CONSOLIDATION OF FIELD FORCES

It is recommended that serious consideration be given to the co solidation of the offices of the collectors of internal revenue and t offices of the internal-revenue agents.

A single organization will promote efficiency and convenience taxpayers in the collection of taxes for the following reasons:

Better service.-Better service will be rendered to the taxpaye since there would be one directing head and one office in each co lection district to which a taxpayer would correspond or personall visit in connection with the assessment, collection of his taxes, an audit of his return.

Under the present arrangement it is the exception rather than th rule when the office of the internal-revenue agent in charge and th collector of internal revenue both being in the same city are locate in the same building. In many instances the collector of interna revenue occupies space in the Federal building, while the office o the internal-revenue agent is in rented quarters. The reverse may b true in some instances where the Federal space is inadequate t house the collector of internal revenue and it is occupied by the internal-revenue agent if the requirements of the agent's office are less than that of the collector.

It is obvious that in the same city taxpayers are confronted with the situation of going to two offices to effect adjustments of their taxes. In the agent's office the amount of tax due may be determined satisfactorily to the taxpayer and then he must go to the collector's office to make payment. Taxpayers, as a general rule, are not familiar with Government procedure and can not understand why one Government official can not determine the amount of tax due as well as accept payment. The situation is more complicated in those States where there is no internal-revenue agent's office. As an example, the States of Idaho, Montana, and Utah are combined in one internal-revenue agent's division, with the office of the agent in charge located at Salt Lake City, Utah. Taxpayers in Montana and Idaho must look to the agent in charge at Salt Lake City for a settlement of their taxes and then make payment to the collector of internal revenue at Helena, Mont., or Boise, Idaho, depending upon the residence of the taxpayer. Assessments made by the bureau are received by the collectors in Idaho and Montana and occasionally controversies arise, in which case the taxpayer must appeal to the internal-revenue agent in charge or to the bureau. The collector of internal revenue, not being charged by law for the assessment of taxes, has very little, if any, information to give to the taxpayer. Their returns are considered either in the office of the agent in charge at Salt Lake City or in the bureau. If there were one office in each State, the internal-revenue official in charge would be in a position to conduct the business of collecting the internal revenue far more expeditiously and with more satisfaction to both the Government and the taxpayer. The case of the agent's division, including the States of Utah, Montana, and Idaho, is a typical one.

There are 64 offices of collectors of internal revenue and 36 offices of internal-revenue agents in charge. Attention is invited to organization chart No. 1 at the end of Volume III herein. It would be economically unsound to establish an office of an internal-revenue

agent in charge in every collection district where there is a collector's office, due to the small number of returns received, but a combination of the two offices could easily take care of the entire situation.

The following incident illustrates fairly well what transpires under the present plan of organization. This is a typical incident. An internal revenue agent makes an examination of the return of a taxpayer residing in Des Moines, Iowa. The taxpayer appeals from the recommendation of the internal revenue agent, and it is then usually necessary for the taxpayer to make a trip to Omaha, Nebr., where the internal revenue agent in charge is located. During the conference with the internal revenue agent in charge it develops that a settlement can not be reached until first-hand information is obtained, which is available only at the office of the collector of internal revenue at Dubuque, Iowa, where the taxpayer originally filed his return and paid his taxes. There is delay, expense, and annoyance due to such situations in numerous districts throughout the country.

Central control.-The central office at Washington will be in closer and in more harmonious touch with its field organization, due to the fact that there will be one directing head in each field district with whom to conduct correspondence and to whom the bureau can look for settlement of any question that may arise. One supervisory organization operating from Washington could maintain a proper inspection of these offices. Two exist to-day. At present it is necessary to deal both with the revenue agent in charge and the collector of internal revenue before final action can be taken in the bureau. This is especially true in connection with bankruptcy cases, fraud cases, and claims for refund.

Duplication of work.-Under the present plan there is much duplication of work, such as

1. Index cards.

2. Mathematical verification of returns.

3. Filing systems.

4. Disbursement clerks.

5. Correspondence.

As an example of the duplication of work in connection with correspondence the following is a typical case: The collector of internal revenue may address a letter to the bureau requesting information relative to some assessment that has been placed on his books for collection. The bureau upon receipt of the correspondence finds that the return giving the information desired is in the files of the revenue agent in charge. It is necessary for the bureau to address a letter to the internal revenue agent, who replies to the bureau, and then the bureau can intelligently answer the collector's question.

It is obvious that a substantial saving both in time and in money would be made if there were one supervisory official in each collection district with whom the bureau could correspond to bring about a satisfactory settlement of the various problems that arise in connection with the assessment and collection of the tax. It is difficult to realize the loss in time and the cost to the Government that this duplication of work brings about, but the magnitude can be readily realized when it is considered that there are approximately 5,000,000 income-tax returns filed each year that must be mathematically verified as to their accuracy, indexed, and filed.

Better legal advice to taxpayers.-Probably every taxpayer in the country knows the location of the office of the collector of internal

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revenue within his district. Each year the collector of internal revenue gives advice to many taxpayers. Naturally when any question arises subsequently about a taxpayer's return he expects to receive an answer from the collector of internal revenue. The features of the internal revenue laws are so intricate that it is almost impossible for one man to master them all. The taxpayer may receive legal advice from one of the collector's employees or from the collector, which is given in the best of faith. The return is filed accordingly and is sent to the internal-revenue agent for audit. The internal-revenue agent assigned to the case may place an entirely different construction on the law, and as a result either increases or decreases the amount of tax. The matter, of course, is eventually settled, but it is difficult for the Government to explain to the taxpayer why he received advice from an employee of one branch of the Government which is not sustained by another branch of the same bureau. Under a consolidated plan of organization as herein proposed there would be assigned to each office a sufficient number of employees to give advice to taxpayers and more consistent advice would be given.

Personnel. At present a large percentage of the employees in the offices of collectors of internal revenue are not appointed through the medium of the civil service. Deputy collectors are appointed by the collector of internal revenue, and as a result may or may not hold their positions during the tenure of office of the appointing officer and have no assurance of holding a position under a successor.

The employees in the offices of the internal-revenue agents in charge are selected from the civil service, and as a result the positions are more or less permanent; at least they are not subject to dismissal due to change of a supervisory official.

During the past three years there was a turnover in collectors' offices of approximately 3,000 employees, or 56 per cent of the present personnel. During the same period there were 993 resignations from internal-revenue agents' force, or 25 per cent of the present personnel. It is estimated that the cost of training an employee is approximately one-third of the first year's salary, and therefore the cost to the Government in this turnover is slightly less than $500,000 per

annum.

It is believed advisable to require that all employees enter through the medium of the civil service. If such legislation is enacted, an undue hardship may be imposed on many employees who do not at present have a civil-service status, unless some arrangement is made to give them an opportunity to obtain a civil-service status by a noncompetitive examination upon recommendation made by the supervisory officials or by a competitive examination in which they will be given due consideration for meritorious service and the special training they have received at Government expense.

It is also suggested that provision be made that the age limit usually required for civil-service examinations be waived as to applicants now in the collection service. The present turnover in the service is sufficient to eventually take care of the substantial reduction in personnel without throwing out of employment a number of people who have given years to the service. It would be unwise for the Government to lose the experience gained by these employees in the service, providing, of course, their work has been satisfactory.

In view of the enormous sums of money that employees attached to collectors' offices must handle, provision should be made for bonding civil-service employees either to the Government or to the supervisory officer in charge. The supervisory officer, however, should be bonded to the Government in such sum as the Commissioner of Internal Revenue may determine.

Appointment of the collectors of internal revenue.—In considering the appointment of collectors, attention is invited to four methods: 1. The appointment of collectors of internal revenue by the President, with the advice and consent of the Senate.

2. The appointment of collectors of internal revenue by the President, with the advice and consent of the Senate, the nomination to be made, however, by the President as the result of selection from the civil-service register or by the selection for promotion of an internalrevenue employee.

3. The appointment of collectors of internal revenue by the Commissioner of Internal Revenue without regard to civil service laws and regulations.

4. The appointment of collectors of internal revenue by the Commissioner of Internal Revenue, selection to be made from the civilservice register or by the selection for promotion of an internalrevenue employee.

Estimated economies.-There were in the internal-revenue field service on September 1, 1927, 9,048 employees.

There is a chart attached to this volume which indicates an ultimate reduction in personnel of 988 employees. This number will be composed of supervisory employees, telephone operators, janitors, disbursement clerks, messengers, file clerks, and other employees occupying positions that would be merged as a result of consolidation.

There will be a better utilization of space under a single organization, a saving in mechanical equipment, telephones, filing equipment, and a large number of other miscellaneous items.

By taking into consideration all the various elements that will enter into the consolidation plan, it is believed that a saving of approximately $2,000,000 per annum can be effected.

The proposed change would increase the efficiency by securing unified personnel, management, and control. It would reduce turnover by giving employees the security of civil service and opportunity for advancement. It would promote uniformity of administration and procedure by placing all field forces under the Commissioner of Internal Revenue. It would permit the transfer of employees from one office to another to meet emergencies. It would save rent, equipment, and reduce pay roll. It would lessen clerical and supervisory work in Washington. The records would be collected in 64 cities instead of about 100. It would eliminate a vast amount of work necessary in two separate organizations, such as the preparation of transcripts of returns and tax accounts and the conduct of correspondence between the two agencies. It would mean infinitely better service to taxpayers.

There is no way to make field administration, which plays an important part in tax determination to-day, economical or reasonably efficient so long as the present scheme is retained.

PART III. INVESTIGATIONS OF PARTICULAR SUBJECTS

EARNED INCOME

(Section 209)

The present Revenue Act in section 209 provides for a tax credit, between certain limits, of 25 per cent of the tax which would be payable on the earned net income of the individual if such earned net income constituted his entire net income.

This provision has been investigated both as to the propriety of taxing earned income at a lower rate than other forms of income and also as to the possibility of simplifying the present method of computation.

The principal results of this investigation are set forth in the following synopsis, and public analysis and consideration of the data presented is invited.

SYNOPSIS

1. The principle of taxing earned income at a lower rate than other forms of income appears to be justified in our income tax law for the following reasons:

(a) Earned income is subject to more uncertainty than is the case with income derived from capital; further, the individual expends his energy and ultimately is worn out in the production of earned income, while the unearned income from capital leaves such capital unimpaired.

(b) The acquirement of earned income on the part of the individual places him in general under expenses not borne by the individual with unearned income, which expenses are not deductible as in the case of a corporation.

(c) Since relief is given taxpayers from full taxation on income from capital, through the capital gains tax and through depreciation and depletion deductions, justice requires a proper rate reduction on earned income.

(d) The principle of taxing earned income at a lower rate than other forms of income is recognized by such countries as Great Britain, France, Italy, Belgium, and Spain.

2. The earned income provision is not generally understood by the taxpayer and causes more errors in the computation of income taxes than any other provision of the act. Investigation reveals that at least 10 per cent of all individual returns are in error on account of the earned income feature, and 20 per cent of all individual returns over $5,000 are in error from the same cause. From the above it results

(a) That the clerical work in audit is increased, with consequent delay and expense.

(b) That many small refunds or additional collections are required.

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