APPROVAL FOR SURVEILLANCE

Senator MONTOYA. Are you going to court every time that you have to use it?

Mr. WALTERS. We must have advance court authorization for any wiretaps and we get advance approval from the Attorney General for any consensual electronic surveillance.

Senator MONTOYA. Do you know of instances where your agents have done it without going to court?

Mr. WALTERS. I know of no instance where it was used without getting approval in advance.

Senator MONTOYA. Have you instructed them that they should not do it?

Mr. WALTERS. Yes, sir.

Senator MONTOYA. Do they use the tie clasp approach in any way? Mr. WALTERS. I don't know what the tie clasp approach is.

Senator MONTOYA. A hidden microphone or device in the tie clasp that records. Have they used that?

Mr. HANLON. We use devices of this nature in a few consensual cases and with prior permission of the Attorney General. This is a rare type of case.

Senator MONTOYA. You say special permission from the Attorney General, Mr. Hanlon, and you, Mr. Walters, say special permission from the court.

Mr. WALTERS. What we are saying is that for consensual electronic surveillance we get the Attorney General's approval and for nonconsensual surveillance or wiretapping we must get advance court approval.

Senator MONTOYA. It is both, then?

Mr. WALTERS. Yes, sir; one or the other, depending on the circumstances.

REVENUE COLLECTIONS

Senator MONTOYA. What were your gross collections during the last fiscal year, and how are your collections running this year on an annual basis?

Mr. WALTERS. As I recall, generally, gross collections were about $192 billion. We can get the exact figure. This year the returns filing and processing program is running about normal.

At this point we have slightly fewer returns filed, slightly less gross revenue paid in. But it is a normal season so far, except for some of the difficulties I pointed out earlier.

Mr. BECK. The figure for 1971 was $191.6 billion, which is the 192 the Commissioner mentioned.

Senator MONTOYA. What do you anticipate for this year?

Mr. WALTERS. A slight increase.

Mr. BECK. $199.8 billion.

Mr. WALTERS. It will be slightly up, just under $200 billion based on projections.

Senator MONTOYA. You didn't project this revenue on the basis of the bright picture in the corporate earnings structure of the economy, did you?

Mr. BECK. I am sure this is based on the situation late last fall.
Senator MONTOYA. It was very dark, wasn't it?

Mr. BECK. I would say yes.

Senator MONTOYA. For Internal Revenue, anyway.

Mr. WALTERS. There might be some offsetting features, Mr. Chairman. We didn't expect the fleecing we are getting from returns preparers.

Senator MONTOYA. I think you have done a good job in alerting them to your concern.

Mr. WALTERS. May I point out one thing, Mr. Chairman, while I think of it. That is, we are not against all returns preparers. The good ones render service to the taxpayers and to us, too. It is the bad ones we are worried about.

Senator MONTOYA. And you should go after them.

RETURNS FILED

I understand in 1971 there were 111.4 million returns received, which was a decrease of 1.6 million from the previous year. Why was that?

Mr. BECK. That was the impact, sir, of the Tax Reform Act of 1969 which took a number of low-income taxpayers off the rolls. With those people out, the trend is again upward.

Mr. WALTER. The Revenue Act of 1971, Mr. Chairman, will also take some additional people off the rolls. Of course, since the number of taxpayers is increasing there will be some offset.

Senator MONTOYA. You say the increase is at the rate of about 2 percent a year.

Mr. WALTERS. Two percent net is what we project; yes, sir.

TAX COORDINATION WITH THE STATES

Senator MONTOYA. Do you have any existing agreements on tax administration coordination with the States?

Mr. WALTERS. Yes, sir; we do. We have several and each year we add additional States because more and more of the States want to cooperate with this program.

Senator MONTOYA. Is this a reciprocal program?

Mr. WALTERS. Yes, sir; it is.

Senator MONTOYA. How many States are missing from this coordination effort?

Mr. BARRON. There are only two, Nevada and Texas, sir. Mr. WALTERS. I know every year new ones have been added. Senator MONTOYA. What kind of technical assistance is extended to States who participate in these agreements?

Mr. WALTERS. Basically, this is an exchange of information and does not involve technical assistance. However, as you are aware, under some recent legislation-and I don't recall the name of the act we are expected to provide technical assistance when requested We have been requested by 2 States to provide them with some technical assistance and we have done so.

I might add that we have used retired IRS employees who have the technical capabilities needed in the particular case. In this way, we do it at the least possible expense to ourselves.

Senator MONTOYA. What do you mean the least possible expense? Does the State pay these people?

Mr. WALTERS. They are not required to. If it gets into extended help, they will pay part of it.

Senator MONTOYA. But you do bear the burden of paying these people?

Mr. WALTERS. Yes.

Senator MONTOYA. Do you do it on a consulting basis?

Mr. WALTERS. In the two cases it has been on a consulting basis. There has been very little involved.

Senator MONTOYA. How do you get around the Retirement Act by hiring ex-IRS employees?

Mr. WALTERS. That I don't know, sir. Well, we can hire them on a consulting basis.

Senator MONTOYA. I know you can. That is why I asked you that question. And they can earn so much. But you have not put them on your own payroll?

Mr. WALTERS. No, sir.

Senator MONTOYA. They would have to go off retirement if you did that so you put them on a consultant basis.

Mr. WALTER. That is right. Our intention is to continue using these retired IRS employees where we can because many of them are young, capable, and vigorous.

Senator MONTOYA. The ones that are retiring today, after 30 years of service, are not getting as much annuity today, as you will be getting when you retire. I think some of them already have to go on relief on their retirement.

Mr. WALTERS. It is a help to them and to us.

Senator MONTOYA. It is good therapy for them, too.

Mr. WALTERS. Yes, sir.

2

Senator MONTOYA. I know most of your retired people in New Mexico because they come to see me all the time.

FOREIGN TAX ASSISTANCE

What comments can you offer us with respect to the foreign tax assistance program?

Mr. WALTERS. Mr. Chairman, let me generally say that over the past few years, of course, we have had requests from several foreign countries for assistance. We have been rendering some.

In some of the cases, we have completed these arrangements and are no longer in those particular countries. Each year we get new requests. The program has generally been reduced in size, although not in importance. One of our particular areas of interest is Vietnam, and we have had a team over there working with them and helping them for some time.

I believe Mr. Hanlon may have some more specific information, although not total.

INTERNATIONAL OPERATIONS

Mr. HANLON. Mr. Chairman, in our Office of International Operations we render taxpayers' assistance overseas. We sent over in December, 37 people to help our American citizens abroad prepare their

tax returns. As you know, we have 10 posts overseas and this is one of the ways we render assistance.

Senator MONTOYA. Do you conduct investigations overseas? Personnel permanently attached to our overseas posts plus revenue agents on detail in foreign counrties examine returns of U.S. citizens living abroad.

Mr. HANLON. Furthermore, if examination of taxpayers in the States indicates we need information from abroad, our overseas posts will prepare collateral reports.

If the need arises in a large-scale investigation or team audit, we may send overseas revenue agents engaged in the stateside examination to review the operations abroad. We found that by going out and making an onsite examination we can see things the books may not show well, such as whether they are taking proper depreciation.

Mr. WALTERS. May I just add that in this day of growth of multinational corporations, this is bound to be a much more critical and demanding concern of ours.

Senator MONTOYA. It should be.

I have been reading in the Wall Street Journal and the New York Times that many Americans are investing in savings accounts in Germany and other places.

How does the tax work on that? If they leave the interest there, is the interest taxable to the Americans?

Mr. WALTERS. In general, residents of the United States are required to report their income from whatever source. What the American citizen would be allowed to do, Mr. Chairman, is, if he paid tax to Germany on that interest earned there, then he would be permitted a credit based upon a formula provided in the law against his U.S. income tax. But he should report it to us.

Senator MONTOYA. He has to report it?

Mr. WALTERS. Yes, sir.

Senator MONTOYA. Does this mean that they have to receive the money in this country?

Mr. WALTERS. No, sir; it does not.

Senator MONTOYA. If it is credited to their account it is income? Mr. WALTERS. That is right.

Senator MONTOYA. What about the corporations that do business overseas?

Mr. WALTERS. Well, as we know, many corporations today do busi

ness overseas.

Senator MONTOYA. Take General Motors, for instance.

Mr. WALTERS. Most of them operate through subsidiaries. I would assume most of them file consolidated returns. But they are required to report the income, assuming it is an American subsidiary. Again there are special provisions that permit them credits. Of course, under the new DISC legislation, if this is a selling subsidiary set up to market U.S. goods in foreign countries so that the American businessman can compete on a more equitable basis with foreign businessmen, the American taxpayer now is permitted to defer taxation on 50 percent of that income.

Senator MONTOYA. Say General Motors might have a plant somewhere overseas and they have their own subsidiary in that country and that subsidiary is strictly under the domain of General Motors

here in this country. Say they have a net profit of $10 million as a result of that operation. Say $1 million has been exacted from the corporation in local taxes by the host country. Under our laws, if it were a domestic corporation, they would be required to pay, say another $1 million. Is that tax deferred as long as it does not come to this country?

Mr. WALTERS. That is right, sir, as long as the profit is not repatriated to this country the U.S. tax would be deferred.

TAXPAYER ASSISTANCE

Senator MONTOYA. How many taxpayers did you assist through your taxpayers assistance program last year? Do you have that number?

Mr. BARRON. 23 million is the figure that we have in our document. That is directly. And about another 7 million were assisted through indirect methods described earlier by the Commissioner, under our voluntary income tax assistance program, where we work through such organizations as the National Association of Retired People.

Mr. WALTERS. We also have programs in high schools and colleges, Mr. Chairman, where we attempt to train those who are interested to make the determination to go out and help in their community. This is principally situated in disadvantaged areas.

ECONOMIC STABILIZATION AND PUBLIC ACCOUNTANTS

Senator MONTOYA. I want to go into another subject. I have received some communications from a group comprising the membership in the National Society of Public Accountants in New Mexico. These public accountants, 180 of them, are licensed by the State of New Mexico. They comprise small business in their particular field and they do service small business.

Under current IRS regulations only attorneys and CPA's can represent businessmen before the IRS on appeals from decisions made under the economic stabilization program. Independent public accounts are denied this privilege. Why?

Mr. WALTERS. When we first began Phase II, Mr. Chairman, it was felt that we should have people who normally are authorized to represent clients, and you might say all the way through the courts representing them. However, we have had a large volume of protest on this. This question is currently being reviewed and we expect this to be changed promptly so that public accountants can represent their clients in this area.

Senator MONTOYA. I wish you would change it.

Mr. WALTERS. It is being changed.

Senator MONTOYA. Sometimes a public accountant can do more to explain the situation and to represent that individual than a lawyer

can.

Mr. WALTERS. Particularly if he handles his work right. This is being changed and should be announced in the next few days.