Form 4683, which is required of a taxpayer who reports a foreign bank account, is designed and processed in such a manner that its value appears limited. No information is extracted or computerized from the form.

Detailed information, such as the name and address of the banks in which the accounts are maintained and the type and amount of accounts, is not required on form 4683 from taxpayers having less than $10,000 in foreign accounts or from those holding 25 or more accounts. These factors were cited in a December 8, 1971, memorandum to the Chairman, IRS, Tax Forms Coordinating Committee, from the Acting Deputy Assistant Secretary for Tax Policy, Treasury, which further said:

The primary purpose of Form 4683 is to curb international tax evasion by U.S. taxpayers, and the information on these returns would be helpful in formulating legislative policy. Unfortunately the potential usefulness of these returns is limited by a number of structural defects in their format, which would be easily corrected.

The defects were never corrected.

A detailed listing of all accounts totaling more than $10,000, regardless of the number of accounts, would seem useful in providing information to IRS to aid its recently initiated effort, resulting from a Presidential directive, to identify and deal with schemes to establish corporate slush funds for illegal and improper purposes. The IRS guidelines issued to its field offices stated that the creation of slush funds is through the use of foreign subsidiaries and foreign bank accounts.

IRS had planned, in 1970, to develop a centralized file of forms 4683. For a short time, a centralized file of these forms was maintained. According to an IRS official, the file was discontinued because there was no demand for the information contained in the file. A Securities and Exchange Commission official informed us that data available from an analysis of a file of forms 4683 would be helpful in identifying persons involved in improper stock manipulations where the trades are made in the name of Swiss banks. Such trading by Swiss banks is often noted in wide fluctuations of securities prices. The SEC official told us that he informally suggested to IRS that this type of analysis be prepared, but nothing ever came of it.

IRS does not incorporate the foreign bank account question in its scientific procedures for identifying returns that have audit potential, despite the recommendation of the staff of the Foreign Bank Account. Proiect. However, when the return is initially identified for possible audit, the response to the question is a factor in the eventual selection of the return for audit.

IRS removed the foreign bank account question from all the 1975 tax returns. The instructions for the preparation of the tax returns still require taxpayers having foreign bank accounts to report this fact on form 4683.

TRS attributed the removal of the question from the individual return to the competition for space on the return and the limited use. made of the question.

According to IRS, they had to add 11 lines to the form 1040 which was already quite full. Three lines related to the needs of the Census Bureau for revenue sharing purposes, and the other eight lines related to requirements of recent tax law changes.

With respect to the removal of the question from the other tax returns, IRS stated, "Forms 1120, 1120S, 1065, and 1041 were not all given separate consideration concerning the foreign bank account question, but were changed to be made consistent with the form 1040." Accordingly, the question was removed from all other forms when it was removed from the form 1040.

Present and former key Treasury, IRS, and Justice Department officials cited as one of the primary benefits of the foreign bank account question the deterrent effect on persons who would use the foreign bank accounts illegally. Under the act, a penalty could be imposed for failure to report such accounts even when another violation of the law could not be established.

Several negative effects could result from the removal of the question from the return:

1. More people will fail to report their interest in foreign financial accounts because the requirement is buried in the tax instructions.

2. According to tax attorneys, it will be difficult to prosecute an individual for failure to report his interest in a foreign account. Aid in providing willfulness in criminal tax fraud cases will be reduced. A taxpayer could claim he overlooked the requirement in the instructions. It would be more difficult to plead this defense if the requirement were prominently displayed on the return.

The issue of usefulness of the foreign bank question, and the proposal to remove the question from the tax return, has caused disagreement between Treasury and top IRS officials as well as within. IRS.

As early as 1973, the issue of removing the question from the tax returns arose. By memorandum dated May 22, 1973, the Commissionerdesignate, Donald C. Alexander, asked the Acting Chairman, Tax Forms Coordinating Committee, to evaluate a proposal to add to the tax form a question on taxable gifts and possibly dropping the foreign bank account question.

In reply, the acting chairman stated that the committee recommended not adopting the first proposal, and, with respect to the foreign bank question, he made the following comment:

The Committee favors removing the question from the 1973 Form 1040 and Form 1120. We will pursue this matter with the International Tax Counsel for the Treasury, if you desire.

In June, 1973, the Director, IRS Intelligence Division, John J. Olszewski, opposed the suggested elimination of the foreign bank account question in a memorandum to the Tax Forms Coordinating Committee. He stated that the elimination of the question would have an impact on long-range Intelligence projects in that plans were being developed to match the data from the foreign bank questions with data from other sources, and the loss of this data would seriously restrict Intelligence's efforts to identify those who would use foreign banking facilities in avoidance and evasion schemes.

In July 1973, the Assistant Secretary of Treasury EOTA questioned the proposal to delete the question from the 1973 return:

We understand that the Internal Revenue Service is considering deleting the foreign financial account question from the Form 1040 for 1973 and subsequent years. Since that question, virtually required by Treasury regulations, is a factor in the Treasury Department's efforts to combat the use of foreign bank accounts

to facilitate illegal activities, we believe that dropping it from the tax return at this time would be counter productive.

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Members of my staff have been working with the Office of the Assistant Commissioner (Compliance) to effect the implementation and enforcement of the Part 103 Regulations. The plans being developed include the utilization of the foreign financial accounts question in a systematic manner for the first time.

While I would have no objection to the foreign financial account question being moved to a less conspicuous place on the tax return. I would prefer not to have it deleted, and would appreciate an opportunity to discuss it with you before any adverse action is taken.

The foreign financial account question was retained in the 1973 return, but the issue was raised again with respect to the 1974 tax year returns. In this regard, an intraoffice Department of Treasury memorandum dated June 20, 1974, to the Assistant Secretary of Treasury EOTA stated:

We understand that the Commissioner has again indicated to his staff that he wants the question removed from Form 1040.

In a June 28, 1974, memorandum to the Assistant Commissioner, Compliance, John Hanlon, the Director, Intelligence Division, John J. Olszewski, said:

We feel strongly that the presence of the foreign accounts question on the Individual Income Tax Return combined with the criminal penalties for falsifying a tax return serve as an important deterrent to potential evaders and encourages a high degree of compliance by all taxpayers who have or who are considering the illegal use of a foreign bank account. The removal of the question, we believe, will cause thousands of taxpayers to overlook the requirement to attach Form 4683.

The question was retained on the 1974 return, but in 1975 the issue of its removal was raised once more. By memorandum dated May 19, 1975, the Intelligence Division again opposed the removal of the question.

However, one day later, in a May 20 memorandum to the Commissioner, the Assistant Commissioner, Compliance, stated that,

Our limited use of the Foreign Bank Question does not justify its retention on Form 1040. While Intelligence feels that the question has potential * * * and should be retained * ** our experience in utilization of the answers to the question does not support its retention when form space is at a premium.

The failure of IRS to use information, we believe, should not be used to justify removal of the question from all of the 1975 tax returns. In Projects Pirate and Haven, we were told, IRS found substantial numbers of taxpayers with foreign financial or bank accounts who failed to respond to the foreign bank account question, or answered NO, and also failed to file a form 4683. Yet we could not find a single instance where prosecution resulted under the penalty provisions of Public Law 91-508, title 26 provisions regarding falsifying a tax return and title 18 provisions of the United States Code for making false representations to a Federal officer.

In response to subcommittee requests for data about the deletion of the question, neither IRS nor the Department of the Treasury provided any documentation to show (1) that IRS requested permission, consulted with or advised the Assistant Secretary of Treasury EOTA of its intention to remove the question, or (2) that the Department of the Treasury ever expressed any concern to IRS about

removing the question, although IRS did notify Treasury's Office of Tax Policy of the proposed action by submitting proof copies of the 1975 tax return showing the deletion of the foreign bank account question. In this regard, the Secretary of Treasury informed the chairman of this subcommittee by letter dated June 2, 1976, that, "In the past, the Secretary of the Treasury has not taken a position regarding the deletion of the foreign bank account question."

However, under IRS' new guidelines, which were issued in response to Presidential and Secretarial directives to identify illegal and improper corporate practices, examiners are required to ask 11 questions of officials of selected corporations. Three of these questions concern the interest of the corporation or it officers in foreign banks. One of the three questions is similar to the foreign bank account question which had been removed from the tax return, and the other two are expansions of the basic question.

Mr. Chairman, in summary, I would like to make the following

comments.

In 1969, Commissioner of Internal Revenue Randolph Thrower, in testimony before the House Banking Committee, stated:

The secret bank account is the latest in a series of devices designed to frustrate the payment of taxes. We in the Internal Revenue Service are deeply concerned at this sophisticated evasion technique because it saps the vigor of our system of self-assessment of tax liabilities. Indeed, I fear the secret bank account is gradually being associated in the public mind as a way of life for a growing number of individuals and corporations flouting their tax responsibilities.

The extent of our concern about the practice of tax evasion through the use of foreign banking transactions protected by secrecy laws is not measured solely by the amount of tax dollars involved. These practices have a corrosive effect upon our revenue system itself.

The Bank Secrecy Act was designed to obtain financial information which has a high degree of usefulness in criminal, tax and regulatory investigations and proceedings.

At about the time of Commissioner Thrower's statement and enactment of the Bank Secrecy Act, IRS showed its concern over the foreign bank account issue by its initiation of the foreign bank account project to identify the nature and extent of the tax problems associated with Swiss accounts, its placement of the foreign bank account question on the various tax returns even prior to the passage of the legislation, and its plan to use the information so obtained.

However, IRS terminated the foreign bank account project and destroyed the computer tapes developed during the various mail watches. As a result, IRS did not:

Follow up on those taxpayers identified in the 1969 and 1971 mail watches as having a foreign bank account, although audits resulting from the 1968 mail watch proved worth while;

Match the mail watch information with the taxpayers' response to the foreign bank question;

Provide data to other law enforcement agencies;

Provide data to its field offices; and

Incorporate the foreign bank account question into its scientific return selection process.

In regard to the foreign bank account question on the tax returns and the related form 4683, IRS did not:

Place the question in a conspicuous place on the form 1040 except for tax years 1971 and 1972 even when it was recognized that, by doing so, the needed high response rate would be obtained; Highlight the requirement in the tax instructions;

Follow up on those returns where the taxpayer failed to respond to the question;

Alter or analyze the data on form 4683 to assist other Government agencies; and

Initiate prosecution actions where it found that the taxpayers did not properly respond to the question such as in Projects Haven and Pirate.

IRS deleted the foreign bank account question from the 1975 tax returns without consulting with or advising the Assistant Secretary (EOTA) who has overall coordinating responsibility for the Bank Secrecy Act.

These actions, we believe, reduced the deterrent value of the question, reduced the chances of obtaining criminal prosecutions and eliminated a retrieval system to identify the taxpayers who have a foreign bank account.

Legislation, regulations, and tax enforcement techniques provide tools to deal with the foreign bank account problem, but if they are not used adequately by IRS, as it presently appears, the success in tax collection, law enforcement, and regulatory activities is less than the American public has a right to expect and, indeed, less than the Congress intended.

Thank you, Mr. Chairman. That concludes our remarks.

Mr. ROSENTHAL. We will have to suspend the subcommittee hearing at this point because of the problem today with the House's very heavy legislative schedule.

Any questions that the subcommittee has of you, we will pick up at the next meeting which will be on Thursday. Hopefully, the situation will not be as difficult then as it is today.

I want to thank each one of you on behalf of the subcommittee for a very thorough job and a very commendable performance in engaging in this task.

The subcommittee stands adjourned.

[Whereupon, at 11:40 a.m., the subcommittee adjourned, to reconvene Thursday, July 1, 1976.]

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