TAX LAWS

Mr. SCHOENEMAN. This sum is to be derived from the administration of the 79 separately classified taxes which are now on the statute books. In the accomplishment of this objective and the execution of this program, good administration requires uniform and equitable enforcement of each of the 79 levies among all geographical areas and among all income and economic segments upon which imposed.

In the administration of these taxes, there are five primary "activities"; namely, (1) interpretative and ruling work incident to the administration of the taxing statutes; (2) front-line enforcement; (3) technical enforcement behind the front line, such as review, hearing of taxpayer appeals and legal work incident thereto, and enforcement of the special technical provisions of the code; (4) processing and control of all payments, tax returns, papers and records; and (5) executive direction of the entire program of administration, which is defined to cover the persons attached to the Office of the Commissioner who are working on top-policy problems.

The purpose of preparing budget estimates according to "activities" is to permit each activity to be analyzed from the standpoint of relative importance and essentiality in the light of the over-all Government program. This same purpose underlies the classification of our estimates as among the primary "activities" of internal-revenue administration.

NUMBER OF EMPLOYEES DISTRIBUTED BY ACTIVITIES

For the fiscal year 1951 the distribution of the employees and the percentage of the total among the primary activities will be as follows:

In the future, we anticipate that many refinements will be made in this list of activities and our basic work-load data in order that more detailed and exact comparisons may be made between the programs, the number of work units, and the man-years required to produce a given number of work units.

The estimates this year contain over-all work-load indicators, but no satisfactory weighting formulas have been developed which will permit the mathematical calculation of the precise number of manyears required to perform given numbers of work units of different types. Moreover, so many changes are currently being made which will affect the productive capacity of each employee that it is unusually difficult to make precise estimates at this time.

As to the five primary activities shown, it is important to note that, as compared with the fiscal year 1949, actual decreases in number of

man-years are being recommended in two instances: namely, (a) processing and control, and (b) technical enforcement.

In view of the fact that the two activities-processing and control, and front-line enforcement-comprise 93 percent of all employees, I think it is important for you to have certain details concerning them.

PROCESSING AND CONTROL

The processing and control activity embraces all routine operations involved in the receiving, processing, recording, filing and controlling of taxpayer returns, remittances and claims, and related information. documents. The estimates for 1951 provide a total of 19,604.3 manyears, or 33.8 percent of the total requested for the Bureau.

This activity is the field of operations at which we have been hammering with the end in view of reducing costs through the adoption of improved methods. Concentrated attacks have been made. upon it by an investigative group of your committee; an investigative group of the Joint Committee on Internal Revenue Taxation; a committee established by the Secretary under the chairmanship of Mr. Wiggins; a privately employed management-engineering firm; and operating officials of the Bureau. These have resulted in a long list of completed changes, with many more in process of installation and still others in the testing stage.

I shall not take your time to itemize these improvements, as the major ones are set forth in the 1949 report to the Secretary of the Treasury from the Committee to Direct the Management Studies of the Bureau of Internal Revenue. I would like to leave with each member of the committee a copy of this report. With your permission, I should also like to have a copy incorporated in the record.

Mr. GARY. I will glance through this and decide about putting it in the record. If it is to go in, I think it really ought to go in at the end of your statement.

Mr. SCHOENEMAN. Yes, sir.

The important point is the over-all effect of such improvements. This effect can best be demonstrated by the absolute decrease in the number of employees being requested for 1951 to perform the processing and control work. We had 20,261 man-years devoted to this activity during the fiscal year 1949. For the fiscal year 1951, our estimates provide for 19,604, or a decrease of 657 man-years. This is indisputable evidence that the drive which we have been making to find new and better ways of performing our "housekeeping" functions is beginning to bring tangible and substantial results; and I can assure you that, as additional reductions become possible from still further improvements, they will be reflected in our estimates for future years.

The figures I have just given you, however, do not tell the whole story of our advances in the performance of processing and control operations. There has been a marked improvement in the quality of the work done. Notices of estimated tax installments are sent out well in advance of the due dates. Index cards are filed promptly. Backlogs of correspondence with taxpayers are being gradually eliminated. The scheduling of all 1948 overpayment refunds-almost 38,000,000-was virtually completed by May 31, 1949. In a word, our housekeeping duties are being performed fully, neatly, and promptly.

60561-50-pt. 1-10

An improvement of this type cannot readily be measured by ordinary statistical methods, but we know that it is recognized and greatly appreciated by the taxpayers generally.

FRONT-LINE ENFORCEMENT

I pass now from the processing and control activity to front-line enforcement. The front-line enforcement activity accounts for over one-half of our total expenditure. It represents 59 percent of our total man-year estimates. This activity has been defined in our justification as embracing all front-line investigations and audits, obtaining delinquent returns, uncovering evidence of fraud, collecting taxes not timely paid, serving warrants for distraint, and legal work involving criminal investigations. It also includes investigative work performed in connection with the analysis and disposition of all clams for refund other than the overprepayment type of refund. The examination of claims absorbs a surprisingly large fraction of the time of our revenue agents. Let me illustrate by reference to the excess-profits-tax relief claims filed under section 722. During the fiscal year 1949, the total number of revenue agents on the rolls averaged about 6,800, and of these nearly 600, or 8.5 percent were assigned to field work on section-722 claims. Admittedly, this is administrative work of the highest importance, involving the disposition of billions of tax dollars, but it is not work that gives rise to additional assessments and collections, but is work that of necessity must be performed even to the exclusion of the audit of cases which would produce added revenue.

The front-line enforcement activity also includes the alcohol-tax inspectors, investigators, storekeeper-gaugers, and associated clerical personnel. The work done by these officers is indispensable to proper enforcement of the alcohol-tax statutes. But, again, it is a type of work that is not reflected in the figure of additional tax assessed.

The total number of man-years requested for all front-line enforcement work is 34,307, or 7,956 more than we had for 1949, and 2,637 above the appropriation base for 1950. Of the 34,307 man-years requested for 1951, 28,818 represent field deputy collectors, collectors' office auditors, returns examiners, revenue agents, special agents, miscellaneous tax agents, alcohol-tax inspectors, investigators, and storekeeper-gaugers. The remainder of 5,489 represents typists, stenographers, and clerical assistants directly servicing the above-named enforcement officers. Under the activity budget, this latter class of employees has been classed with the front-line enforcement work rather than processing and control, since they are needed solely to support the front-line officers. It is because we have the front-line officers that we must have these auxiliary employees.

Front-line enforcement is a field of work in which we can do little or much. It is purely a matter of public policy. It represents the policing aspects of the internal-revenue service. If we vary the number of employees in this work, we vary the amount of governmental

revenue.

In reaching the decision to recommend an increase for 1951 in frontline enforcement personnel, we took account of certain factors which we felt were of sufficient important to influence a policy decision of this nature.

First. By 1951, it is likely that additional assessments resulting from the audit of excess-profits-tax cases will be only a small fraction of their volume during the years up to 1949. For the past few years, added assessments from this source have averaged close to one-half billion dollars annually. Therefore, it has seemed proper to make an attempt to offset this decline in revenue, insofar as possible, by an expanded audit program.

Second. During 1951, the statute of limitations will have run against most of the returns for the war years, except in the case of fraud and those returns protected by claims or consents. Thus, most of the wartime money cases will have been closed and we will be dealing with the postwar tax years in which there will be a general tightening up of tax issues, which will tend to reduce the rate of added assessments.

Third. The general level of tax rates applicable to the postwar returns has been materially reduced, and each dollar of understated net income discovered through audit will be worth much less taxwise than formerly. $100 added to the surtax net income of a married man at the $20,000 level in 1946 and 1947 was worth $53.20 taxwise. Beginning with 1948, it is worth only $33.44, or less than two-thirds of the earlier figure. In the case of corporations subject to the excess-profits tax, the drop is from $85.50 to $38 for each $100 of income. So, with the same examining force, the added revenue will inevitably drop, which drop can be partially offset only by examining a larger number of returns.

Fourth. The audit-control program, which we described to you last year, has more than confirmed our previous estimates as to the amount of revenue that we were losing each year through failure to examine a larger proportion of the individual income-tax returns. Preliminary results of this survey indicate that we will lose more than three-quarters of a billion dollars in the individual income-tax field alone for the tax year 1948 by virtue of our failure to examine all the returns. As yet we have no idea as to our annual loss in the corporation income-tax and excise-tax fields, but we propose to find out and report the results to you.

Fifth. It is not possible to maintain reasonably adequate compliance with the tax laws by confining audits to the upper-income classes, and the more productive cases from the standpoint of immediate return, when we have tax laws which depend upon returns of income under $7,000 to supply more than one-half of the total individual income-tax liability.

Sixth. During the fiscal year 1949 we closed 1,890,565 warrant cases on which we collected long overdue taxes in the amount of $347,000,000. Notwithstanding our drive in this field, we are steadily slipping behind. As of October 31, 1949, there were on hand 1,041,899 warrants involving $535,500,000. This compares with 1,037,669 involving $481,500,000 on hand at the same time a year ago. The longer these cases are allowed to go uncollected, the less chance there is for collection.

Seventh. The final factor which has influenced us to recommend expansion of our enforcement activity relates to the refund situation. During the fiscal year 1949, we refunded $2,903,000,000, most of which related to the returns for the tax year 1948, and $2,510,000,000 of which was refunded prior to audit. This represents a huge sum to allow on a

tentative basis and there is obvious need for expanded follow-up of these refunds.

The joint committee's advisory group stated the case very well when it said:

There is no automatic device which can be used to determine Bureau needs and to shut off or accelerate its enforcement efforts. The committee has weighed carefully the testimony from competent observers both within and without the Bureau on the point, has examined such statistical evidence as it believes pertinent (there are no statistical data which provide more than a fraction of the total evidence to be taken into account), and has come to the conclusion that a substantial increase in the over-all enforcement activities of the Bureau is clearly in the interest of the country.

*

The benefits of added front-line enforcement are not fully reflected in the added assessments made during a given year but are simultane-. ously cumulative and expanding. They are cumulative because a taxpayer who is set right in one year as a result of an audit tends voluntarily to report the proper amount in succeeding years. They are expanding because a taxpayer who is examined for the first time quite frequently passes the word on to his friends and neighbors, with allaround salutary effect. The sum of the benefits to be derived cannot be measured solely in additional assessments, as these taxes are reported voluntarily and are included as dollars voluntarily paid, and thus will firm up the basic collections. And let us make no mistake about the need to firm up the basic collections. Weak front-line enforcement will cumulatively reflect itself in a decline in basic collections.

During the fiscal year 1949, we were able to make 3,073,301 examinations of all classes of tax returns. During this fiscal year we anticipate that we will make 3,473,000, and for 1951, on the basis of the personnel requested, we will make 4,183,000 examinations. The total tax added by audit for the fiscal year 1949 was $1,891,679,000, of which $561,659,000 represented excess-profits tax assessments.

In concluding this portion of my statement, I would like to point out that the number of examinations provided for, namely, 4,183,000, is to be compared with the total of 83,484,300, which represents the number of returns to be filed. This is an improvement over the current examination ratio, but nevertheless it is far below the level of enforcement needed to maintain a high standard of voluntary compliance by taxpayers.

GENERAL NATURE OF ESTIMATE

Our total monetary request is $253,000.000 to cover all operating costs of the Bureau in the fiscal year 1951. This represents an increase of $23,287.263 over our 1951 appropriation base. The increase is comprised of the following: $8,000,000 to meet the pay increases provided by the Classification Act of 1949; $2,402,317 to meet the cost of automatic promotions required by law; $9,254,531 to provide an additional 2,956 positions in front-line enforcement work; $1,864,198 to meet related travel, equipment, and other nonsalary costs of the added 2.956 positions; and $1,766,217 to purchase new mechanical equinment which partially accounts for the decrease of 657.2 man-years in the processing and control activity.

Our personnel request is for 2,956 additional positions, which with the number granted last year will bring us up to within 41 of the