Senator CORDON. That statement carries at least the inference to me that you have examined all returns in order to determine which returns are $7,000 or over?

Mr. ATKESON. That is correct. All of the returns are divided into two groups, $7,000 and over and $7,000 and under..

Senator CORDON. Is that $7,000 adjusted or net?

Mr. ATKESON. Adjusted gross income.

Senator CORDON. Of those under $7,000 adjusted gross income, you examine one out of four?

Mr. ATKESON. No, sir.

Senator CORDON. Form 1040?

Mr. ATKESON. No, sir. The Form 1040, we mathematically verify one out of four. Now then the 1040's are divided between those over $7,000 and those under $7,000. Now the over $7,000 returns are inspected and classified as to the content of the return so as to determine whether or not it would be worth while pulling it out and giving it to an agent to make contact with the taxpayer and make inquiry as to the nature of the return. Those under $7,000 are given the same treatment in the collector's office, they are examined for the purpose of determining whether or not there is any information on the return which would lead them to think that the return should be investigated.

Now actually they are able to pull out only about 3 or a little more than 3 percent of all the returns for this contact with the taxpayer, simply because they do not have the agents or the deputy collectors to take the returns and make inquiry of the taxpayer as to its content!

SIGNIFICANCE OF 3-PERCENT CHECK

Senator CORDON. You say 3 percent, that can mean 3 percent of a vast number of very minor claims and it can mean 3 percent of a very great number of very large claims and the two are certainly different in my book.

Mr. ATKESON. That is right, sir.

Senator CORDON. If your 3 percent goes only to your small returns, many of which represent nothing but salary payments, that is not too important to me; but if the 3 or 6 or 10 percent is applied to the larger incomes, then it becomes very important.

Mr. SCHOENEMAN. Yes, sir.

EFFECT OF LOWERED EXEMPTION

Mr. ATKESON. Mr. Chairman, may I make this comment? In the old days before we had the lowered exemption, we could have audited about 14,000 returns and covered almost 50 percent of the income. tax, but today more than 50 percent of the income tax is under the $7,000 adjusted gross income level. So when you start at the top and start auditing downward and just take the big cases, you are ignoring more than half of the tax volume.

Senator CORDON. But you are not ignoring half of the potential error that is there because of the minor returns which represent salary payments where withholding has been made and the opportunity for fraud is absent; is that correct?

Mr. ATKESON. What you are saying is correct in respect to the salary items, but there have been found from experience a considerable amount of understated tax returns as a result of misunderstanding in respect to exemptions and the tendency to leave off income other than salary, and I would like to say this, if I may, that I think the Commissioner has an answer on this particular point in respect to a study that is now being made.

: Senator CORDON. I have no more questions.

PERCENTAGE OF LOW LIABILITY

Senator ROBERTSON. What percentage of your eighty-million odd show a tax liability of $5 or less?

Mr. ATKESON. Mr. Chairman, in answer to Senator Robertson's question, I would like to say that I have it, but it would take me a few minutes to locate it here. Could I supply it for the record?

Senator ROBERTSON. Supply it for the record and give us an offhand guess.

Mr. ATKESON. I would be afraid to give you an offhand guess.
Senator MAYBANK. Could you locate it in a few minutes?
Mr. ATKESON. Yes.

Senator ROBERTSON. We had better get it in because it has a bearing on what Senator Cordon has referred to. I would guess it would be over 10,000,000.

Mr. ATKESON. Mr. Chairman, I do not believe I have it. I have a lot of other distributions, however, and if the Senator would like to have me give those, I can do so.

Senator ROBERTSON. Is there anyone here who can make a wellinformed guess on that point?

Mr. SCHOENEMAN. This is not in answer to your question, but you must bear in mind that of this 80,000,000 odd, 40,000,000 of those represent refunds of overpayments. That is a pretty good indication that we do not have many nontaxable returns. We have many returns indicating overpayment of tax which must be handled.

COST OF EXAMINING A CLAIM

Senator ROBERTSON. I am not as familiar as I was with this subject when I was on the Ways and Means Committee, but at that time, I kept in pretty close touch with what you were doing. At that time it cost the Bureau about $1.50 to examine a claim. We were told that it did not pay to spend that much to show a liability of $1.

Mr. ATKESON. Mr. Chairman, I wonder if I could answer Senator Robertson's question this way: You know the returns are classified by size of adjusted gross income and all with incomes of over $600 are required to file. I have them broken by the several classes and let us take for example, the $2,500 adjusted gross income class as one point. Now, 26,556,000 of the 84,000,000 returns are in the under $2,500 category. Now I could put this particular table for each of the detailed classes in the record, if it would be of interest to you, sir. Senator ROBERTSON. Do you want it in, Senator Cordon? Senator CORDON. Yes, I would.

(The tables are as follows:)

[Adjusted gross income classes and money figures in thousands of dollars]

[Adjusted gross income classes and money figures in thousands of dollars]

DETAILED CLASSES OF CLAIMS

Senator MAYBANK. What number, for instance, would be over the $7,000?

Mr. ATKESON. A little over 2,000,000.

Senator MAYBANK. All the way from $7,000 up?

Mr. ATKESON. Yes.

Senator ROBERTSON. Prior to the Revenue Act of 1942, which became effective in 1943, only one-tenth of 1 percent of the people in this country had a net taxable income of $10,000 or more.

Now that

has greatly increased but the percentage of those who have $10,000 or more is still relatively small as compared with the returns you get today.

Senator MAYBANK. What is the percentage?

Mr. ATKESON. A little over a million, which would be 1,000,000 out of 148,000,000 population, so it would be something much less than 1 percent today.

Mr. SCHOENEMAN. I believe that attention should be called to the loss we have even on the small returns such as the example I gave where the taxpayer selects his tax from the wrong column and it means a $100 error, which is not a small item for a small taxpayer. Senator ROBERTSON. That does not happen when they make the return on the form we adopted which was worked out on the Ways and Means Committee with the automatic deduction if they choose to report on the short form, 10 percent.

Mr. SCHOENEMAN. That is still in effect, the standard deduction. Senator ROBERTSON. And the uniform exemption of $500 for the wife or husband and $500 for each child? Mr. SCHOENEMAN. It is now $600.

TRIBUTE TO MR. MOONEY

Senator ROBERTSON. Your old employee, Mr. Mooney, by the way, was the man who really worked that out for me, and I think I should pay tribute to him because he was one of the best men on this subject I ever saw. When I was struggling to simplify these returns for the payment of taxes, simplify them for the Bureau as well as for the taxpayer, he told me that if we got a uniform deduction for the dependents we could get a simplified return. That is the original of the plan that I offered to the committee and it was adopted. Under that, 30,000,000 ór 40,000,000 of your taxpayers return in that manner.

DANGERS OF INADEQUATE INVESTIGATION

Mr. SCHOENEMAN. We are a little bit fearful that even the small taxpayers are able under our present system, because of our lack of investigation or because of our inadequate investigation, to get away without making payments which they should be making such as the instance of getting into the wrong column and arriving at the wrong amount. In the case of a person claiming an exemption he is not entitled to, he is getting a terrific advantage.

Senator ROBERTSON. I am not arguing that you do not need this money for more investigators, you understand, I am for that. However, I hope it is your policy to use those investigators to turn up real revenue and not $5 and $10 claims.