seems to come from two sources. There are a few IRS personnel who would like the Service to participate in a generalized attack on criminal activity even though that criminal activity involves only indirectly or tangentially violations of the tax laws. Perhaps a greater source of criticism of Service policies in this regard is those law enforcement personnel in other agencies who would utilize IRS special agents (probably the best investigators in the Federal establishment), powers and enforcement techniques in their investigations. I welcome the opportunity to describe the Service's actions, and their rationale, in the hope of fostering an increased understanding of what we are doing and how and why we are doing it. A guiding principle of tax administration should be that the Service's power and its people not be used to further ends other than those of tax administration and tax enforcement. An excellent example of a situation in which the Service's capabilities were possibly misapplied is in the narcotics traffickers program—a "new, all-out offensive" on drug abuse announced by President Nixon in 1971 in which the IRS was instructed to participate. The Service's involvement in this program was unsound from two distinct viewpoints. First, and most importantly, is the fact that the Service was not correctly using its powers of seizure, terminations of taxable years and jeopardly assessments in some narcotics program cases. In some localities when an arrest of a narcotics trafficker occurred, and property or money was found in his possession, the objective of Service personnel in too many cases was to deprive that person of his working capital by constructing an arbitrary tax assessment and seizing that amount of cash which might fairly represent the unpaid tax liability of that person. In some instances the determination of the amount of the deficiency to be asserted would start with the amount of money found on the suspected narcotics trafficker-the notion being. apparently, that such action, depriving the suspect of working capital, would force him out of business. The judiciary became concerned about abuse of these powers. For example, Judge Clark of the Fifth Circuit Court of Appeals observed as follows in the court's decision in Willits v. Richardson:

"The IRS has been given broad power to take possession of the property of citizens by summary means that ignore many basic tenets of pre-seizure due process in order to prevent the loss of tax revenues. Courts cannot allow these expedients to be turned on citizens suspected by wrongdoing-not as tax collection devices but as summary punishment to supplement or complement regular criminal procedures. The fact that they are cloaked in the garb of a tax collection and applied only by the narcotics project to those believed to be engaged in or associated with the narcotics trade must not bootstrap judicial approval of such use."

Even before this strong judicial criticism, the Service had, at my direction, taken steps to ensure that the same standards would be applied in narcotics cases as are applied in tax cases generally. Service personnel have been told that the IRS lacks the authority to terminate a taxable year or make a jeopardy assessment unless such actions are taken in accordance with the law. We must have a sound basis for taking the action in the first place that is, it must be determined if the taxpayer is liable for income taxes in the current or preceding taxable periods, and that circumstances show that the collection of the taxes is in jeopardy. Our employees have been cautioned to take special care to avoid excessive and unreasonable assessments. The tax laws simply cannot be used as a means of effecting forfeitures. However, this redirection of the participation by the Service in this Federal program was met by considerable resistance, within the Service, and more particularly, by other law enforcement agencies, especially the Department of Justice.

Not only did the Service's participation in the narcotics program seem to misapply its prerogatives but, despite the assignment of a disproportionate amount of IRS Intelligence and Audit personnel to the program, the cost-benefit analysis, insofar as collected revenues is concerned, is dreary indeed. During the four fiscal years of its participation in the program, 1972 through 1975, the Service collected only $38.3 million in revenues as against a cost to it of participating in the program of $67.6 million. While the Service's enforcement program is designed to encourage voluntary compliance through the establishment of a deterrent or corrective effect and does not exist primarily to collect revenues, our limited enforcement budget should be applied in the most effective manner possible. It makes no sense to apply our enforcement program resources in a manner which is seemingly abusive of the Service's powers and at the same time results in a costs to collection ratio which is much poorer than that achieved in the general enforcement program.

The Service's participation in Federal strike forces presents a slightly different, though certainly related, aspect of the utilization of the Service's investigative authority. The unification of investigative and prosecutorial capability. which is the central theme of the strike force approach, is certainly one with which the Internal Revenue Service has no basic quarrel. Soon after becoming Commissioner I became concerned, however, about the extent of the Service's commitment to strike force activities and the effect of that commitment upon participation in strike forces at that time was supposedly executed through the existing lines of authority for all compliance and enforcement activities, at least two organizational aspects caused me concern. A departure from the existing lines of authority concept was the assignment of both an Audit and an Intelligence representative to each strike force reporting to the IRS National Office. Since the chief function of these officials was to act as liaison between the strike force attorneys and IRS district and regional officials, and not to direct, supervise or coordinate strike force investigations or projects (responsibility for these functions being with the districts and regions as in other IRS enforcement programs), I saw no need for a duplication of the liaison commitment. Another matter of concern was the fact that IRS strike force representatives were under National Office supervision.

I was, and still am, of the view that IRS audit and investigative activities should not be centralized, regardless of their nature. Experience has shown us that the difficult job of tax administration and enforcement is best solved through the use of traditional lines of authority established at a local level. While controls and guidelines for all of the Service's activities are, and should be, established in the National Office, I was opposed to the adoption of a variant of our existing organizational structure especially tailored for cases involving a specific class of taxpayers.

There has been considerable discussion, in the press and elsewhere, concerning a divergence of view between the Department of Justice and the Internal Revenue Service regarding the extent of the Service's commitment to the strike force activity. In August of last year, former Attorney General Saxbe wrote me complaining, in strong terms, of the removal, by the Service, of the Audit representative to the strike force and of the imposition, by the Service, of a ceiling on the manyears applied by the Intelligence Division to all special enforcement programs. This action by the Service has been greatly misunderstood. The removal of the Audit representative from the strike force unit does not mean, in any way, that the tax cases identified by the strike force unit will be denied an audit capability. It simply means that the Service concluded that since the thrust of the strike force is the investigation and prosecution of criminal offenses, the special agent, representing the Intelligence Division, is the proper individual to represent the Service as liaison in each of the 17 strike force units throughout the country, and that only one person acting in a liaison capacity was necessary. Placing a limitation on the commitment of investigative time to the strike force activity as a whole was felt necessary to assure a balanced intelligence program pending an overall review of the relationship of the drive on organized crime to our enforcement program generally.

At the present time the Department of Justice and the Internal Revenue Service are engaged in discussions which are designed to produce guidelines relating to the Service's participation in strike force activity. While these discussions could be proceeding at a faster pace, and agreement could be forthcoming more rapidly than it is, the discussions have been marked with some progress. For example, at the meeting held last week it seemed to be the consensus of the representatives of the Department of Justice that most United States attorneys would agree not to accept a plea of guilty to an indictment containing both Title 18 and Title 26 counts unless the defendant agreed to plea guilty to at least one of the tax counts. If this particular point is finally agreed upon, it will avoid the situation, which is very damaging to tax administration, where tax counts in a multiple count indictment are dropped at the time the defendant pleads guilty despite the fact that considerable time and effort was expended in the development and preparation of the tax cases. Clearly no tax administration goal is served when tax cases, so laboriously prepared, are dropped by the wayside at the conclusion of the case.

Our paramount concern is, however, that our participation in such joint investigative efforts not be counter productive to sound tax administration. If the IRS agents participating in a strike force "team" become involved in investigations that they would not ordinarily become involved in, either by working on a

case which does not involve a potential tax violation or, though involving a potential tax crime, is not a case to which our normal case selection criteria would apply, the enforcement resources of the Service are not being properly utilized and tax administration suffers.

The issue involved here is who should direct and control the activities of the IRS agents involved in these joint efforts. On this we may have no difference of opinion with our colleagues in the Department of Justice. While the Executive order providing for strike forces designates the Attorney General as the one who is to "facilitate and coordinate" the law enforcement activities of participating agencies, it by no means provides that he, or his delegate, is to control the activities of cooperating personnel. Deputy Attorney General Tyler's testimony late last month before Congressman's Vanik's Subcommittee on Oversight indicates that we and the Department of Justice are at one on this issue. In his prepared statement Judge Tyler, in describing the strike force, stated that “Each agency participates in the planning and retains absolute control over its operation."

If control by participating agencies is admitted, there would seem to be no quarrel over the fact that that control must include the right of the appropriate supervisors to decide what cases—what kind of work—participating personnel are to extend their efforts on. Certainly, IRS agents should not be assigned to work on so-called title 18 criminal violations, that is, cases which involved criminal violations with no tax significance. Even putting aside the fact that such activity would exceed the agent's authority, and would probably involve a misuse of our budgeted funds, such activity fails to serve the ends of tax administration and enforcement. From this it would seem to plainly follow that sound tax administration is not served by directing IRS agents to develop criminal tax cases which fall short of case selection criteria which are specifically designated to establish the corrective and deterrent effect which is essential to a well functioning voluntary compliance system. Service personnel cannot be directed to work cases simply because organized criminal activity is suspected. Agents participating in strike force activities are perfectly willing to receive, from the strike force attorney, information regarding potential subjects for tax investigation, but the Service must make the decision as to whether each case is one on which to expend its limited enforcement resources.

This approach does not detract from the "team" concept of the strike force. Subject to the rules relating to the disclosure of tax return information, Service personnel are perfectly willing to make available to the strike force attorney evidence relating to the possible commission of nontax offenses which they obtain while working the tax case, and to further develop that evidence if it involves going over the same ground and pursuing the same leads as are involved in the tax case. If for some reason the tax case becomes unsuitable for prosecution, but the nontax title 18 case is to proceed, the IRS agent with knowledge of the nontax case will, of course, be available for testifying, and, on a case-by-case basis, available for trial preparation in connection with the on-going nontax case, as long as substantial time commitment of Service manpower is not involved. While the Service is making every effort to work out the differences which may exist between it and the Department of Justice on the strike force issue, it must subject its participation in that program to the same kind of scrutiny it applies, on a regular basis, to all of its activities. A recent study by Internal Audit of the Service's participation in the strike force program in the three largest strike force locations is not encouraging. The study reveals that deficiencies of $122.5 million were proposed in 157 strike force cases developed during fiscal years 1972 and 1973 by agents in these three locations. Of this amount, as of July 1975, only $12.1 million had actually been assessed and, as the same date, only $1.3 million in taxes and penalties had been collected. Not only do the amounts actually assessed represent a very small percentage-10 percent-of the deficiencies originally proposed, but it appears as though the amounts actually collected in these cases may represent a disproportionately low percentage of the amounts actually assessed. Of the $12.1 million actually assessed, $6 million have been either abated or disposed of as uncollectible. Thus, even if the remaining $4.8 million of the $12.1 million actually assessed are eventually collected-a remote possibility-the total amount collected would be just about the same as the $6 million which were either abated or found to be uncollectible and a very small percentage of the amounts originally proposed. These figures do not present a promising picture of the most effective use of our resources.

It is well known that the Service acquires a wide variety of information necessary for the fulfillment of its tax administration responsibilities. This necessity creates the distinct possibility that Service personnel may gather information which is unrelated to tax administration. Here, again, the Service must be especially vigilant to avoid becoming enmeshed in activities unrelated to tax administration. If we do not do this, the lessons of "Operation Leprechaun" and the Special Service staff, have not been well learned. The Service has issued revised information gathering guidelines which instruct its personnel that they are authorized to seek and obtain only information necessary for the enforcement and administration of the tax laws. In the event that information unrelated to tax administration is received by Service personnel, it will not be indexed or associated with the name or identifying symbol of a taxpayer, and procedures are being developed for purging and destroying such information within a short time after it is obtained.

In another area, also, the Service has been especially vigilant not to use illegally obtained evidence against the taxpayer. While constitutional restraints would prevent the use of such evidence against the taxpayer in a criminal tax proceeding, the Service has concluded, even though the issue has not been finally resolved by the judiciary, that it would be inappropriate to use such evidence in a civil tax proceeding involving the taxpayer. In yet a further area, the Service has recently implemented guidelines controlling payments for information received from informants. Not only must the information received be strictly tax related, but such amounts may be paid only after obtaining approval of the Assistant Commissioner (Compliance).

Difficult questions with respect to Service policies and the legality of the use of information are also illustrated in the so-called Operation Tradewinds, and the related "Operation Haven." For some time the Service has been concerned about the use of foreign trust accounts, for example in the Bahamas, as part of a tax evasion scheme. During the early 1960's the IRS received information that certain organized crime figures were using foreign trust accounts, or alleged accounts, as part of attempts to evade U.S. taxation. In some instances funds allegedly transferred to Bahamian accounts were not actually transferred, or if transferred, may have represented amounts that were never subjected to U.S. taxation. In order to obtain information concerning the identity of these depositors, and the amounts and times of deposit, the Jacksonville district office of the Internal Revenue Service commenced an information gathering project named "Operation Tradewinds," later named "Operation Haven." The difficulties of gathering information in foreign countries were made acute by the enactment in Bahama, shortly after the project got underway, of the Banks and Trust Companies Act of 1965. This law provided that it would be unlawful for any person to disclose information relating to the affairs of a bank, or of a customer of a bank, which that individual has acquired in the performance of his duties. After this act was passed very little information was received and Service personnel made few trips to the Bahamas in 1966. As a response to this problem the Service developed during 1966 and 1967, guidelines which authorized the obtaining of information from Bahamian Bank employees through American citizens acting as intermediaries. All contacts by IRS personnel with the informants were, according to the guidelines, to take place only on American soil, with the exception of limited contacts in the Bahamas for the purpose of arranging future contacts in the United States with informants. The guidelines provided that the information was to be received in the United States by an agent other than the agent assigned to go to the Bahamas for liaison purposes. All contacts by Service personnel were to be with an informant and they were instructed not to deal with Bahamian bank officials for purposes of obtaining this type of information. Clearly these guidelines were developed by facilitate the receipt of information from Bahamian sources who might be willing to violate the penal statutes of that country. Equally clearly, they were intended to insulate special agents from the reach of the Bahamian laws. Lawyers in the Chief Counsel's office and in the Department of Justice concluded that conduct pursuant to the guidelines would not result in violations of federal laws by IRS personnel, hence the information so obtained could be used in criminal cases. Whether or not this procedure was then or is now appropriate for a federal agency is a different question. Although jurisdictional problems exist, it is the opinion of Chief Counsel Whitaker that both the intermediary and Service personnel who receive such information in the United States, have violated the abetment and conspiracy provisions of Baha

mian law. Moreover, investigation has revealed instances where the guidelines were violated as a result of violations, by special agents, of Bahamian laws while in the Bahamas.

It seems clear that under the present case law the constitutional rights of a defendant in a potential criminal tax case would not be violated-the only person who could conceivably complain would seem to be the bank official "invited" to violate Bahamian banking laws. However, substantial policy questions exist regarding whether the Service should nonetheless use such evidence in the prosecution of criminal tax law violations.

Reconsideration of the potential problems and policy aspects involved in this manner of obtaining information for use in tax cases occurred as a result of the occurrence, referred to by Deputy Commissioner Williams in the press conference held at the Service last week, of the incident involving the surreptitious removal by an informant in Miami of information from the briefcase of a foreign national and the photocopying of such information by Service employees, while the individual owning the briefcase was with a woman companion arranged for by the IRS informant. As Deputy Commissioner Williams indicated, there are additional legal and policy aspects to this incident. The facts suggest that the information may have been obtained in violation of Federal, and possibly State, laws with at least an inference that the Service's Intelligence Division was involved in such violations. Perhaps more important, is the policy issue of whether evidence obtained in such a manner should be used in tax enforcement, either criminal or civil.

Even if the Miami incident involved only a violation of Bahamian law, it appears somewhat inconsistent to adopt a policy preventing the use, in a civil case, of evidence obtained in violation of federal law (as I have described, above, we have done) and yet permit the use of evidence obtained in violation of foreign criminal laws. Moreover, if a Federal law violation is involved, it must be determined whether the evidence obtained will still be used even though the rights of someone other than the taxpayer have been infringed.

Although our concern about the use of foreign tax havens as part of tax evasion schemes should not, and will not, falter, we should at least consider an entirely different approach. In our effort to deter the widespread use of Swiss bank accounts as devices to avoid U.S. taxes, the focus has been on legislative solutions and discussions with foreign officials, and not on obtaining evidence under questionable circumstances. In the meantime, however, work on Project Haven cases has not ceased. All cases in the field will be reviewed to determine the effect, if any, upon these cases of evidence obtained from the briefcase. Those cases which will not be affected will proceed routinely. We expect to determine promptly the policy to be followed so that this effective enforcement program will not be materially delayed. We welcome the comments of this committee on these issues.

In conclusion, Mr. Chairman, I wish to reiterate that the central mission of the IRS is the administration and enforcement of the Federal tax laws. The Service must do everything reasonably possible to ensure that all of the myriad functions which it performs are carried out with only this objective in mind. Further, and just as important, in fulfilling its tax administration responsibilities, the Service must do so in a way that is completely fair and fully respective of its legal obligations and the rights of taxpayers.

STATEMENT OF DONALD C. ALEXANDER, COMMISSIONER OF INTERNAL REVENUE BEFORE THE SUBCOMMITTEE ON ADMINISTRATION OF THE INTERNAL REVENUE CODE OF THE COMMITTEE ON FINANCE OF THE U.S. SENATE, DECEMBER 1, 1975 I am pleased to appear before you today to explore with you the subject of the role which the Internal Revenue Service can and should play. The Internal Revenue Service has a large, difficult and important role the collection of the revenues and the administration and enforcement of the Federal tax laws. If the Internal Revenue Service's ability to carry out its role is impaired, there will be a serious adverse effect on our system of taxation and Government.

The subcommittee today begins considering what this basic role entails, what additional roles the Internal Revenue Service can and should be called upon to play, and what the costs will be. This analysis is necessary because most of the additional jobs that the Internal Revenue Service is called upon to perform from time to time are necessary and in many cases quite important to society and if they could be performed by the IRS without significant social costs, the Service