Friday, Apr. 13, 1962

Due, Blue, and 97% Pure

The advent of April 15 each year is hailed, as sure as death, by newspaper accounts of heavy punishment being visited upon miscreant taxpayers. The timing is no accident: the Internal Revenue Service likes to give the impression at filing time that, like the Mounties, it always gets its man. Last week, as some 62.9 million Americans went through their annual throes, they could reflect on the well-publicized tax indictment of J. Truman Bidwell, chairman of the board of governors of the New York Stock Exchange.

Then there was the invasion of Fordyce, Ark., by 30 tax agents who checked the 1961 returns of nearly 1,000 of the 10,522 citizens of Fordyce and surrounding Dallas County--and found that many had not filed any reports at all last year. And the U.S. taxpayer could also contemplate the case of a Brooklyn man arraigned for claiming an exemption for his mother, who had been dead for ten years. His wonderful explanation: "Mother's still alive in my heart." Such items effectively get across the idea to the taxpayer that the odds are heavily against him in his annual duel of wits with the tax collector. And so they are: the Internal Revenue Service, with 58,584 eagle-eyed workers in 1,224 offices, is by far the biggest, most efficient and most successful revenue collection agency in human history. But the U.S. taxpayer is quite a fellow himself. In his heart burns a variety of emotions: deep resentment, hopeless resignation, awful foreboding, dark temptations. His conscience, if it does not always triumph still does pretty well. Unlike the Italian, the Latin American or the Frenchman, for whom tax evasion is a way of life, the U.S. taxpayer turns over anywhere from 20% to 91% of his income, as requested, with uncommon honesty. Like everyone else, he likes to play the game with the tax collector, but usually for small stakes. IRS Commissioner Mortimer Caplin estimates that the U.S. taxpayer is 97% pure.

To help the taxpayer stay pure, the Internal Revenue Service has set up a system of checks and double checks. When a return first lands on the desk of a local collector, it is scanned for proper information and necessary enclosures. Minor errors are corrected, and marginal sarcasm from taxpayers calmly endured. But wait! Less obvious errors, or outright evasions, are searched out after the returns have been routed to three data-processing service centers across the U.S. There returns are translated onto a punch card and checked by machine for arithmetic accuracy. The U.S. taxpayer is pretty punk at adding and subtracting: almost 2,400,000 errors were caught last year. Of them, about 1,500,000 were in the taxpayer's favor, to the tune of $132 million; but 892,000 citizens shortchanged themselves by $66 million.

Dreaded Audit. For most taxpayers, the arithmetic check is the last made on their returns. But the IRS selects about 5% of all the returns for more thorough checking--the dreaded audit. The criteria used for auditing are as closely guarded as the formula for Coca-Cola, vary from year to year to keep the taxpayer off guard. Those who have run into trouble in a previous year almost invariably get a second or third look. Upper bracket incomes get special scrutiny, and if a taxpayer makes more than $25,000 a year, the odds are 1 in 4 that he will be audited.

In about a third of the audits, the taxpayer gets off clean. The rest almost always produce an increase in his tax--last year amounting to $2 billion. The IRS claims that it is not vindictive and only wants to get its money, but it cannot shake the conviction of many investigated taxpayers that an auditor is judged by how much more money he can dredge up.

If the taxpayer is caught, he can usually escape simply by paying up, with 6% interest. Better than 98% of all challenged returns are resolved without going to court; last year only 764 citizens suffered criminal tax convictions.

Canine Dependents. The most common form of chiseling is the phony dependency claim. Some taxpayers simply make up names; others list more children than they really have. Still others claim dead relatives, cats and dogs as dependents. Business deductions run a close second in disputes. This year the taxmen are keeping a closer eye than ever before on entertainment and travel deductions, and the Administration is seeking legislative repeal of the so-called "George M. Cohan rule." Deciding a tax suit filed against the free-spending Broadway actor, a court ruled in 1930 that the IRS had to accept his word that some entertainment deductions were part of his business, even though he could produce no receipts or records. The ruling has hampered the IRS ever since in its efforts to corner businessmen with heavy expense-account deductions.

For every tax cheater, there is at least another taxpayer who ends up paying too much, either out of timidity, ignorance, or failure to take full advantage of the tax laws. Many taxpayers do not read far enough to realize that they may be entitled to a 4% credit on dividend income.

Consultants feel that most taxpayers do not deduct enough for medical expenses, and that they seldom make an attempt to document losses due to floods, storms or fire. Still others forget to deduct for insurance payments, excise, taxes, sales taxes.

Even the man who wants to throw out furniture can turn it into a tax benefit. By donating furniture or clothes to a thrift shop run by a charity (there are 36 such shops in New York City alone) he can deduct the fair market value.

The taxpayer is more likely to get into trouble for what he puts on his return than for what he omits. The Service estimates that more than $24.4 billion in income went unreported last year, representing about $4 billion in tax money. The sole proprietor--the doctor, lawyer, farmer or small businessman who keeps his own records and is often paid in cash--is the chief offender in failing to report income.

Ceaseless Search. The search for clues to such offenders never stops. Many IRS agents spend much of their time scanning the newspapers, carefully clipping anything that might point to a suspicious tax situation: a gossip-column item that a movie star has bought a yacht, a crime story reporting the discovery of a heroin cache, a doctor's indictment for malpractice. The Service also gets help from tips by informers, who are frequently disgruntled employees, wives or girl friends. Last year the IRS collected $12 million as a result of informers' tips, paid them $522,000 (they get up to 10% of the reported tax). Some taxmen now check on the informers themselves, on the theory that if they know so much about such dealings they may at one time have played the game themselves.

Few taxpayers are informers--but most of them resent the fact that the other fellow so often seems to get away with something. They do not grumble so much about the size of their own tax as about loopholes or advantages open to others: the foreign tax shelters, the oil-depletion allowance, the movie star or businessman who settles his tax bill for less than he owes, the man who can afford high-priced accountants to get around taxes even if he does not evade them. The Internal Revenue Service believes that the whole tax structure needs a complete overhaul, and the Kennedy Administration has promised to present a tax-reform bill to Congress--one that promises to set off a mighty brouhaha. Meanwhile, the IRS, like the taxpayer himself, is bound to the existing tax rules--and loopholes.

Forms & Reforms. Nonetheless, Big Brother seems confident that the days of the finagler and the fudger are numbered.

Under Commissioner Caplin, a former University of Virginia law professor who taught both Bobby and Ted Kennedy, the Government is toughening up its stand on tax loopholes and tax offenders. Personally, Caplin believes that the Government could garner at least as much money--and make the majority of taxpayers happier--by reducing tax rates to 10% in the lowest bracket and to 65% in the highest bracket while getting rid of most exemptions, and lowering oil-depletion allowances. To make present tax rules more intelligible, the IRS has cut form 1040--the long form used by more than a quarter of the nation's taxpayers--from four pages to two, laid it out in more logical order and simplified it in 19 places. Last summer Caplin took personal charge of a committee rewriting tax forms, tried out the phraseology of newly written forms on his wife Ruth. An English professor was called in to help redraft the forms in simple English--a task that has been at least partly successful.

Caplin believes that much more than the tax form needs change. He has introduced something called a "quality audit," which he hopes will raise a lot more money. Revenue agents used to go over large numbers of returns, generally stopped auditing when they found one violation or error. But the IRS believes that some taxpayers, particularly businessmen, throw in an easy-to-spot violation as bait to get the audit over with while hiding the really important evasion.

In the quality audit, such returns get a thorough going-over by agents under no pressure to run up numbers.

Psychological Advantage. Beyond that, the IRS has in the works a system calculated to scare the daylights out of every taxpayer in the land. It is called ADP--for automatic data processing--and its heart will be an electronic computer system headquartered at the National Computer Center at Martinsburg, W. Va.

Every taxpayer will be given an identity number (85% will use their social security numbers; the others will be assigned numbers), which will have to be included with his name on not only his income tax return and withholding statements but on any bank, corporation or other business report of dividends, interest, rent or royalties. At IRS regional centers, information from the returns will be transcribed on punch cards and then on magnetic tape before being shipped to Martinsburg. Eventually, Martinsburg will contain a master file on 80 million individual and corporate taxpayers that will stretch for 400 miles on magnetic tape, yet be stored in a single room measuring only about 30 ft. by 40 ft.

When the computer system, which will cost the Government $7,000,000 a year to rent, is fed a taxpayer's return, it will match informational documents and past returns in its memory with the new tax report. For the first time, all withholding statements will be checked against returns, and the machine will immediately indicate what citizens have not filed returns. The computers will rapidly disclose who owes taxes for previous years, who has refunds coming and who filed duplicate claims for refunds. "We can program this thing," says Clinton Walsh, chief of the IRS's management branch, "to do just about anything we want it to do." The computer system has already been pressed into service to process business tax returns from the seven Southern states, even writes businessmen robot letters if they pay too much or too little. But the taxpayer has a period of grace before the impersonal and sleepless computers go to work on the entire country in 1966--and the IRS is using the interim to 156.8 psychological advantage. "As a word to the wise," says Commissioner Caplin, "I would say that this is a very good time to clean the slate if past errors or omissions are known. In fact, if I had a friend with doubts about his personal tax records. I would advise him to drop around to his district office soon and clear them up." Your friendly neighborhood tax collector thinks the odds are about to make the struggle completely one-sided.

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