Aiming at fundamentally improving the performance of MR dampers, including maximizing dynamic range (i.e., ratio of field-on to field-off damping force) while simultaneously minimizing field-off damping force, this study presents the principle of an inner bypass magnetorheological damper (IBMRD). The IBMRD is composed of a pair of twin tubes, i.e., the inner tube and outer concentric tube, a movable piston-shaft arrangement, and an annular MR fluid flow gap sandwiched between the concentric tubes. In the IBMRD, the inner tube serves simultaneously as the guide for the movable piston and the bobbin for the electromagnetic coil windings, and five active rings on the inner tube, annular MR fluid flow gap, and outer tube forms five closed magnetic circuits. The annular fluid flow gap is an inner bypass annular valve where the rheology of the MR fluids, and hence the damping force of the MR damper, is controlled. Based on the structural principle of the IBMRD, the IBMRD is configured and its finite element analysis (FEA) is implemented. After theoretically constructing the hydro-mechanical model for the IBMRD, its mathematical model is established using a Bingham-plastic nonlinear fluid model. The characteristics of the IBMRD are theoretically evaluated and compared to those of a conventional piston-bobbin MR damper with an identical active length and cylinder diameter. In order to validate the theoretical results predicted by the mathematical model, the prototype IBMRD is designed, fabricated, and tested. The servo-hydraulic testing machine (type: MTS 810) and rail-guided drop tower are used to provide sinusoidal displacement excitation and shock excitation to the IBMRD, respectively.