…well…taxation itself.

In the U.S., at the federal level, the unenviable duty of collecting federal income taxes falls on the Internal Revenue Service (IRS). As the United States tax collector and only having 3 letters in its acronym it is as close to a four-letter word could come.

It states its mission is:
“Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.”

First, A Little History
After becoming independent from Britain, America was wary of taxation and didn’t grant the federal government authority to levy taxes right away. The federal government, though, had the right to ask for tax payment from the states, but states were under no obligation to comply. With time, the government was given the right to levy taxes, but it lacked the agency to do so.

The onset of the Civil War changed everything — or more precisely, the need to pay for that conflict. Congress and President Lincoln enacted the nation’s first income tax with the Revenue Act of 1862, which created the office of the Commissioner of Internal Revenue.

The law was temporary, but gave the office the right to levy excise taxes on commonly consumed and traded goods, as well as the means to collect those taxes. It also marked the first progressive tax in U.S. history. The need to have an agency in place for enforcing and collecting these taxes gave birth to the Bureau of Internal Revenue (BIR), the predecessor to the IRS.

After the war ended and reconstruction was underway, the Revenue Act was allowed to expire in 1872. Between then and 1894, federal taxes remained but evolved. When the government attempted to further codify and expand taxation with the Income Tax Act of 1894, the Supreme Court ruled it unconstitutional. It wasn’t until the 16th Amendment was passed in 1913 under President William Howard Taft that Congress won the authority to impose an income tax.

Soon after,  Form 1040 was born. The tax rate for personal incomes more than $3,000 was 1%; on incomes of more than $500,000 it was 6%. Income tax rates rose sharply during World War I (peaking at 77% for top-earners), and then again during the Great Depression (63% rate on top-earners).

The “tax collecting agency” was revamped in 1950s, first by President Truman as a part of his reorganization plans. The patronage system of the agency was replaced with a career civil service system. The move was endorsed by President Eisenhower, who in 1953 rechristened the Bureau of Internal Revenue the Internal Revenue Service.

The federal tax system has always been a mystery to nearly all Americans, nevertheless, they systematically without question send in one fourth to one third or more of their paychecks just like clock work without ever stopping to question why?

Most of us know this system is not right and does not apply to us but finding the answers in the tax code can be daunting. It is intentionally written to be difficult to understand and is extremely long winded. This was done by the lawyers who work for the IRS to discourage American from finding out that most of them do not and have never owed federal income tax.

We have proof in the form of checks received by our happy and satisfied clients proving our system works. Are you wondering if you qualify for a refund for the last 3 or more years of your income taxes paid in? Would you like to find out?

For tax payers, failure to pay taxes or declare your income accurately can lead to serious issues with the IRS issues. The professional tax advisors and tax professionals at our firm can help. Email us at for more information and be sure to visit our website at

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