initial evaluation, to the appropriate Chief, Intelligence Division, along with pertinent returns, transcripts, and other available data.

DISTRICT PROCESSING OF DEA PROJECT INFORMATION ITEMS

(a) The DEA Project information items will be evaluated by the Chief, Intelligence Division, using established IRS standards.

(b) To assist in the evaluation of the information item, the Chief, Intelligence Division may supplement the information furnished by DEA: by contacting the local DEA office; by making other limited inquiries described in IRM 9311.2:(3) ; or by gathering information on the individual in accordance with Manual Supplement 93G-152,2 Information Gathering Guidelines.

(c) The items evaluated as lacking criminal potential will be returned to the Chief, Intelligence Staff or referred to the district Audit or Collection function, as appropriate.

(d) It is contemplated that the final Project instructions will require the Chief, Intelligence Division, to notify the Director, Intelligence Division, through channels of any DEA Project information item that is lacking criminal potential. This determination would not be finalized until any authorized Information Gathering was completed. The notification will provide sufficient data to the Director to explain why the individual was not selected for Intelligence investigation. However, such reports should not be submitted until the final Project instructions are issued.

INTELLIGENCE DIVISION RECORDKEEPING REQUIREMENTS

(a) All Project activity will be considered as within the Special Enforcement Program (SEP).

(b) A special program code is not being assigned to this Project. Instead, the appropriate existing SEP program code will be used. (See B. (6) of Exhibit 400-3 of IRM 9570, Case Management and Time Reporting System Handbook.) (c) National Office Project Number 21 has been assigned to track Project activity under the Case Management and Time Reporting System. Accordingly, each region and each district will establish a project number, using National Office Project Number 21 as the first two digits. (See 300 of IRM 9570, Case Management and Time Reporting System Handbook.)

The above instructions will be reissued in the Internal Revenue Manual in accordance with IRM 1254.

THOMAS J. CLANCY.

2 CR1 (15) G-91, 41G-105, 42G-328, 45G-231, 51G-118, 5(12) G-25, 71G-9, 94G-57.

Senator BAYH. Has IRS been working with DEA before last week on these matters?

IRS AND DEA COOPERATION ON CASES

Mr. CLANCY. Yes, sir; we certainly have. We've got projects around the country that DEA has let us into. They are turning out to be very successful.

In some cases DEA recognized that some people were amassing wealth. They suspect part of that may be from narcotics. We have gotten involved in that, and it appears that a good deal of it is, in certain areas of the country.

Yes, sir; we are working with DEA.

This example of the case that you put into the record, the newspaper, I believe also came with discussions with the local DEA office here in the area. The information concerning this case which was received from the Montgomery County Police was invaluable to the outcome.

Mr. WOLFE. Again, Mr. Chairman, in the Southwest we have a very important project going on with DEA. It's been going on for months. And it is also being worked in coordination not only with DEA but

the Justice Department, and that is a very important project. But, again, it is going to take time. These people don't keep records. You've got to go out and establish income before you can even recommend prosecution. You've got to show, and, for example, if they build new homes, swimming pools, buy jewelry, whatever it is, and you've got to go and not only find out what they do, but you've got to document it and you've also got to get a list of witnesses to testify that they did buy this in order to prove a tax evasion case.

Senator BAYH. It's fair to say that it requires very intensive effort and very specialized emphasis, doesn't it.

Mr. WOLFE. It absolutely does.

Senator BAYH. I could not agree with you more. I don't envy you your task, and I'm sure you need very sophisticated and professional people trying to do it.

But what concerns me, and I get back to it, have you changed your idea, Mr. Alexander, that you expressed in Hawaii to the ABA that you are going to change the emphasis away from those special programs?

[EXHIBIT No. 9]

EXCERPT FROM Remarks BY DONALD C. ALEXANDER, COMMISSIONER OF INTERNAL REVENUE, BEFORE THE ANNUAL CONVENTION OF THE TAX SECTION OF THE AMERICAN BAR ASSOCIATION, HONOLULU, HAWAII, AUGUST 14, 19741

As regards our intelligence operations, the overall emphasis of our criminal enforcement activities has been shifted away from special enforcement programs such as Narcotics Traffickers and Strike Forces, and have been aimed more directly toward the taxpaying public in general. This shift in emphasis has enabled us to achieve greater occupational and geographic coverage in our criminal tax sanctions are more equitably applied-reaching the broadest possible spectrum of society within our resource limitations. I believe that our revised enforcement philosophy and not only achieves this goal, but more fully meets the intent of Congress in that our resources are being used for the enforcement of tax statutes, rather than as alternative methods for the prosecution of violators of laws normally enforced by other Federal or local agencies.

Mr. ALEXANDER. I found one situation, as I have tried to describe several times this morning, Mr. Chairman, and faced with that fact situation, it seemed to me that certain actions should be taken. Disproportionate to what is the question. If we had the small number, the insufficient number, of our special agents working only on narcotics traffickers, we would have a greater effort against them than if we had a lesser number working such cases but we would have a lesser effort to deal with corporations that are tax evaders, to deal with white-collar tax evaders, to deal with organized crime figures who are not narcotics traffickers who are tax evaders, and to deal with corrupt politicians who are tax evaders. And we need to deal with all of those, and I am sure you agree with that.

Senator BAYH. Well, I'm surely not suggesting anything counter to that.

I think you are evading the question. I want to get to where we are today.

In 1974 you said—and I want to repeat it-that you are shifting away from the special enforcement programs, one of which we are talking about here-the NTTP.

1 See Appendix, Part 2 for complete text of Mr. Alexander's remarks, pp. 306 et seq.

Mr. ALEXANDER. Mr. Chairman, there is no doubt that I thought the situation I found in 1974 did have too much of our limited manpower assigned to certain narrow areas you mentioned a handful this morning and not enough assigned to such things as major corporate crime. That is quite clear.

INVESTIGATIONS AGAINST NARCOTIC TRAFFICKERS NOT MAINTAINED

Mr. CLANCY. Mr. Chairman, I don't want to mislead you. We are giving you some figures of what we have been doing in the past current year in the narcotic area, and I'm sure if you compare that to the high year back in 1973, perhaps, our level of activity will not be as high in fiscal year 1976 as it was previously. That is correct. I would not want to mislead you or imply that we have maintained our investigations against identified narcotics traffickers at the same level in fiscal 1976 that we did in prior years.

But it is important, I think, for you to have heard from us, because I think there have been some misstatements from people who really don't know that indicated that we canceled investigations against traffickers, and that certainly is not true.

Let me build a little bit upon the Commissioner's comment about allocation of resources.

The Intelligence Division is taking a 10-percent cut in resources in fiscal 1977, and we will do the best we can with what we have remaining, and I think we can do a good job with it. But when I became an Assistant Regional Commissioner for Intelligence in the Mid Atlantic Region in July of 1973, I looked at what we had been doing with our resources in that region, and one-half, 50 percent of our intelligence resources had been allocated and spent in special enforcement.

Now, there is no question in my mind that we definitely want to have programs to investigate those people that are deriving illegal income and not paying their fair tax on it. We do and we have the special program. I believe, though, that 50 percent was a much too high percentage of cur total limited resources to allocate and leaving only 50 percent, of course, on the other side for the great problem that we have in tax administration to utilize the criminal sanctions of the tax law, to try to achieve compliance to the extent we can.

Senator BAYH. Well, I am sure you get frustrated in your inability to communicate, and some of us may get the wrong conception; but we have a particular problem, and I cannot imagine that anybody in this Congress wants to make a smaller effort in this area. I think a lot of people get very frustrated with the lack of results. I'm not trying to oversimplify the problem, but I think anyone who understands its complexity knows that it means you are going to have to spend more dollars per unit of result than other more simplified tax problems.

You know, back in 1971, the President and the Congress together provided special earmarked resources for this purpose. There has been significant concern expressed that one of the reasons you haven't had more results is that for some reason or another some of these earmarked resources and positions-as I recall, it was $15 million and 598 positions-a significant number of both of these have been shifted off into other areas.

Is that true?

Can you tell the subcommittee how many positions and how many dollars you are spending, of this earmarked money, in the area for which it was designated?

Mr. ALEXANDER. Do you have that, Mr. Wolfe?

Mr. WOLFE. Well, actually, we exceeded those expenditures in that first year, Mr. Chairman. We expended more money in this area than the Congress appropriated.

Senator BAYH. Well, how about this last year?

Mr. ALEXANDER. Mr. Chairman, there is no doubt that the Internal Revenue Service did once get a supplemental appropriation for this program. There is also no doubt that the Intelligence Division's appropriation, as a whole, went up from $86.8 million to over $100 million, and I am very sorry to see it reduced. It went up to $100.4 million in fiscal year 1975. And there is no doubt-and we would be glad to submit this for the record, our submissions to the Appropriations Committees and what they acted on-that there was no earmarking, Mr. Chairman, in fiscal 1975, in fiscal 1976, none whatever.

Now, that we have talked about the question of earmarking and, I hope, straightened it out-if not, it is a matter of record rather than argument, and I would like to go to the record rather than argue about it-let's talk about resources.

Senator BAYH. Well, before we get there, let's make sure we are talking about the same thing.

When was the earmarking?

MS. ALPERN. Fiscal years 1972 to 1974, I believe.

Mr. ALEXANDER. I though it was two years. I though it was fiscal 1972 which included some of calendar 1971, and also fiscal 1973. Senator BAYH. Was there any earmarking in fiscal 1974?

Mr. ALEXANDER. Perhaps so, Mr. Chairman. I am convinced there was none in 1975 and 1976.

Senator BAYH. My figures of $15 million and 598 positions, are those accurate as far as the earmarked funding?

Mr. ALEXANDER. The original-the first figures-I think, were about $7.5 million, and actually we spent

Mr. WOLFE. $10.5 million.

Mr. ALEXANDER. And I think also exceeded appropriations the second year, and then this was accounted for as a separate program until, as I recall, June 30, 1975, internally.

But the question you have raised goes to the action of the Congress, in saying you have given this money for this purpose, and what I am saying is that that action was not taken recently and the record will show what was done and what was not, and I would like to submit that to you for the record, sir, to try to clarify it.

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

80-321 O - 77-10

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.