"AN IRS AUDIT IN 1917, VS. ONE 80 YEARS LATER"
AUDIENCE;
This presentation is intended for college faculty, administrators, practitioners, IRS personnel, and interested parties to the American taxation system.
OBJECTIVE;
This paper will examine the IRS's emphasis and focus of a typical audit of a 1917 tax return, compared to one in 1997.
Included will be actual audit papers and summaries of findings from 1917, and 80 years later actual IRS audit conclusions in 1997.
THE PRESENTATION;
Will done through an overhead projection of many IRS documents, samples attached of some 80 years old.
KEYWORDS;
IRS; taxes; gross income; deductions; taxable income; revised income; penalties; interest.
LAWRENCE N. WATERBURY; ACCOUNTING PROFESSOR QUINNIPIAC COLLEGE
AAA
1999 NORTHEAST REGIONAL MEETING ROCHESTER, N.Y.
ABSTRACT;
This paper focuses on the U.S. "Federal Income Tax", particularly the scope of auditing procedures. Congress enacted the first version in 1861 to finance the Civil War, expiring shortly after. We would assume there were few auditing techniques available at that time.
In 1909 Congress proposed an amendment to the Constitution allowing it to levy a tax on all incomes without apportionment among the states based on population. It was successful in the passage of the Sixteenth Amendment allowing the first
"Revenue Act of 1913". Various confusing rulings were later consolidated into the Internal Revenue Code of 1939 … a permanent codification, revised continually through 1998.
To insure success of the system, Congress charged the Secretary of Treasury with responsibility of administering and enforcing the Internal Revenue Code. The Secretary delegated this rule-making authority to a newly created "Internal Revenue Service" and appointed a Commissioner to ensure compliance with tax laws.
We are familiar with this procedure through a systematic review of tax returns filed. It is the intent of this paper to look at one such review in 1917, and again in 1997. REFERENCES;
Pratt, James W. ; Kulsrud, William N. "INDIVIDUAL; CORPORATE;
PARTNERSHIP; ESTATE AND GIFT TAXATION" (Dame Publications, 1998) Strassels, Paul N.; "ALL YOU NEED TO KNOW ABOUT THE IRS" (Random House, 1996)
In 1997, a relative of Mr. Adolph Woltzen discovered in a safe deposit box, the results of a four year audit conducted by The Internal Revenue Service (1917-1920). The Audit was performed by Revenue Agent Charles G. Rogers of the Springfield, Illinois District IRS office.
The results were concluded in 14 pages prepared by a hand operated Remington typewriter popular at that time found in Government offices.
Note that the style and format are similar to what is used today by the IRS … that is to show the taxpayer's original computations followed by proposed corrections.
The methodical and complete analysis audit approach is seen with nothing left to be unexamined.
Even in 1918 when women were still yet to vote, their income was taken into consideration with husbands.
Of the four year audit, this was the most complex transaction, a capital gain on sale of a farm.
The IRS now, and then apparently too, will alleviate the taxpayer's requirement to "pony-up" additional taxes by saying "it's O.K., you can just add it to the basis of your investment".
Here found in the safe deposit box was a note from Mr. Woltzen to himself to remember to do that (we wonder if he ever did?).
In 1920 we are now up to the fourth and final year of the series of examinations by the Internal Revenue.
In paragraph "A", the taxpayer maintains some rather good logic why he should not be subject to additional taxes at this time because of the contingency involved.
And an additional $342.17 was due for 1920. There was no information as to an appeal possibility for Mr. Woltzen (would you like to have handled the appeal?).
William G. Cahill, a psychotherapist and Ph.d in his field understood that anyone of average intelligence should be able to prepare their own tax return (as did Adolph Woltzen 80 years earlier).
As an after thought (and for good measure), the taxpayer attached a note as to why his education expenses were so extremely high.
Unfortunately for Mr. Cahill, today's IRS (with their technology not available in 1917), were quick to notice the unusual expenses on his schedule C.
The IRS was not moved by the taxpayer's attached note, and actually used it against him as they disallowed his educational expenses.
And while they were at it, the IRS found a number of other items to disallow and add to Mr. Cahill's increasing tax bill.
Note the style and format the IRS uses in reconciling the original and audit corrections today, as back in 1917.
As you recall, Mr. Woltzen only owed 3 cents on his adjusted 1917 return compared to the $19,497.88 the IRS was asking from Mr. Cahill.
Note, that although he has a doctorate from a well known New York University, his handwriting is not nearly as good as Mr. Woltzen's (also his spelling is not so great).
At this point the taxpayer yelled "Uncle" (excuse the bad pun), and hired a professional to help him with his tax difficulties.
CONCLUSION;
The Internal Revenue Code from its inception in 1909 has been unique among world systems in that it relies heavily on voluntary compliance and self-assessment to collect tax revenues.
The American taxpayers themselves are responsible for reporting the appropriate tax liability to the Federal Government.
In 1917, Adolph Wotzen, could prepare his own returns and defend them to the IRS as shown in the earlier exhibits. However, the increasing complexity of tax law has made assistance almost a necessity (about one-half of all returns are professionally prepared).
In 1997, William Cahill (expert in his field but not in taxes) had to be professionally rescued at the appeal level.
