Impact on the Service

To implement the new provisions on jeopardy and termination assessments, the Service will have to develop administrative procedures for:

1.

providing the taxpayer with a statement of the information
used to justify the assessment;

2. making administrative reviews of the assessments;

3.

4.

5.

providing a written statement which proves the need for
this special assessment that can be used in U. S. District
Court proceedings;

providing procedures for keeping Collection Division apprised of the current status of cases, so that the sales date of seized assets can be determined; and

determining at the end of a tax year whether a deficiency exists, and thus, whether the Service must send a termination assessed taxpayer a notice of deficiency.

Mr. WHITAKER. There's a further aspect.

Senator BAYH. Compliance where?

Mr. GLYNN. Compliance has under their jurisdiction, and under Mr. Wolfe and Mr. Clancy, the division in which we do criminal investigations.

Senator BAYH. That provision you are talking about is in the pending tax bill.

Mr. GLYNN. That is correct.

Senator BAYH. It has not had a very significant impact on the business as of now, has it? [Laughter.]

Mr. ALEXANDER. No.

The problem we were talking about, I mentioned that the courts had curtailed our powers and that Congress was acting to curtail our powers. That was the point. That was the point I made in connection with section 1204.

Now, I guess Mr. Whitaker has an added point.

CURTAILMENT OF ADMINISTRATIVE SUMMONS AUTHORITY

Mr. WHITAKER. Mr. Chairman, you inquired a moment ago what could be done, what Congress could do, or maybe what Congress should not do, to help the significant high-level narcotics program that we are embarked on.

One of the aspects of the present tax bill which will tend to interfere to some extent with our program is the limitations on our use of the summons.

Senator BAYH. Which?

Mr. WHITAKER. The administrative summons to obtain evidence.

The big difficulty in this kind of a program on which you and the President have asked us to focus is that we have a very difficult job building a case, as the Commissioner pointed out. The tax case has to be largely built on indirect evidence. It is a net-worth type of case. We have to use every mechanism we possibly can to obtain evidence that will sustain either criminal prosecution or civil assessment in court.

This is very different from the type of a street program which was highly visible and was pursued in the past and was pursued successfully, although with a misuse of the tax laws.

The program that we are embarked on and are continuing to embark upon is a very, very difficult type of case to make. It is difficult for the special agents to develop the evidence; it is difficult for the lawyers to put the evidence together to get an indictment or to make a civil case, either one, because we are dealing with-as I said, with indirect evidence and in most cases with this type of person we're dealing with funds that travel back and forth between this country and foreign countries.

To get at these people we have got to have every investigatory tool we possibly can have. That is why these little bits and pieces that we have mentioned in the testimony today so far are very helpful to us. A matter of being able to introduce evidence in a civil case in court that is certified to us by a foreign official that we get through our tax treaties is something which will help us. It is not going to break the program for us, but it is something we need and will help us. Any curtailment of our administrative summons authority will, to some extent, make our job more difficult.

Senator BAYH. As far as criminal prosecutions are concerned?
Mr. WOLFE. Yes, sir.

For example, this case that was made last weekend, in order to get some of the evidence that we needed, we had to go to the banks. Under this current bill we would be required to notify the taxpayer that we had served, or were going to serve a summons on that bank to produce information on that taxpayer. That could alert that taxpayer and could then make whatever records or whatever evidence was available which related to those records and was in the procession of the taxpayer-he could dispose of it very quickly.

Mr. ALEXANDER. And the taxpayer would be given standing to come to court and block our summons. And suppose there was no grounds, no reasonable grounds, to support the taxpayer. There frequently won't be in these cases. Still, the taxpayer comes to court, ties up the case indefinitely, and, as you know, the staler and older a case gets, the more difficult it becomes.

INVESTIGATIONS MAY BE FOR CIVIL OR CRIMINAL CASES

Mr. WHITAKER. In the beginning of these cases, Mr. Chairman, there is really no basic difference between whether our focus is civil or criminal, because it is an investigatory focus, that is, trying to get at the accumulation of money that an individual has and compare it to what the individual has reported for tax purposes. So the initial focus is really-it is both civil and criminal. And we frequently need to use administrative summons to get at financial records, because that is what we are after, appropriate records, bank records. We know what the taxpayer has reported, but to find out what he actually has, we have got to analyze every transaction that the taxpayer has been through.

And, again, it is time consuming. It is a matter of 1 year or 2 years sometimes or more to make a case.

But this is what we need to do and this is what we are trying to do. Mr. WOLFE. Mr. Chairman, one thing else, I think, needs to be said. I think it is possibly unfair and improper to judge the success of any program on dollars that may be recommended. I think the success of a program, from our point of view is, if these people have violated the tax law, they should be in jail. And that is the big emphasis that I think we should go after, is getting those people who violated the law and see that they pay their proper due to society.

And there are cases of violation of the tax law. And I think our effort on the class 1 violators is this. Now, that doesn't mean that if a class 2 or class 3 violator hasn't paid his taxes, we shouldn't go after him. But I don't think we should measure the success of the program on dollars that we may recommend as a result of a very quick determination of tax liability.

Rather interestingly, I was reviewing this GAO report, and GAO reviewed 64 termination cases involving narcotics. In those 64 cases we had originally set up $1.2 million. Because of the lack of sufficient records or evidence, we ended up disposing of those cases for $220,000, of those just of those that GAO looked at-and it is spelled out in that report.

And so we can make a nice picture by saying this is what we are recommending. But I think you have got to look at the final results.

Senator BAYH. I concur. It seems to me the Federal agencies have two responsibilities: One, to put these characters in jail and, two, to make sure they pay their back taxes.

Mr. WOLFE. Absolutely. 100-percent correct.

Senator BAYH. Now, there's been a lot of reference to the emphasis on class 1 tax violators.

Of the cases that you just mentioned, Mr. Clancy, what percentage or what number are class 1 violators?

Mr. CLANCY. I can't tell you that at the present time.

Our internal instructions did not require the trafficker to be previously or currently listed as a class 1 by DEA. Our instructions do require, though, that it be a significant-either somebody that would fit into the strike force program-and many of these cases are being worked on in the strike force program in concert with the Department of Justice or be a significant operator and a major influence in his area before they would be put into the special enforcement program. This one example that I gave you, I can tell you, it does happen to be a class 1.

Senator BAYH. Could you get us those figures so we could have some idea whether they really are "exciting"?

[Subsequent to the hearing the following information was received:]

[EXHIBIT NO. 7]

Question 2. Senator Bayh: "*** what percentage or what number of them [narcotics traffickers] are Class I violators?"

Response. Class I violators is a classification developed by DEA for their own enforcement requirements as a means of identifying major narcotics traffickers. Under the NTP program, targets were selected by a selection committee. The former Bureau of Narcotics and Dangerous Drugs was relied on for potential target identification, but the ultimate selection was made by the committee. Names submitted by the Bureau of Narcotics and Dangerous Drugs were not classified as Class I violators. Although the plan was to select those targets who were believed to be middle or upper-echelon traffickers, subsequent investigations indicated that some targets did not qualify for this classification.

INVESTIGATIONS AND PROSECUTIONS OF TARGET CASE NARCOTIC TRAFFICKERS FOR CRIMINAL VIOLATIONS OF THE INTERNAL REVENUE CODE

Mr. CLANCY. Now that we have sent out the 206 class 1 to our field people for evaluation and determination of which ones could be investigated for criminal prosecution, to also have them reassess the cases currently in inventory and classify those into our narcotics project that we will establish and are in the process of establishing. So I will find out how many of the current inventory are, in fact class I and then determine why the other ones or how we would classify those.

It should be kept in mind that the individuals identified by DEA as class I violators are probably classified on the basis of DEA criteria, in that the subjects have either been arrested or are potential targets for arrest and either possess or are believed to deal in large quantities of narcotics. Our Intelligence Divisions will do an independent investigation and evaluation to determine whether the individuals identified are in fact upper echelon narcotic traffickers and justify being classified as class I targets.

Interim guidelines were transmitted to the Regional Commissioners, Service Centers and District Directors on August 4, 1976. What we are interested in is the individuals who finance narcotic traffickingthose who remain behind the scene-and are rarely in the hazardous position that would lead to their arrest for possession of narcotics. They are the ones we would classify as class I targets and we anticipate that our District agents will be able to determine whether those individuals identified by DEA qualify for inclusion as a class I subject. We want to avoid the pitfalls experienced in the old NTP program and stay away from the common street-peddler variety of taxpayer. However, where our investigations indicate that any trafficker is dealing in large quantities of narcotics and exhibits considerable financial profits, we will pursue criminally. A copy of our interim guidelines are attached.

[EXHIBIT No. 8.]

Internal Revenue Service memorandum.

AUGUST 4, 1976.

To: All Regional Commissioners, all Service Center Directors, and all District Directors:

From: Director, Intelligence Division.

Subject: High-level drug leaders tax enforcement project.

We are transmitting to the Chiefs, Intelligence Staff, under separate cover, a List of individuals who have been identified by the Drug Enforcement Administration (DEA) as DEA Class I violators, along with related information also furnished by DEA.

The material is being sent to the Chiefs, Intelligence Staff for processing in accordance with the interim guidelines contained in this memorandum. The interim guidelines, which are restricted to the processing of the information we received from DEA on Class I violators, also include instructions for the processing and evaluation of these items by the district Intelligence Division after the items are referred there by the service centers.

We ask that the Chiefs, Intelligence Staff give the highest priority to the processing of this information.

The interim guidelines, presented below, should be followed until the Memorandum of Understanding between DEA and IRS is implemented by instructions issued in an International Revenue Manual documet.

SERVICE CENTER PROCESSING OF DEA PROJECT INFORMATION ITEMS

(a) The information furnished by DEA concerning DEA Class I violators will be referred to in this memorandum as "DEA Project information items." (b) The Chief, Intelligence Staff at the Service Center will:

(1) on a priority basis, process the DEA Project information items, transmitted by the National Office, in accordance with Manual Supplement 93G-164, "Central Evaluation and Processing of Information Items," dated March 4, 1976;

(2) insert the words, "DEA I" in Item 6a. of each Form 3949, Intelligence Information Item; and

(3) on a priority basis, send a photocopy of the information item, without 1 CR 1(15) G-103, 41G-108, 45G-250, 51G-132, 5(11) G-65, 71G-14, 92G-35, 95G-61.