|Table of Contents|
Table of Contents
1. Income tax return preparers
2. Declaratory judgments--charitable, etc., organizations
3. Assessments in cases of mathematical or clerical errors
4. Withholding--state tax--legislative peronnel
5. Withholding--state tax--armed forces
6. Withholding--state and city taxes--national guard and ready reserve
7. Withholding--U.S. tax--gambling winnings
8. State lotteries
9. Jeopardy and termination assessments
10. Exemption from levy
11. Administrative summons
12. Public inspection of private letter rulings
13. Disclosure of tax return information
TAX REVISION ISSUES-1976
PREPARED FOR THE USE OF THE
COMMITTEE ON FINANCE
BY THE STAFF OF THE
JOINT COMMITTEE ON INTERNM4L-K
APRIL 14, 1976
U.S. GOVERNMENT PRINTING OFFICE
69-527 0 WASHINGTON : 1976
Introduction ------------------------------------------------- v-------
1. Income Tax Return Preparers--------------------- ---------------- 1
2. Declaratory Judgments-Charitable, Etc., Organizations------------- 4
3. Assessments in cases of Mathematical or Clerical Errors------------- 8
4. Withholding-State Tax-Legislative Personnel--------------------- 10
5. Withholding-State Tax-Armed Forces---------------------------- 11
6. Withholding-State and City Taxes-National Guard and Ready
Reserve --------------------_---------------------------- ----- 12
7. Withholding-U.S. Tax-Gambling Winnings----------------------- 13
8. State Lotteries-------------------------------------------------- 15
9. Jeopardy and Termination Assessments----------------------------- 17
10. Exemption From Levy-------------------------------------------- 22
11. Administrative Summons----------------------------------------- 24
12. Public Inspection of Private Letter Rulings -------------------------- 26
13. Disclosure of Tax Return Information------------------------------ 30
Digitized by the Internet Archive
This pamphlet presents background information regarding a num-
ber of administrative matters relating to internal revenue taxes. sub-
stantially all of them focusing on income taxes. In addition, several
items deal with withholding of State or local income taxes.
The matters discussed in this pamphlet include regulation of in-
come tax return preparers, declaratory judgments as to status as
charitable organizations, assessments in the case of mathematical or
clerical errors on income tax returns, voluntary withholding of State
(and county "piggyback") income taxes of certain Congr'ess.ional per-
sonnel, withholding of State (and county "piggyback") income taxes
of members of the Armed Forces. withholding of State and local
income taxes of members of the National Guard and the Ready Re-
serve, withholding of Federal income taxes in the case of gambling
winnings, treatment of State lotteries under the excise tax provisions,
procedures to be followed in the case of jeopardy and termination
assessments, minimum exemptions from levy, administrative sum-
mons, public inspection of private letter rulings, and regulation of
disclosure of tax return information.
In each of these cases. the pamphlet will describe the present law
and the issues that have been presented. Where these matters are
dealt with to some extent in the House-passed bill (H.R. 10612), the
House provisions are also briefly described. One or more subsequent
pamphlets will discuss alternative proposals for dealing with these
1. Income Tax Return Preparers
Pre.sen t la w
The Internal Revenue Code contains few provisions which affect
the conduct of persons who prepare the tax returns of other persons
for a fee. The tax return forms generally require that any person pre-
paring a return for another person sign the return, but the law pro-
vides no penalty in cases of failure to sign. No other provisions in the
Code require an income tax return preparer to disclose to the Internal
Revenue Service that he is in the business of preparing returns or what
returns he has prepared.
In addition, most sanctions prescribed by present law for improp-
erly prepared returns relate to improper preparation by the taxpayer
himself and not by a preparer. Taxpayers may be subject to criminal
fraud penalties of up to $10,000 in fines and imprisonment for not
more than five years for willful attempts to evade tax (sec. 7201).
Taxpayers are also subject to civil fraud additions to tax of up to 50
percent of the amount of any underpayment of tax, or additions to tax
for negligence or for intentional disregard of rules and regulations in
an amount equal to 5 percent of any underpayment of tax (sec. 6653).
By contrast, persons who prepare returns of others for a fee are
subject only to criminal fraud penalties for willfully aiding or assist-
ing in the preparation of a fraudulent return, which crime can be pun-
ished by fines of up to $5,000 and imprisonment for not more than
The past few years has seen a substantial increase in the number of
persons whose business is to prepare income tax returns for individuals
and families of average income. The Service estimates that for the
year 1972, 35 million taxpayers, or one-half of all those who filed
income tax returns, sought some form of professional or commercial
tax advice in preparing their returns. The Service also estimates that
in 1972 approximately 250,000 persons were engaged in the business
of preparing income tax returns.
The rapid growth of the business of professional and commercial
preparation of tax returns has led to a number of problems for the
Service. Some abuses have arisen in the preparation of returns for
wage earners at the cost of a relatively small fee. In some of these
cases, return preparers have made guarantees that individuals will
obtain a refund because of the tax expertise of the preparer. In other
cases, return preparers have suggested that a taxpayer sign a blank
return (i.e., before it is prepared) in which case the taxpayer would
not look at the return, let alone review it, before it is filed. In some
of these cases, the preparer either claimed fictitious deductions or
'Tax return preparers are, in addition, subject to criminal penaltie-; for unlaw-
fully disclosing or otherwise using information disclosed to them in connection
with the preparation of a return (sec. 7216).
increased the number of exemptions claimed in order to achieve the
desired refund or tax liability whichll was promised to the taxpayer.
In 1972 and again in 1973 thle Service conducted sirveys of preparers
su)pec'ted to I)e ellrgaingr inll these types of conduc)Illt. For 1972 the Serv-
ice conicluled( that about 6W percent of tlihe returns surveyed (or over
1.1ht) returir:) showedd .significant fraud potential. In the 19073 survey,
22.3; percent of thle returns prepared (or 1.112 returns) showed fraud
potential. Thle izal.le number of returns with fraud potential resulted
ill part )ecaluse thle Service focutised on preparers suspected of im-
proper conduct. Nonetheless, tlie surveys indicate that a significant
number of preparern, in those years had engaged in abusive practices.
Under present law, it is difficult for the Service to detect any indi-
vidual case of improper preparation .inee the tax preparer might not
sign the return. This. tlhe Service has no way of knowing whether the
return was prepared by the taxpayer or by a preparer who may be
engaging in al usive practices involving a number of returns.
Furthermore, even if the Service can trace the improper preparation
of tax returin- to an individual tax return preparer, the only sanctions
available against that preparer are the criminal penalties of the Code.
Such criminal penalties are often inappropriate, cumbersome, and an
ineffective deterrent given the costs and length of time involved in
trying these cases- in court. Because these criminal penalties are diffi-
cult to apply, the Service under present law generally proceeds against
only the most flagrantly fraudulent cases involving income tax return
The abuses described above primarily involve "commercial" tax
preparers (i.e., individuals often without formal training engaged in
the. seasonal business of preparing tax returns) rather than "profes-
sional' tax preparers. such as lawyers and certified public accountants.
Yet it is difficult to single out any group alone for special regulation.
At the request of tlhe Joint Committee on Internal Revenue Taxation
the General Accounting Office conducted a study of tax return prep-
aration by all types of tax return preparers. The GAO report indicates
that commercial preparers on the average have not had a significantly
greater tendency to make mistakes in preparing" returns than do other
typvles of preparers. For example, the GAO studied the 22.000 tax
returns which were audited in depth for the year 1971 under the IRS
Taxpayer Compliance Measuremnent Project and discovered that for
all returns (excluding 1040A short form returns) with adjusted gross
incomes of 10.O0O and under and for nonbusiness returns of adjusted
gross income between $10.0000 and *50,000, the percentage of tax ad-
justment deterniined from the Service's audits averaged 10.9 percent
for returns prepared by commercial preparers and 10.2 percent for
returns prepared by professional preparers. Other parts of the study
also indicate that cominiercial preparers are not more likely to make
more or larrr mistakes on the returns they prepare than are profes-
sional preparer:-. This result occurs probably because most commercial
preparers are generally involved only with those returns which are
relatively simple to prepare, while professional preparers are ,enerally
involved in mnore complex retiri s. It should be noted that the errors
Imad1e by prof(-ssioiial return preparers do not necessarily result
from the tyvws of abiisep, referred to above Nbut may resullt from
differences of interpretation. Nonetheless, the fact that all types of pre-
parers are about equally likely to make errors in preparing tax returns
led the GAO to recommend that any regulation of tax return preparelrs
apply equally to all preparers.
Under the House bill (sec. 1201), a series of provisions dealing with
income tax return preparers would apply in general to returns and
documents prepared after December 31, 1975. These provisions include
1. Each prepared return, statement, or other document must contain
the identification number of the return preparer and other data suffi-
cient to identify the preparer. A $25 penalty is provided for each
failure to comply, if without reasonable cause.
2. Each preparer must furnish to the taxpayer a copy of the tax-
payer's return or claim for refund prepared by the tax return pre-
parer at the time the return or claim is given to the taxpayer for his
signature. A $25 penalty is provided for failure to comply, if without
3. Each person employing a tax return preparer to prepare the re-
turns of others must file an annual report with the Service listing the
name, identification number, and place of work of each such employed
preparer. Self-employed preparers also have to file such returns. Fail-
ure to comply without reasonable cause would result in a $100 penalty
for each failure to file an annual return and a $5 penalty for each
failure to include a name, identification number, or place of work
in the annual report. These penalties are not to exceed $20,000 for a
4. Each return preparer or employer of return preparers must retain
for three years either a list of taxpayers for whom returns were pre-
pared or copies of their returns and claims for refunds. A $50 penalty
is provided for each failure to retain a copy of a return or to list a
taxpayer for whom a return was prepared, up to a maximum of $25,000
for all returns in a year.
5. A $100 penalty is provided for negligent or intentional disregard
of Internal Revenue Service rules or regulations by a tax return pre-
parer. A $500 penalty is provided for a willful attempt to evade, defeat
or understate any tax by a tax return preparer. A separate penalty
may be imposed for each return or claim for refund.
6. A $500 civil penalty is provided for any endorzeiment or other
negotiation by a person who is an income tax return preparer of any
check received by a taxpayer from the Service.
7. The Service would be given the authority to seek a court injunction
against income tax return preparers (1) engaging in conduct subject
to penalties, (2) misrepresenting their qualifications (including eligi-
bility to practice before the Internal Revenue Service), (3) guarantee-
ing the payment of a tax refund, or (4) engaging in other conduct
similar in nature to the above types of conduct which substantially
interferes with the proper administration of internal revenue laws.
A tax return preparer who files a bond of $50,000 to guarantee pay-
ment. of further penalties would not be subject to an injunctive pro-
ceeding for penalty-type conduct.
8. The Internal Revenue Service would be authorized to provide the
names, addresses, and taxpayer identifying numbers of preparers to
State authorities charged with enforcing State provisions regulating
tax return preparers.
2. Declaratory Judgments-Charitable, Etc., Organizations
An organization that meets the requirements of section 501(c) (3)
of the Internal Revenue Code 1 is exempt from tax on its income.2
"(c) List of Exempt Organizations.-The following organizations are referred
to in subsection (a):
"(3) Corporations, and any community chest, fund, or foundation, orga-
nized and operated exclusively for religious, charitable, scientific, testing
for public safety, literary, or educational purposes, or for the prevention of
cruelty to children or animals, no part of the net earnings of which inures
to the benefit of any private shareholder or individual, no substantial part
of the activities of which is carrying on propaganda, or otherwise attempt-
ing, to influence legislation, and which does not participate in, or intervene
in (including the publishing or distributing of statements), any political
campaign on behalf of any candidate for public office."
In general, a domestic organization which is exempt under section
501(c) (3) is also eligible to receive deductible charitable contributions
(sec. 170(c) (2)).
If such an organization is a private foundation (defined in sec. 509),
then it is subject to a series of restrictions on its activities (sec. 4941
et seq.), as well as a tax on its investment income (see footnote 2
above). Also. if it is classified as a private foundation (other than an
operating foundation (sec. 4942(j) (3)), its status as a charitable con-
tribution donee is in some respects significantly less favorable than if
it is not so classified (compare sec. 509(a) with sec. 170(b) (1)).
Although the tax status of an organization generally does not de-
pend on the Internal Revenue Service's position as to the organiza-
tion. as a practical matter, most organizations hoping to qualify for
exempt status find it imperative to obtain a favorable ruling letter
from the Service and to be listed in the Service's "blue book" (Cumula-
tive List of Organizations Described in Section 170(c) of the Internal
Revenue Code of 1954. Publication 78). An exemption letter and list-
ing in the blue book assure potential donors in advance that contribu-
tions to the organization will qualify as charitable deductions under
I"SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN
"(a) Exemption From Taxation.-An organization described in subsection (c)
or (d) or section 401(a) shall be exempt from taxation under this subtitle unless
such exemption is denied under section 502 or 503.
Such an organization is, nevertheless, subject to tax on its "unrelated busi-
ness taxable income" (sec. 511 et seq.) and. if it is a private foundation, is also
subject to tax on its "net investment income" (sec. 4940) ; however, it is not
subject to Federal income tax on its related business income. The tax on private
foundations' investment income is at the rate of 4 percent; by comparison, the
rates applicable to taxable corporations are up to 49 percent, and to taxable
trusts are up to 70 percent.
section 170(c) (2). In general, potential donors may rely upon these
indicia even though the organization may not in fact be qualified under
the statute for this treatment at the time of the gift.3
In two cases decided in 1974 (Bob Jones Ui,'.;ty v. Sinmoi, 416
U.S. 725, and Alexande,' v. "Am< /;cans United" Inc., 416 U.S. 752),
the Supreme Court held that an organization could not obtain the
assistance of the courts to restraiii the Internal Revenue Service from
withdrawing a favorable ruling letter or withdrawing its listing in
the blue book. In effect, this means that a judicial determination as
to the organization's status cannot be had by the organization or its
contributors, except in the context of a suit to redetermine a tax de-
ficiency or to determine eligibility for a refund of taxes.
By the time the Supreme Court issued its opinions in Bob Jones
and Americans United, both Houses of Congress had already passed
versions of what became the Employee Retirement Income Security
Act of 1974 (Public Law 93-406). Each House's version of the bill
included provisions for declaratory judgments as to the tax-qualified
status of employee retirement plans. This added section 7476 to the
Internal Revenue Code.
Under that provision, the Tax Court has been given jurisdiction to
hear declaratory judgment suits as to the tax qualification of an em-
ployee retirement plan (pension, profit sharing, stock bonus, etc.),
so that the plan's status can be tested without the necessity of the
Service issuing a notice of deficiency or a taxpayer suing for a refund
In Bob Jones Unri'er.sity v. Simon, the Supreme Court summarized
the problems faced by an organization seeking to establish its chari-
table tax-exempt status. The Court noted that, as itf interpreted
"Congress has imposed an especially harsh regime on 501 (c)
(3) organizations threatened with loss of tax-exempt status
and with withdrawal of advance assurance of deductibility of
contributions. * The degree of bureaucratic control that,
practically speaking, has been placed in the Service over those
in petitioner's position [i.e., the position of Bob Jones Uni-
versity] is susceptible to abuse, regardless of how conscien-
tiously the Service may attempt to carry out its responsibili-
ties. Specific treatment of not-for-profit organizations to allow
them to seek preenforcement review may well merit considera-
8 See Rev. Proc. 72-39, 1972-2 C.B. 818, for the Service's position on the extent
to which contributors may rely on the listing of an organization in the blue book.
4 The Court's opinion noted that former Internal Revenue Commissioner
Thrower had criticized the present systemni for resolving such disputes between
the Service and the organization.
"This is an extremely unfortunate situation for several reasons. First.
Sit offends my sense of justice for undue delay to be imposed on one who
needs a prompt decision. Second, in practical effect it gives a greater finality
Sto IRS decisions than we would want or Congress intended. Third, it inhibits
the..growth of a body of case law interpretative of the ex(nmpt organization
provisions that could guide the IRS in its further deliberations." (Thrower,
IRS Is Considering Far Reaching Changes in Ruling on Exempt Organiza-
tions, 34 Journal of Taxation 168 (1971).)
The opinion then suggested that this is an appropriate matter for
the Congress to consider.5
In order to provide an effective appeal from an Internal Revenue
Service determination that an organization is not exempt from tax.
or is not an eligible donee for charitable contributions, or is a private
foundation (an operating foundation or a nonoperating foundation),
it has been urged that there be access to the courts through some dec-
laratory judgment procedure.
The questions that have been raised include (1) which courts should
be "iven jurisdiction to hear such cases; (2) whether declaratory
judgment suits should be available to test other exempt organization
questions. such as whether an organization is a social welfare orga-
nization under sec. 501(c)(4), a fraternal organization under sec.
50(c)(8), a cemetery company under sec. 501(c)(13), etc.; (3)
whether such a proceeding should be available to test revocations of
prior favorable Service determinations, as well as initial unfavorable
determinations (or refusals to rule); (4) what should be the tax
treatment of persons who make contributions to the organization
during the pendency of the suit, if it is ultimately determined that
the organization was not exempt (i.e., if the court agrees with the In-
ternal Revenue Service); and (5) whether contributors or third
parties should be permitted to seek a declaratory judgment that the
organization is exempt (despite a Service decision that it is not exempt)
or that the organization is not exempt (despite a Service determina-
tion that it is exempt).
Under the House bill (see 1202), a declaratory judgment procedure
would be provided if the IRS revokes an organization's prior ruling or
fails to issue a favorable ruling. In this case the organization may peti-
tion the United States Tax Court or the Federal district court for a
declaratory judgment as to its exempt status as a religious, educa-
tional, charitable, etc., organization under section 501 (c) (3), its classi-
fication as a private foundation or a private operating foundation,
or its classification as an organization eligible to receive deductible
The declaratory judgment procedure would be available only to the
organization seeking to establish its own status and then only when
the organization has exhausted the administrative remedies reason-
ably available to it within the Internal Revenue Service.
*In a dissenting opinion to Alexander v. "Americans United" Inc., the com-
panion case to Bob Jones Unieri-sity v. Simoiz, Mr. Justice Blackmun stated that
"where the philanthropic organization is concerned, there appears to be little to
circumscribe the almost unfettered power of the Commissioner.' This may be
very well so long as one subscribes to the particular brand of social policy the
Commissioner happens to be advocating at the time (a social policy the merits
of which I make no attempt to evaluate), but applications of our tax laws
should not operate in So fickle a fashion. Surely, social policy in the first instance
is a matter for legislative concern. To the extent these determinations are reposed
in the authority of the Internal Revenue Service, they should have the system
of checks and balances provided by judicial review before an organization that
for years has been favored with an exemption ruling is imperiled by an allegedly
unconstitutional change of direction o(in the part of the Service." (Footnote
If the declaratory.judggment involves a revocation of a prior favor-
able charitable donee status decision, the)i deductions for contributions
made to the organization (1) after the IRS's announcement that con-
tributions to the organizations are no longer deductible and (2) before
the court's decision in the suit, would not generally be disallowed
merely because the court determined in that suit that the organization
was not tax exempt. Contributions of less than $1,000 made during the
period between the IRS announcement and the court decision could be
deductible. Also, the organization would be treated as a charitable
donee with regard to other charitable donees for this period. However,
no contribution deductions would be available during this period to
any person who was responsible for the organization's actions or inac-
tions that caused it to lose its charitabledonee status.
This provision would apply to pleadings or petitions filed with the
Tax Court or Federal district court more than 1 year after the date of
enactment of this legislation.
3. Assessments in Cases of Mathematical or Clerical Errors
Under present law (sec. 6213(a)), in general, the Internal Revenue
Service must send the taxpayer a notice of deficiency and provide the
taxpayer an opportunity to petition the Tax Court before the Service
can assess a defi-iency of income, estate, or gift tax, or of a tax im-
posed under the private foundations provisions (chapter 42) or under
the provisions relating to qualified pension, etc.. plans (chapter 43).
An exception under present law permits the Service to summarily
assess any additional tax resulting from correction of "a mathematical
error appearing on the return" (sec. 6213(b) (1)). In such a case, the
Service is not required to send a notice of deficiency to the taxpayer,
nor does the taxpayer have a right to judicial review (through a Tax
Court petition) before being required to pay the tax.
Where the Internal Revenue Service determines that a mathe-
matical error has been made and that. as a result, the taxpayer owes
additional tax. an assessment is summarily made. and a notice of
mathematical error which describes the error is sent to the taxpayer.
Under the Service's policy, before it begins to collect the amount of
tax due on account of the apparent error, tlhe Service permits the
taxpayer to explain why he or she believes there is no error. If the
taxpayer substantiates the claim, the Service's policy is to abate any
assessment which it may have made or refund any additional tax
which the taxpayer may have paid. Under present law, however,
a taxpayer has no right to claim abatement of any income, estate, or
gift tax (sec. 6404(b)).
The term, mathematical error, has been interpreted by the Service
to include several types of error which are broader in nature than
literal errors of arithmetic. The Service's position is that mathematical
error includes the following: errors in arithmetic (such as 2+2=5);
errors in transferring amounts correctly calculated on a schedule,
form, or another page of Form 1040 to either page 1 or page 2 of Form
1040; missing schedules, forms, or other substantiating information
required for inclusion with Form 1040; inconsistent entries and com-
putations (such as cases where total exemptions claimed do not agree
with the total used in computing the tax) ; and errors where the entry
exceeds a statutory numerical or percentage limitation (such as a
standard deduction claimed in excess of the maximum allowed by the
Court opinions, however, generally have limited the scope of the
term. mathemniatical error, to arithmetic errors involving numbers
which are themselves correct.
Questions have been raised as to whether the Service has used its
mathematical errors summary a-sessiment powers in cases where their
use is not authorized by the statute. The Service maintains that it
properly uses this procedulre in categories of ca.s-s where most tax-
payers do not dispute the Service's conclusions, thereby sil>stantially
iredlucing administrative and other costs.
On the other hand, concerns have been expre(.scd where the Service
proceeded summarily where the Service may have erred in its
Under the House bill (sec. 1203), summary assessments would be
allowed in the following five categories:
(1) errors in addition, subtraction, etc., shown on the return;
(2) incorrect use of a Service table if the error is apparent from
(3) inconsistent entries on a return;
(4) omission of information required to be supplied on the
return in order to substantiate an item on that return; and
(5) an entry of a deduction or credit in excess of the statutory
limit (e.g., taking a standard deduction greater than the per-
mitted maximum standard deduction).
If the Service determines that there has been such an error, it would
notify the taxpayer, who would have 90 days to respond to the Service
determination. If the taxpayer requests an abatement of the assess-
ment, the Service would have 60 days to decide whether its original de-
termination was correct. If the Service notifies the taxpayer within the
60 days that it intends to pursue the matter, the taxpayer would have
30 days to confirm the request for abatement which then must be
granted. In the absence of confirmation, the Service may then use the
regular notice of deficiency procedure.
The Service would be required by statute to explain to the taxpayer
just what adjustments it is making to the taxpayer's return when the
Service determines that the taxpayer has an additional tax liability.
These provisions would apply with respect to returns filed after
December 31, 1975.
4I. Withholding-State Tax-Legislative Personnel
S ilsequcnt to the inclusion of this material in the House bill (sec.
12,'4), tle II House o f Rvl)resentativves pas-ed House Resolution 732
whicli provides for the voluntary withholding of State income taxes
in the case of those legislative officers and employees covered under
this section of the bill. Senate Memliers and employees are already
covere d un der a ,si im ilar withholding system. (Public, Law 93-371. Allu-
,rist 13, 1974).
The Finance Office of the House of Relpresentatives has begun to
imple)lient this withiolding procedure effective for April. Consequent-
ly, this provision can he deleted from the House bill.
5. Withholding-State Tax-Armed Forces
Under present law, the Secretary of the Treasury is required to enter
into agreements with States which request it to withhold State inc,, m.e
tax from Federal employees. These agreements may not apply to
members of the Armed Forces.
Previously, the military provided States with iiilformation conce l-
ing the earnings of military personnel. This practice was eliminated
as of September 25, 1975, when the Office of Manatminent and Budget
(0MB) cancelled Circular No. A38 which was the bWisi- for providing
States with payroll information concerning military personnel oi the
grounds that provision of such information conflicted with the authori-
zation of the Privacy Act of 1974 (P.L. 93-579).
It has been claimed that the absence of withholding has crIated
difficulties for some servicemen who may not know that they are -ub-
ject to State income tax and may be assessed with a large deficiency
when they return from active duty. In addition, it is stated that in the
absence of withholding, many members of the Armed Service have
difficulty making the lump sum payments required when complying
with the State tax on an annual basis.
The General Accounting Office, in its report on this question: Re-
port to the Congress, By the Comptroller General of the United State.-.
"A Case for Providing Pay-As-You-Go Privileges to Military Per-
sonnel for State Income Taxes", states in part:
"The Congress should enact legislation to provide military personnel
with pay-as-you-go privileges for State income taxes. Laws which
permit these taxes to be withheld from Federal civilian pay prohibit
such withholding on military pay * *."
The House bill (sec. 1205) would amend present law to eliminate
the prohibition against the Secretary of the Treasury entering into
agreements with States and the District of Columbia to withhold State
(and county "piggyback") income taxes from members of the Armed,
Services and would provide for such withholding in ca.-es where the
members request it.
This provision requires the Secretary to enter into a withholding
agreement 120 days after the request from the proper State official
and such a request cannot be made until after the date of enactment
of this provision.
6. Withholding-State and City Taxes-National Guard and
Prs, nt la tc
Under )'res-ent law, the Sece.tary of thle Treasury is required to
enter into a greemllelt.ts with Statcs and cit is to witlihhold State and city
incollme taxes f'roin thli' ,copnll)Isat ion of Federal employees. Tlhe agree-
mient. lOweve'tVrlII, Iay ,lo)t apply to pay for service as a inemlber of the
In the case of members of tlhe National Guard or Ready Reserve
who are serving in this status within the State of which they are a
resident, the inability of the Federal Governmnent to withhold State
inconie tax from their compensation often means they are faced either
with large lump-sum payments at the time of filing or they must make
a declaration of estimated tax and pay the tax quarterly. This is the
same concern which led to the adoption of the Federal withholding
of State income tax provision in the first instance.
The House bill (sec. 1206) would extend the provision under present
law requiring the Secretary of the Treasury to enter into agreements
with States. the District of Columbia, and cities to withhold income
taxes from Federal employees to members of the National Guard and
Ready Reserve when they are paid for performing regular training.
The bill requires the Secretary to enter into a withholding agree-
ment 120 days after the request from the proper State official and such
a request cannot be made until after the date of enactment of this
7. Withholding-U.S. Tax-Gambling Winnings
Under present, law, withholding of United States income tax on
racetrack winnings is not required although payouts to winners of the
daily double, Exacta, Perfecta, and similar type pools are reportable
on Form 1099 information returns if the payout is based on betting
odds of 300 to one or higher. In addition, Nevada gambling casinos are
required to report certain large winnings from Keno and bingo games
on Forms 1099 to the Internal Revenue Service depending on the price
of the ticket purchased, as well as on the amount won.
It has been suggested that although most wagering transactions
have no tax significance, since the majority of bettors end uip the year
with no net wagering gains, the special types of wagers mentioned
above represent occasional windfalls that generally produce a signfi-
cant tax liability. The view has been expressed that even with the
existing information reporting requirements, many taxpayers have
not reported these winnings on their income tax returns. One source
of this nonreporting of income is, for example, the use of the so-called
"10-percenters" at the racetrack. A 10-percenter is a person hired by
the winner to cash the winner's ticket for 10 percent of the winnings
and provides fictitious identification so that the reporting on Form
10990 is provided in a name other than that of the actual winner. These
10-percenters themselves seldom pay any income tax either by filing no
tax return or claiming sufficient off.ett ing losses.
One type of gambling that is sometimes regarded as different from
others because of its automated nature is slot machines. However, in
the windfall situations referred to above, the large payoff from a slot
machine is in the form of a check or cash being paid to the winner by
an employee of the gambling establishment, rather than thousands of
quarters pouring out of the machine. Consequently, in the case of
large winnings, even slot machine payoffs appear to be amenable to
whatever system of record-keeping or withholding is chosen for other
forms of gambling.
Under the House bill (Sec. 1207), the present information report-
ing requirement on certain gambling winnings would be replaced with
a 20-percent withholding requirement on such winnings. The per.-ons
making the payment of winnings subject to withholding would be
required to deduct and withhold from the payment 20 percent of the
payment. The withholding would be based on the entire payment
rather than the amount of the winnings. The whiings SUbject to
withholding would be proceeds of more than s1,000 from wager in
sweep.stakes. wva~ering pools. or lotteries (whether or not conducted
by a State or a'irncv or in-iirutlewntalitv of a State). In the case of willn-
niners oththri thani t lh.-e iWientioi1ed al)ove. witlliholdinil.r would be re-
(iiired on pavniits f inore thaiil 1,01)( from tilt' 'wateri''iir transac-
tiol if tile at, ll illt of tle pro'Ceeds \vas at least :3)lI timte- a:- large as the
amount wagered. The receiver of the winnings subject to withholding
would he requiired to furnish the payor with the name, address and
taxpayer identification number of thle person receiving the payment
and of each person entitled to any portion of such payment, under
penalty of perjury.
I'lhese provision. would apply to wagrering transactions occurring
after December 3:1, 19T75.
8. State Lotteries
Under )resent law, each person engaged in thie buiisille:. of accept-
ing wagers is subject to an excise tax of 2 percent on the amount of
wagers placed with that person (sec. 4401). The excise tax on wageir
generally applies to any person who is conducting a lottery. Inii a(ddi-
tion, a related occupational tax of $500 per year is impo-ed on each
person who is liable for the tax on wagers (or wlio is .aed in the
business of receiving wagers for or on behalf of a person who is in
turn, liable to pay the excise tax on wagers) (.ec. 4411). Also, a special
occupational tax of $250 per year is imposed on the operation of coin-
operated gaming devices, including a vending machine which dis-
penses tickets on lotteries (sec. 4461). An exemption from the w;igt r-
ing tax is provided for sweepstakes or lotteries conducted by an agency
of a State if the ultimate winners of the sweepstakes or lotteries are
determined by the results of a horse race (see. 440-2).
In 1963, New Hampshire became the first State in recent history to
establish a State lottery. The lottery was similar in operation to the
Irish Sweepstakes, so that the lottery's ultimate winners were deter-
mined by the results of a designated horse race. which was run follow-
ing a preliminary selection of the prospective winners by lot. The
lottery, when established, was subject to the Federal taxes on wagering.
In 1965, however. Congress provided an exemption for State-conducted
sweepstakes, wagering pools, or lotteries from the excise tax on wagers.
The exemption was specifically based upon the New Hanmpshire-type
of lottery and has two 1,asic requirements: (1) the sweepstakes, wa Zer-
ing pool, or lottery must be conducted by an agency of a State acting
under authority of State law: and (2) the ultimate winners mist be
determined by the results of a horse race (sec. 4402(3)). The provi-
sion was added to the Excise Tax Reduction Act of 1965 by a Senate
floor amendment. In the course of the brief debate on this amendment,
it was stressed that the provision is similar to a parimutuel system in
horse racing and that parimutuel wagering licensed under State law
was already exempt from the wagering tax.
Since the appearance of the New Hampshire lottery, several other
States have established and are operating lotteries. Several more States
haves either authorized, or are investigating the feasibility of lottery
operations. The lotteries which have been established since 1965. in-
cluding a revised version of the New Hampshire lottery, differ sub-
stantially in the manner in which they operate from the forii of
lottery which was made exempt by Congress in 1965. Although most
States use a format which gives the appearance that the ultimate
winners are determined oni tlhe basis of a horse race. as a matter of
fact, ultimate wiinwe'rs are determined by lot. Coiisequiently, the lot-
teries. as now conducted, dto not satisfy tle second requirement for
exXCiIp)tion from the tax on wagers, tllhat is. tlhe use of a horse race to
determine the wilners.
Under the ITIou.e bill (sec. 1208), State-conducted lotteries would be
exempt from the 2-percent wagrerllg tax. Vending ll machines which
dispense tickets on a sweepstakes or lottery conducted and maintained
by State lottery agencies would be exempted from thlie occupational
tax on wagering.
'lheset, provisions would apply with respect to wagers placed after
March 10, 1964.
9. Jeopardy and Termination Assessments
Under normal assessment procedure, there is generally a consider-
able lapse of time between a taxpayer's firs-t notice that the Internal
Revenue Service is seeking to collect taxes from himin and the actual
enforced collection of those taxes. For example, a taxpayer who does
not agree with a proposed assessment of income taxez, may pursue
administrative appeals within the Service and, if no agreement is
reached, the taxpayer may petition the Tax Court after the Service
has issued a notice of deficiency, all without paying the tax allegedly
due. On the other hand, when the Service determines that the collection
of a tax may be in jeopardy, it may forgo the normal time-consuming
assessment and collection procedures and immediately assess. and col-
lect the tax. For this purpose, there are two basic types of special
assessments-jeopardy assessments and termination assessments.1
Jeopardy assessments are of two different types depending on whether
the taxes involved are (1) income, estate, gift, or certain excise taxes
(those taxes that are normally dealt with under the notice of deficiency
procedures) or (2) other taxes (such as employment taxes and wager-
Use of jeopardy assc.qsments relating to income., etc., ti,.,re.-If the
Service determines that the collection of income estate, gift, or certain
excise taxes is in jeopardy, a jeopardy assessment may be made under
section 6861 of the Code. Under such an assessment, the Service deter-
mines that a deficiency exists and that its assessment or collection
would be jeopardized by the delay. The Service is then authorized im-
mediately to (1) assess the tax, (2) send a notice and demand for pay-
ment, and (3) levy upon the taxpayer's property for its collection.
The 10-day waiting period normally required between demand for
payment and seizure of the taxpayer's property does not apply in this
case. However, if the jeopardy assessment is made before the statutory
notice of deficiency is sent to the taxpayer, the Service is required to
send the notice within 60 days after the jeopardy assessment is made.
The judicial remedies available to a taxpayer who has been subject
to a section 6861 jeopardy assessment are identical to the remedies
available for a normal assessment. Upon receiving a notice of defi-
ciency, the taxpayer may file a petition for redetermination in the Tax
Court.2 Alternatively, the taxpayer may pay the full amount of the
'The Internal Revenue Manual states. that a j,)opardy or termination asess-
ment should not be made unless at least one of the following three condition; is
(1) The taxpayer is or appears to be designing quickly to dopelart from the
United States or to conceal himself;
(2) The taxpayer is or appears to be designing quickly to plnee his property
beyond the reach of the Government either by removing it from the United State .
or by concealing it, or by transferring it to other persons, or by dissipating it: or
(3) The taxpayer's financial .solvency appears to lie imperiled.
2 The notice is a jurisdictional prerequisite to litigation in the Tax Court.
dleficiemc. file a claim for refinid N with the Service. wait. 6( months
( unless tie claims is denied by the Service sooner), anld tlien i ile a ire-
funl d action iii a Federal district ,'oi, rt or the (Court of Cla ins.
Thle taxpayer who lhas been subjected to a jeopardy assessment, how-
ever, does not have all tlhe protection afforded the ordinary taxpayer
during the jdll icial review. In tlie normal deficiencv case, thle Service is
prohibited from making aii ast'sse ient and takinqr collection action
against a taxpayer's property or assets ,prior to tlhe time allowed for
filing a p1titi'o for redeternminationm aid during tlhe time litigation is
pleinidinir in tine Tax Court. Although the Service is generally precluded
frol -elling any property seized prior to or durigii Tax Court litiga-
tion. tlhe jelopardIv taxpayer-unlike thie ordinary taxpayer-loses the
use, of whLatever property and assets are seized by the Service while
relief is- soIIgrlt in tle Tax Court.
U.R( of j
than an income, estate, gift. or certain excise tax is in jeopardy, the
Service may make a jeopardy assessment under section 6862. This
type of jeopardy assessment differs from that jeopardy assessment
under section 6861 in that the taxpayer does not have the right to
appeal the ,Service's determination to the Tax Court because the Tax
Court has no jurisdiction in cases involving the type of taxes covered
by section 6862.
As in the case of a section 6861 jeopardy assessment, if the Service
determines that a tax is due and that the assessment or collection of
the tax would be jeopardized by delay, the Serv-ice is authorized
to immediately assess and levy upon the taxpayer's property. How-
ever, unlike the prohibition that prevents the Service from selling
any property seized under a section 6861 jeopardy assessment before
Tax Court appeal rights have been exhausted, property seized as a
result of a section 6862 jeopardy assessment (since the case cannot
be taken to the Tax Court) can be sold before the taxpayer has a
right to contest the tax liability.
The appeal rights for a taxpayer who has been subject to a section
6862 jeopardy assessment begin after payment of the tax and filing
of a claim for refund with the Service. The taxpayer must wait 6
months-unle.ss the Service denies the claim sooner-and then either
the Federal district court or Court of Claims will consider a refund
suit. by the taxpayer.
r'sf of tr nmhwf;,o, .,?.v. s.m,?ts.-The two types of jeopardy assess-
ment discussedd up to this point are used only where the deficiency is
determined after the end of the year to which it relates. A termina-
tion assessment (see. 6-51 of the Code) may be made when the col-
lection of an income tax is in jeopardy before the end of a taxpayer's
normal tax year or before the statutory date the taxpayer is required
to file a return and pay the tax. Under a termination assessment.
wliich may be made only to collect income taxes, if tbe Service finds
that the collection of a tax is in jeopardy, it is authorized to:
(1) serve notice on the taxpayer of the termination of his
(2) demand immediate payment of any tax determined to be
due for the terminated period: and
(3) if payment is not received, immediately levy upon of the
Any amount collected as a result of the termination it.-trment is
credited against the tax finally deteriniiied to be due for their tax-
payer's full year liability. The 10-day waiting period normally re-
quired between demand for payment and seizure of the taxpayer's
property does not apply when a termination asse-,-iiient i- made.
In recent years there has been considerable lit igation and confusion
concerning the judicial remedies of taxpayers who have been subject
to termination assessments. It has been the Service's po-ition in the
case of termination assessments, that its authority to a-.-s is not
limited by requirements (such as found in section 6861) that the Serv-
ice must send to the taxpayer a deficiency notice within 60 days after
assessment. Thus, under the Service's position, a taxpayer who has
been subject to a termination assessment may contest the asses-,ment
only by (1) paying the assessed tax, (2) filing a claim for refund with
the Service, and (3) after 6 months, unless the refund claim is denied
sooner, filing a refund action with the Federal district court or Court
of Claims. Since it also has been the Service's practice not to consider
a refund claim until after the end of the taxpayer's normal tax year,
there could be a considerable delay until the taxpayer can obtain
judicial review of his case, and during this delay the taxpayer is
deprived of the use of any refund to which he or she would be en-
titled. Before the Laing decision (see footnote 3, below), some courts
had sustained the Service's position, and other courts had rejected it.
On January 13, 1976 (after H.R. 10612 was passed by the House),
the Supreme Court held 3 that when a taxpayer has been subjected to
a termination acsessiment, the Service is required to -.end the taxpayer
a notice of deficiency within 60 days after assessment (see footnote 2,
above). In addition, the Court held that the Service has no authority
to sell property seized pursuant to a termination assessment before the
taxpayer has had any opportunity for judicial review of the tax lia-
bility in the Tax Court.
In recent years, most taxpayers who have been subject to termina-
tion assessments have been suspected of dealing in narcotics. Particu-
larly during 1972 and 1973, a concerted effort was made to utilize
termination assessments to "reduce the profitability" of dealing in
illegal drugs. In 1974, however, the Service revised its guidelines to
emphasize that termination assessments (and jeopardy assessments)
were to be utilized to achieve maximum compliance with thlie internal
revenue laws rather than to attempt to disrupt the distribution of
As a result of concern in this area, the Joint Committee on Internal
Revenue Taxation, on December 27, 1974. reqiuected the General Ac-
counting Office to act as its arent in reviewing the proceduv-e followed
by the Internal Revenue Service in making jeol)ardv assessments. The
review was to include how the Service uses these enforcement tools, how
often they are used. and whether their use varies sicnif ,antly from
district to district. Because of developing Congressional tax reform
schedules, the GAO expedited its review and t'erefor, limited its
work to two IRS districts. The GAO has submitted its draft report
to the Joint Committee.
3 Laing v. United Statc. U.S. -- ,. 7'-1, USTC par. 914-1, .7 AFTR 2d 76-52,1.
96 S. Ct. 473.
The GAO draft report indicated that most jeopardy assessments
and termination assessments were, utilized against taxpayers allegedly
engaged in illegal activities, althollugh some of thle jeopardy assess-
ments under section 1(;.S2 were utilized to collect I)enaltv taxes from
persons whlo hlad failed to collect, or pay over, employment taxes.
Alt(houghr the GAO generally concluded that these types of assess-
ments hlad not been mlistlsedl, it did note that the termination assess-
ments were generally unproductive from a tax collection viewpoint,
since in 25 .casets wllhich had been completed at the time of review,
$742.294 was assessed but the total tax deficiency after audit was only
S3:.(;<) (4.9 percent of the assessments). The GAO also noted that, in
at least one case where a section 6862 jeopardy assessment was used to
collect penalty taxes resulting from a corporation's failure to pay
employment taxes, it was at least possible that the taxpayer was not
liable for payment of the penalty tax.
The jeopardy and termination assessment powers granted to the
Internal Revenue Service are generally considered valuable weapons
which the Service can effectively utilize in unusual circumstances to
prevent taxpayers from avoiding the payment of taxes. However, a
taxpayer who has been subjected to such an assessment may suffer
considerable hardship. This may result .from the suddenness with
which action may be taken.
Hardship may also result because of the requirement that, if the
assessment is made under section 6862 (jeopardy assessment for other
than income, estate, or gift tax. or certain excise taxes), the taxpayer
must pay the tax, file a claim for refund, and then wait six months
before filing a suit for refund. In addition, property seized following
a jeopardy assessment under section 6862 can be sold before the tax-
payer can contest the tax liability.
Since a taxpayer subjected to a section 6851 termination assessment
or a section 6861 jeopardy assessment must be mailed a deficiency
notice within 60 days after the assessment, the problem is less acute
in his case than in the case of a taxpayer subjected to a section 6862
assessment. However, since, even in the case of a termination assess-
ment or a section 6861 jeopardy assessment, a taxpayer may have to
wait at least 60 days to petition the Tax Court and then his case will
be placed on the regular docket of the Tax Court, his judicial remedy
(considered in the light of the fact that substantially all of his assets
may have been seized) is not sufficiently speedy to avoid undue hard-
ship in cases where the assessment may have been inappropriate. In
addition, although a taxpayer subjected to an assessment under sec-
tion 6851 or 68,61 has statutory protection against his assets (seized
pursuant to the assessment) being sold prior to or during judicial
proceedings, no such protection exists with respect to assets seized
pursuant to assessments made under section 6862.
Furthermore. some may argue that a taxpayer's rights for review of
the Commissioner's action are constitutionally inadequate. That argu-
ment would be based on the premise that. in view of the hardship that
may be suffered by a taxpayer who has been the subject of a jeopardy
or termination assessment, it is not sufficient to provide that within
60 days a taxpayer could file a petition with the Tax Court which
generally could be expected to render an opinion within 12 to 30
months after the petition is filed.
On March 8, 1976, the Supreme Court decided the ,a of (6'n,.',-
sioner v. Sh-aipo, U.S. ______, 76-1 USTC par. 92C6,
37 AFTR 2d 76-959 (1976). involving an initerpretat iii of the Anti-
Injunction Act (section 7421 of the Code) with respect to a taxpayer
aga inst whomi a jeopardy assec-ssinent hadi bcin made. In tli. ;i-,. the
Supreme Court rejected the Commissioner's po-ition that he "Im- no
obligation to prove that the seizure has any basis in fact no matter
how severe or irreparable the injury to the taxpayer and no matter
how inadequate his eventual remedy in the Tax C('ourt." (Slip opin-
ion. ). 15) The Suprenme Court al:-o indicated that. at least in certa-i,
circumstances, a taxpayer may be constitutionally entitled to a more
rapid judicial or administrative review of the Service's 1 :.iis for a
seizure of a-sets pursuant to a jeopardy assessment than i provided
by his right to petition the Tax Court under the normal Tax Court
procedures. In its opinion (at footnote 12), the Supreme Court also
Nothing we hold today, of course, would prevent the Govern-
ment from providing an adinnit.rative or other forum outside
the Art. III judicial system for whatever preliminary inquiry
is to be made as the basis for a jeopardy assessment and levy.
Under the House bill (sec. 1209), Tax Court review of jeopardy
and termination assessiients would be provided oan an expedited
If a jeopardy or termination assessiiient is made, the taxpayer
would be able to promptly petition the Tax Court for judicial
review. Within 20 days after the filing of a petition, the Tax Court
would determine whether the Service had reasonable cause for inmaking
the assessment and whether the amount of the assessment made was
appropriate in view of all of the cireunmstances. In addition, until com-
pletion of judicial review, the Internal Revenue Service would not
be permitted to sell property (other than perishables) seized pursuant
to jeopardy or termination assess ient procedures.
These rules would apply to jeopardy assessments, termination as-
sessments, and levies made after December 31,1975.
10. Exemption from Levy
Presc n t air
Present law (sec. 6334 of the Code) enumerates a list of items of a
taxpayer which are exempt from levy for taxes. The itemis so exempt
are generally as follows: (1) wearing apparel and school books neces-
sary for thle taxpayer or members of his family; (2) if the taxpayer
is the head of a family, up to $500 worth of the following: the fuel,
lprovisions, furniture, and personal effects in his household, arms for
personal use, livestock, and poultry; (3) up to $250 worth of books
and tools necessary for the taxpayer's trade, business, or profession;
(4) unemployment benefits (including any portion payable with re-
spect to dependents): (5) undelivered mail; (6) annuity or pension
payments under the Railroad Retirement Act, benefits under the Rail-
road Unemployment Insurance Act, special pension payments received
by a person whose name has been entered on the Army, Navy, Air
Force. and Coast Guard Medal of Honor roll, and annuities based
upon retired or retainer pay under the Retired Servicemen's Family
Protection Plan; (7) workmen's compensation payments (including
any portion payable with respect to dependents); and (8) so mucfi
of the taxpayer's salary, wages, or other income as is necessary to
comply with a pre-levy court ordered judgment for support of the tax-
payer's minor children.
tinder present law, a levy extends only to obligations which exist
at the time-of levy (sec. 6331(b)). Consequently, the Internal Reve-
nue Service can levy on salaries and wages only to the extent they
have been earned as of the date of the levy. If the amount of such
wages or salary levied upon is inadequate to satisfy the taxpayer's ob-
ligations. the Internal Revenue Service may utilize successive levies
against additional salaries or wages until those obligations have been
It has been pointed out that, since no portion of a taxpayer's salary
or wages is exempt from levy (except for court-ordered child support
payments), but unemployment compensation is exempt, an employed
taxpayer who is subject to a levy is substantially worse off than an un-
employed taxpayer would be under similar circumstances. Concern has
been expressed that this rule may serve to induce taxpayers to go on
unemployment compensation rather than to continue to receive a salary
which is entirely subject to levy.
Also. it has been suggested that the requirement of successive levies
in the case of salary and wages results in substantial administrative
problems for the Internal Revenue Service and does not afford indi-
vidual taxpayers any significant benefit.
Under the House bill (sec. 1210), a limited amount of a taxp;myerIs
wages, salary, and other income would be exempt from levy under
jeopardy and termination assessnient procedures and ot ,. wis,. The
amount that would be exempt for a taxpayer wliho receives all of hi-
wages, salary, or other income on a weekly basis would be $50 plus
$15 for each individual who is specified as a dependent of the taxpayer
in a verified written statement submitted to the per-,,n on whom notice
of levy is served. The bill also provides that a levy on a taxpayer's
salary or wages shall be continuous until the tax liability with respect
to which it is made is satisfied or becomes unenforceable because of the
lapse of time.
These provisions would apply only with respect to levies made
after December 31, 1975.
11. Administrative Summons
Under present law, the Internal Revenue Service is given authority,
during the course of an investigation to determine the tax liability of a
person, "to examine any books, papers, records, or other data which
may be relevant or material" to the investigation. This includes not
only the right to examine records in the possession of the taxpayer but
also the authority to issue a summons to "any person" having posses-
sion or custody of records "relating to the business of the person
liable for tax" as well as the authority to take the testimony of any
such person under oath. In certain cases, where the Service has reason
to believe that certain transactions have occurred which may affect the
tax liability of some taxpayer, but is unable for some reason to deter-
mine the specific taxpayer who may be involved, the Service may serve
a so-called "John Doe" summons, which means that books and records
relating to certain transactions are requested, although the name of the
taxpayer involved is not specified (United States v. Bisceglia, 420 U.S.
141 (1975)). The summonses served by the Internal Revenue Service,
which may be referred to as administrative summonses, may be en-
forced where necessary by court procedure.
Where the summons is served on a person who is not the taxpayer
(i.e., a third-party summons), the party summoned may challenge
the summons for nroeedural defects (i.e., on rounds that the summons
is not validly served or is ambiguous, vague, or otherwise deficient. in
dosc-ibincr the material requested), on n-rounds of the attorney-client
privilege (where applicable), and on other grounds, such as an asser-
tion that the material subject to summons is not relevant to a lawful
investigation, or that it is not possible for the witness to comply (as
where the records are not in his possession).
The person to whom the records pertain may also have some protect-
ible interest which could be asserted to bar enforcement of the sum-
mons. However, there is no legal requirement that the taxpayer (or
other party) to whose business or transactions the summoned records
relate be informed that a third-party summons has been served.
The Service maintains that the use of the administrative summons,
including the third-party summons, is a necessary tool in conducting
many leritimnAte investigations concernin- the proper determination
of tax. The Serviee ariuez that the administration of the tax laws
requires that it be entitled to obtain records, etc., without an advance
showing of probable cause or other standards which usually are in-
volved in the issuance of a search warrant. On the other hand it is
contended by others that the use of this important, investigative tool
should not be allowed to infringe on the civil rights of taxpayers,
including the right to privacy.
The Service has instituted an adlinin-trailive policy desig r1l to
establish certain safeguards in this area. Under this policy, Service
representatives are instructed to obtain inforiniition from taxpayers
and third parties on a voluntary basis where pos.-ihle. Where a third
party summons is served, advance supervisory approval is required.
In the case of a John Doe summons, the advance supervisory approval
must be obtained on a high level basis. Many believe, however, that
these administrative changes, while commendable, do not provide all
of the safeguards which might be desirable in terms of protecting
the right of privacy.
It has been suggested that many of the problems in this area would
be cured if the parties to whom the records pertain were advised
of the service of a third-party summons, and were afforded a reason-
able and speedy means to challenge the summons where appropriate.
(While the third-party witness also has this right of challenge, even
under present law, the interest of the third-party witness in protecting
the privacy of the records in question is frequently far less intense than
that of the person to whom the records pertain.)
In the case of a John Doe summons, advance notice to the taxpayer
is obviously not possible. Here some have suggested that the IRS
agent should be required to show adequate grounds for serving the
summons in an independent review process before a court before any
such summons can be served.
Under the House bill (sec. 1211), in the case of a third-party sum-
mons (when the identity of the taxpayer is known), the Service would
be required to include sufficient information to enable the third-party
recordholder to locate the records. The taxpayer (or other person to
whom the summoned records pertain) would receive notice of the
summons from the Service at the time of its issuance and would have
the right to stay compliance by notifying the person summoned
(within 14 days after the date on which the summons is served), not to
comply with the summons. The Service would then be required to seek
enforcement of the summons in a Federal court and the taxpayer
would have standing to challenge such enforcement. However, notice
to the taxpayer would not be required in the case of an administrative
summons to a lhank, issued in connection with the collection activities
of the Service where the purpose of the summons was solely to ascer-
tain whether or not the taxpayer has assets in that bank. In the case
of a "John Doe" summons (where the identity of the taxpayer is not
known), the Service would have to go into court, establish reason-
able cause for requesting the summons, and receive court approval
before issuing the summons. In the case of a canvas of district, pur-
suant to section 7601, a John Doe summons would not be issued, except
in accordance with this court procedure.
These. provisions would apply to summons issued after December 31,
12. Public Inspection of Private Letter Rulings
P Rf,.,t'W i t li,.'
As a part of the tax system the Internal Revenue Service provides
written advice to taxpayers on the tax treatment of their specific
Advice may be issued upon a written request from the taxpayer,
giving factual details about the transaction and after the taxpayer
ans w&'rs questions the Service may have about the transaction. (In-
formation, provided 1by the taxpayer to the Service often contains con-
fidential financial (or personal) information about the taxpayer. Some
of this information is repeated in the letter of advice that is issued by
the Serv ice.) The letter of advice generally is called a "ruling" and is
in tlhe form of a letter to the taxpayer.2
The letter ruling to the taxpayer has been treated as "private" in the
-sense tlat it is issued in response to the request of the taxpayer and
is officially kept confidential. Even if another taxpayer obtains a copy
of a private ruling, he cannot use it as a precedent in his own case. A
private ruling applies only to the taxpayer who is the subject of the
ruling, and only to the particular factual situation described in the
In addition, the Service publishes revenue rulings in its official bulle-
tins. Taxpayers and Service employees may rely on these published
rulings as precedent. However, before publication, all identifying in-
formation is deleted from the proposed revenue ruling, facts may be
altered to conceal identity, the position of the Service may be changed,
and this "sanitized" version is subject to extensive administrative
In 1975, the Technical Office of the National Office. handled 29,620
ruling requests. Approximately one-half of these (14,867) dealt with
requests for changes in accounting periods and methods; these re-
quests are handled rapidly and normally do not involve any substan-
Statement of Procedural Rules 601.201: Rev. Proc. 72-3, 1972-1 CB 698.
modified by Rev. Proc. 73-7. 1973-1 CB 776. However, the IRS will not rule on all
transactions. For examlle. the IRS will not rule on whether compensation is rea-
sonable in amount or on whether a taxpayer who advances funds to a charitable
organization and receives a promissory note therefore may deduct as contributions
;i mounts of the note frgiven by the taxpayer in later years. Rev. Proc. 72-9. 1972-
1 CB 71.s. In addition, in some cases, the IRS has established guidelines describ-
ing the form a transaction must take before a favorable ruling will he issued.
See, e.g., Rev. Proc. 75-21. 1975-1 CB 715, which sets out conditions which a
transaction must meet, before a favorable ruling will be granted that a transac-
tion is a leveraged lease and noit a conditional sale.
'While an erroneous ruling issued to a taxpayer may be mnodifiedl or revoked,
generally (in the absence of an omission or misstatement of material facts or
change in law) an advance letter ruling which is relied upon by the taxpayer in
good faith will not be modified or revoked retroactively if the facts which subse-
quently develop are not materially different from the facts on which the ruling
was based. Statement of Procedural Rules 601.201(1) (5).
Of the remaining rulings in 1975, the Tehnical Office responded to
14,753 taxpayer ruling requests. These requests dealt with exempt
organizations (3,386), pension trusts (1,358), acthiirial matter'-
(1,280), other income tax matters (7,388), and nliscellaneous iii:tters
The National Office of the Service also will a i.-wer request for a(d-
vice from the district offices on issues that ari.-e in the course of ;in1
audit of a taxpayer's return. This advice is in the form of a technical
advice memorandum. A technical advice memorandui is addre,-'.'i to
a field office of the Service but has an effect similar to that of a private
letter ruling in that the technical advice involves a deterillination of
tax questions concerning a particular taxpayer who generally lIas a
right to, and usually does. participate in the technical advice proceed-
ing. In 1975, the Service handled 1,551 requests for technical advice.
In 1975, the Service published 576 revenue rulings in its official bul-
letin. The source of these revenue rulings was both private rulings and
technical advice memnioranda. In one of the areas of tax law generally
considered to bt- very complex-that of corporate reorganization
the Service published 35 rulings in 1975. In that saiiie year, there were
approximately 2,600 private rulings issued in the corporate reorgani-
Fj' edom. of Infonrmation Act.-The Freedom of Information Act
(FOIA) became effective on July 4, 1967. The FOIA requires each
agency to make available for public inspection and copying "inter-
pretations which have been adopted by the agency * *." (5 U.S.(C.
552(a) (2) (B).) However, there are a number of exceptions from
the requirement of disclosure under the FOIA, including matters that
are specifically exempted from disclosure by statute.
Recently, the courts have considered the i-site of whether private
rulings are exempt from disclosure under the FOIA because they
constitute tax returns (or return information) which are exempt from
disclosure under the Internal Revenue Code (secs. 6103 and 7213). In
these cases, both the U.S. Court of Appeals for the District of Colum-
bia and the IT.S. Court Appeals for the Sixth Circuit held that private
letter rulings were not covered under sec. 6103 and 7213 of the Code
and were subject to disclosure under the FOIA. Tax Analysts d&
Advocates v. Internal Rlevenue Ser;ce, 3 Fruehauf Corp.. v. It eternal
In addition, in Fruehauf, the court held that technical advice mem-
oranda were to be open to inspection to the extent intended for issu-
ance to a taxpayer. However, in Tax Analysts the court hlield that
a technical advice memorandum was not open to inspection, being a
part of a tax return and therefore exempt from disclosure under the
FOIA (by reason of sees. 6103 and 7213 of the code).
In 1975, a suit was brought under the FOIA to compel release of
all private letter rulings issued by the IRS since July 4. 1967, the
effective date of the FOIA. Tax Anali/ysts &f Ad(oca r. Intern.'I
Rr,,e/,e Screice. F. Supp. 37 AFTR 2d 76-352, 75-2 ST('
par. 9869 (DC, DC). After considering the plaintiff's motion for sum-
mary judgment, the court ruled that the FOIA applies to unpublished
3505 F. 2d 350 (D.C. Cir. 1974).
4 75-2 USTC 16.189 (6th Cir. 1975) (petition for cert. granted Jan. 12, 1976).
pIivat' letter riigs isstueid since July" 4, 1967, but stayed further
pn,'eelil's ill the c 'ase lpendlilng Sulpreme (Couirt action in Frwhauf.
lrj / '1 ,/4 I 0h hv.-( )In )'cember 10, 1974, the IRS issued pro-
po-e',l pii(,' rural rile-, dealing 'g. with le pIublication of private rulings.
Il leeral. tIe.-,e, proposed riles provide for public inspection begin-
1lL1' ;ipo.Xi I lately 8:)l days ifter t lie iss iane of the rulin,.. (Further-
, Ire. in cert;i ii cases. a delay in pl lic inspection could be granted
f,r :(I1 ;Illditi,()iil period not to exceed 1.3 weeks.) Under these pro-
1P-,il rules. the Internal Reveenie Servic.e wotildn make available for
l iblii' ilslpe.'tion the full text of private rilingns. including identifying
information. Ilo\ever, t liest, proposed rules provide procedures for
Srot ect in trade secrets and national defense or foreign policy secrets.
()ii Mac *.i "25. 1975, the IRS held public hearings on these pro-
po-s,,i rules, at which time there was slastantial public comment. In ad-
ditio,, tle IRS ,was informed bI the Justice Department that at least
Mne part of tlhe prop esd rules (dealing with "req(iired rulings") might
he contriry ivto otlier princii(iples of law.
It has been argied that the private ruling system has developed
into a ,bolvy of secret law known only to a few members of the tax
profession. Additionally, it is contended that the secrecy surrounding
letter rulinurs hias irenerate'l suspicion that the tax laws may be used
by the influentiala" to their advantage, and that the tax laws are not
being applied on an evenhanded basis.
These types of concerns led to the lawsuits described above to open
private rulings to public inspection. While two courts have held pri-
vate rulings to be open, significant additional questions have been
raised since these court decisions. These questions concern the parts of
a ruling file that should be published, whether private rulings should
be available as "precedent" for other taxpayers, what procedures
should be established to allow taxpayers to claim that protected ma-
terial should not be disclosed, etc.
Tlie questions generally apply to future as well as to past rulings.
There are additional questions concerning past rulings, however, be-
cause taxpayers who previously obtained rulings applied for them in
reliance on the service's position that the information submitted to the
service would be treated as confidential tax information. (See State-
ment of Procedural Rules 601.601(d) (2) (iv) (h), (v) (b).)
Under the House bill (sec. 1212), private "letter rulings" issued by
the Internal Revenue Service pursuant to a request filed on or after
September 2.5, 1975, would be made available to the public in public
rea(ling roomm, and tlhe material released w-ould generally include the
1ame's of taxpayers who receive these rulings. However, because letter
rulings deal with transactions by specific taxpayers, the same type
of material presently protected from disclosure under the Freedom of
Information Act would generally be deleted from letter rulings before
they are made public. Only the letter ruling itself would be in the read-
ing rooms, and not the underlying file.
To protect taxpayers' privacy, there would be a )30-day delay in the
disclosure of letter rulings. The taxpayer would tlie n 1i allo%%ed :i
further delay in disclosure until the translation is completed (or up to
6 months, whichever is shorter). An additional delay in )iu)blic;ition of
up to 6 months could be allowed by the IRS on application b)y the
Additional l)protection of privacy for "required rulings" would tbe
provided. In general, identifying details in required rulings would
not be disclosed. In the case of rulings dealiinc with changcr- ii) ac-
counting periods anid methods, a short synopsis of the ruling woulld I,,
Technlical advice memoranda would also be made public. IHowever.
because these memoranda arise out of audits or similar activities, dis-
closure of the taxpayer's identity would be deletedl from technical
advice memoranda before they are made public.
A letter ruling (or technical advice memorandum) could not be used
as precedent by any taxpayer or by the Service.
These rules would apply to letter rulings and technical advice mem-
oranda requested on or after September 25,1975.
In the case of rulings and technical advice memoranda requested
before September 25, 1975, and issued after July 4, 1967 (the effective
date of the Freedom of Information Act, the identity of the taxpayer
involved would not be disclosed. These prior rulings would be dis-
closed in the order of the date they were issued. However, disclosure
of these prior rulings would be contingent upon the availability of
appropriated funds for purposes of processing these rulings. Rulings
and technical advice memoranda issued before July 4, 1967, would
not be made public under these rules.
13. Disclosure of Tax Return Information
The general statutory rules governing( disclosure apply to tax "re-
turns." (Sec. 6103 of the Code.)
The regulations under sec. 6103 (a) have defined tax "return" to
include information returns, schedules, lists, and other written state-
inents filed with Internal Revenue Service which are supplemental to
or become a part of the return. Tax "return" also includes other rec-
oid(-. reports. information received orally or in writing, factual data.
documents, papers, abstracts, memoranda, or evidence taken, or any
portion thereof relating to returns and schedules, etc. The definition
also includes reproductions or recordings of all or part of any such
The regulations under sec. 6103(b) and 6103(c) provide a different
definition of tax return. Under these regulations. a "return" includes
information returns, schedules, lists and other written statements filed
with the Internal Revenue Service which are supplemental to or be-
come a part of the return, and also includes, in the discretion of the
Commissioner of Internal Revenue, other records or rei)orts containing
information included or required by statute to be included in the
Under present law, all income tax returns are described as "public
records." However, tax returns are generally open to inspection only
under regulations approved by the President, or under Presidential
This applies to returns concerning income tax. estate tax. gift tax.
manufacturers excise taxes, communications tax. and transportation
tax. The statute does not cover returns concerning a number of other
tvpes of taxes. These returns may be open to inspection at the discre-
tion of the Commissioner, and include returns with respect to excise
taxes on private foundations, and Federal Insurance Contribuition Act
(FICA) taxes. A more complete list is set out in the margin.2 Addi-
U'nder the statute, income tax returns are open to inspection upon order of
the President and under Treasury rules and regulations approved by the Presi-
dent (,e,'. 6103(a) (1). Income tax returns also are "open to public examination
and in,,prection" to the extent authorized in rules and regulations established by
the Pres.ident. (See. f103(a) (2).)
Estate and gift tax returns and miscellaneous excise tax returns also are open
to inspection under rules and regulations. established by the PresidEnt.
2Ciahses of returns which may be open to inspection at the Commissioner's dis-
cretion include: (a) Rules Applicable to Recovery of Excessive Profits on Gov-
ernment Cointracts. (Chapter 4) ; (b) Federal Insurance Contributions Act
(Chapter 21); (c) Railroad Retirement (Chapter 22): (d) Collection of
Income Tax at Source on Wages (Chapter 24) ; (e) Special Fuels (Subchanter E
of Chapter 31) ; (f) Taxes on Wagering (Chapter 35) ; (g) Certain Othler Excise
Taxs (Cihapter 36)-(1) Occupational Tax on Coin-Operated Devices (Sub-
chapter B), (2) Tax on Use of Certain Vehicles (Sulbchapter D), (3) Tax on
tionally, the statute provides a number of spl,, -ilice situllations ill wlli-h
tax returns cain be disclosed.
In addition to the provisions of the Internal Revenlue (Code aI IdI tle
Treasury regulations, the Privacy Act of 1974 ((Public L.;w 9-1579)
and the Freedom of Information Act (5 1 .S.(C. )5)2) affect tle di:--
closure of tax information. The Privacy Act gener;:lly prohibits ani
agency from disclosing any of its records concerning an indiv(1id(tual toI
another agency, without that individual's consent. Ilowever uner
this Act, records may be disclosed( to other agenciwe, wit hiot shll
prior consent for a "routine use,' for civil and criminal law eniforce-
ment activities, to the Bureau of the Census for census p1IrpoIe-,: a1d
in certain other case-.3
Under the Freedom of Information Act, the courts have lield that
private rulings must be made public; the courts have also rwquir.1 the
disclosure of the names of the individuals to whom the letter rlins
were issued. (The issue of private rulings is (disci-.sed in part 12 of
DISCLOSURE TO CONGRESS
Congressional committees are classified in three categories for disclo-
sure purposes. The tax committees may inspect tax information in
executive se-sion. (Sec. 6103(d).) Select committees of the House and
Senate may inspect tax information, in executive session, if specifically
authorized( to do so by a resolution of the appropriate body. (Sec.
6103 (d).) Standing and select committees may inspect tax information
under an executive order issued by the President for the committee in
question.4 and on the adoption of a resolution (by the full committee)
authorizing inspection. (Reg. 301.6103(a)-101.) The resolution
must set out the names and addresses, of the taxpayers in question and
the periods covered by the returns to be inspected. Subcommittee: may
inspect tax information under an executive order and resolution of
the full committee. The designated agents of any authorized commit-
tee also may inspect tax information. (See 6103(d), Reg. ,301.6103
The tax committees and select committees authorized to inspect
tax information may submit "anv relevant or useful" information
obtained to the House or Senate. (Sec. 6103 (d) (1) (C).)
Use of Civil Aircraft (Subchapter E) ; (h) Sugar (Subchaplter A of Chapter 37) ;
(i) Regulatory Taxes (Chapter 39) ; (j) Private Foundations (Chapter 42) (k)
Taxes on Distilled Spirits, Wines, and Bcvr (Chapter 51) ; (1) Taxt., on To:,.cc,.
Cigars, (Cigarettes and Cigarette Papers and Tulies (Chapter 52) (in) Taxes
on Machine Guns and Certain Other Firearms (Chapter 53). IRM 1272. I)i,.o-
sure of Official Information IIandbook 320.
SIt is not yet clear what constitutes a routine use of tax information. How-
ever, from the legislative history of the Privacy Act it seehis that routine -H-c
would include disclo-,sure to the Departmetit of Justice in tax .:tc.-, di-.losure
to State and local tax agencies to administer their tax laws, iand disclosure to
tax committees of the Congress and to tlr.ir staffs. It also apii'ears that the Ils
may, under the Privacy Act guidelines prepared by the Office of M.i't :lg.,itt
and Budget, treat as a routine use, disclosure of tax information curreiitiy
allowed pi)irsuant to statute and regulatiirnn. See IRS N,,tice 403 (S-75)i and 40
Fed. Reg. 38024 (Aug. 2-,, 1975).
4 A new executive order muLst |e issued every two ye:a ts for a ziimmittee which
wants to continue e to obtain tax information, because an executive. rrder is g-mid
only for the Congress in which it is issued.
The Joint Committee on Internal Revenue Taxation has used tax
iiforiatio,0 most recently in its investigation of the use of the IRS
for political purposes (both in the investigation concerning the
"friemil.-" and "enemies" lists and the investigation concerning the
foriur Speci'l Service Staff). It lhas also made use of tax return in-
forimation in examining (as requested) the tax returns of former
Presidnt Nixon, President Ford and Vice President Rockefeller. In
addition it has examined returns in connection with its statutory duty
to review certain refunds. Although the Senate Finance Committee
and the Houise Ways and Means Committee have access to tax informa-
tion, traditionally these two committees, to the maximum extent possi-
ble, consistent with their responsibilities, have used tax data that is not
assoc iated with individual taxpayers. Instead the Joint Committee
staff has compiled data from individual tax returns and the data has
bheen used by the Finance and Ways and Means Committees.
In 1972, the Joint Committee staff made a survey of the other com-
mittees that had requested tax data. in recent years. Generally, the
survey showed that these other committees used tax information spar-
inglv. For the most part, tax information was used in investigations
of alleged nmisonduct with respect to government operations, in cor-
roborating financial records otherwise obtained, and in developing
DISCLOSU-RE TO THE WHITE HOUSE
Pr-csrn .t 7a w
For a number of years, it has been the position of legal advisers to
the Commissioner of Internal Revenue that the President (and the
White House) has unrestricted access to tax returns and tax informa-
The Internal Revenue Code does not provide specifically for dis-
closure to the President. However, the Code generally provides that
disclosure can be made as authorized in rules and regulations estab-
]ish(ed by the President. (Sec. 6103(a).) Under this provision, the
President could issue a "rule or regulation" providing for his access,
and that of White House employees, to tax information. Additionally,
in a previous administration, the then-Chief Counsel for the IRS in-
formed the Commissioner in a legal opinion that, as a constitutional
matter, there are no restrictions on the Commissioner disclosing tax
information to the President. This interpretation was based on the
part of the Constitution which vests executive power in the President
and, on this basis, it was contended that he was entitled to all informa-
tion relative to hiscontrol of the Executive Branch.
President Ford, by executive order, has established rules that govern
the disclosure of tax information to the White House. (Executive
Order 11805, September 20, 1974.) Under this order, tax returns are
available for insl)ection by the President. Requests for inspection are
to be in writing and signed by the President personally. Requests are
to state the name and address of the taxpayer in question, the kind
of returns which are to be inspected, and the taxable periods covered
by the returns.
Under this executive order, other White House employees ablo may
obtain tax information. The order provides that the Presi(dent may
designate, by name, employees of the WhiteI liouse who may receive
tax information. This is limited to employees with an annual rate of
1asic pay not ls.-. than that prescribed by 5 1 ..C.( 5;316(; (at )pr-(.nt,
$37,800 per year). No further disclosure (except to the P1n-ident
may be made by such empl)loyees without the written directioM of the
(Commnnissioner Alexander also las instructed the employv.., of tihe
Internal Revenue Service with respect to pri, ,edures. that are to be
followed (concerning requests for tax information from the White
I louse. Any IRS ellployee who receives a request for tax infoirniition
from the White Ilouse is to prompl)tly communicate that fact to the
Commissioner. through channels. The Commissioner will evaluate the
request, an(d only the Commissioner (or, in his ab.-eiice, his deputy) is
to make the tax information available to the White House. This proce-
(duire also applies to "tax checks'" on potential Presidential appointees.-
(IRS Information Notice 74-23, August 9, 1974.)
Disclosuare of tfax returns.-Generally, there have been three types
of tax information provided to the White House. In some cases, tax
returns, parts of tax returns, or analyses of tax information with re-
spect to specific individuals have been provided the White House.5
"Tax checks"' on potf-ntial Goernment appointees.-The White
House also receives information on "tax checks" of Presidential ap-
pointees. The staff understands that, under the current procedure, a tax
check on a potential Presidential appointee is initiated by the White
House Counsel's Office as part of a "security and conflicts review" to
which the potential appointee consents. As part of this review, the
FBI conducts a "full field investigation" which includes checks with
various governmental agencies, including the Internal Revenue Serv-
ice. Therefore, the inquiry to tlhe IRS with respect to a potential
Presidential appointee comes directly from the FBI rather than from
the White House.
Under the procedure established by Commissioner Alexander, only
the Commissioner (or, in his absence, the I)epiuty Commn isioner) may
authorize disclosure of information under a tax check made for the
White House. Additionally, under the Commissioner's procedures, the
information provided is limited to whether an individual has filed
SFor examilde, John J. Caulfield testified that. while employed at the White
House, he received tax information concerning Billy Grahamn. John VWayne. a
number of individuals in the entertaiiiiinment industry who were "politi,;lly
active," and an individual working in the re-election camiipai-ni of former Presi-
dent Nixon. (Testimony of John J. Caulfield before the Senate Select Com-
mittee on Presidential Ca mpaign Activities, Ma.irch 23,11)74.)
Additionally, Clark Mollenhoff. while a White House, employee, received
tax information relating to the 1968 Presidential 'amlpain -i4,f Governor George
Wallace and to income received by his brother. Gerald Wallace. (Affidavit of
Clark R. Mollenhoff before the House Committee in the Judiciary, dated
June 4. 1974.) Also, Carmine Bellino, formerly special consultant to Prsident
Kennedy, received tax returns in 1961 while eondltina inve4tiirations for the
White House (and simultaneously the Justice Department and the Seilate
Permanent Subcommittee on Investigations of the Government Ol-rations Conm-
mittee). (Congressional Record, April 16, 1970.)
income tax returns for tihe immediately preceding three years; owes
any unpaid taxes ;id, it so, for wfhat years; hlas been under any crimi-
111l tax inve.,tigation( and thle result of such investigation; or has been
asse.-ed i pea1Lnalty for fraud or negligence. (IR Manual, IMT 1272-6
This information is reported to the FBI which in turn reports it to
the White House Counsel's Office. The staff is informed that the White
TIIit- e Coiun.el's %Office transmits a report to the President that the
security ;,nd co)lnflicts review of the potential appointee has either been
apprtvd or ili.-approved. Thle tax information received by the White
Hiioue Counsel's Office is, under present practice, not transmitted to
any other office in the White House.
The staff also is informed that the White House security and con-
flict.-, review is used for Presidential appointees. White House staff,
-ome of the Executive Office staff and others who receive a ."WhIite
llou-c pass giving them access to the White House and to the Presi-
dent. Tax checks are also made on persons nominated for Department
of Commerce "E" Awards (established by Execuitive Order 10978).,
The reports of the IRS to the Joint Committee for calendar year
197;- show the following tax checks requested by Federal agencies:
White House------------------------------------------------ 1, 139
Department of Justice ----------------------------------- 706
Department of Treasury------------------------------------------ 1,499
Department of State---------------------------------------- 165
Department of Commerce---- ---------------------- ------------96
Export-Import Bank------------------------------------------ 9
United States Information Agency---- -------------------------- 30
District of Columbia Judicial Commission------------------------- 6
Congressional Committee--------------------- ------- 1
DISCLOSURE TO JUSTICE DEPARTMENT-TAX CASES
Tax returns and other tax information may be furnished without
written application to U.S. Attorneys and Justice Departmnent attor-
neys in civil or criminal tax cases referred by the IRS to the Justice
Department for prosecution or defense. (Reg. 301.6103(a)-l(h).)
Where tlhe Justice Department is investigating a possible violation of
the civil or criiiiinal tax laws and the matter has not been referred
by the IRS, a Justice Department attorney or U.S. Attorney may
obtain tax information upon written application where it is "necessary
in the performance of his official duties." (Reg. 301.6103(a)-1(g).)
The written application must state the name and address of the tax-
payer, tlhe kind of tax, thie tax period, and the reason inspection is
desired. It must be sig-ed by the Attorney General, Deputy Attorney
General, an Assistant Attorney General or by a U.S. Attorney.
'In addition to tax checks at the request of the White House. some tax checks
are made at the request of other Federal agencies. These checks may be made
ait the request of the head of the other agency, and( apparently also may be
maide at the request of other agency officers or einployees. Also, it appears that
ceasainally tax checks are made on potential employees of congressional staffs,
at the request of the Members of Congress concerned.
The Justice Department can obtain the return of potentil wit-
nesses and third parties. Also, in a tax cam( (or any other c;e -e), t e
IRS will answer an inquiry from the Justice ID)ep'alirtiment :is to
whether a prospective juror has been investigated by the IRS. (R k..
301.6103(a)-l (h).) However, other tax information i- not available
for examining prospective jurors.
Tax information obtained by the Justice D)epartnment iiiy be u-.d
in proceedings conducted by or before any department or .stablish-
ment of the Federal Government or in which the United States i, a
party. (Reg. 301.6103 (a)-1 (f).)
The Justice I)epartment is responsible for almost all civil and
criminal tax matters litigated before the Federal courts (except for
the Tax Court).7 Mo. t civil tax cases handled by the Justice Depart-
ment are tried by attorneys of the Tax Division of the Justice I)ep)rt-
ment. The Tax Division is routinely furnished the entire IRS file on
a particular taxpayer with respect to any matter in controversy in
a tax case concerning that taxpayer. Additionally, most civil tax liti-
gation involves refund suits by taxpayers where the taxpayer's liabil-
ity is directly in issue; in refund cases, it is common for the taxpayer
to place his tax return in evidence.
Most criminal tax cases are conducted by U.S. attorneys (subject
to the Tax Division's supervision). These cases generally are ba-ed oii
referrals from the IRS recommending prosecution. In these cases, al-o,
the Justice Department is routinely furnished the entire IRS file on
Tax returns obtained by the Justice Department generally pertain
to the taxpayer whose civil or criminal tax liability is directly involved
in the case. However, the Justice Department also may obtain directly
from the IRS district offices tax returns of potential witnesses for the
taxpayer or Government, and third parties with whom the taxpayer
has had some transactional or other relationship.8
The returns of witnesses generally are obtained for purposes of
cross examination and impeachment. In many cases, the information
obtained from the witness' tax return is used to cast doubt upon his
credibility as a witness, as opposed to establishing the tax liability in
Additionally, in the course of a tax case, the Justice Department
may obtain the return of a third party who will not be a witness in the
case but who has had a transactional relationship with the taxpayer
involved in the case.9 In a criminal tax case, third-party returns may
be used to develop leads to evidence establishing the guilt of a defend-
ant. In civil tax cases, third-party returns may be used to develop
7 In the U.S. Tax Court, the Commissioner is represented by the Chief Counsel
for the IRS.
"A request to the IRS National Office for tax information neied only be nldfr
in the event the IRS district office rejects the Justice Dep:irtment request. Rejec-
tion is to occur in those instances where the district office finds timhat the party for
whom the tax information is requested is neither a potential witness nor h;is had
any tra iinsactional relationship with the tax payer.
'Also, the staff has been informed that third-p.Tirty returns ,',mhotimes are ob-
tained where the third party has a tr:ns.actional relationship with a witnef- in a
forthcoming trial and not with the taxpayer in the trial.
evidence pertaining either directly to the tax liability of a taxpayer, or
to impeach the testimony of the party whose. tax liability is at issue
(or to impeach tlhe testimony of witnesses testifying on his behalf).
The Government also obtains the tax returns of its own witnesses to
determine the veracity of their proposed testimony and their credi-
bility in general.
DISCLOSURE TO JUSTICE DEPARTMENT-NONTAX CRIMINAL CASES
Under TrLeasury regulations, a U.S. Attorney or an attorney of the
Departminent, of Justice may obtain tax information in any case "where
necessary in the performance of his official duties." This may be ob-
tained on written application, giving the name of the taxpayer, the
kind of tax involved, the taxable period involved, and the reason in-
spection is desired. The application is to be signed bythe U.S. Attorney
involved or by the Attorney General, Deputy Attorney General, or an
Assistant Attorney General. (Reg. 301.6103 (a)-1(g).)
Tax information obtained by the Justice Department. may be used
in proceedings conducted by or before any department or establish-
ment of the Federal Government or in which the United States is a
party. (Reg. 301.6103(a)-1(f).)
The service also will answer an inquiry from the Justice Department
a.) to whletlher a prospective juror has been investigated by the IRS.
(Reg. 301.6103(a)-l(h).) However, other tax information is not
available for examining prospective jurors.
Last month, the U.S. Supreme Court (in Garner v. U.S., slip opin-
ion, MIarch 23, 1976) held that a taxpayer's Fifth Amendment privi-
le(ge against compulsory self-incrimination was not violated when his
income tax returns (which showed his occupation to be "gambler")
were not introduced in a criminal gambling conspiracy trial. The Court
held that he had waived his rights by making these disclosures on his
income tax returns. The Court indicated that, in order to preserve his
rights, he would have to claim the privilege against self-incrimination
on his return, even though this meant that he would not have filed a
complete income tax return. The opinion has been read as suggesting
that a failure to file a tax return, because of a decision of a taxpayer
to claim rights under the Fifth Amendment, would not constitute a
violation of the Internal Revenue Code provision (sec. 7203) which
makes it a crime to willfully fail to file a tax return. Presumably, this
doctrine would not be limited to the particular factual situation in
Ganwrr (i.e., it would not be limited to gambling cases).
St?',ke Forre.-The Organized Crime and Racketeering Section of
the Department of Justice coordinates, through Federal Strike Forces,
an integrated investigation and prosecution program against organ-
ized crime and racketeering activities. These investigations involve the
participation of various Federal agencies, including the IRS.
In investigating organized crime, a strike force may focus on a
single person, identified by various intelligence agency sources as a
leader, member, or associate of a criminal organization, and investi-
g(ate the transactions in which hlie is involved. Also, a strike force may
focus on a racketeering situation, and from there determine the persons
who should be investigated in connection with that situation.
A .trike force generally "targets" a suiispect and investigates all hli-
activities to determine what criminal laws he may have violated. In
this process, it often may obtain tax information from the IRS to
determine whether there has been a violation of the criminal -t;itutes.
both nontax and tax. Examples of nontax crimes which a strike force
may investigate are counterfeiting and forgery, loan sharking, mail
fraud, interstate transportation of stolen property, and illegal pay-
ments and loans to labor unions and employees.
Tax information may be used to provide strike force investigators
leads relating to such criminal activity. Moreover, tax information
is used to gather leads or make connections between various individ-
uals and entities. The staff has been informed that the tax information
considered most useful by strike force personnel in its nontax criminal
investigation work is that which IRS investigators acquire from
parties other than the taxpayer.
Tax information obtained in strike force inve-tigations is used in
prosecuting criminal offenses. Thus, request. are made for tax infor-
mation pertaining to the defendant, and to defense witne-es in the
course of the investigation, at the pretrial level, and sometimes during
the trial. The returns of defense witnesses in nontax criminal trial: are
often requested to obtain information for cros-examination and im-
peachment of witnesses.
The tax returns of Government witne-ses are also obtained in order
to evaluate the veracity o.f their proposed testimony, as well as to
evaluate their credibility in general.
Tax information also is obtained with respect to third parties who
have had some transactional or other relationship with the defendant
in order to seek investigative leads.
The staff has been informed that during the calendar year 1975
there were 166 requests for tax information by strike forces (and an
additional 62 by the Criminal Division) of the Justice Department.
The strike force requests concerned 8,103 tax returns of 1,711 tax-
U.S. Attorneys.-As the chief law enforcement representative- of
the Attorney General within their respective judicial districts, U.S.
Attorneys are responsible for investigating and pros-euting pe!':Sosl
who violate the Federal criminal laws.
U.S. Attorneys use tax information in investigating and p1ro-e,'t-
ing criminal activities. In calendar year 1975. .S. Attorney-s made
1,350 disclosure requests for tax information. These requests pertained
to 17,678 tax returns of 4,330 taxpayers. It appears that a significant
proportion of the requests made by U.S. Attorneys are for criminal
investigative( purposes, and this may be due to the incre:ti-ed in e.-ti-
gative activity of U.S. Attorneys. For example, in sonic lle'ilitie,-
special team investigations, sometimes referred to a- "task force-",
(which are analogous to the national level strike fore:-) have been
conducted under tlhe leadership of a U.S. Attorney.
According to the Justice Departmenet, most I.S. Attorney tax 4data
requests for investigative purposes pertain to potential "white col:,I "
crimes involving some form of corruption (e.g., bribery, illeg l kick-
backs) o(r "major fraud" (e.g., 1iank, investment, aiid mail frauds).
(O)rdinllarily, requests for tax returns are not male with respect to
crimes of violence or for routine inisdemea-ior cases.
DIS('I.OSURE TO JUSTICE DEPARTMENT-NONTAX CIVIL CASES
Under Treasury regulations, a U.S. Atorney or an attorney of the
Justice DI)epartinent may olitain tax information in nontax civil cases
in the same manner and to the same extent as in nontax criminal cases.
During 1975 there were 77 requests for tax information by divisions
of the Justice Department involved with civil-nontax matters. These
requests pertained to 515 returns of 119 taxpayers.
The Justice Department has used tax returns in suits brought
against the Government seeking money damages for injury or wrong-
ful death. The Justice Department has informed the staff that tax
information is used in these cases to verify the claims of loss of income,
and also to determine, through claimed medical expenses deductions.
whether the plaintiff had suffered other injuries before or after the
accident in question.
Tax information is also used in suits concerning the renegotiation
of Government contracts, where the Renegotiation Board has deter-
mined that excess profits were earned on a Government contract. Here,
tax information is used to verify the income earned on the contracts
Nontax civil cases also involve affirmative money claims, including
civil fraud claims, by the Government against various private parties.
In these cases, tax information may be used to determine whether the
defendant is financially able to pay the demand contemplated by the
Tax returns are also requested after the Government has obtained a
judgment against a party in order to verify statements made by the
judgment debtor as to his financial ability to make payment of his
Much of the nontax civil litigation falling under the responsibility
of the Civil Division of the Justice Department is handled by U.S.
Attorneys, who request tax returns for the purposes described above.
As noted above in connection with tax and nontax criminal cases.
disclosure requests also are made with respect to the tax returns of
defense witnesses, Government witnesses, and third parties having a
transactional relationship with the defendant or a defense witness.
Several agencies obtain information from tax returns for statistical
purposes. Under regulations allowing general inspection of tax infor-
mation; the Department of Commerce (Census Bureau and Bureau
10 The Civil Division is the chief Justice Division using tax information for
nontax civil purposes. Other divisions involved with nontax civil mntterq request
and use tax returns on a minimal level. These include the Anti-Trust Division,
the Land and Natural Resources Division, and the Civil Rights Division.
of Economic Analysis) is authorized to use information from tax
returns for statistical purpose,, (Reg. 301.6103(a)-104). Ihe Fed-
eral Trade Commission (Reg. 301.6103(a)-106) and the Seruritic.s
and Exchange Commission (Reg. 301.6103(a)-102) also are aml or-
ized to use information for statistical purposes.
Other agencies which do not have Executive Orders allowing geLiieral
inspection of returns probably could obtain tax retuirni for statistical
purposes under the regulations allowing disclosure on a case-byv-case
basis. (Regs. 301.6103 (a)-l1(f).)
For a short period, the Agriculture Department was authorized to
obtain tax information on a general inspection basis for statistical
purposes. This authority was established in 1973 and revoked in 1974.
Census BUrau.-The most extensive user of tax information for
statistical purposes is the Census Bureau, within the Department of
In most cases the Census Bureau does not obtain the full tax returns.
Instead, the information consists of name, addries,, industrial
activity, and some coded financial information (i.e., whether the tax-
payer has gross receipts within a given range, on a scale of 10 ranges).
In the case of the Economic Census, information is provided concern-
ing wages paid.
In general, information from tax returns is ised by the Census Bu-
reau to prepare lists of persons to be surveyed by the Bureau. The
Bureau uses information from tax returns to assist in preparing the
Economic Indicators, the Survey of Minority-owned Busin4- s Enter-
prises, and the Survey of County Business Patterns.
The Economic Census (conducted every five years) is used for the
Index of Industrial Production (of the Federal Restrve Board), the
Index of Wholesale Prices (of the Bureau of Labor Statistics), and
the Gross National Product accounts. The Current Economic Indica-
tors include information on retail sales, manufacturers' shipment .
orders and inventories, investment, and are used for the Index of
Industrial Production (Federal Reserve Board).
These statistics are used as a basis for national economic policy.
for distributing funds by agencies, by State and local governments in
determining their programs, and by private business in forecasting.
marketing, investment, etc.
Generally, these statistics are not based on data from tax returns.
The Census Bureau has stated that information from tax returns is
largely used to prepare lists for census and survey, to tabulate statisti-
cal links between data reported by the Service and the Census Bureau.
to excuse smaller firms from filing reports (by using data from tax re-
turns instead), and to weed out firms that do not need to report.
The Census Bureau has made an analysis of the effect of not allow-
ing it to use tax data. Generally, the Bureau has stated that tihe effect
For example, in 1975, he following income tax return records \vre tra infi-frred
to the Census Bureau:
1. 8,400,000 Business Master File Entity Changne Records showing employer
identification number (EIN), name. address, and Aip code.
2. 21,200,000 Formi 941 showing EIN, total coinpenisaition, FICA wagvs. taxable
tips, master file account, tax period, and address change.
of entirely prohibiting it from having access to infornIation from tax
ret ulrlls wouli be to significantly increase the costs of collecting data
aiul to sigrnificaIItly decrease thle quality of the statistics developed.
In the alternative, the Census Bureau has evaluated the impact of
having liim ited data from tax returns, such as name, address, size. and
kinlld of businves.. With regard to the Economic Census (next scheduled
for 1977), tlhe Bureau states that. with access to such limited data, it
could "asse1blle a satisfactory mailing list with a cost. tilie, and work-
load frame .-imilar to the 19t2 EconomJic Census." However, if actual
tax record values for annual sales and annual payroll were not avail-
able, the Bureau states that "it would be necessary" to collect this in-
formation from small as well as large business. (apparently affecting
alx)ut 3 million small firms).
The 1974 Arricultural Census used the limited tax identification
information of name. address, identification number, and size class.
Additionally, this type of information is essentially what the Bureau
now obtains for the Economic Indicators program.
The Census Bureau also currently uses "relatively small samples of
individual tax records." on a case-by-case basis, to compare income re-
ported in tax returns with income reported in the census. Similar eval-
uation studies are used by the Bureau in connection with surveys such
as the Current Population Survey.
Information from tax returns is also used by the Bureau in deter-
mining amounts to be allocated under revenue sharing; this use was
specifically contemplated by the Congress in establishing the revenue
sharing program (see General Explanation of the State and Local Fis-
cal Assistance Act, H.R. 14370, 92nd Congress. Public Law 92-512,
page 39 (Feb. 12, 1973).)
Bu.reau. of Economic Analysis.-The Bureau of Economic Analysis
(BEA) prepares the National Income Accounts, including the 'a-
tional Income and Product Accounts focusing on GNP, and the Bal-
ance of Payments Accounts.
BEA has stated that a major input into GNP is the IRS published
Statistics of Income series. However, BEA has also stated that it
needs access to a sample of individual large corporation's tax returns
to prepare "industry extrapolators," and to be able to distinguish
changes in the IRS Statistics of Income series that occur on account of
shifts in economic development from changes that occur on account
of shifts in tax reporting.
The staff is informed that BEA does not obtain tax information.
from individuals' returns, but, only from returns of large corporations.
Generally, BEA employees examine IRS transcript cards that sum-
marize information from 500 to 1,000 returns of the largest corpora-
tions. (In calendar year 1974, BEA obtained 300 "transcript-edit
sheets" of corporate returns.) BEA employees copy data from these
cards and also inspect 20 to 100 tax returns over the course of a year.
Federal Trade COmm.s.sion.-In 1974,12 the Federal Trade Com-
mission obtained the following information for use in the Industrial
and Financial Reports Program and the Quarterly Financial Report
1. 58,729 specially prepared abstract sheets for corporation
1 1975 data are not yet available.
2. 43,000 Forms 1120, etc., including name, address, EIN, date
incorporated, gross receipts, taxable income, total assets, industry
code, accounting period, and name, address and EIN of consoli-
3. 31,000 abstracts of corporate tax returns showing name, ad-
dress, zip code, EIN, date incorporated, gross receipts, taxable in-
come, total assets, industry code, accounting period, and name,
address and EIN of consolidated subsidiaries.
The staff has been informed by the FTC that, for the most part, it
does not need detailed financial information from the IRS, and in any
case does not use information about individuals. The FTC has stated
that it uses the information it receives to develop a sample of corpora-
tions which the FTC then surveys. To develop this sample, the FTC
needs the following information: name, address, EIN, industry code,
sample code, and gross assets indicator. (The "industry code" tells
what the principal industrial activity of the corporation is, the "sample
code" tells the sampling process used by the IRS with respect to its
Statistics of Income (not with respect to audit, etc.), and does not ap-
pear to be tax information. A gross assets indicator would tell, e.g.,
whether the corporation had gross assets of over $10 million, $5-$10
million, $3-$5 million, $1-$3 million, or less than $1 million.)
The FTC has also stated that other information as the accounting
period and consolidated return indicator are helpful in developing
more accurate statistics, but are not basic to its statistical proce-s. The
same is true with respect to net receipts and net income.
Agriculture Departnwment.-On January 17, 1973, Executive Order
11697 was issued allowing the Agriculture Department general inspec-
tion of tax returns to obtain data about farming operations to be used
"for statistical purposes only." The regulations issued under this Ex-
ecutive Order allowed the Agriculture Department to obtain the name,
address, and EIN of taxpayers and "any other data" on the tax
On March 27, 1973, a second Executive Order (E.O. 11709) was
issued, along with regulations. These regulations limited the informa-
tion which could be obtained by the Agriculture Department to name,
address, EIN, type of farm activity, and one or more measures of
size of farm operations, as gross income from farming or gross sales of
On March 21, 1974, these two Executive Orders were revoked by
E.O. 11773. Revocation occurred after significant criticism was di-
rected at inspection of tax returns by the Agriculture Department.
(See "Executive Order 11697 and 11709", Hearings before a sub-
committee of the House Committee on Government Operations. 93rd
Congress, 1st Sess., May 9 and August 3, 1973.)
The data to be obtained by the Department of Agriculture was simi-
lar to that obtained by Census for its agricultural census. However.
Congressional testimony has suggested that the two cases are different
because the Census Bureau is "the statistical handmaiden of the entire
Federal Government," but the Agriculture Department statistic:l
division "has a responsibility to gather statistical data for the policy-
making of the Department of which it is a part." Consequently, "the
featr existed that the material obtained by the Agriculture Depairt-
,ient would, or at least could, be used by Agriculture in making de-
cisions within respect to the prouiranis which it directs."
S,,'fr;f/'.,, a(d/1(Lc/,ni.qe Comm;.,s;orn.-The staff is informed that
thet SEC has not lobtailled tax information for statistical purposes for
several years, since the functions for which the SEC( required this in-
formation were moved to tlie Federal Trade Commission.
OTHER FEDERAL AGENCY USES
Tax information is available to each executive department and other
establishments of the Federal Government in connection with matters
officially before them on the written request of the head of the agency.
Tax information can be inspected for nontax administration pur-
poses by Treasury employees (who are not in the IRS) on the written
request of the head of the appropriate bureau or office. The request
is to state the name and address of the taxpayer, the kind of tax and
the taxable period involved, the reason why inspection is desired,
and the name and position of the employee who will inspect the return
(this last item is not required for non-IRS Treasury Department
inspections). Tax information obtained in this manner may be used
as evidence in any proceedings before any "department or establish-
ment" of tlhe United States or any proceedings in which the United
States is a party.
Under the regulations., several agencies may generally inspect tax
information for qualified purposes, without the head of the agency
having to write a specific request to the IRS identifying the taxpayer
and the reason for the desired inspection. For example, the Depart-
ment of Health, Education, and Welfare may inspect individual tax
returns as required to administer Title II of the Social Security Act
(old-age. survivor, etc., benefits). Inspection is authorized on the writ-
ten application of any authorized officer or employee of the depart-
Also, Customs, Secret Service, and other Treasury enforcement
agents may obtain limited tax information on their own request, with-
out the request of the head of their office. This includes information
on whether a delinquent account has been issued, whether an audit wa.
made, whether an Intelligence investigation was conducted, and the
During calendar year 1975, the following agencies obtained tax in-
formation under this provision:
Number of Number of
Federal agency requests taxpayers
Department of Agriculture.---.--------------------------------------------- 2
Bureau of Alcohol, Tobacco, and Firearms.----------------- ----------------------- 1 1
General Accounting Office-------------------------------------------------------1 234 5
Renegotiation Board-.....---.----------------------------------------------------51 84
Department of Justice .......- ......--------------- ------------------------------29 62
U.S. Attorneys....-------------. --------------------------------------------- 5
Small Business Administration...----------------------------------.--- ----------- 65
Total........---- ----.. . . . . ..------------------ - -- 90 458
In 1972, the Joint Committee :-taff conducted a s,1rviyv of the vanri-
out Federal agencies which had previously relui-tced tax da't, fron1
the Internal Revenue Service. The ageiicie- were asked tlwe 'i-- to
which the information was lput. For the l iost part, infoiimiitiol ob-
tained by the agenci,- on a ca-e-by-ca ,: bat-i- (under Reg-. 8,1.61038
(a)-l(f)) was ui:edl in investigation. .of siiIv,(ted( violation,- of laws
under the jurisdiction of the aVenry. TI.-e investiratio1- concerned
kickbacks, failure to file reports or verification of l'form:itioii and re-
ports, concealment of assets and other undi.:,lo:.rd interests, unlawful
control of assets, "financial fitne--", etc. The Renegotiation Bo;ird hi-
used tax information in conjunction with its r..espoli-ibilit \ under the
Renegotiation Act to eliminate exces-i,.ve profits fr'm contract- with
the Federal Government. Tax data is requ,.-td by the Social Security
Administration to obtain evidence of earnings so that an individual's
entitlement to monthly benefits may be properly determined. This in-
formation can be used to the benefit of the individual or to thlie benefit
of the government with respect to determining Social Security benefits.
STATE AND LOCAL GOxEiN.MENTS
On the written request of the State governor, individuals' and
organizations' tax returns may be inspected by State tax official- for
purposes of administering the State's tax laws. At the governor's writ-
ten request, tax information also may be obtained for local govern-
ments to be used in administering their tax law-:. (Sic. 6(103(b).) In-
come tax information is not furnished directly by the IRS to local
governments. Instead, State tax officials furnish :-1ch information
to local governments where the IRS has approved such action at the
request of the Governor.
Under the regulations, with the permission of the Coniiuii--ioner
and for purposes of State tax administration, a State may be allowed
to inspect on a general basis all income, estate, and gift tax returns
filed in the district in which the State is located. The :-aie is true for
other types of returns such as estate tax and gift tax returns. Addi-
tionally, the specifically identified returns of taxpayers who filed
within the relevant district, and of taxpayers who filed in districts
which do not include the State in question, may be inspected on a case-
by-case basis on the written request of the State Governor.
On request, the Commissioner may allow each State to inspect on a;
general basis all tax returns filed by residents of the State. The -taiff
understands that all States except Nevada have made such reque-ts
and may make a general inspection of returns. The ability to inspect
returns under this procedure applies to the physicnal il -pection of the
documents in question.
The States may also enter into tax coordination agreements with
the IRS with respect to inspection of tax information. (All Stat'-
except Nevada, and Texas have entered(l into these arklnents, and tlhe
staff is informed that Texas is now negotiating with the IlRS raru-
ing an agrreemient.13 These agreements generally provide for coopera-
tion bet weon tihe IRS and the States in tax administration, for an ex-
lchange of tax information, for assistance in locatinlg delinquent tax-
payers (and their property), and for cooperative au(lits, and also
provide for preserving the confidentiality of tax information.
By far the largest IRS/State information exchange program, in
terms of aimouints of information transferred, is the furnishing of Fed-
eral tax information on iagpietic tape. In 1975, 41 States (plus the
District of Columbia and Puerto Rico) participated in this program.
Tlnder thet 1975 Individual Master File (IMIF) program. information
on nea rly 66 million taxpayers was provided to the States. (This covers
approximately 80 percent of individual taxpayer records.) IMF tax
data available to the States include: name. address, social security
number, filing status, tax period, exemptions claimed, wages and sal-
aries, adjusted gross income, interest income, taxable dividends, total
tax. and audlit adjustment amount.
Under the tape exchange, programs, the States agree to conduct a
joint review with the IRS of safeguards of tax information.
A Business Master File (BMF) program is also available to the
States to aid them in establishing their own business master files.
Information from the Exempt Organization Master File is also avail-
able to the States, as is gift tax data.
Under the cooperative audit program, copies of examination reports
are furnished the States. In 1974, nearly 700,000 abstracts of these
reports were furnished the States. (The 1975 figures are not available.)
Also, the IRS furnishes the States information on returns that appear
to have good audit potential but will not be audited by IRS because
of manpower rest frictions. In 1974. information was furnished on more
than 70,000 returns under this program. (The 1975 figures are not
It has been siuggested that tax information that is supplied to tax
officials at the State and local levels may not be invariably subject to
appropriate safeguards on confidentiality. Also, it has been suggested
that political considerations may produce unwarranted interest by
State and local governments in tax information, even at higher levels,
for nontax purposes.
IRS studies have indicated that in several situations, State authori-
ties have allowed other States (or local governments) to inspect Fed-
eral tax information, have not maintained adequate records of
inspection of Federal tax information, and have inadequate procedures
to instruct employees with respect to Federal tax return confidenti-
alitv. However, it is the staff's understanding that when these problems
have been brought to the attention of the State authorities involved,
reniedial action has been taken.
On the other hand, it appears that it is important to the States that
they have access to Federal tax information. With Federal tax infor-
mation, the. States are able to determine if there are discrepancies be-
A State is not precluded from inspecting tax information if it has not entered
into an agreement. Therefore, Texas may inspect returns of its residents on a
general and case-by-case basis, and Nevada may inspect returns of its residents
on a general and case-by-case basis.
tween the State and Federal returns in, e.g., reported income. Also,
many States have only a few, if any, of their own t:x auditor- and
rely largely (or entirely) on information concerning Federal eriforc-
ment in enforcing their own tax law:.
TAXPAYERS WITH A MATERIALS INTEREST
Under the regulations, income tax returns presently are open to the
filing taxpayer, trust beneficiaries, partners, heirs of the decedent, etc.
"Return information", as opposed to the tax returns themselves, is
only available to the taxpayer, etc., at the discretion of the IRS.
Also, the statute specifically authorizes the inspection of a corpora-
tion's income tax returns by a holder of 1 percent or more of the cor-
poration's stock. (Sec. 6103 (c).)
MISCELLANEOUS DISCi.os u-RES
Prese nt law
Under present law, several provisions of the regulations allow dis-
closure of tax information for miscellaneous administrative and other
purposes. For example, accepted offers in compromise (under see.
7122) are open to inspection. Internal Revenue officers may disclose
limited information to verify a deduction, etc. Additionally, in a num-
ber of cases, tax information may be disclosed at the discretion of the
Commissioner, as the statute is wholly silent with respect to certain
types of returns. For example, FICA tax returns and private founda-
tion excise tax returns are within this category.
In other cases, the statute specifically requires public disclosure of
certain types of returns. Under the Code, applications for exempt
status by organizations and applications for qualification of pension,
etc., plans are generally open to public inspection. (Sec. 6104(a).)
Also, the annual reports of private foundations are open to public
inspection. (Sec. 6104(d).) Returns with respect to the taxes on gaso-
line and lubricating oils are open to inspection by State officials (Sec.
4102.) Under certain circumstances, the amount of an outstanding tax
lien may be disclosed. (Sec. 6323 (f).)
Upon inquiry, the IRS is to disclose whether any person has filed an
income tax return for the year in question (Sec. 6103 (f).)
Inquiries under section 6103(f) are made by, among others, new-
media and commercial concerns.
Additionally, the IRS sometimes is asked to provide information
concerning a taxpayer's addres-. Address information will be provided
to State or local officials for tax administration purpot.-s. to State or
local enforcement officials if furnishing the information will aid in
Federal special enforcement programs (e.g., narcotics programs), to
Federal agencies in general to assist in administering their re-spolsli-
bilities and to "educational lending institutions" to locate delinquent
borrowers under Federal loaii guarantee,. Adddiress information will
not, however, be provided to commercial concerns. Al]o), ;ddir,-s in-
formiiation is provided to local welfare agencies regarding "runaway
parents ider Public Law 90-248 (section 410 of the Social Secli-
rity Act). Address information also may be provided ind(ivid(als in
elliergency sit Nations.
PROCEDI'URES AND RECORDS CONCERNING DISCLOSURE
P/ .s. m1t lair
Several different offices of the IRS have responsibility for approving
disclosure of tax information to particular agencies. For example, the
Disclosure Staff (National Office) deals with case-by-case requests for
tax returns by other Federal agencies while the Statistics Division
deals with the disclosure of information to Federal agencies (largely
on magnetic tape) to be used for statistical purposes. Additionally,
the Planning and Research Division deals with disclosure of informa-
tion on magnetic tape to the States while the Disclosure Staff deals
with ease-by-case disclosure to the States.
While these offices negotiate and approve disclosures of tax infor-
mation, the actual transfer of the information generally takes place
in other offices, such as the Service Centers, District Office, Computer
Center, etc. In addition, District Directors and Service Center Direc-
tors are authorized to approve applications for certain types of dis-
closure, such as disclosure to persons with a material interest in the
returns, and returns of the taxpayer (in tax cases) to U.S. attorneys.
The IRS presently maintains records concerning disclosure. How-
ever, the staff understands that the type of records maintained are not
standardized as between, e.g., Service Centers, and that the IRS does
not maintain a complete inventory of records so, for example, it can-
not determine what has been disclosed and what has been returned
Under the Privacy Act of 1974 (P.L. 93-579), each Federal agency
is to account for disclosures to other agencies, noting the date, nature,
and purpose of each disclosure and the name and address of the
agency to which disclosure is made. This rule does not apply to dis-
closures by State agencies. The accounting is designed to enable the
agency to inform the individual concerned of disclosures made with
respect to him.
Recently, there have been cases reported where tax information was
transferred outside the IRS, without following what might be con-
sidered proper procedures. For example, John J. Caulfield testified
before the Senate Select Committee on Presidential Campaign Activ-
ities that he received a "back door copy" of tax information on Billy
Graham. Mr. Caulfield testified that he received this information
from Vernon Acree who was Assistant Commissioner (Inspection) at.
There does not presently appear to be a standardized system of
accounting for disclosure, so that the IRS can determine what inform-
ation has been transferred, for what purposes, what use has been made
of it, and whether it has been destroyed, returneod. etc., after it 1. tli e1en
used. Also, studies indicate that in several situations, inadeqiialte rec-
ords have been maintained of transfer of tax information to the varioi-
Federal agencies and to State authorities, and that, in certain i tance-.
IRS procedures have not been properly followed.
PPeCS( ut huim
Except for the general criminal penalty for unauthorized di-closure.
the tax law does not provide rules for safeguarding tax information
disclosed by the IRS to other agencies. However, some of the existing
Agreements on Coordination of Tax Admninistiat ion entered into
between the Federal Government and the State,' include provi-ions
for safeguarding tax information.
The Privacy Act require- that each agency establish appropriate
administrative, technical, and physical safeguards to si.ure re'ords
on individuals. This requirement applies to each Federal agency that
maintains a "system of records". This provision doo. not apply to State
or local government agencies that receive Federal tax records.
The IRS has no authority under the Privacy Act to audit the safe-
guards established by other agencies, or to -top disclosure to other
agencies that did not properly maintain safeguards.
ENFORI 'EM ENT
Unauthorized disclosuree of Federal tax information by a Federal
or State employee is a misdemeanor punishable by a fine of up to
$1,000, or imprisonment of up to one year, or both (together with the
costs of prosecution). Federal officers or employees also are to be dis-
missed from office or discharged from employment. It also is a mi-de-
meanor (punishable in the same manner) for any person to print or
publish in any manner not provided by law any income return or
financial information appearing therein. (Sec. 7213(a) (1), (2), zee
also 18 U.S.C. 1905.)
One-percent shareholders who examine a corporate return are guilty
of a misdemeanor (punishable as above) if they disclose in any man-
ner "not provided by law" the amount of any income, etc., shown on
The IRS lhas conducted investigations concerning the possible im-
proper disclosure of confidential information as follows:
1973 1974 1975
Investigations conducted----------.. -....---------------------------- 58 103 179
Disciplinary actions....-----.-----...---------------------------------- 9 23 23
Separations from employment...--------.......----------------..------------- 4 2 5
There have also been criminal prosecutions for illegal disclosure of
confidential tax information, as follows:
1973 1974 1975
Prosecution referrals.............................................. -------------------------------------------8 8 4
Prosecutions declined.............................................. -----------------------7 5 4
Convictions.....-------------------------------------------------.................................................. 1 3 0
Two of the four people convicted were IRS employees and two were
private detectives. The two IRS employees were given probation (and
one was fined $350). The two private detectives were each fined $250,
placed on two-year probation, and jailed for short periods of time (i.e.,
24 hours for two Tuesdays).
The House Ways and Means Committee held extensive hearings on
this subject, but did not deal with it in H.R. 10612.
UNIVERSITY OF FLORIDA
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