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Nixon Reflects Typical Errors Of High Bracket

President Nixon’s tax returns for the years 1969 through 1972 were typical for upper income Americans in at least one respect: they contained errors. A secret Internal Revenue Service study, based on audits of 1971 tax returns, indicates that about four-fifths of all returns filed by persons earning more than $50,000 a year had mistakes.

President Nixon's tax returns for the years 1969 through 1972 were typical for upper income Americans in at least one respect:  they contained errors.

A secret Internal Revenue Service study, based on audits of 1971 tax returns, indicates that about four-fifths of all returns filed by persons earning more than $50,000 a year had mistakes.

But Mr. Nixon, in another respect, is unlike other upper income taxpayers.

His mistakes were detected – although not originally by the IRS – and he has been ordered to pay the back taxes he owes.

That secret IRS study indicates that the great majority of erroneous tax returns filed by upper income individuals go undiscovered, the money uncollected.

Mr. Nixon is unusual in yet one other way.

He has agreed to pay the full amount assessed by the IRS. Traditionally, upper income taxpayers who appeal the initial IRS recommendation for additional tax pay only a percentage of the tax said to be owed.

To Thomas F. Field, a former trial attorney in the tax division of the Justice Department and attorney-adviser in the Treasury Department's Office of Tax Legislative Counsel. Mr. Nixon's case best illustrates one of the key underlying weaknesses within IRS audit systems.

No W-2 for Property

"The audit of property income – income from capital gains, rent, interest and dividends – is much less thorough than the audit of wage income," says Field, who now is executive director of Tax Analysts and Advocates, a Washington, D.C., public interest law firm.

"If you go out and earn a dollar in wages, at the end of the year a W-2 form gets submitted, outlining all your wages and the taxes withheld," Field explained.

"You have to attach that W-2 to your income tax return and that takes care of all the people in the lower income bracket. IRS has both the information reported on the W-2 and the withholding tax, so the little guy has no way to escape."

When it comes to the middle income taxpayer, Field continued, there is some interest and dividend income, but the reporting of that information to IRS is ineffective.

Forms reporting interest and dividend payments to taxpayers are forwarded by banks and corporations to IRS, Field said, but "in general these forms pile up in warehouses. The information is not keypunched and as a consequence most of the data goes nowhere."

The lone exception to this condition are those few banks and corporations which report dividend and interest payments on a computer tape that is turned over to IRS. In those cases, the payments may be compared with the individual data IRS has fed into its computers.

Lacks Controls

Finally, concludes Field, when you get to the upper income taxpayer who may have a sizeable income from capital gains, "IRS has no tools at all.

"If you buy 1,000 shares of stock this week for $10,000 and sell it next week for $20,000, IRS has no record whatsoever of that transaction."

That is one of the reasons, Field believes, that taxpayer compliance tends to fall off as income increases; IRS does not have the same kind of reporting controls on the wealthy that it has on the low income wage earner.

Consider the President's own tax returns.

The first audit made by IRS agents results in a glowing letter from an IRS district director, complimenting the President on his returns.

A number of errors eventually discovered in those same returns – resulting in a tax bill of nearly a half-million dollars – involved property income and deductions related to property.

There were, for example, unreported capital gains of $117,835 on the sale of some acreage at San Clemente, $11,617 on the sale of some Florida lots and $8,936 on the sale of his New York apartment.

The first public hint that the nation's tax-collecting system was in trouble came last spring during a hearing held by a subcommittee of the House Committee on Appropriations.

Enforcement Slips

Testifying on IRS budget needs for the coming fiscal year, outgoing IRS Commissioner Johnnie M. Walters told the subcommittee:

"Today we face serious problems in taxpayer compliance and a real danger of general deterioration. There is a growing opinion that our tax system is not equitable. One reason for this is the fact that we are not enforcing the tax laws adequately.

"The situation has not occurred overnight. Tax law enforcement has been slipping for 10 years, for a variety of reasons.

"In the first place, we have seen a substantial growth in the taxpayer population. But more significant has been the rapid growth in higher income returns raising more tax issues; they are more complex and more likely to need audit."

Walters had much the same thing to say about the IRS' general failure in auditing large corporations:  "I think we should admit that we have not had the manpower to audit these corporations as intensely or as in depth as we should have.

"I think it is obvious that a corporation that plans its affairs, and has a whole corps of people working on it all year long, can handle its affairs in a way that we are not apt to pick up, in audit, easily."

Over the years, for one reason or another, some kinds of businesses and industries have largely escaped any comprehensive tax audits.

Persian Gulf Audit

As The Inquirer disclosed last December, there has been only one significant audit of the American oil industry in the last several decades.

That audit was carried out in the late 1960s and focused on several American oil companies operating in the Middle East. It became known within the agency as the Persian Gulf audit.

As a result of the examination, IRS imposed on the companies the single largest tax assessment in the agency's history, about a half-billion dollars.

After secret negotiations, the oil companies settled up their back tax bill for about $300 million, according to a former Federal official familiar with the audit.

Field, a former Treasure Department official, offers this explanation as to why some businesses are more likely to be audited than others.

"Group supervisors have always put their auditors where the return is highest. The oil industry was never much audited because the effective tax rate was low.

Experts Are Needed

"If you have a choice to audit General Motors, with an effective tax rate of say 38 percent, or Exxon Corporation with an effective tax rate of say 8 percent, and you have a shortage of auditors, where do you send your auditors?

"You send them to General Motors, where for every dollar you find, General Motors must pay 38 cents. For every dollar at Exxon you find, Exxon must pay only 8 cents."

Testifying last year before a Senate subcommittee that was studying taxpayer compliance, Ralph Nader, the consumer advocate, offered still another reason why some businesses were not audited, and an example of one of those businesses:

"I would venture to say, Mr. Chairman, that in one of the most complex areas of the Internal Revenue Code, the insurance company section, that that section is virtually unenforced. The IRS has almost no technical expertise, such as actuaries and other personnel, allocated to the insurance industry."

Whatever IRS policies may be on corporate audits, it is clear that examination procedures are seriously lagging despite the implementation of a team audit concept several years ago, in which a group of agents are assigned to audit a business.

As one former IRS official explained to The Inquirer:  "You have conglomerate operations all over the world. What good are the figures they give to you?  We can't go to Indonesia and get their books. We will are not doing thorough examinations."