It is imperative, of course, that a discussion of the issues that should not be a part of the proper IRS role not cloud the fact that the Service is proceeding vigorously to discharge its obligation to administer and enforce the tax laws. For example, in the recent past the IRS has conducted (as part of its political campaign contribution compliance project) a national program to identify improper tax reporting arising out of campaign fund raising activities. This program, which has a significant number of both audit and intelligence division personnel assigned to it, has resulted in sending a sizable number of information items to the field for further investigation. Generally speaking, also, our activity in the development of criminal tax cases involving corporations has been active-the number of completed Intelligence Division cases involving corporations (many of them major corporations) increased substantially in fiscal 1975 over the prior fiscal period. The Service has also intensified its attention in areas of those tax shelters which defy economic reality and is currently dealing with problems arising out of the abuse of foreign subsidiaries.

In the performance of its criminal law enforcement responsibility the Service fully understands the need to work closely and effectively with the Justice Department to see to it that the tax laws are effectively and responsibly enforced both against those suspected of other criminal conduct and those whose only crime is tax evasion. This spirit of cooperation must, however, be marked with two extremely important aspects. As is stated in our publicly available policy statement, our investigative activities must be "in all respects . . . within the bounds of the law". Next these investigative responsibilities we assume must give due consideration to the Service's limited resources and the allocation of those resources should be made in the way best suited to the fulfillment of our mission.

EXCERPT FROM NAR EXECUTIVE CONFERENCE, BROOKHAVEN SERVICE CENTER, JUNE 8-10, 1976

NARCOTICS PROGRAM

Memo of understanding between IRS and DEA is in process. Commissioner Alexander met with top Mexican officials in El Savador and recently with Dr. Girtz who is the Mexican equivalent of the head of our FBI and DEA. He has pledged his full cooperation to assist us in the drive to enforce the tax laws with respect to high level narcotic dealers.

This is an IRS program and IRS line officials will decide which referrals have sufficient tax implications to warrant devoting our resources to them. There will be no National Office target selection. Cases will be made on their own merit. The Commissioner said he hoped that we will get quality information from DEA on what they have termed "class I violators." It is estimated that there are about 10.000 so-called "big shots." IRS is expected to work closely with Customs and BATF in this program.

The Service has gone forward with a request for more money to restore the cuts in Intelligence to handle both this program and the Corporate Slush Fund program. The Commissioner is convinced and is trying to convince others that we need the money and the people to do the job.

REMARKS BY DONALD C. ALEXANDER, COMMISSIONER OF INTERNAL REVENUE, PREPARED FOR DELIVERY BEFORE THE ANNUAL CONVENTION OF THE TAX SECTION OF THE AMERICAN BAR ASSOCIATION, HONOLULU, HAWAII, AUGUST 14, 1974 Within bureaucratic circles, the IRS is regarded as one of the Federal Government's best organized and best managed agencies. Now, as some of you outside of the public sector are aware, I have undertaken to make a number of changes in the operations of the Internal Revenue. In spite of that fact. I would concur that I find the Service to be, on the whole, an effectively managed institution staffed predominantly with high caliber professional personnel. I am, of course, very pleased that this is the case and that I am able to stand here before you this afternoon and tell you so.

However, in all candor, I could wish the Service's image wasn't quite as good as it is among the leadership of the Federal establishment. In fact, once I even considered-but rejected-the possibility of leaking some trumped-up stories to the press about how poorly we were doing in some areas, so the other Federal

planners and executives would leave us alone and quit trying to give us additional responsibilities, particularly in the non-tax areas.

My discussion of the Service's management image is by way of setting the stage for my topic this afternoon, "Redefining Tax Administration." One of the results of the reorganization which the Service went through in the early 1950's was that it came out of that exercise with a very modern, orderly organizational hierarchy. A good hierarchial structure, when you see it on a wall chart, looks rather like a pine tree-you know, like a child's image of a Christmas tree. The IRS has presented such an attractive Christmas tree to the various Federal policy makers and planners over the past 15 or so years, that they hung a number of ornaments on us that did not really belong there.

During that period of time, the Service became involved with the enforcement of the expanded Fire Arms Control Act, information gathering for Revenue Sharing, the Economic Stabilization Program, the enforcement of Federal energy conservation activities during the past eight months or so, and presently some are talking about the possibility that the Service would be the organization to administer the income maintenance or so-called "negative income tax" program for reforming the Nation's welfare system.

In this particular case, they have said, "Now, the Internal Revenue is so well organized and so well managed that it would carry off the job most effectively". But surely the Internal Revenue Service does not have a monopoly on effective techniques of organization and management in the Federal Government. Then it was suggested that this program, which is admittedly going to be a very sensitive one regardless of who administers it, would be better placed in the Internal Revenue Service because Congress won't interfere with us as much as they would with other agencies. A response to that is found in a volume of transcripts from the Montoya hearings almost a foot thick. You know, I have spent a lot of my time with the Senator and his committee during the past year. But then they said the Internal Revenue Service would be less emotional about running this very controversial progam. Well, maybe tax men are a little more calculating and rational than social scientists and economic planners. But all they've really said is that it's going to be a hard job to do right; well, so is tax administration!

Now, I don't mean to imply that the IRS will shirk its duties. If something is really part of the tax system, it is indeed our responsibility. But it doesn't become part of the tax system simply because it may be labeled as such. Having said that, I will now say that if a job is assigned to us in the future, we will do our best to do it—just as we have done in the past.

Tax administration is always going to be a hard job. What's more, no matter how well IRS does it, there will always be room for improvements. I would like to discuss with you this afternoon some of the things that we have done, that we are doing, and that we are going to try to do in order to improve Federal Tax Administration.

It is no accident that I have chosen to group these efforts to improve our management of the nation's Revenue laws under the title "Redefining Tax Administration". Over a period of years, the definition of "Tax Administration" has been altered and expanded to the point that some of our important basic goals and responsibilities have either been subsumed or jeopardized. This diffusion of purposes and resources has been brought about, in large part, by three different sets of influences. The first has been through placing additional responsibilities upon the tax administration organization. The second has been through the use of the existing tax procedures and powers for purposes other than those of the tax system itself. The third, of lesser concern to the tax administrator, has been through the revision and expansion of the Internal Revenue Code to include provisions whose principal purpose is other than that of raising revenue or defining what should be taxed. Each of these actions or, rather, groups of actions, has had an influence upon the manner in which the definition of "Tax Administration" has evolved over the years. These same influences have also affected the manner in which the Tax Administration charter has been carried out.

Even prior to my coming with Internal Revenue, I had become concerned with the degree to which I believed that some of these factors were impinging upon the administration of our tax laws. My experience as Commissioner showed me that my concern was well placed, and I began to take steps to ameliorate this situation. I would like to spend the next few minutes discussing some of the results of these efforts.

With respect to removing the inappropriate ornaments from the IRS Christmas tree, I believe we have made very good progress. The Alcohol, Tobacco, and Firearms organization was transferred from the IRS to the direct jurisdiction of Treasury Department in 1972. Still, the Internal Revenue continued to provide its former component with administrative support in a very large way throughout the Fiscal Year 1972. Today, however, the Alcohol, Tobacco, and Firearms Bureau of the Treasury is very largely on its own, and the support resources which the IRS had been expending on the ATF organization are now once again available full time to support the busines of Tax Administration. Of course, in a more dramatic and massive area of activity, the Service divested itself of its enforcement functions under both the Economic Stabilization and Federal Energy Programs. The death of the Economic Stabilization Program was mandated by Congress, so we can take little credit for that. However, the Service was under some pressure to retain some of its enforcement functions for the Federal Energy Office for an indefinite period of time. I am pleased to say that we successfully managed to stave off that particular initiative.

Although none of the three activities I have just mentioned affected our interpretations of the tax laws or the manner in which we administered them, they did affect the levels of service which we were able to provide, and in some cases, the quality as well. For example, Taxpayer Service Representatives, whose principal function is to respond to public inquiries and offer assistance to those in need of help in meeting their tax obligations, were seriously affected by our involvement in the Economic Stabilization and energy enforcement activities. In many locales, taxpayers had to compete with citizens seeking information regarding these other, non-tax activities; and I make no bones about it, we do not have these Taxpayer Service Representatives in sufficient number to meet the legitimate demands of the taxpayers, as it is. Moreover, these Representatives were required to learn and maintian up-to-date operating knowledge of not only the Internal Revenue Code, but the Stabilization and Federal Energy regulations as well. Now, with the departure of these two programs, we anticipate a significant increase in both the quality and quantity of the Taxpayer Service we will be able to provide. We will also be able to return slightly more than 1,000 experienced Revenue Agents to the field and the auditing of tax returns. Added to that, of course, our administrative people will now be able to devote their full time to the support of tax administration.

While the kind of influences which I have just cited have a measurable effect on both the level of resources devoted to the tax administration effort and the quality of that effort, they do not significantly affect the integrity of that effort. There are influences, however, as I indicated earlier, which do affect that integrity. These influences arise most often when either the framing or the application of tax laws do not have the raising of revenue as their principal objective. For centuries, governmental power to tax has been used in a multiplicity of ways transcending the simple, straight-forward function of raising revenue. Taxation has been used as an agent of morality-witness the traditional taxation on alcohol, tobacco, and other drugs; gaming and amusement devices, etc. Taxation has also been used as a private tool-a number of years back, there was a special tax on margarine to make butter more competitive against it. This was pushed through the Congress by the dairy interests, and the Internal Revenue Service administered it during the 1920's and 30's.

Today, fortunately, the United States has only a limited number of such taxes. For those few which we administer, I believe it is of utmost importance to the integrity of the Tax Administration that we do so with impartiality, and, in the absence of any Congressional charter to the contrary, that we place no particular emphasis on any one tax or group of taxes over that which we place upon any other.

For the Internal Revenue Service to place a disproportionate emphasis on collecting one particular tax or enforcing the revenue laws for a particular group of people, in effect, puts the Service in a position of setting itself up as a judge between good and bad in our Society. Clearly, under such circumstances, the IRS ceases to view all taxpayers as being equal before the law. Such practices by the Service, however rightly viewed and supported by other forces of the Federal Executive, by Members of Congress, or even by a large portion of the population in general, can only serve to the detriment of the integrity of the Tax Administration System. Selective enforcement of tax laws, designed to come down hard on drug dealers or syndicated crime, for example, may be applauded in many quarters, but it promotes the view that the tax system is a tool to be wielded for policy purposes, and not an impartial component of a democratic

mechanism which applies equally to all of us. I need not tell you here this afternoon that the Service is already having some public image problems in that respect.

One aspect of this program applies to public institutions across the board. We are victims of our own image making, because after all, pubile policy makers, planners and bureaucrats are also members of the public at large. The images which we create with our press releases and our public statements feed back to us and we believe what we are saying and we build on that. Let me give you an example of what I mean. Back in the 1930's, almost by accident, we stumbled upon the efficacy of the Bureau of Internal Revenue in combating organized crime, which had, up to that point, been practically impervious to the standard methods of law enforcement. So, tax problems got Al Capone and a number of the other more notorious luminaries of the criminal world during the 1930's. Internal Revenue performed impressively, and the public, at the urging of the media, was impressed. In fact, we impressed ourselves as well. Gradually, law enforcement officers and public leaders began to see in Internal Revenue a useful tool that they could apply not only to organized crime, but to other areas of criminal activity which were difficult to detect and to prosecute under traditional law enforcement methods.

During the period of social and political turmoil, which began in the 1960's and developed up through the early 70's, the forces of hard-line law and order promoted the use of the Internal Revenue Service as a generalized tool for criminal law enforcement. IRS participation in the Organized Crime Drive of the Justice Department and in Federally-led strike forces in the major cities around the country were the first manifestations of this movement. Following that, there came the Narcotics Traffickers program. In part as a result of the adoption of this general philosophy, in 1969 Internal Revenue created a staff to collect information on the financial affairs of a variety of right and left wing organizations. Congressional Committees and others were concerned that these organizations were being used to funnel tax-exempt money into various violent activities. Although this Special Service Staff did nothing but collect information and forward it for review by different functions, I ordered it terminated on August 9, 1973, because its existence implied that the Servce was concerned with activities, legal or illegal, that had little direct relationship to the administration of the tax laws. My point in bringing up the Staff and the other special law enforcement applications of the IRS is to indicate the degree to which the orientation of the Internal Revenue Service, and thus, the "definition" of Tax Administration was being altered by its selective use over that period of time.

This reorientation of purpose was manifested by Service operations in a variety of ways, both large and small. An example was the Service's reaction to tax resistance related to the Vietnam War. During the late 1960's, antiwar groups identified nonpayment of the telephone surtax as having great potential to disrupt the tax administration system, and they urged, through their publications and at their gatherings, that people engage in large scale noncompliance with this tax. Now, the amount of this tax is extremely small-it generally comes to only one or two or three dollars per month for most individuals-while the cost to the IRS to bring its active collection process to bear on such delinquencies is obviously many times in excess of those amounts. The antiwar groups were well aware of this disparity and they made their intentions clear in their public statements. They hoped to bring the nation's tax collecting mechanism to a halt by overwhelming its resources with thousands of tiny delinquent accounts.

Obviously, they did not achieve their objective; nor did they even come close. Still, in some of our largest districts, they did manage to generate a substantial number of delinquent accounts to which the Service's reaction was precisely as they had anticipated. Many Revenue Officer manhours were wasted by deciding to emphasize the collection of these delinquencies, giving them a higher priority than the collection of delinquencies arising in the normal course of IRS operations. I have ordered a stop to such selective priority-setting. Once again, however, it is not my intention here to debate the correctness of the response to a particular situation. My point here is that the definition of Tax Administration was permitted to stray from its proper emphasis. If our Tax Administration is either permitted or encouraged to respond selectively to such socio-political phenomena as are likely to crop up from time to time in our pluralistic nation, or if it permits itself to be used as a selective tool which places criminal enforcement or other criteria before revenue collection and enforcement, we may be jeopardizing our traditional tax administration processes, both from the standpoint of the most

effective use of our resources and from the standpoint of the public's faith in an impartial, non-political tax system.

Now, what have we in the IRS done to "redefine" our working understanding of Tax Administration? In addition to doing away with the Special Service Staff, we have changed the criteria for IRS involvement in antinarcotics and strike force activities. Today, such activities must satisfy the revenue and professional criteria which have long been established within the IRS as guides for channeling our resources. In other words, in the future, special activities will have to compete openly and equally for resources against our regular tax administration activities. At the same time, we are tackling influences which have, over the years, crept into our own standard practices and procedures. I have reference not so much to manifestations of selectivity such as the telephone surtax situation, but rather to the more subtle incursions into our basic enforcement policies and procedures.

Now, I am sure you all know the Service's resources have never been sufficient to permit us to audit anything more than a small percentage of the total number of returns that are filed each year. Over the past 25 years, a number of policies and procedures have been developed to assure that the Service, and ultimately the public, get the maximum utility out of their tax collection dolllar. Many of these developments have been wise and fair; I am thinking particularly of the Discriminant Function, or DIF technique which, on the basis of mathematically determined criteria, identifies returns whose characteristics suggest a high probability that they contain erroneous items. A measure of the effectiveness of this technique is reflected by the fact that, while roughly 41 percent of our audits generated no change in tax liability prior to the use of the DIF technique, only 28 percent of the returns selected for district audit by our computers applying the discriminant function criteria resulted in no-change determinations.

Our Taxpayer Compliance Measurement Program is also quite effective in identifying areas of noncompliance. We are also constantly improving the quality of our audits as well, both through improved methodology, such as package audits, and through the application of modern technology as represented by our expanding program of computer-assisted audits. While we have been developing these and other sound programs for enhancing our effectiveness, however, we have also evolved some policies and practices which, although initially based upon apparent logic, may have generated counter-productive tax administration decision making.

For example. the Service has had a long-standing policy which encouraged field personnel to concentrate enforcement efforts on cases with maximum "publicity potential", and stated, in part, that the purpose of criminal enforcement was to make an example of the offender. The original intent of this policy was clear, and laudable to the extent that it achieved its goal-that is, maximizing the deterrent effect arising from those cases which we successfully completed, by assuring that the public in general was made aware of the Service's enforcement activities. However, this policy, like those resulting in an excessive emphasis upon drug dealers or antiwar protesters, could have the effect of directing a disproportionate share of the Soviet's enforcement efforts and resources toward a relatively small segment of our total population. This might mean that certain other portions of our society would escape their obligations. Both aspects, in my view would seem inappropriate from the standpoint of a fair and impartial administration of the nation's revenue laws.

Along much the same line, our own fascination with the Service's image as a "law enforcement" agency began to affect the manner in which we applied certain of our enforcement policies. For example, a long-standing IRS procedure cautioned against the uncoordinated pursuit of civil enforcement actions where a criminal enforcement action was pending. The original purpose of this policy was to avoid accidentally imperiling the criminal prosecution potential in such circumstances.

In application, however, the policy gradually led to a situation in which our normal audit and collection activities began to adopt a "hands-off" attitude toward all taxpayers against whom a fraud investigation was pending. This attitude applied regardless of the potential merits of the pending fraud investigation or the degree of relationship between the fraud issues and the legitimate civil atcions which the Service might have pending regarding the taxpayer. Now, this was a prime example of public policy being set by bureaucratic momentum ; organizational practice translated an otherwise prudent procedure for coordinating certain exceptional situations into a reinterpretation of the basic tax ad