some help in title IV which helps our sister bureau in Treasury, Customs, to obtain information which we will share for the benefit of the Treasury Department and for the benefit of the public. BELIEVE ILLEGAL PROFITS HIDDEN IN TAX-HAVEN COUNTRIES We also, Mr. Chairman, are having a problem that goes beyond the bill before you, S. 3411. It is mentioned at the end of my statement over on pages 11 and 12.1 We believe that frequently the proceeds of the narcotics traffic are hidden in foreign tax-haven countries, countries with secrecy laws. We are trying to work out treaties with these countries. It takes time. It is very difficult to achieve. It goes against certain economic goals that some of these countries may perceive. But the use of these termination powers met with very strong judicial and public criticism. The article in the Wall Street Journal of April 10, 1974, is a prime example of media criticism. In addition to the Laing and Hall cases that I have mentioned, there is a case called Willits v. Richardson, which made it clear that the fifth circuit court of appeals would not permit the use of our broad powers to take possession of the property of citizens by summary means that ignore many basic tenets of due process to be turned on citizens suspected of wrongdoing, not as tax collection devices, but as summary punishment. We cannot do it. The fifth circuit struck us down time and time again. What does this make for? It makes for ineffective enforcement. It does not achieve the goal which you, Mr. Chairman, restated your dedication to a few minutes ago. Instead it detracts from the achievement of that goal, because resources are applied to cases that cannot be sustained. We need to have a change in the law, and our chief counsel, Mr. Whitaker, can describe it in much more detail than I, which will reduce the very high standard now demanded with respect to certification by foreign officials of a fact that we need to establish. We need to have this evidence admitted and held to be presumptive of the fact. This provision, if enacted, plus title III, title IV, and raising the now $2,500 limit on administrative forfeitures to $10,000, which we also strongly favor, will go far, together with a strong and effective and lawful effort by the Internal Revenue Service working with DEA, to enforce the tax laws against tax evaders who are narcotics traffickers, in meeting the goals and in striking that delicate balance that you described. Mr. Chairman, I would like to submit for the record the Joint Committee on Internal Revenue Taxation Release of August 3 with respect to a GAO report, and that GAO report, as well, of July 16, 1976, discussing the use of jeopardy and termination assessments by the Internal Revenue Service. GAO, having reviewed the prior program, which has been discussed before this committee and before other committees, found-looking from the standpoint of its fulfillment of its responsibilities-certain problems that had not escaped our attention. 1 See prepared statement, p. 32. Senator BAYH. We will insert them in the record at this point. As exhibits No. 2 and 3. [Testimony continues on page 67.] [EXHIBIT No. 2] USE OF JEOPARDY AND TERMINATION ASSESSMENTS BY THE IRS The Joint Committee on Internal Revenue Taxation announces the release of a report from the Comptroller General of the United States entitled "Use of Jeopardy and Termination Assessments by the Internal Revenue Service" (GAO Report No. GGD-76–14; July 16, 1976). This GAO report is in response to the December 1974 request by the Joint Committee for a review of the use by the Internal Revenue Service of jeopardy and termination assessments. This request was made because of concern that these extraordinary assessment and collection procedures be used only where appropriate and in a reasonable manner with adequate procedural safeguards against abuse. (A GAO report on IRS procedures regarding seizures and sales of property will be made later this year to the Joint Committee.) GAO findings and conclusions The GAO study of IRS use of jeopardy and termination assessments included a field review of jeopardy and termination assessments of two IRS districts and one IRS Service Center and a review of a sample of audit reports at the National Office. The assessments reviewed were initiated from January 1973 to June 1975. The Internal Revenue Code provides that when the IRS determines that collection of a tax may be in jeopardy, it may be immediately assessed and collect the tax-through seizure of property, if necessary. If the date for filing a return and paying income tax has not passed, a "termination assessment" may be made of the tax liability before the end of the tax year (under section 6851 of the Code). If the due date for filing a return and paying the tax has passed, this is generally done pursuant to a jeopardy assessment. Jeopardy assessments are of two types: (1) when the tax involved is a tax which the Tax Court has jurisdiction to consider (income, estate and gift taxes, and the private foundation and pension excise taxes), the jeopardy assessment is made under section 6861 of the Code; and (2) where the tax liability is not subject to review by the Tax Court, the jeopardy assessment is made under section 6862 of the Code. The GAO indicates that before fiscal year 1972, IRS made relatively few jeopardy and termination assessments. However, in response to the President's announcement of an expanded effort to combat drug abuse, the IRS in July 1971 established a high-priority project called the narcotics traffickers program. The purpose of the program was to make a systematic tax investigation of middle-and-upper-echelon narcotics dealers. IRS statistics show that after the trafficker program was initiated many of the jeopardy assessments and the majority of the termination assessments made were directed at individuals suspected of or arrested for drug law violations. The GAO review of termination assessments (sec. 6851) used against suspected narcotic traffickers indicates that only a small portion of the original asssesments was upheld by later IRS review. Sixty-four of the 68 termination assessment cases covered by the GAO review involved alleged narcotics traffickers. Forty of these had been finalized as of March 1976. The original assessments in these cases totaled $1,254.233. The final assessment totaled $220,677. Jeopardy assessments (under sec. 6861) were also used against suspected narcotics traffickers but with much greater success. Twenty-one of these jeopardy cases were examined of which 12 involved suspected narcotics traffickers. Of these, nine were finalized as of March 1976. The original assessments for these cases totaled $353.210 and the final assessments totaled $342,105. At the time of the GAO review, termination cases were not afforded the same opportunities for judicial review as were section 6861 jeopardy assessments; and the GAO indicates that this may be the reason why the latter were better supported. With respect to jeopardy assessments under section 6861 against taxpayers other than narcotics traffickers, the GAO indicated that it was satisfied that the use of jeopardy assessmens was reasonable. Also, with respect to jeopardy assessments under section 6862, the GAO indicated that it was satisfied that, in each instance, a tax deficiency existed and the taxpayer assessed was liable for the deficiency. The jeopardy assessments under section 6862 were made against officers of insolvent corporations who were found by IRS to have been responsible for withholding taxes from employees' wages and for not paying the withheld taxes to the Government, against employers for taxes withheld from the wages of employees but not paid to the Goverment where the financial solvency of the employers appeared to be endangered, and against taxpayers for the nonpayment of wagering taxes. The GAO review also indicated that for the cases in which termination assessments were used against taxpayers other than narcotics traffickers, the use of termination assessments appeared to be reasonable. The GAO also reviewed the existing law to determine the adequacy of the legal remedies of a taxpayer who is subjected to a jeopardy or termination assessment. In its September 1975 draft report to the Joint Committee (prepared at the time of the Ways and Means consideration of the tax reform bill), the GAO noted that the IRS had maintained that the only judicial remedy available to a taxpayer who had been subject to a termination assessment was to pay the assessed tax, file a claim for refund with IRS, wait 6 months (unless IRS denied the claim sooner), and file a refund petition with the Federal district court or Court of Claims. Because it was IRS practice not to consider a refund claim until after the end of the taxpayer's normal tax year, there could be considerable delay before the taxpayer obtained judicial review of his case. During this period the taxpayer would be deprived of the use and benefit of any property that IRS had seized. Consequently, the GAO recommended in the draft report that a taxpayer whose taxable period has been terminated under section 6851 should have a more timely right of judicial review and that his property should not be allowed to be sold until such review is completed. However, in view of two January 1976 Supreme Court decisions (Laing v. U.S. and U.S. v. Hall), which held that the IRS is required to issue a notice of deficiency—a jurisdictional prerequisite to litigation in the Tax Court-to a taxpayer whose taxable year is terminated pursuant to section 6851, this recommendation was deleted from GAO's final report. GAO legislative recommendations GAO recommends that the Congress amend the Internal Revenue Code to provide that, if a jeopardy assessment is made under section 6862, the taxpayer shall have a more timely right to judicial review than is currently provided under the Internal Revenue Code and that seized property shall not be sold until the judicial review process is completed. GAO further believes that if legislation is enacted to carry out its recommendation, IRS procedures now applicable to section 6851 and 6861 assessments could be extended to section 6862 assessments with a minimum of administrative difficulties. GAO also reviewed the provisions in the tax reform bill (H.R. 10612), as passed by the House, and concluded that such provisions (relating to assessments under sections 6851, 6861 and 6862) would meet the objective of its recommendation. IRS comments The GAO report includes a response from the Commissioner of Internal Revenue commenting on the GAO draft report. He stated that IRS had no objections to the GAO proposals for judicial review of jeopardy and termination assessments. However, he indicated at that time (December 9, 1975) that IRS could envision some tax collection problems created by delays which would develop. GAO notes that the collection problems envisioned earlier by the IRS to a large extent are now moot since, in response to the Supreme Court decisions, the IRS has issued instructions to handle section 6851 termination assessments in a manner similar to the handling of section 6861 jeopardy assessments. Availability of GAO report Copies of this GAO report on IRS use of jeopardy and termination assessments may be obtained ($1.00 for the general public-those not associated with the press, the govenment, or an educational or nonprofit organization) from the U.S. General Accounting Office, Distribution Section, P.O. Box 1020, Washington, D.C. 20013. (Exhibit No. 3) REPORT TO THE JOINT COMMITTEE BY THE COMPTROLLER GENERAL Use Of Jeopardy And By The Internal Revenue Service Department of the Treasury GAO recommends legislative changes to more GGD-76-14 JULY 16. 1976 This report discusses how the Internal Revenue Service collects taxes it believes would be jeopardized by delay if normal collection procedures were used. It is one of a series of reports your Committee requested. we are sending copies of this report to the Director, Office of Management and Budget; the Secretary of the Treasury; and the Commissioner of Internal Revenue. Feuse R. Stacks Comptroller General |