Causes and Effects of the Tax Return Blockade

A survey of the work done and remaining to be done in the Bureau of Internal Revenue on back income tax returns discloses an accumulation of 1,605,955 returns, or 22 per cent of the whole number received by the Income Tax Unit for audit since 1917. These figures are as of March 1, 1924, the last date for which any statistics are available. They do not include returns filed March 15, upon which the work of audit has not yet started. Of the back returns still awaiting final audit 28,203 are 1917 and 1918 returns. The evidence is that the Income Tax Unit has only recently begun to make substantial progress on the auditing of back returns.

Hardships to Taxpayers

In consequence of the accumulation of returns, thousands upon thousands of taxpayers have been left, in doubt, “some for more than five years, as to the amount of their ultimate tax liability. Until the expiration of the five year limitation on additional assessments, no taxpayer can be certain, under the present condition, that he will not be suddenly confronted with a demand for large additional tax payments upon the final auditing of his returns for past years. These additional assessments, in the case of large taxpayers have sometimes amounted to $1,000,000 or more.

When the limitation upon additional assessments on 1917 returns expired March 15, 1923, some 16,000 returns for that year still awaited final audit by the Income Tax Unit. The situation was met by demanding that taxpayers sign waivers and in cases of refusal, arbitrary assessments were made, in amounts sufficient to cover all possible contingencies. The same methods were followed, to protect the interest of the government, when the limitation on 1918 returns expired March 15, 1924.

The delay in final settlement of the taxpayers' liability, it Is pointed out, may make impossible business extensions and improvements which, are necessary or desirable, and in extreme cases may result in little short of business paralysis. Pro forma assessments made when the limitation on additional assessments on 1917 and 1918 returns was about to expire, while they may later be scaled down or even cancelled eventually, in the meantime constitute a serious threat of injury to the taxpayer, giving rise to liens which hinder or prevent the normal processes of business and frequently Interfere with commitments previously made. “How can a concern do business,” it is frequently complained, “if it hasn't the faintest notion not only what its tax for 1924 is going to be but what its tax for 1917 was?”

Purpose of the Audit

All personal returns on incomes of less than $5,000, which constitute 75 to 80 per cent of the returns filed,