INVESTIGATION OF THE BUREAU OF INTERNAL

REVENUE.

FRIDAY, MARCH 14, 1924.

UNITED STATES SENATE,

SELECT COMMITTEE ON INVESTIGATION

OF THE BUREAU OF INTERNAL REVENUE,

Washington, D. C.

The select committee met, pursuant to call, at 2.30 o'clock p. m., in the Committee on Finance committee room, Capitol, Senator James E. Watson (chairman) presiding.

Present: Senators Watson (chairman), Jones of New Mexico, King, Ernst, and Couzens.

Present also: Mr. D. H. Blair, Commissioner of Internal Revenue; Mr. C. R. Nash, Assistant to the Commissioner of Internal Revenue; Mr. J. G. Bright, Deputy Commissioner, Income Tax Unit; Mr. N. T. Hartson, Solicitor Internal Revenue Bureau; and Dr. T. S. Adams, tax expert, Yale University.

The CHAIRMAN. The committee now meeting was appointed by the Senate, pursuant to a resolution introduced by Senator Couzens providing for an investigation of the Internal Revenue Bureau of the Treasury Department.

The committee met yesterday informally, and after some discussion, decided to ask Commissioner Blair and such assistants as he cared to bring with him to meet with us to-day for the purpose of outlining a plan of procedure or a program to be pursued by the investigating committee.

Senator COUZENS. I would like to ask Commissioner Blair if he has any suggestions, in view of the discussion that I had with him. several weeks ago, as to how best to proceed to get at the results, with the least possible interference with the conduct of the Internal Revenue Bureau.

Senator KING. And, Mr. Commissioner, while answering the suggestion of Senator Couzens, please have in mind what I am about to propound, in view of the fact that I offered the resolution for the investigation of the department, in which I charged that it was alleged that there was inefficiency and waste in the Internal Revenue Bureau, that the method of making refunds in the ascertainment of and the settling of accounts of taxpayers was inefficient and productive in many instances of fraud and corruption, or the opportunity for corruption— and that latter language is included in one of the "whereases" of Senator Couzens's resolution, although it is not a part of the resolution itself as passed; and in view of the further fact that it was stated in that and in another resolution that frauds were committed upon the

Government by reason of allowances for depletion in the returns on mines, particularly coal mines; the charge also having been made that employees who had separated themselves from the service had done so for the purpose of drumming up business against the Government, and that they and lobbyists and so-called experts and whatnot were bringing actions against the Government, claiming to have influence with the department to secure refunds, because my resolution contemplates an investigation to learn to what extent those things exist. We want to ascertain from you whether or not machinery should be established to pass upon these claims in the open, instead of by a sort of star-chamber proceedings; that instead of the methods which were employed in the past, to have a court with judicial powers to pass upon the claims, which you may make against others and the claims which the taxpayers would make against the Government, for refunds on account of illegal and improper assessments.

Those are the charges embraced in my own resolution, and I think this committee will want to inquire into those things. After having answered the Senator's suggestion, will you state how we can best, in your opinion, make an investigation of those charges to which I have referred?

STATEMENT OF D. H. BLAIR, COMMISSIONER OF INTERNAL

REVENUE.

Senator COUZENS. You have my question, Mr. Commissioner, have you not?

Commissioner BLAIR. Yes.

Senator COUZENS. All right; you may proceed now.

Commissioner Blair. The first question was as to how you could best proceed to get at something definite and concrete. I do not

think that you can get an intelligent understanding of this situation in your own minds, that is, a picture of the Bureau of Internal Revenue, and for that reason I have brought a chart showing the organization of the bureau, a copy of which I have placed before each

of you.

I really think you could get a better idea of the bureau by taking a little time to go through it, and I should like to invite the committee, at any time to suit its convenience, to go through this bureau and see just what the problems are that we are up against.

The bureau is located in seven different buildings, scattered pretty nearly all over the city of Washington. Five of those buildings are temporary buildings. One is on Louisiana Avenue; one at Sixth and B Streets, known as Building C; another large building at Fourteenth and B Streets, where most of the income-tax work is done, a temporary building; another known as Building 5, at Twentieth and C Streets; and then in the Treasury Building we have some offices; my own office is in the Treasury Building, the solicitor's office; and the office of the committee on appeals and review is in the Interior Building. Then we have annex No. 1, which is a fireproof building, just opposite the Treasury Building and next to the Riggs Bank. All of those buildings except the Treasury, the annex No. 1, and the Interior Building are temporary buildings.

From No. 5 building at Twentieth and C Streets, in which we have a large number of people, to the building at Sixth and B Streets I should

say it is 2 miles, and quite a number of the buildings are at least a mile away from the commissioner's office.

The CHAIRMAN. How many persons are employed in the bureau, in the aggregate?

Commissioner BLAIR. In the city of Washington?

The CHAIRMAN. In the Internal Revenue Bureau.

Commissioner BLAIR. Between five and six thousand-about 5,700. Senator KING. You mean just in the District?

Commissioner BLAIR. That is in the District. There are something over 19,000 altogether, including collectors' offices. Since last July we have reduced our force by some 2,000 people.

Senator KING. It seems to me that there ought to have been a material reduction following the war, because during 1918, 1919, and 1920 you were collecting double the amount of revenue that you are collecting now.

Commissioner BLAIR. Yes, sir; but the work on those very returns has been done in the last two or three years; but the Government had to have the money during the war, and in 1920 they made what is known as a superficial audit and sent out their assessments, with the idea of getting money quickly, and then having the returns audited accurately afterwards. Some one said, "They needed the money badly, and they shook the tree and got the easy fruit." Then the audit and the determination of the difficult questions concerning invested capital and other things were left, and that work was hardly commenced before the last month of 1920 and the early part of 1921. While it is true that we collected more money, the very work on those returns is the thing that has thrown us behind, and that superficial audit, which was necessary, I think, was the thing that has given us the most trouble up to the present time.

Prior to 1917, for the year 1916, there were about 450,000 incometax returns filed. The organization, of course, was small. For 1917 it jumped to 3,824,000.

Senator ERNST. The 450,000 tax returns were filed when?

Commissioner BLAIR. Those were for 1916. Those were returns filed in 1917 for the year 1916. For the year 1917, it jumped to 3,824,000; in 1918, it jumped to 4,742,000; and in 1919, it jumped to 5,652,000.

Senator KING. But a good many of those returns did not get you any revenue.

Commissioner BLAIR. That is, of the returns filed, some were nontaxable, and some were the small returns on less than $5,000.

In 1920, it jumped to 7,605,000; in 1921, it exceeded 8,000,000 returns. In 1922 it was not so great. There were 7,575,000 returns filed in that year.

The force in 1917 and 1918 was not adequate. Men who ought to have been doing that work, or who were best suited for the doing of that work, were in the war, and they were obliged to get anybody they could; the law was new; nobody knew anything about it. It was complicated.

Senator JONES. My recollection is that the statement was made. that there were not enough auditors in the country to really do the work during that time.

Commissioner BLAIR. I think that is true, Senator Jones. Somebody has said that the automobile has made us a nation of mechanics.

The income tax law is going eventually to make us a nation of accountants; but they did not exist at that time, and there was nobody to do the work. The result was that it just accumulated and piled up. They had no machinery; they had no organization. I think they did a marvelous piece of work in 1920 to get this thing organized and in shape, and they built up a good machine for the doing of this work, but that machine was not in complete operation until the last of 1920. In that time, the income tax returns were piling higher and higher, and we have been trying to clean up that situation during the last three years.

The CHAIRMAN. How many cases remained unadjusted at the time that you became Commissioner of Internal Revenue?

Commissioner BLAIR. I can not give you the exact number, Senator Watson. I did not know just what the purpose of this meeting today was, but what I want to do is to ask you to permit me to file, within a few days, a brief history, showing just those facts. I should like to supplement any statement that I may make today by filing a written statement with you. I will prepare that statement very quickly, and will file some day next week, if permitted to do so. Senator KING. I move that he be permitted to file that statement. The CHAIRMAN. Certainly; you may do that, by consent. Senator KING. Proceed and bring the matter on up, unless you desire to make the statement in your own way.

Commissioner BLAIR. The bureau is making rapid progress within the last year and a half in getting these cases closed. We believe, and we are confident, that, in spite of all the obstacles, by the end of the next fiscal year we can have this work reasonably current. Senator KING. That means by June, 1925?

Commissioner BLAIR. Yes.

Senator ERNST. Mr. Blair, in your judgment, have you all of the assistance that you now need in your bureau?

Commissioner BLAIR. I am basing the statement I have just made on our present organization. I think last year we did cut our forces more than they should have been cut. I think we could have held

many of the men to good advantage. You will remember that our appropriation was cut some $3,500,000, and we reduced our forces very materially. I think some of those men could have been held to very excellent advantage to the Government.

Of the 1917 returns, for example-and I want you to understand that this includes the little returns, the big ones, the non-taxable ones and all-we have closed 99.7 per cent. I give you the percent, because, when it gets into millions, the number looks large. There are still pending in the bureau 9,135 1917 returns.

The CHAIRMAN. The other day, Mr. Gregg, representing the Treasury-a very intelligent young man, too-said before the Finance Committee that there were 68,000 of those cases, and that they are being adjusted now at the rate of 14,000 a month.

Commissioner BLAIR. Mr. Gregg had the figures of last December in mind, and I had the 1917 and 1918 figures in mind, instead of the 1917 only because those are the correct figures for 1917 and 1918. Senator KING. He may have been giving the aggregate number of cases that are being disposed of every month, rather than the number which might be allocated to the 1917 returns.

Commissioner BLAIR. Yes. He was correct as to the approximate number of cases which we are disposing of every month.