Chairman, TCMP involves the selection of a scientific sample of tax returns for indepth examination. And for 1973 the foreign account question was pursued in every TCMP examination, regardless of how it was answered. Based upon the TCMP examinations, it was projected that about 300,000 taxpayers actually held a foreign bank account. Further, the TCMP analysis revealed that failure to correctly report an affirmative response to the foreign account question occurred predominantly among low-income non-business returns, where an erroneous entry might more reasonably be attributed to ignorance or misunderstanding of the reporting requirements than if it were to have occurred among more sophisticated, high-income individual or business returns.

Our analysis indicates foreign financial accounts are comparatively rare among the population of 84 million individual income taxpayers. To provide a standard for comparison, the line item regarding the use of individual retirement plans added as a result of the Employee Retirement Income Security Act of 1974 involved approximately 1.2 million taxpayers and a potential 1.8 billion dollars in tax credits. Because of the small number of taxpayers responding affirmatively to the foreign accounts question, the response did not produce a variable of sufficient significance to be included in our discriminate function formula for audit selection.

Finally, perhaps because of the location of the question on the reverse of the return, in tax year 1974 over 60% of all persons filing Form 1040-more than 38 million individuals-left the foreign account question unanswered altogether. To "perfect" the returns of those taxpayers who failed to answer the question, by corresponding with them, would cost the Service several million dollars. In addition, it seemed apparent that there would have been a substantial adverse public reaction from a follow-up of that nature, were we to ask millions of predominantly low- or middle-income taxpayers, for a second time, whether or not they had any foreign financial accounts. Clearly, any sort of more stringent efforts to force a public responsiveness to the question (e.g., a specific dollar penalty for failure to check the foreign accounts question) would have been unacceptable to the public and to the Congress.

I would hasten to add, at this point, that our experience of the past five years has taught us considerably more than that the placement of the foreign accounts question on the basic tax return documents was not a panacea. The past five years have made it clear to us that the matter of illicit use of foreign financial institutions and international currency transactions for tax evasion purposes cannot be treated simply on a catchall, systematic basis, but rather that it should be dealt with on an intensive, case-by-case basis. The knowledge we have gained in the concentrated effort which we made in examining taxpayers where we had information concerning the possible maintenance of a foreign account has been valuable in shaping the guidelines which we provide to our examiners. These guidelines are reflected in our Techniques Handbook for InDepth Audit Investigations. Over the past five years, our management and our examiners have been made well aware of the foreign account problem, and are pursuing the matter wherever there are grounds to do so.

Now, the question has been raised with regard to the effect of the deletion of the foreign account question on the Government's efforts to prosecute individuals for failure to comply with this reporting requirement. We think that the effect of the deletion is negligible, because the taxpayer is still required to file the foreign account information return, Form 4683. If the taxpayer fails to file the required return, the Service must still obtain admissible evidence to the effect that the taxpayer did, in fact, have an interest in a foreign financial account. Our principal enforcement problem in this area is our inability to obtain that admissible evidence and it is with regard to this area that I would like to direct the remainder of my remarks this morning.

Now, as I indicated at the beginning of my remarks, PL-91-508 has been effective in improving the Service's ability to reconstruct financial transactions, to establish audit trails, and to monitor major currency flows within the United States. However, in many cases, this access to information terminates with our national boundaries. Our ability to obtain reliable information and admissible evidence with regard to the overseas financial transactions of individuals subject to the provisions of the Internal Revenue Code is seriously impaired by foreign bank secrecy laws.

The Service is in a difficult position with regard to the enforcement of the tax laws as they apply to overseas transactions of American taxpayers. The universe of foreign transactions is enormous. We recognize that the bulk of overseas financial transactions and investments by Americans and foreigners

line. In March 1973 a lawsuit was filed against the Service by Common Cause seeking an order requiring the Service to put the check off directly on Forms 1040 and 1040A. Thereafter, Section 6096 of the Internal Revenue Code was amended to require that space be provided for the check off either on the first page of the return or on the signature page of the return so long as the designation is made at the time for filing the tax return. Thus in the case of the Form 1040, beginning with the 1973 return there was, in effect, a statutory mandate to put the checkoff question on the front page (which is the signature page) of the return. Consequently, the foreign bank account question was forced to the backside of the 1973 return. As I stated previously, in 1975 the Service was required to devote three lines of space on the return for additional address data to be used by the Census Bureau to check the accuracy of its population migration data. Although both of these decisions are well intentioned-to remove the impact of big contributors from political campaigns and to attempt to insure that revenuesharing funds are distributed fairly, the effect is the same-an additional burden on the Federal income tax return.

The result of the increasing complexity of the tax laws and of forcing the tax return to carry nontax burdens is predictible tax administration and enforcement suffers. Taxpayers find it harder to complete their returns and are forced to seek assistance. Our taxpayer assistors have a harder job to do, can serve fewer people, and make more mistakes. Our data processing operation is slowed. Our costs increase and thus the resources that we have available to administer and enforce the tax laws are stretched thin. Because of the additional nontax questions that are imposed on the return, and because of the additional items that must be included on the return as a result of the increasing complexity of the tax law, we do not have space left on the return for questions that we would like to have for tax administration and enforcement purposes. Their priorities just cannot quite compete with such things as our need for the taxpayer's name and address, a line for taxable income, a line for the earned income credit for the working poor, etc. Certainly, there would be some compliance benefits from having the foreign bank account question appear on the face of the return just above the signature line.

One thing is very clear, however: this cannot be accomplished merely by administrative fiat, or by a recommendation from this subcommittee, without some solution to the problems of complexity and nontax burdens. This is an area in which the House Government Operations Committee, which has oversight jurisdiction over "The operations of Government activities at all levels," and which has the ability under the House rules to require other House Committees to consider its findings and recommendations, is uniquely situated. It will be quite helpful to tax administration if this Subcommittee would come to grips with the entire problem when it considers the status of the foreign bank account question. I have been calling for simplification of the tax laws since before this 94th Congress was elected. The Service has made the point over and over again that when nontax duties are imposed on the Internal Revenue Service, tax administration and enforcement may suffer. This Subcommittee has the ability to address these two issues. We have seen how the increasing complexity of the tax code and the nontax demands on the Service's forms have squeezed out an item that would be of some benefit to tax administration and enforcement. We believe that the solution to this problem lies in a solution of the underlying problems of the impact on tax enforcement and administration of the increasing complexity of the tax law and the burden of the nontax duties imposed on the Internal Revenue Service.

When we began our efforts to carry out our responsibilities under PL-91-508. we had no basis upon which to estimate the number of taxpayers who maintained accounts with foreign financial institutions. We had incomplete knowledge as to what degree the existence of such accounts contributed to under-reporting of income or intentional evasion. In addition, we were faced with the problem that occurs with every change in the law, of educating the public about their new responsibilities. Under these circumstances, we placed the foreign account question right on the Form 1040. Our experience in this area has been that the number of taxpayers reporting foreign accounts on their returns is quite small. For Tax Year 1973, for example, only 221,000 taxpayers responded affirmatively to the foreign accounts question.

Another part of our effort to determine the scope of the compliance problem involved the inclusion of the foreign account question and the data from Form 4683 in our Taxpayer Compliance Measurement Program Survey for 1973. This survey involved all 1973 Individual Returns filed in 1974. As you know, Mr.

Chairman, TCMP involves the selection of a scientific sample of tax returns for indepth examination. And for 1973 the foreign account question was pursued in every TCMP examination, regardless of how it was answered. Based upon the TCMP examinations, it was projected that about 300,000 taxpayers actually held a foreign bank account. Further, the TCMP analysis revealed that failure to correctly report an affirmative response to the foreign account question occurred predominantly among low-income non-business returns, where an erroneous entry might more reasonably be attributed to ignorance or misunderstanding of the reporting requirements than if it were to have occurred among more sophisticated, high-income individual or business returns.

Our analysis indicates foreign financial accounts are comparatively rare among the population of 84 million individual income taxpayers. To provide a standard for comparison, the line item regarding the use of individual retirement plans added as a result of the Employee Retirement Income Security Act of 1974 involved approximately 1.2 million taxpayers and a potential 1.8 billion dollars in tax credits. Because of the small number of taxpayers responding affirmatively to the foreign accounts question, the response did not produce a variable of sufficient significance to be included in our discriminate function formula for audit selection.

Finally, perhaps because of the location of the question on the reverse of the return, in tax year 1974 over 60% of all persons filing Form 1040-more than 38 million individuals-left the foreign account question unanswered altogether. To "perfect" the returns of those taxpayers who failed to answer the question, by corresponding with them, would cost the Service several million dollars. In addition, it seemed apparent that there would have been a substantial adverse public reaction from a follow-up of that nature, were we to ask millions of predominantly low- or middle-income taxpayers, for a second time, whether or not they had any foreign financial accounts. Clearly, any sort of more stringent efforts to force a public responsiveness to the question (e.g., a specific dollar penalty for failure to check the foreign accounts question) would have been unacceptable to the public and to the Congress.

I would hasten to add, at this point, that our experience of the past five years has taught us considerably more than that the placement of the foreign accounts question on the basic tax return documents was not a panacea. The past five years have made it clear to us that the matter of illicit use of foreign financial institutions and international currency transactions for tax evasion purposes cannot be treated simply on a catchall, systematic basis, but rather that it should be dealt with on an intensive, case-by-case basis. The knowledge we have gained in the concentrated effort which we made in examining taxpayers where we had information concerning the possible maintenance of a foreign account has been valuable in shaping the guidelines which we provide to our examiners. These guidelines are reflected in our Techniques Handbook for InDepth Audit Investigations. Over the past five years, our management and our examiners have been made well aware of the foreign account problem, and are pursuing the matter wherever there are grounds to do so.

Now, the question has been raised with regard to the effect of the deletion of the foreign account question on the Government's efforts to prosecute individuals for failure to comply with this reporting requirement. We think that the effect of the deletion is negligible, because the taxpayer is still required to file the foreign account information return, Form 4683. If the taxpayer fails to file the required return, the Service must still obtain admissible evidence to the effect that the taxpayer did, in fact, have an interest in a foreign financial account. Our principal enforcement problem in this area is our inability to obtain that admissible evidence and it is with regard to this area that I would like to direct the remainder of my remarks this morning.

Now, as I indicated at the beginning of my remarks, PL-91-508 has been effective in improving the Service's ability to reconstruct financial transactions, to establish audit trails, and to monitor major currency flows within the United States. However, in many cases, this access to information terminates with our national boundaries. Our ability to obtain reliable information and admissible evidence with regard to the overseas financial transactions of individuals subject to the provisions of the Internal Revenue Code is seriously impaired by foreign bank secrecy laws.

The Service is in a difficult position with regard to the enforcement of the tax laws as they apply to overseas transactions of American taxpayers. The universe of foreign transactions is enormous. We recognize that the bulk of overseas financial transactions and investments by Americans and foreigners

alike are not only legitimate, but serve the larger interests of the United States in promoting the free and effective flow of capital and trade. We believe that the use of foreign financial facilities for illicit purposes represents a small proportion of the total number of transactions involving foreign entities. Yet, the secrecy provided by the laws of many foreign jurisdictions clearly offer an attractive opportunity for those who wish to circumvent U.S. tax laws.

I would like to summarize what we believe to be the general implications to the overall tax administration process.

In the first place, it is clear that the vast majority of those individuals involved in the use of overseas institutions and transactions to conceal untaxed income are neither casual nor simplistic in their activities; they are sophisticated and purposeful. They are, by definition, well aware of the extent to which they are in violation of the law, and the scheme seems clearly worth the candle, in their minds. If for no other reason than this, the idea that the foreign accounts question on the tax return would be an effective enforcement tool was, in retrospect, somewhat naive, since the individual who intends to violate the law, and who believes that his or her efforts will be successful because they will be undetected, will scarcely jeopardize him or herself by giving a truthful answer to such a question. Executives who are willing to involve their corporations in large-scale black market currency speculation, or professional underworld couriers who are willing to take 5% or 10% of the action in exchange for taking the personal risk involved with smuggling gambling "skim" over international boundaries will scarcely feel compelled to respond honestly when confronted by a "yes-no" question on Form 1040, anymore than they are disposed to correctly report the income that they have hidden.

As we have become increasingly familiar with the extent and detailed nature of tax evasion schemes involving overseas institutions and transactions, we have experienced an increasing frustration at the difficulty we have in coping with many of these schemes. Some of our investigative efforts in these areas have been dropped for lack of admissible evidence. In other cases, successful prosecution has occurred only by virtue of information which Service agents have discovered accidentally in the course of some routine activity not initially related to the principal case.

Now, as our knowledge of the entire range of illicit foreign activities grew, along with our improved perception of the limitations placed upon us by foreign secrecy laws, we began to undertake a variety of initiatives, some of which were essentially research projects, and some of which were operational in nature. In the procedural area, on July 1, 1975, we initiated a computerized system for processing and evaluating intelligence information items. This system, located in the 10 IRS Service Centers, provides for the processing and cross-checking of all Forms 4789 (Currency Transaction Reports) and 4790 (Report of International Transportation of Currency or Money Instruments), against all other information items on file, and against all open criminal investigations.

Under this system, the information on these forms is first evaluated for criminal potential by Intelligence Division personnel. Those with criminal potential are associated with tax returns, taxpayer account research and other available information, and then forwarded to the appropriate office for determination as to whether a criminal investigation should be initiated. At the same time, forms without immediately apparent criminal potential are made available to audit and/or Collection personnel for possible civil tax implications. Those selected are sent to a District Office for assignment.

In addition to the foregoing, we have also developed source-codes for both Forms 4789 and 4790 in the three management information systems which we use to monitor information returns, information gathering projects, and open criminal investigations. The data now being gathered from these systems will be used to measure the usefulness of the information on the forms in criminal tax investigations, and will be broken out to show common characteristics of successful data/case relationships. We expect to begin getting some good working knowledge from this system within a year.

We are also improving the liaison between our Intelligence activity and the U.S. Customs Service and plan to exchange magnetic tapes containing the information from Forms 4789 and 4790. Customs, which is responsible for enforcing the reporting requirements regarding the international transportation of currency (Form 4790) will begin to provide that data to IRS this summer on magnetic tape; we will provide the information from Currency Transaction Reports to Customs, but because of the much higher volumes and dispersed distribution of these documents, it will be 10 to 12 months before we can begin to supply this data to Customs on tape.

In the area of illicit foreign financial transactions, North-Atlantic Region pursued a wide range of research activities from 1957 until 1971. During the first 10 or 12 years of this period, these efforts were relatively rudimentary, and were principally aimed at assessing the scope of our problem with regard to the use of secret Swiss bank accounts in the evasion of U.S. income taxes. These efforts were useful in revealing the degree to which this area posed serious problems for us. The North-Atlantic research demonstrated, for example, that a large number of individuals filling out Treasury Form TCR-1 (the forerunner of today's Form 4789) gave fictitious identities and addresses.

The results of these first studies suggested a need for much tighter regulation of international currency law. On July 1, 1960, a conference was called in the IRS National office to develop means for controlling the illicit international money flow. None of the ideas developed at that conference proved attractive, and the problem continued to grow.

In 1966, our North-Atlantic Region joined with the U.S. District Attorney for New York City, who was then conducting a Grand Jury investigation of suspected use of numbered foreign bank accounts by "underworld" types and financial manipulators of dubious reputation. The IRS National Office gave approval to make regional employees available to the U.S. Attorney to assist in the examination of subpoenaed bank records and correspondence. This liaison continued through early 1967, when a task force was formed. This task force coordinated North-Atlantic Region activities with a committee of Natinoal Office IRS analysts representing Intelligence, Audit, and our Office of International Operations.

The results of these efforts were disappointing since no large deficiencies were assessed, largely due to a lack of adequate documentation. At that time, in order to more accurately identify those taxpayers conducting financial business with foreign banking institutions, a proposal to analyze mail entering the U.S. from certain foreign financial institutions was advanced by our Intelligence Division. With the cooperation of postal authorities, the outside of envelopes thought to be originating from those financial institutions were microfilmed for later analysis. This activity took place in New York City for a total of approximately thirty days on an intermittent basis, late in 1968 and early in 1969.

After the monitoring period ended in early 1969, copies of the envelopes were printed out from the accumulated microfilm and used as input information for data processing analyses performed at our Andover Service Center. The resulting data was immediately put to several uses. The North-Atlantic Region Task Force selected a number of individuals for examination. A sample was also examined in three other regions. The results were non-productive. Only one criminal prosecution recommendation resulted from these examinations and this one was rejected by Regional Counsel, mainly due to the continuing inability of the Service to acquire adequate corroborating testimony and documentation from foreign financial institutions.

It became increasingly clear that, in order to enforce U.S. tax laws where they applied to foreign financial holdings and transactions in nations maintaining strict banking secrecy, a new type of international agreement between the U.S. and such nations would be essential. It was at this time that negotiations began between the Government of Switzerland and a U.S. team made up of representatives from the Treasury, Justice and State Departments, and the Securities and Exchange Commission, to establish a new mutual assistance treaty between the United States and Switzerland in matters of criminal law enforcement. It was also during this time that Chairman Patman, of the House Banking and Currency Committee also began to exhibit a concern for the foreign bank account problem. Of course, this joint interest eventually led to the holding of hearings and the drafting of a bill that was an attempt to remedy some of the difficulties plaguing the Internal Revenue Service. This bill was eventually enacted into law on October 26, 1970, as P. L. 91-508.

Meanwhile, in order to measure taxpayer compliance with the new foreign financial reporting requirements, the Service engaged in a third mail microfilming project, which was carried out between December 17, 1970, and January 31, 1971. This program was approved by then IRS Commissioner Randolph Thrower, the Justice Department, Postal authorities, and the main Treasury, and was conducted under the supervision of postal inspectors, and special agents of the IRS Intelligence Division, in both New York City and Chicago. Once again, the exterior of envelopes thought to be originating from certain foreign financial institutions were microfilmed. The microfilm was printed out, and entered into a computer which then produced a consolidated listing of approxi