In March 1961 President John F. Kennedy asked Congress to increase funding for the Internal Revenue Service. Citing the need for more robust enforcement, Kennedy and his freshly confirmed IRS commissioner, Mortimer Caplin, asked lawmakers for $456,800,000 in fiscal 1962 — a significant boost from the $388 million the agency had received the year before.
Kennedy’s request was only the latest in a series of presidential efforts to increase IRS funding. President Eisenhower had asked for additional money too, especially after the tax agency began ramping up its automatic data processing program in the late 1950s. But Kennedy’s request would prove controversial, at least in the House of Representatives, where lawmakers voiced concern about the agency’s relentless growth.
Kennedy and Caplin eventually got most of what they wanted. Having warned darkly about the danger of lax enforcement — which they considered a danger to the integrity of the tax system and to American morals more generally — they prevailed on the Senate to restore much of the funding that House lawmakers had eliminated. But it was a near thing, and the battle hinged on the promise that money invested in the agency would be repaid many times over through increased revenue collections.
Eisenhower’s Effort
The drive to raise IRS budgets began during the later years of Eisenhower’s presidency, and especially after the tax agency began computerizing its operations in 1958. In making his case to Congress, Eisenhower cited the attractive return on investment in the IRS, especially its enforcement capacity. The government was clearly losing out on revenue it was rightfully owed, the president told lawmakers in his January 1960 budget message.
“There is growing evidence that a considerable amount of revenue is lost annually to the Government because of the failure of some individuals and businesses to report fully the income which they have received,” Eisenhower wrote. “The existence of such a condition seriously weakens the integrity of our tax system, and places an unfair share of the total tax burden upon the vast majority of citizens who conscientiously report all of their taxable income.”
Eisenhower asked Congress to give the IRS an additional $29 million in fiscal 1961, “primarily to strengthen its enforcement programs, including initiation of an electronic computer system.” But such an investment in the short term would pay dividends in the long term, he promised: “The additional costs should be recovered many times through increased tax collections in later years.”
Reporters had fun with Eisenhower’s mention of the “electronic computer system” under development by the IRS. “Tax-Cheaters Beware! Now Come Robots,” warned The Los Angeles Mirror. A United Press International story on Eisenhower’s speech struck a similar note. “Electronic detectives will be used in the future to put the finger on tax chiselers, if Congress goes along with a proposal by President Eisenhower.” These stories, and others like them, were certainly lighthearted, but they also accepted at face value the administration’s projections that a computerized master file of taxpayer accounts would pay for itself “many times” over in the years to come.
In his final budget request, Eisenhower asked Congress for another boost in IRS funding. “The 1962 budget includes an increase of $36 million in new obligational authority to $450 million for the Internal Revenue Service,” Eisenhower wrote. “This will finance the second year’s cost of a program to provide more effective enforcement of our tax laws and will thus reduce the revenue losses which arise from the failure of some individuals and businesses to report their incomes fully or accurately.”
Treasury officials defended the Eisenhower request in the waning days of his administration and, like the president, emphasized the need for tougher enforcement. In addition to stressing the revenue payoff, they underscored the need to protect the integrity and viability of the tax system itself.
“The principal need for additional funds is to make possible a more thorough and extensive audit of tax returns and to secure delinquent returns,” testified Treasury Secretary Robert B. Anderson to the Senate Appropriations subcommittee overseeing his department. More robust auditing was necessary, Anderson contended, “so as to maintain and strengthen the willingness of all taxpayers to comply with our voluntary assessment system.”
Anderson also outlined the computerization project that would support existing audit programs. “Automatic data processing with electronic equipment,” Anderson said, “will permit us to remedy serious deficiencies in our existing system that could be overcome by manual methods only with tremendous increases in manpower and with very heavy increases in payroll, facilities, and other costs.” Electronic data processing, in other words, would allow for new efficiencies at the IRS.
In questioning Anderson, Sen. Styles Bridges, R-N.H., worried aloud that not enough people in the “lower-income brackets” were getting audited. He was quick to qualify that concern, noting that he did not mean people in the “extremely low” brackets, just those in the “medium-low” brackets. “From the point of view of tax returns and the government at least, I think that some of them should be audited enough so that it will get around that they are liable to be audited in those lower-medium brackets,” Bridges said.
IRS Commissioner Dana Latham assured Bridges that “nobody is ever completely certain that he will not be audited,” regardless of what bracket he or she might find themselves in. “But because of limitations on manpower and due to the fact that in certain circumstances it simply is not economical to do so, we cannot and do not recommend the audit of all returns nor do we have any set pattern, that is every five years or every four years.” Still, he told Bridges, “We try to get to everybody’s return at some time or another.”
Kennedy’s Additional Request
Eisenhower’s request for additional IRS funding received no action from lawmakers; they were waiting to see what the newly inaugurated President Kennedy had to say about the tax agency. And in March, Kennedy settled the matter by asking Congress for even more money, boosting the Eisenhower request by another $7 million. As stated in the IRS’s request to the House Appropriations Committee, the additional funding would serve two purposes:
The first of these is to improve and strengthen the tax collection system not only for the immediate additional revenue resulting from expanded enforcement effort but also to assure the preservation of our self-assessing tax system. The second is the vigorous, coordinated drive against lawlessness, in which the Service will play an important part.
Kennedy’s emphasis on law enforcement — specifically around taxation and also in society more generally — played a central role in his budget request for the IRS. Both he and Caplin stressed the moral and administrative importance of enforcing the tax laws. The revised budget request included $2.7 million for coordinated law enforcement efforts, which included work with the Justice Department on racketeering investigations.
“The Internal Revenue Service has been invited to cooperate with the Justice Department and all other law enforcement agencies in rooting out of our society certain undesirables as well as carrying out our normal enforcement program,” Caplin explained to House appropriators. “I think the increased emphasis on the law enforcement program fits into the philosophy of the administration,” he continued, “to try to obtain a high level of morality throughout our society.”
But it was hard to encourage morality when IRS resources were stretched to the breaking point. In his testimony, Caplin warned that audit coverage was “presently so thin that errors involving very significant sums of additional tax due are not detected.” Perhaps worse, current coverage failed to “discourage a substantial number of taxpayers from taking the chance that they will be detected in their understatements.” Something had to be done, Caplin declared.
For the most part, that something would involve workers. Additional audits would require more staff. So would investigation of suspected delinquency. In those days, before computerization, tracking down unmatched Forms W-2 and 1099 was manual work. But as Caplin stressed, “We lack help for running down the leads where delinquency is suspected.”
Caplin’s comments began with a gesture of reassurance to wary lawmakers. “I wish to state clearly that I do not advocate a high-powered police force of Treasury men,” he said. But he then shifted his tone substantially. “However, a broad exercise of the auditing procedure on a reasonable basis has a salutary effect.” If taxpayers knew they stood a good chance of being audited, they would be disinclined to play fast and loose with the law. But when taxpayers knew that audits were rare, abuses were common. “Too often we encounter the taxpayer willing to take a chance on the gamble that his returns will not be scrutinized,” Caplin said.
Caplin then offered a grim assessment of the overall compliance situation. “The present audit coverage, in my opinion — and this is backed up by the experience of the people at the top level in the Service — is not adequate to secure the full revenue which should be reported and collected under the present revenue laws,” he testified. “Errors of significant amounts of money often are undetected. The inadequate coverage is known as a fact in the field — people know this, and some of them will deliberately understate their income or overstate deductions.”
Perhaps most galling, many people were simply abandoning their fiscal responsibilities altogether. “Many people are just not filing returns,” Caplin said. “Under our present capabilities, we do not have the manpower to bring this into the open.”
Return on Investment
The Kennedy administration was asking Congress for even more additional IRS funding than the Eisenhower administration had. But they were also predicting a bigger payoff in terms of additional revenue collected. Eisenhower had predicted that his requested investments in the IRS would produce $135 million in additional collections (something like a 5-to-1 return on investment). Kennedy was asking for the same budget increase plus another $4.3 million. In return, they also projected another $23 million in revenue.
Rep. J. Vaughan Gary, D-Va., pressed Caplin on this sort of estimate. “For a number of years the Internal Revenue Service has been requesting additional employees,” he said, “and each year our committee has been told that these employees would bring in from 10 to 20 times the amount of their salaries if we allowed them.” But at some point, Gary said, there had to be a point at which returns began to diminish. “I do not believe anybody can pinpoint that spot,” he said, “but what is the average return now of our field agents as compared with the amount of their salaries?”
Caplin and his aides promised to get back to Vaughan with an updated estimate. They later reported that audit activities were expected to produce an 11-to-1 return in 1962.
How Much Is Enough?
Caplin was cagey when pressed about the number of auditors the IRS would need in the years ahead, simply noting that the agency was struggling to “service the needs of a growing population and a growing economy.” But he was eager to provide a clear picture of the agency’s current state.
In 1959, he said, the agency had received 92,858,000 income tax returns. Of these, 61,514,000 had been screened for potential audit, but only 2,624,000 were actually audited — 4.3 percent of those screened.
In 1960, the IRS had audited 2,763,000 returns, or 4.4 percent of those screened. In 1961, they expected to audit 2,919,000 screened returns, or 4.5 percent. In 1962, assuming implementation of their expanded audit program, they hoped to audit 3,464,000 returns, or 5.3 percent of those screened.
“Now, whatever the ultimate long-range development of the Service is in terms of an evaluation of increased efficiency or impact of automatic data processing and the like,” Caplin said, “based upon my personal experience in the tax field, a 5.3 percent audit is much too low.”
And with that, Caplin cut to his moral and administrative argument for greater funding down the road.
“People continue to gamble on the fact that they will not be audited,” Caplin told the House appropriators. “I have had people who are honest in their other daily activities regard this as a game with the government. You advise them in advance something is not properly deductible and they still may say they will take their chance on their return not being audited.”
The problem, Caplin insisted, was one of perceived fairness. “If a person realized that his neighbor is paying his fair share of the tax burden, he would be more willing to pay his fair share,” Caplin said. “It is when he feels the other person is not paying his fair share that his tax morality is weakened and undermined.”
Asked what sort of audit coverage might achieve that sort of salutary effect, Caplin threw out the possibility of 10 percent. That might be enough to achieve the “maximum of voluntary compliance — in balance with not unduly bothering the taxpaying public,” he suggested. Or perhaps the number would be slightly more or slightly less — 9 percent, say, or 11 percent.
But Caplin’s bottom line was clear. “I do not think 5.3 percent is sufficient.”
Committee Cuts
House appropriators were unconvinced. In a March 24, 1961, report on the Treasury appropriations bill, they recommended a $16.8 million cut from the Kennedy request. They still supported a $52 million increase above the IRS’s fiscal 1961 budget, but they slashed the number of new hires in the agency’s plans for the following years. Eisenhower had asked for 3,810 additional personnel, and Kennedy had raised that number to 4,575. The committee responded with funding for 2,000 positions, plus 183 more for the governmentwide law enforcement initiative.
“The committee is firmly convinced that the request for 4,575 new personnel is unrealistic and far beyond the capability of the Service to wisely recruit, properly train and usefully absorb into the Service in any one year,” the panel declared emphatically. The IRS had already seen its employee count increase “tremendously” in recent years. And while lawmakers acknowledged that the work of the IRS was “extremely important,” they also believed that its employees should be “as highly qualified as possible.” Filling the ranks with underqualified hires, all in the name of speed, was unwise and unnecessary. “The Service should be able to show some increased efficiency in operations,” the committee suggested, “and the electronic data processing centers previously authorized, in which the Committee has evidenced a definite interest, should begin to show some positive economies.”
Ultimately, however, the House lawmakers seemed to have a more traditional objection to the administration’s request: It was simply excessive. The IRS was growing too big, too fast. As the report concluded: “The level of employment must be brought under control.”
Kennedy was not discouraged by the House cuts to his request. On the same day that the House panel released its report, the president restated his call for additional funding. And once again, he stressed both revenue and crime fighting to make his case. “I want to reemphasize my earlier request to the Congress for additional funds for the Internal Revenue Service,” he said in a special budget message to Congress. “More and better qualified agents can both increase the collection of Federal revenues and help curb corruption in and out of government, racketeering and organized crime.”
Senate to the Rescue
On May 25, 1961, the Senate Appropriations Committee restored the funds cut by their House colleagues. Specifically, senators approved the request for 4,575 new employees to beef up the agency’s audit program. In testimony before the Senate Appropriations subcommittee overseeing the Treasury budget, IRS officials had again emphasized the revenue payoff from adding new employees.
In reconciling the House and Senate bills, the conference committee gave the Senate most of what it wanted, agreeing on a $12 million increase over House-approved funding for the IRS (which also represented a $4.8 million cut from the Senate figure). The extra money in the final bill was expected to pay for 3,365 new positions at the agency, most of them “enforcement agents assigned to run down those who cheat on their income taxes or are too careless about the taxes,” according to The New York Times.
The Times accepted IRS estimates that the additional agents would cost the agency about $23.5 million in personnel costs but return at least five times that amount in additional revenue. And indeed, it was those estimates that seemed to carry the day for Kennedy, Caplin, and other champions of IRS funding increases. While some lawmakers, like Gary in the House, harbored doubts about the specific return on such investments, most others were convinced that additional money spent on enforcement would more than pay for itself.