OVERSIGHT HEARINGS INTO THE OPERATIONS OF

THE IRS

(Administration of Bank Secrecy and Reporting Act)

THURSDAY, JULY 1, 1976

HOUSE OF REPRESENTATIVES,
COMMERCE, CONSUMER,

AND MONETARY AFFAIRS SUBCOMMITTEE

OF THE COMMITTEE ON GOVERNMENT OPERATIONS,

Washington, D.C. The subcommittee met, pursuant to notice, at 10 a.m., in room 2247, Rayburn House Office Building, Hon. Benjamin S. Rosenthal (chairman of the subcommittee) presiding.

Present: Representatives Benjamin S. Rosenthal, Robert F. Drinan, Elliott H. Levitas, Edward Mezvinsky, Garry Brown, Willis D. Gradison, Jr., and John N. Erlenborn.

Also present: Peter S. Barash, staff director; Herschel F. Clesner, chief counsel; Eleanor M. Vanyo, assistant clerk; and Henry C. Ruempler, minority professional staff, Committee on Government Operations.

Mr. ROSENTHAL. The subcommittee will come to order.

For the past several months, the Commerce, Consumer, and Monetary Affairs Subcommittee has been examining enforcement of the Bank Secrecy Act by the Internal Revenue Service and other Federal law enforcement agencies. The Bank Secrecy Act was enacted after congressional hearings in 1970 disclosed that the use of secret foreign bank accounts for illegal and improper purposes created grave regulatory and tax enforcement problems in the United States. These secret foreign accounts were being utilized by organized crime and narcotics traffickers in their operations. They were reported to be a haven for unreported income of American corporations and citizens.1

Today's hearing will explore the role of the Internal Revenue Service in administering those portions of the Bank Secrecy Act that fall within its jurisdiction, including the question of whether IRS has made effective use of information it has developed on foreign financial accounts; whether the decision to remove the "foreign bank account question" from all income tax returns was justified; and whether IRS' investigative techniques have at all times been efficacious and proper. We will also be hearing today from the Commerce Department on the activities of President Ford's Task Force on Questionable Payments Abroad.

1 Recent events such as the Gulf Oil, Phillips Petroleum, and other disclosures indicate the continued use of secret foreign bank accounts.

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Our first witness is the Honorable Donald C. Alexander, Commissioner of the Internal Revenue Service.

Commissioner, we are delighted you are here with your colleagues. We know you have a prepared statement and are anxious to hear from you.

STATEMENT OF DONALD C. ALEXANDER, COMMISSIONER, INTERNAL REVENUE SERVICE; ACCOMPANIED BY WILLIAM E. WILLIAMS, DEPUTY COMMISSIONER; MEADE WHITAKER, CHIEF COUNSEL; THOMAS V. GLYNN, ASSISTANT TO THE COMMISSIONER; SINGLETON B. WOLFE, ASSISTANT COMMISSIONER (COMPLIANCE); THOMAS J. CLANCY, DIRECTOR, INTELLIGENCE DIVISION; ANTHONY J. TOTERA, CHIEF, TAX FORMS DEVELOPMENT BRANCH; ANITA F. ALPERN, ASSISTANT COMMISSIONER (PLANNING AND RESEARCH); ROBERT H. TERRY, ASSISTANT COMMISSIONER (ACCOUNTS COLLECTION AND TAXPAYER SERVICE); JOSEPH G. MCGOWAN, DIRECTOR, OFFICE OF INTERNATIONAL OPERATIONS; AND ROBERT J. STANKEY, JR., ASSISTANT TO THE DIRECTOR, FINANCIAL CRIMES AND FRAUDS, OFFICE OF LAW ENFORCEMENT, DEPARTMENT OF THE TREASURY

Mr. ALEXANDER. Thank you, Mr. Chairman.

I would like to introduce the large number of people with me and to explain the reason for this large number. It is due to our desire to comply with the request in the second to the final paragraph in your letter of June 8 calling for us to provide witnesses to your committee who have familiarity and knowledge with your areas of concern. That is the reason there are so many of us here.

On my far right, Mr. Chairman, is Mr. Thomas J. Clancy, Director of our Intelligence Division. To Mr. Clancy's left is Mr. Singleton B. Wolfe, our Assistant Commissioner of Compliance. To Mr. Wolfe's left is Mr. Thomas V. Glynn, Assistant to the Commissioner. On my immediate left is Mr. Meade Whitaker, Chief Counsel of the Internal Revenue Service.

On Mr. Whitaker's left is Anthony J. Totera, Chief of the Tax Forms Development Branch. On Mr. Totera's left is Mr. William E. Williams, Deputy Commissioner, whom you know.

Behind Mr. Totera is Mr. Robert Terry, our Assistant Commissioner of Accounts Collection and Taxpayer Service. To Mr. Terry's right is Ms. Anita F. Alpern, Assistant Commissioner of Planning and Research. To Ms. Alpern's right is Mr. Joseph G. McGowan, the Director of our Office of International Operations.

You made a very broad inquiry, Mr. Chairman, transcending a number of activities of the Internal Revenue Service over the years. And we are glad to have an opportunity to respond.

Mr. Chairman, as you pointed out, I do have a prepared statement of some 29 pages. Knowing the demands on this subcommittee this day, with the House in session, I prefer to summarize this and submit it for the record.

Mr. ROSENTHAL. Without objection, the entire statement will be included in the record.

[See p. 166.]

Mr. ALEXANDER. Mr. Chairman, the Internal Revenue Service, as has been pointed out previously in this set of hearings, was one of the agencies that expressed great interest in the passage of the Bank Secrecy and Reporting Act of 1970. That act has been very helpful

to us.

Immediately prior to passage of that act, Mr. Chairman, we found that many domestic banks were not maintaining permanent records and were not keeping those records long enough. The greatest benefit of this act to us is the requirement that banks maintain recordsrecords which we badly need to fulfill our responsibility to administer and enforce the tax laws.

This act gave us a number of valuable tools not only in the domestic area, but also in connection with foreign bank accounts. The recordkeeping requirements enable the Service to trace domestic flows of cash and credits, including the U.S. end of international financial transactions when conducting an examination or investigation.

But serious problems still remain-and these problems have been brought to the attention of this committee-in the use of foreign financial institutions by American taxpayers. We are aware of these problems, Mr. Chairman, and we are trying to cope with them.

On page 4 of my prepared statement, Mr. Chairman, we touch on the foreign bank account question on the tax return that you mentioned, and then we discuss form 4789, a very helpful form, a currency transaction report which we distributed to all U.S. financial institutions with instructions that they be filed with our Philadelphia Service Center.

Now our responsibilities under the act, however, Mr. Chairman, are for insuring compliance of only certain limited and rather small types of people or organizations those who engage in business in dealing or exchanging currency, cashing checks or issuing or selling or redeeming traveler's checks, money orders, and the like.

The responsibilities for dealing with the major financial institutions under the act lie with the Comptroller of the Currency, the Federal Reserve System, and a number of other organizations described on page 4 of my statement.

In connection with the form 4683, which we require those who maintain foreign bank accounts to file, initially we separated these forms from the returns and had a file of these forms in our Philadelphia Service Center for access and use by other agencies having a need for

them.

The Bank Secrecy and Reporting Act had received wide publicity. We had expected, given that publicity, that there would be a demand for these forms. It turned out that there was not. And we stopped. accumulating this separate file.

Mr. Chairman, you touched on this morning, and prior witnesses have discussed, in this set of hearings, the problem of the question on form 1040, which was removed in connection with the 1975 form 1040, asking for a "Yes" or "No" answer to whether an individual had authority over a foreign bank account. This was a difficult decision. The question had some-not very much, but some-value in the enforcement of the tax laws.

When the question was moved from page 1 of the form 1040 to the back of 1040, which move was made after consultation with the Office

of the Assistant Secretary of the Treasury for Enforcement, compliance with answering this question-which had not by any means been 100 percent prior to the move-fell off. Immediately prior to this shift from the front to the back, there were over 3 million people that did not answer the question at all. After that shift, that 3 million became over 30 million people, Mr. Chairman-35 million and then 38 million. The shift was occasioned, among other things, by a requirement in the law, section 6096, as I recall, that we place the Presidential election checkoff on either the first page of the return or the signature page. And the first page and the signature pages are identical. So we had to put the checkoff on the first page of the return even though Internal Revenue originally believed that this would not be a sound way of fulfilling its responsibilities.

This checkoff was subject to litigation. Common Cause sued the Internal Revenue Service, Common Cause was quite concerned about the lack of response to the checkoff when it was originally devised and implemented. And Internal Revenue became quite concerned about the checkoff.

The response now is almost 26 percent, Mr. Chairman, for this year. There is more than $95 million gross in that fund. A number of dollars have been used already in connection with the primaries and, I think, advances toward convention expenses. But almost double the number of people who check it "Yes," check it "No."

In any event, in settlement of the Common Cause litigation and fulfillment of our responsibilities under the amendment to section 6096 that I mentioned, we put the checkoff on page 1. And the foreign bank account question went to page 2-and to the bottom of page 2. And the response was not very good.

The question has some value. We have, I understand, recommended one case-and only one case for criminal prosecution with respect to an incorrect answer to this question. This recommendation has not yet been acted upon by the Department of Justice.

But in 1975, we had some special problems. We had to find 11 new spaces on the 1040. Three were because we were required to put revenue sharing questions on the tax form asking people to respond specifically as to what township and the like they lived in. We did not want to do that, Mr. Chairman. We did not think this was the best route towards solution of the problem that the Census Bureau and the Office of Revenue Sharing had in trying to determine how many people move each year. But we were required to do it.

Also, we had to find eight additional lines for such things as individual retirement accounts, forfeited interest, earned income credit, personal exemption credit, and such.

And this year, while we do not expect to have to ask the revenue sharing questions again, we probably will have to find space on the return for such things as geothermal credit, home insulation credit, more lines to cope with the earned income credit as revised, and perhaps even a line for a garden tool credit. The garden tool credit was passed by the House, but is not in the Senate bill.

We are considering whether the benefits to be served to enforcement of the tax laws in restoring a foreign bank account question, which surely will not be as inartfully written as this particular question, will more than balance the costs to the public and to the Service in further complicating an already too complicated return.