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The CHAIRMAX. Back taxes?
Mr. BLAIR. Yes, sir.
The CHAIRMAN. How much per month are you collecting on that?

Mr. West. We are assessing at the present time approximately $25,000,000 a month.

The CHAIRMAN. What are you collecting?

Mr. West. These assessments are practically all collected. They are put on the assessment list only after full investigation of the revenue agents' reports and after conferences with the taxpayers.

The CHAIRMAN. When you were before the committee some time ago and got $8,000,000, it was said that you were going to be able to collect $35,000,000 a month by the use of this $8,000,000. How far have you succeeded in keeping your promise?

Mr. West. I think I can answer that in this way. Due to the activities of the field investigations on income-tax work, there was recommended for assessment during the fiscal year 1921, $473,500,000 in round numbers.

The CHAIRMAN. That is, back taxes?

Mr. West. Altogether back taxes, taxes that ordinarily would not have been assessed had it not been for the activities of this field force of approximately 2,000 men.

That is $36,900,000 approximately in excess of what was recommended for assessment in the 1920 fiscal year. Four hundred and seventy-three million dollars was the total amount recommended for assessment by this field force. All of this was not assessed.

The CHAIRMAN. How much of their recommendations were approved ?

Mr. West. As a result of the audit of these returns and reports additional taxes amounting to $357,000,000, approximately, was assessed, and of this amount $113,613,000 was the result of the bureau audit here in Washington, leaving $244,000,000 approximately, as a result of the work in the field.

The CHAIRMAN. So that the result of the appropriation of $8,000,000 was $244,000,000.

Mr. ANTHONY. Assessed only.
The CHAIRMAN. But they say they collect all the assessments.

Mr. West. I just stated that practically all of that is collected. It is only assessed after an adjustment has been made, after the taxpayer and the bureau auditors here in Washington have gone over the revenue agents reports from the field. There are some losses on account of insolvency and occasional readjustments on account of after-discovered facts.

The CHAIRMAN. And this is in addition to the amount set out in the original schedules by the parties against whom this new assessment is levied.

Mr. West. That is correct; yes, sir. In other words, we have 2,036 internal revenue agents and inspectors, and 35 agents in charge of divisions, in charge of this investigating work, dealing altogether with income tax, and the figures show on the basis of the amount spent for their salaries and traveling expenses and miscellaneous items, approximately $6,500,000, which is $38 return for every dollar of expense.

The CHAIRMAN. Then the cost was a little less than 3 per cent.
Mr. BLAIR. Yes.

PERCENTAGE OF COST FOR COLLECTIONS, ETC.

The CHAIRMAN. What is the average percentage cost?

Mr. West. The average percentage cost last year for all collections, including the amount we expended for enforcement of regulatory laws, such as the narcotic and prohibition laws, 87 cents for every $100 collected.

The CHAIRMAN. That is eighty-seven one-hundredths of 1 per cent.

Mr. West. Yes; or in other words, if you take out the expense for enforcing regulatory laws, the cost would be 72 cents for each $100.

The CHAIRMAN. Does that include this 3 per cent?

Mr. West. Yes; that is included. Now, if you figure on the total amount we collected last year, which was $3,223,000,000 in round numbers, from income-tax sources alone, and figure out what we spent for income-tax work--and we can only do that roughly on account of so many of the officers having dual duties--we get practically $134 for every $1 we spend.

The CHAIRMAN. That is, including the regulatory work and all ?

Mr. West. No; that is just including the income-tax work. We collected $3,228,000,000 for the fiscal year ended June 30, 1921, and we spent for the income-tax work, as well as we can segregate that part of it, about $24,000,000 or less than 1 per cent.

Mr. Sisson. That is a pretty cheap collection, is it not?
Mr. BLAIR. Yes; we think it is.

Mr. Sisson. I think this income tax is about the cheapest tax we collect.

Mr. BLAIR. I think that is true.

Mr. Sisson. And, as a matter of fact, I think after you shall have gotten the people thoroughly familiar with the law and have punished a few of these tax dodgers, you will not have any trouble collecting this tax.

Mr. BLAIR. Unquestionably, that helps a great deal. We have some cases now which I think will be very beneficial to the department.

Mr. West. There is another angle to that end of it, and that is the delinquent taxpayer. I mean the man who does not make any return at all. The supervisor of the collector's office who has charge of the collector's forces has advised that the average collection from delinquents each year by each field deputy approximates $15,000, and with an addition of 300 field deputies, which still would not bring the force up to what it was early last spring when we had to reduce it to keep within the appropriation, and after deducting the time for training, should result in bringing into the Treasury approximately $4,000,000 per annum in delinquent taxes that otherwise would not be collected; or, for every dollar spent for such additional force over $6 would be returned to the Government, to say nothing of the moral effect upon the taxpayers. Mind you, this is the man who does not make any return at all. We have special drives during the year on this class of delinquents. The total of delinquent and additional taxes collected and reported for assessment by deputy collectors during the fiscal year was $38,352,612. It may be well to state here that in less than 10 years the number of taxpayers filing returns with

collectors who are our collecting agents, and there are 64 of them, has increased from approximately 600,000 to over 9,000,000 annually. That just shows the volume of increase that we have to contend with.

The CHAIRMAN. Of course, the first income-tax law did not require so many people to pay taxes. You want to remember that.

Mr. WEST. I do.

The CHAIRMAN. That increase, of course, was due to the fact that more of them came within the scope of the law and was not because you had agents in the field.

Mr. Sisson. But Mr. West is endeavoring to show the volume of business they had to attend to.

Mr. West. That is all. Considering the monthly returns of sales tax payers and quarterly payment of income taxes (and many take advantage of that provision in the law) approximately 15,000,000 separate transactions with collectors occur each year. This is just to show the volume of the work now.

Mr. KELLEY. Is any considerable part of this $357,000,000 of back taxes which you have assessed due to change in regulations in the department ?

Mr. WEST. I believe most of it is due to misinterpretation of regulations and taking advantage of depreciation and amortization and interpreting in their favor rather than in favor of the Government.

Mr. KELLEY. Has the department itself changed its interpretation of the regulations to any great extent which would account for any considerable part of that sum?

Mr. West. Not so as to vitally affect this amount. I think I could answer that in this way. Most of these additional assessments relate to 1917 and 1918. In other words, the office is not yet through with the 1917 audit; that is, the returns filed for the calendar year 1917.

Mr. KELLEY. Occasionally a complaint comes in that successive auditors following your regulations arrive at widely different conclusions; how could that arise ?

Mr. WEST. I do not see how it could arise where the difference is great. I can see easily how it could arise where it is a minor difference.

The CHAIRMAN. They have made new interpretations of the regulations. They have decided that one state of facts will result in a certain conclusion at one time and a totally different state of facts will be required to bring about that same conclusion at some other time; have they not?

Mr. West. I did not think there was much of that.

Mr. Sisson. I think most of that is due to the people who are not in favor of the income tax law. When I am not in favor of a law I can find a world of criticism of it, but if I approach it with a fair mind and if I am in favor of the law, I find that I then interpret everything in favor of the law. It is largely a question of the point of view. This is a fact, however, that some of the first returns we had to make out were so complicated that if I had not had an expert to help me out I expect I would have been in the penitentiary.

COMPLICATED INCOME TAX LAW. Mr. ANTHONY. Out in my country the criticism is not against the income tax law, but is due to the fact that the law is so complicated. Has the department done anything to simplify the forms that they send out?

Mr. BLAIR. You can not very well do that because the forms are made absolutely to fit the law section by section.

Mr. ANTHONY. Under the law the Treasury Department has the absolute power to formulate the regulations under which the taxes shall be collected.

Mr. BLAIR. Yes.

Mr. ANTHONY. And the general complaint over the country is that they are so very complicated that people do not understand them. Is anything being done to simplify them?

Mr. BLAIR. We are trying to simplify them all the time and we are doing something, but they never can be made simple. As long as business is complex the law must be complex, and as long as the law is complex the forms must be complex.

Mr. ANTHONY. In my opinion, here is the way in which a lot of this money is wasted, for instance, in going over these old returns a taxpayer will be notified that $2 or $3 is due the Government on a payment of several thousand dollars, and a couple of inspectors will come around and call on that taxpayer and spend a day or two going over his return, and the net result of it will be the payment of probably two or three dollars to the Government.

Mr. Sisson. I do not think it is a question of collecting the two or three dollars, but the fact that you do that with one man and carefully check him up makes hundreds of other men more careful about their returns. VALUATION ENGINEERS, ADDITIONAL FIELD AND BUREAU FORCE.

The CHAIRMAN. What we are anxious to know about now is what you want with this

money. Mr. BLAIR. As Mr. West stated, 40 per cent of the 1917 corporation returns are yet unaudited. Of course, it is from the corporations we get the biggest taxes. There are vast amounts no doubt due to the Government in additional taxes on those returns. There is a much larger percentage for 1918, 1919, and with the 1920 not touched. We want to catch up with that work and in order to do it we need 75 valuation engineers and additional field and bureau force.

The CHAIRMAN. How much of the 1918 and 1919 audits have you completed ?

Mr. West. I have a rather illuminating statement here just along that line

Mr. BLAIR. I think that statement really puts the whole thing more concisely than we can give it to you.

The CHAIRMAN. If it is not too long, suppose you read the statement.

Mr. West. It is not very long. This statement was submitted to me by the income tax unit when we were considering the estimates for 1923:

A careful survey of the various audit sections of the unit in Washington leads to the belief that work may be brought current by the present force with the exception of the consolidated returns subdivision.

That is where most of the tax is secured—from the returns of the consolidated corporations.

The CHAIRMAN. Explain just what that means.

Mr. West. Under section 240 of the revenue act of 1918 corporations which are affiliated within the meaning of this section may file a consolidated return including all of them, and it is that class of return that is rather prolific in revenue when the returns are examined.

The CHAIRMAN. Corporations like the United States Steel Corporation would come under that head.

Mr. West. Yes; all the large corporations with a large number of subsidiaries. The report for the income tax unit continues as follows:

At the present time only about 60 per cent of the 1917 consolidated returns have been audited and the present personnel is sufficient only to complete the remaining 1917 returns during the present fiscal year. In order to handle the 1918 consolidated returns, of which there arn 9,000, in the current fiscal year, 600 additional resident auditors are required for the full year beginning July 1, 1921, estimating their production at the normal rate now atrăined by experienced auditors.

The CHAIRMAN. That would give one man 15 cases a year.
Mr. West. Yes; that is correct.

Mr. BLAIR. I saw one consolidated return that had 22 volumes, many of them as thick as that book (indicating], showing the immensity of the proposition. It cost $50,000 to prepare those returns.

If substantial progress is to be made on the audit of the 1918 returns during the current fiscal year, it is important that the 600 additional resident auditors for this work be authorized; furthermore, that as large a number of them as is possible be recruited and employed at once. The plan is to recruit these auditors at a minimum rate of 100 per month or as rapidly as auditors capable of performing this grade of work can be secured. At the minimum rate above mentioned, the net effective strength of the additional force would be equivalent to 400 additional resident auditors for the entire year, which additional force, I estimate could at the best complete a little more than one-half of the 1918 returns during the year. This class of cases calls for the highest technical skill and the features involved are often unusual and generally intricate and the taxable amounts are generally quite large. It is essential that the auditors engaged on this class of work be of the highest type and thoroughly trained to the end that the interests of the Government and of the taxpayer alike may be efficiently served and that each case may be satisfactorily and completely closed.

I have estimated for 75 additional engineers. Of this number 40 are needed in the Natural Resources Subdivision, 30 on the valuation of oil and gas properties and 10 on coal, timber, and metals. The work of these men is, as you know, of extreme importance in securing the retaining men capable of doing this class of work in sufficient numbers to make any substantial progress in determining the original valuations

The CHAIRMAN. What do these engineers do-go out and make a physical examination of the property?

Mr. WEST. Yes, sir. As I understand from the income tax unit that is the real problem, to get the value of the property.

Mr. KELLEY. You are speaking now of mining property?

Mr. West. All kinds of property, such as mining, oil, gas, and lumber, and these valuation and appraisal engineers are used for that work. They do not determine the final outcome, as I understand it, of the examination of the returns.

The remaining 35 additional engineers are needed for appraisal purposes in the amortization section. At the present time there are more than 1,500 cases on hand in that section, and as the average time consumed in closing a case of this character is approximately two months, the additional force requested represents the minimum possible toward making any progress in the disposition of the e ca es. It is planned to recruit the 75 additional engineers at the rate of 25 per month.

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