practice with which certified public accountants are most directly concerned.

The first question we would like to raise is about section 101 in title 1, on disallowance of unsubstantiated deductions. This is obviously closely related to the proposed amendment of section 54 (a) in section 103.

On the face of it, these proposed amendments may not give the Commissioner of Internal Revenue or the Secretary of the Treasury any authority which they do not now possess. Certified public accountants would be the last to suggest that taxpayers should not be required to keep records which will adequately substantiate the amount of income reported and deductions claimed. At the same time, if this bill is enacted, we hope it will be made clear that it is not the intention of Congress to require record keeping in such minute detail, beyond the ordinary practice of prudent businessmen and individuals, as to constitute an onerous and unnecessary burden on taxpayers.

In particular we hope the proposed requirement for substantiation of deductions will not be construed to prohibit the use of generally accepted auditing standards and techniques such as the "test check" approach which have been developed over a great period of years. It has long been recognized by professional accountants that the reasonableness of financial data can be established by something less than a complete and detailed audit of every transaction. The Bureau of Internal Revenue is represented at the examiner level by many men who are skilled in the observance of auditing techniques and standards. In fact, many internal revenue agents have had earlier training in professional accounting and auditing. The principle of accepting certain deductions as appropriate and proper because of the nature of the business involved without requiring detailed proof is long established.

Experience has proved that agents of the Bureau of Internal Revenue must be given reasonable discretion in the allowance of deductions. It is impossible as a practical matter to spell out in complete detail in regulations exactly what records should be required in connection with every type of deduction. The alternative to reasonable discretion would be an intolerable burden of paper work for the taxpayer, and also a burden on the Bureau of Internal Revenue out of all proportion to its effect on the collection of the revenues. It is a wellestablished fact that Federal taxation is a voluntary system based on self-assessment, and it requires taxpayer cooperation to work successfully. Additional burdens should not be imposed without the most careful consideration of their effect on taxpayer cooperation.

Along the same line, we hope that it is not the intention of the Congress, if sections 103 and 104 should be enacted into law, to require a great increase in the voluminousness of records to be kept by the average taxpayer. Furthermore, section 104 can be construed in such a way that compliance would be virtually impossible in many cases, from the accounting point of view.

As certified public accountants, a considerable part of whose work is tax practice, perhaps we should be expected to welcome a change in the law which would require taxpayers to seek more assistance from us and from other tax practitioners. We are, however, much more concerned with the reasonableness and efficiency of tax administration, and we fear that anything which added substantially to the burden of

paper work already required of the average taxpayer would ultimately lead to a breakdown rather than improvement of tax administration. Another proposal in this bill with which we are especially concerned is section 106, on the authority to examine records. The Commissioner of Internal Revenue already has the authority to subpena any records which he may need to examine in connection with a tax case. While we would hope and expect that the authority which would be conferred by section 106 would be exercised with discretion, we are not convinced that it is desirable or in the public interest to give the Bureau of Internal Revenue such broad authority to require any taxpayer or taxpayer's agent to appear and produce records, without limitations as to a particular matter or area. It seems to us that the language of the bill would encourage fishing expeditions which might greatly inconvenience and harass taxpayers and taxpayers' agents without accomplishing any necessary purpose. We have not seen any evidence that the present authority of the Bureau to obtain and examine records is insufficient.

Our final question with respect to this bill concerns sections 107 and 302, dealing with persons assisting in the preparation of returns, and unauthorized practice before the Treasury Department. Although it is not explicit in the language of the bill, we wonder if the amendments proposed by these sections would require major changes in the rules of the Committee on Practice of the Treasury Department. The American Institute of Accounts has devoted a great deal of time and thought to this question, and 4 years ago we initiated a conference with Treasury Department officials on this subject. At that time, we raised the question as to whether all persons who assist others for a fee in the preparation of tax returns should not be required to register. Treasury Department officials emphasized the tremendous administrative burden of registering the hundreds of thousands of individuals who may engage in such work on a part-time basis during the tax season, and particularly the difficulty of policing the registrants. We agreed with Treasury officials at that time that it would be highly undesirable for the Government to give any form of official recognition to individuals whose competence to assist others in the preparation of tax returns had not been tested.

We are not clear as to the type or extent of registration which is contemplated by these sections of the bill. We have no objection to a requirement of some form of registration for anyone who for a fee prepares another person's tax return. It is undoubtedly desirable that incompetent or dishonest individuals be kept out of this field. On the other hand, we would like to call the attention of this committee to the difficulties of screening all the people who now provide tax service during the tax season, and especially to the dangers of giving official recognition to such individuals through registration without testing their competence. If these two dangers can be avoided, some form of registration might be desirable.

I should like to repeat our support of the general purposes of this bill. We hope that the suggestions we have made are constructive, and will result in clarification of provisions which might prove unnecessarily burdensome without serving any really useful purpose. Thank you for this opportunity to present our views to the committee. Mr. COOPER. Does that close your statement, sir?

Mr. DANNE. It does.

Mr. COOPER. Any questions?

Mr. Kean of new Jersey will inquire.

Mr. KEAN. Mr. Danne, there is no registration in this bill.

Mr. DANNE. Congressman, it was not quite clear to us as to what was intended.

Mr. KEAN. It says just name and address to be stated on the return. Mr. DANNE. That coupled with section 302 speaking of unauthorized practice led us to wonder whether this was contemplated.

Mr. KEAN. The subcommittee discussed the question of registra tion very carefully, and the subcommittee was generally in accord with what you said about the fact that the complexities of registration were so great that it would put an undue burden on everybody. That is why we put in this provision rather than putting in a provision calling for general registration.

Mr. DANNE. Fine. As I say, we were not sure whether that was intended and we wanted to get these points across.

Mr. COOPER. Mr. Reed of New York will inquire.

Mr. REED. I call attention to page 3 of your statement. Your whole statement was very fine and very clear. I congratulate you. Mr. DANNE. Thank you, sir.

Mr. REED. I am disturbed. I put in the record a blank that has been prepared by the Treasury to send out and compel people to answer an infinite number of questions as to the transactions in a week, a month, or a year. It is claimed that that is to take care of racketeers. Really, the burden about which the taxpayer complains is not about the amount of tax he pays but the difficulty of keeping records. I can see where this leads to a very great abuse in the field, where the official says, "All right, you don't seem to have any records here. You don't have this or so. Suppose you answer this questionnaire." That is enough to terrify a man. I can see the purpose, but it can be greatly abused. I would like to get your opinion on that. What do you think about that?

Mr. DANNE. This form?

Mr. REED. Yes, this form that you probably know about.

Mr. DANNE. Yes, I am familiar with it. I understand of course that is only contemplated for use in cases involving fraud or suspected fraud. Of course that covers a wide area. I think it does put a tremendous burden on the average sincere and honest taxpayer to attempt to fill that out from the records which he would normally keep.

Mr. REED. With such a discretion in the Department of the Treasury with power to use it in the field, a great many people, perhaps thousands of people would say, "Well, that being the case, I had better keep these records," and that certainly is going to be a tremendous burden on these people who have a multitude of transactions.

Mr. DANNE. That is quite true. As I said before, we deprecate the keeping of insufficient records, but sufficiency is something less than we think is called for by the bill.

Mr. COOPER. Mr. Jenkins of Ohio will inquire.

Mr. JENKINS. You are speaking for the American Institute of Accountants?

Mr. DANNE. Yes, sir.

Mr. JENKINS. Now, do you have a special examination and qualification you have to meet in order to be a member of the institute?

Mr. DANNE. Yes, sir, one must be a certified public accountant in good standing.

Mr. JENKINS. They are certified under State licenses and you have 48 different qualifications?

Mr. DANNE. We have 48 different States plus the District of Columbia and the Territories. An examination is given practically uniform, prepared by the American Institute of Accountants for the various boards of examiners.

Mr. JENKINS. Your aim is to have all these persons belonging to your institution, your organization, with about the same qualifications all over the Nation?

Mr. DANNE. That is quite true.

Mr. JENKINS. About what proportion of the tax returns are prepared by other people than are prepared by your group? In other words, there would be many more times the number filled out by justices of the peace and notaries public all over the country than by members of your organization.

Mr. DANNE. That is true, sir. We have 19,000 members of the American Institute. By the barest "guesstimates" we concluded there are hundreds of thousands of persons assisting in some parts of the year.

Mr. JENKINS. I would say several times the Government representative comes to the post office; he is there a good many months of the year.

Mr. DANNE. That is true.

Mr. JENKINS. He advises them and keeps small business straight. At the time the rush comes on I expect there are not very many people who fill out their own blanks. Is that right?

Mr. DANNE. I think that the Forms Committee of the Bureau of Internal Revenue has done a good job with a complicated problem. Mr. JENKINS. That is right. I know I have to have help to fill mine out. I am sure everybody else does. So it is a big business.

Now, here is what I am coming to. In order to practice law all over the United States you have to be admitted to the bar. That is a long story, and we have been years in building that up. Still there are a good many shysters that practice law who are not eligible to practice law. The tax-collecting business is getting to be a tremendous business and it would be a fine thing for the people to make it as simple as possible.

Mr. DANNE. I agree with you, sir.

Mr. JENKINS. I have expressed myself here. I do not like for us to start by looking down on everybody as being more or less crooked. I would like to see the time come that everything would be simplified so that nearly everybody could pay his own taxes because a great many of them now have their wages withheld. Most people are small taxpayers, the big taxpayers have auditors and they have certified public accountants. They are good American people but it is hard for them to pay taxes.

Mr. DANNE. I agree with you. It should be made simpler for them, certainly not harder.

Mr. COOPER. Mr. Byrnes of Wisconsin will inquire.

Mr. BYRNES. In connection with section 101 which from the standpoint of the subcommittee has as its purpose the elimination of the Cohen rule, I would like to have your view as to what you think about

the Cohen rule, whether it is a sound principle to follow or whether you believe there should be a change in the present Cohen rule.

Mr. DANNE. Speaking as a certified public accountant, I think that the Cohen rule has placed the recognition of court on what has long been recognized by trained auditors as a common-sense approach or certification. Without intending to express an opinion on questions of law, I think it is one of the soundest rules we have.

Mr. BYRNES. In other words, you believe that a person should be able to deduct business expenses on pure estimate and on a pure assumption that since such a deduction would be reasonable in the trade, therefore, it can be assumed that this man had such a deduction. Is that really what the Cohen rule is?

Mr. DANNE. That is what it says. Perhaps I would not go as far as that. I would like to distinguish between the fact of a transaction. and the amount involved. I think that the Cohen rule can be relied upon to establish the fact of the transaction. As the court itself said, in the absence of proof as to the amount the taxpayer must bear the burden of the court's determination.

Mr. BYRNES. I think what the subcommittee had in mind was to get away from the idea that because in that particular trade or business a person might be assumed to have incurred certain business expenses which were deductible, therefore he actually had incurred them. It is an imposition on the Bureau in making an audit to require them to determine what expenses were reasonable deductions and what expenses were actually incurred and what expenses were not actually incurred, in the absence of any records.

Mr. DANNE. I see your point, Mr. Byrnes. I think Mr. Jensen would like to comment on that.

Mr. COOPER. Please give your name and address and capacity in which you appear.

Mr. JENSEN. My name is Wallace M. Jensen, certified public accountant of Michigan. I reside in Detroit, Mich. I am chairman of the subcommittee on tax legislation of the American Institute of Accountants.

As Mr. Danne has explained to the Congressman, we have felt that the Cohen rule had a lot of merit in that, at least every case of which we have knowledge, the fact that expenses were incurred has to be first established. Then the problem is, what proof does the taxpayer have? Does he have canceled checks and other support? In the cases that have gone to the court and in many settlements made in the field the taxpayer has been penalized because of not having had adequate records. We have had to advise taxpayers many, many times that if they really expect and want to have the deductions allowed that they must keep good records.

Mr. KEAN. You agree with this section then, you must keep good records. That is all the section says.

Mr. JENSEN. I am afraid the section goes too far in that it permits the revenue agent to disallow the entire deduction if the proof was only 75 percent.

Mr. KEAN. As you read the section, if a man proves 75 percent of them and 25 percent is not proved, the Government will disallow the whole 100.