APPENDIXES I. Internal Revenue Service regulations, guidelines, manual, and policy statements concerning freedom of information__ II. Internal Revenue Service instructions and guidelines relating to freedom of information reading room- Page 181 224 231 III. Internal Revenue Service Chief Counsel's classification of records 265 FREEDOM OF INFORMATION: IRS MONDAY, APRIL 1, 1974 U.S. SENATE, SUBCOMMITTEE ON ADMINISTRATIVE PRACTICE AND The subcommittee met, pursuant to notice, at 10 a.m., in room 2228, Dirksen Office Building, Senator Edward M. Kennedy, chairman of the subcommittee, presiding. Present: Senators Kennedy (presiding) and Thurmond. Also present: Thomas M. Šusman, counsel and Ann Phillippi, staff assistant. Senator KENNEDY. The committee will come to order. Every American used to believe in the old adage that no matter who you were or who you knew, only two things in life were inevitabledeath and taxes. Many are no longer so sure about taxes. They are now convinced that a few-individuals with rich and powerful friends and corporations who buy political clout with campaign contributions— have found a way to escape the April 15 reaper. Certainly it is true that the compliance of Americans with their tax laws has always been the envy of the free world. It is equally true that the reason they comply is because they believe that our system of taxation is founded upon fair, uniform and even-handed enforcement of the law. Yet when we fill out our form 1040 this year, it is hard not to think of individuals earning hundreds of thousands of dollars who escape Federal tax liability completely; of oil companies with soaring profits who pay only 6 percent of their income in taxes, while workers pay more than triple that amount; and of a vast number of corporations who obtain special treatment under the tax laws. We also think about White House plans to use tax audits to harass political enemies; of White House plans to obtain embarrassing personal information from tax files; of White House plans to revoke tax exemptions for public interest organizations; and of White House plans to secure special treatment for friends. And we think about the allegations that the President himself may have avoided paying his lawful share of his own tax bill. Our system of self-assessment, backed by the full weight of the law whenever necessary, has produced a greater degree of voluntary compliance than the tax system of any other free people. But it is little wonder these days that, when Archie Bunker's daughter catches him cheating on his tax return, he replies, "I'm just, what do you call it, exercising my loopholes, that's all. Like the big guys." Last year a Harris poll found 60 percent of those surveyed in sympathy with (1) Archie's "taxpayer revolt"—a revolt most directly affecting both the financial soundness of our Government and the institutional soundness of the Internal Revenue Service. There is probably no agency of the Government which impinges more directly on the lives of more people than the IRS. Employing more than 68,000 men and women throughout the Nation, using one of the world's largest and most sophisticated computer systems, overseeing the filing of almost 117 million tax returns, the IRS resembles Orwell's Big Brother all too closely. Each year the IRS audits almost 2 million returns, handles around 50,000 administrative and court cases, and issues over 30,000 rulings. In requiring all taxpayers to report and pay the correct amount of taxes, the Internal Revenue Service demands that each of us lay bare to the Government many of the most confidential facts of our lives. These facts are used by the IRS to measure the accuracy and honesty of our compliance with the law. The Internal Revenue Service is guardian of our tax system, adviser to taxpayers, and policeman for our tax laws. Our hearings today will begin to examine the extent to which the IRS complies with the law-the Freedom of Information Act, which guarantees to every American the right to know what his Government is doing. At this time of the year, when the IRS is asking all taxpayers to provide confidential and personal information for tax collection purposes, it is appropriate for us to ask how fully and fairly the IRS is complying with its own obligation to supply the American people with information on its operations, its practices, and its procedures. Our tax program must be a two-way street. The IRS should expect taxpayers to comply fully with the enormous burdens placed on them by the tax laws. But taxpayers have an equal right to demand compliance by the IRS with requirements of the Freedom of Information Act. Thomas Jefferson said it best: If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be. Maximum public disclosure by the IRS of all its activities and decisions is necessary to secure and retain the trust and confidence of the public. Each taxpayer must know that he has been treated fairly. He must know that he has been treated the same as his neighbors, the same as his elected officials, and the same as the friends of those officials. In 1967 the Attorney General explained the purpose of the Freedom of Information Act in these words: If the government is to be truly of, by, and for the people, the people must know in detail the activities of the government. Nothing so diminishes democracy as secrecy . . . Beginning July 4, a most appropriate day, every executive agency, by direction of Congress, shall meet in spirit as well as practice the obligations of the Freedom of Information Act. Only if the Internal Revenue Service opens to public view its guidelines, rulings, and manuals can the taxpayer know what his rights are, what his obligations are, and whether he is being treated fairly and equitably. Only if the IRS discloses its reports, its statistics, and its studies can the taxpayer find out how the tax laws are working, and whether the system is being administered uniformly and even-handedly. Only if the IRS opens its deliberations, its decisionmaking, and its decisions can the taxpayer be confident that this vital institution of Government is free from improper influence. We intend this morning to begin an inquiry into the extent to which the Internal Revenue Service, in the almost 7 years since the Freedom of Information Act became effective, has complied with both the letter and the spirit of the law. I think we all recognize that the tax laws are voluminous and complex, that the professional staff at the IRS consists of some of the most able, independent men and women in our Government, and that Congress has continued to multiply the laws that the IRS is responsible for administering-most recently the wage and price controls-without correspondingly increasing the agency's manpower. Certainly Congress shares much responsibility for creating the loopholes and ambiguities in the laws that guide the IRS. Nonetheless, the public information law contains no exemptions for overworked officials, complicated issues, or controversial materials. And it is the implementation of this law that concerns us today. We have four witnesses in our hearing this morning: Mr. Mortimer Caplin, Mr. and Mrs. Philip Long, and Mr. Tom Field. Representatives from the Internal Revenue Service will be called to testify at some subsequent date. So that we can maximize the discussion given as to Internal Revenue Service practices we have asked all of them to appear in the panel together. We will hear testimony from each separately but we will give each individual an opportunity to comment on the other statements and observations. Our first witness will be Mortimer Caplin, currently practicing law in Washington, D.C. Mr. Caplin was a tax lawyer practitioner and a professor of taxes and in fact my professor of taxes at the University of Virginia Law School. In 1961 he was named Commissioner of the Internal Revenue Service by President Kennedy and served in that post until 1964 when he returned to the practice of law. He has been an old and dear and longtime friend who is always willing to come up and appear before congressional hearings. All of us benefit from such appearances, and we welcome your appearance this morning. We notice you have your son here as well, who is following in the traditions of the legal profession of his father. We want to welcome him too. STATEMENT OF MORTIMER CAPLIN, FORMER COMMISSIONER OF INTERNAL REVENUE SERVICE, WASHINGTON, D.C. Mr. CAPLIN. Thank you very much. It is a privilege to appear before your subcommittee to testify on the administration of the Freedom of Information Act by the Internal Revenue Service. The act has been a most welcome development for all administrative agencies. Nevertheless, I believe that no agency stands to benefit more from a general "free information" policy than the Internal Revenue Service. In recent years my law firm and I have made use of the act and materials disclosed by the Revenue Service under the act. We believe the act has made a salutary difference in the administration of the tax laws and in general taxpayer response to them. NATURE OF OUR TAX SYSTEM Our tax system, as you have pointed out, is largely dependent upon the voluntary compliance of our citizens-and over 97 percent of what we collect each year as a nation comes from what they report themselves and then what they assess themselves for. In turn, this outstanding record of compliance could not have been maintained if the Revenue Service had not succeeded in conveying a general impression that the tax system is administered fairly and equitably for all taxpayers-be they large corporations or individuals, Iowa farmers or New York stockbrokers. Obviously such an extensive and complex system cannot always operate with perfect consistency and equality of treatment. When each year close to 2 million income tax returns are examined by some 13,000 revenue agents and 3,500 tax technicians each a different human being, each with different abilities-something is sure to go wrong on occasion. But evenhandedness and equality of treatment should always remain the system's objective. And to the extent that this objective is not made perfectly clear to the public, we may expect public confidence in the system to waver, with adverse consequences for everyone. When these points are considered, it is clear that the Freedom of Information Act is not a threat to our tax system, but a positive aid. In effect, the act encourages the Revenue Service to search continuously for areas of disclosure and to come forward with a flow of information of interest to taxpayers. The Service has always had great concern over whether it has the authority to disclose certain information. I think that the Freedom of Information Act really took away this veil and gave the service an opportunity to reach forward to the public. Most of the information sought under the act concerns the Service's views of the tax laws and the means by which taxpayers may bring themselves into compliance with these laws. The Service should be glad to share this information with the public, and to use the opportunity offered by the act to enhance public knowledge and confidence in its activities. REASONS FOR IRS NON-DISCLOSURE I am aware of reasons why the Service might be reluctant to divulge some types of information. For example, there is clearly a need to protect from public scrutiny the internal decisionmaking process, that is, the "consultative functions" of government-"the advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and policies are formulated." Policies cannot be formulated and evaluated in a "fishbowl," and decisionmaking would be stultified if every policy recommendation by subordinate to chief had to be disclosed. This would ill serve the public interest. Similarly, the Service has an obvious interest in refusing to disclose the fruits of certain ongoing investigations, particularly |