entire spectrum of IRS activities. The nature of our organization, of course, requires that communications pass through various levels of authority en route to their ultimate destination. This fact may have contributed to your inference that communications from the Director of Intelligence are often "misinterpreted" by members of the Commissioner's staff before they reach Commissioner Alexander. What normally occurs is that the Director, Intelligence Division makes recommendations to me or prepares correspondence to the Commissioner for my signature. If I elect an alternative course of action to that proposed by the Director, Intelligence Division, it is not the result of misinterpretation of his views but the choice of another option reached after considering the various alternatives. I seriously consider his views when making any decision which impacts on his area of responsibility. You also quote an unidentified member of the Commissioner's staff as having said that Intelligence is "behind the times", and that he "one day would bring Intelligence to its knees." I do not know whether such remarks were actually made by anyone. I can only assure you that they do not represent my views, nor the views of the Commissioner. 8. Adversary Posture of the Commissioner Toward OC&R Section of the Department of Justice First, I would like to point out that in the processing of our criminal cases, our relationships with the Department of Justice continue to be excellent. It is in the area of policy considerations in the application of IRS resources that we have views that may differ from those of some Justice Department officials, particularly in the matter of Strike Forces. I believe we are in agreement that the basic concept of the Strike Force is sound and should be continued. However, I believe our major contribution must come about through our enforcement of the tax laws and tax-related Title 18 provisions. I think it is this posture that may have caused some misunderstanding between our two agencies. However, to label this an "adversary posture" is, in my view, a gross exaggeration of the situation. 9. Restrictions on Legal Use of Electronic Surveillance The IRS does permit the use of electronic surveillance provided the consent of at least one of the participants has been obtained and that certain designated officials grant their approval. In order to conduct electronic surveillance without any participant's consent, it is necessary to obtain a court order under Title III of the Omnibus Crime Control and Safe Streets Act. This statute does not authorize non-consensual monitoring to investigate violations of Title 26. 10. Failure to Endorse and Support Aggressive Fraud Investigations of It is simply not true that the IRS wants to prosecute the "little guy" at the expense of foregoing prosecutions of racketeers and political figures. There have been a significant number of racketeers and political figures prosecuted since Commissioner Alexander took office. To achieve the maximum levels of voluntary compliance with the tax laws, it is necessary that criminal enforcement activities be directed toward all segments of the taxpaying public. This would .include some attention to the "ordinary" tax criminals as well as those involved in organized crime or political corruption. 11. Transfer of Wagering Enforcement to BATF The decision to transfer this responsibility was made by top officials of the Treasury Department. Before making the decision, they reviewed position papers and proposals submitted by both agencies IRS and BATF. The facts cited in your letter regarding the availability of trained IRS personnel and their prior experience in enforcing these statutes were among many factors that were considered in making the decision. I have no doubt that IRS Intelligence personnel are fully qualified and capable to enforce the wagering laws, nor was any such doubt expressed by the officials making the decision. The key factor was to try to derive the greatest benefit from the effective deployment of Treasury's law enforcement personnel. 12. 13. Retirement of the Director, Intelligence Division The Director has stated that he is retiring for personal reasons. The IRS Inspection Service has always had the responsibility to review the procedures and practices of other segments of IRS to ensure adherence to existing laws, regulations and rules. In the light of recent events, it has become necessary to conduct a thorough review of the use of informants by the Intelligence Division. Such a review may require that Inspection be given the names of certain, selected informants for purposes of verification of payments and other procedures. This does not mean that complete lists of all informants used in a given district will be disclosed to Inspection. It does Dean that each Intelligence Division Chief should maintain a list of informants and, upon receipt of a duly authorized request, reveal the names of a selected few informants for test check or verification purposes. This Inspection responsibility is not new, nor is the process of verifying transactions with informants. I believe the current concern on this issue has been sparked, to a great extent, by the recent misleading publicity regarding IRS informants. 14. Restrictions on Pre-Trial Publicity far Beyond the Requirements of the Attorney General's Guidelines IRS guidelines regarding pretrial publicity were designed with two principal objectives in mind. First, they are intended to fix the responsibility for publicizing these actions with the agency that has jurisdiction in the case -- in this instance, the Department of Justice. Second, the guidelines are designed to avoid prejudicing an individual's right to a fair trial by causing excessive pretrial publicity. Both of these are genuine concerns that the IRS must recognize if it is to be successful in its criminal enforcement efforts. On the other hand, we recognize that a prosecutive action can be more effective if it is publicized. For this reason, our guidelines are designed not to restrict, but simply to control our publicity generating activities. Mr. Ryan, let me assure you and the members of your organization that both Commissioner Alexander and I are keenly aware of the need for a strong criminal enforcement program as an integral part of our tax system. We also recognize and appreciate the effective and efficient performance of the Intelligence Division in this regard. is unfortunate that recent events have presented an unfair and distorted impression of Intelligence and of our views toward it. It Once again, I thank you for this opportunity to present our views on these very important issues. Please convey them to your members, along with my reassurance of support for the important role of the Intelligence Division as one of the top law enforcement agencies in the federal service. With kind regards, Sincerely, S. P. Wolfe Assistant Commissioner C. TREASURY POLICY To: Edward C. Schmults, Under Secretary. From: David R. Macdonald, Assistant Secretary (Enforcement, Operations & Tariff Affairs). Subject: Narcotics trafficker program. JUNE 27, 1975. As you requested, I have reviewed Commissioner Alexander's memoranda of June 7 and 9 to the Deputy Secretary concerning the Narcotics Trafficker Program. Although I share the Commissioner's desire that our tax enforcement policies should be equitable and enhance the Service's public image, it seems that we have different opinions regarding the role of the IRS special enforcement programs in achieving those goals. The memoranda raise the following issues: JUNE 7 MEMORANDUM (1) The equity of the IRS tax enforcement policies. (2) The public's reaction to those policies. (3) The use of the IRS authority to terminate tax years and to make jeopardy assessments. (4) The cost effectiveness of the NTP vs other IRS programs. (5) The decline of the NTP activity at a time when there is national concern over the increase in the drug traffic. (6) The allegation that NTP cases have not met the selection criteria that other cases have met. (7) The proposal that resources previously allocated to NTP be allocated to other IRS programs. JUNE 9 MEMORANDUM (8) The advisability of sponsoring new legislation to amend 21 U.S.C. 881 (a) to permit the forfeiture of cash or other property found in the possession of a drug trafficker. COMMENTS (1) Equity of IRS Enforcement Policies For many years IRS enforcement policies have been vulnerable to the charge that they favor those engaged in illegal occupations. In FY 1974, IRS office auditors examined 1,455,000 returns, mostly of low and middle income taxpayers engaged in legal activities. The additional taxes and penalties recommended totalled $335,300,000-$230 per return. During the same year, the IRS Audit Division examined 2,030 NTP cases and recommended additional civil assessments and penalties totalling $69,500,000-$34,236 per case. Even if the NTP figure is discounted as much as 90%, the NTP average would still be 10-15 times larger than the average return from the office audit program which accounted for 82% of all the examinations of individual and fiduciary income tax returns completed in 1974. These figures clearly show that the IRS civil enforcement effort is continuing to concentrate on the "little guy." One reason for that may be that the criminals do not willingly cooperate with the tax authorities. They do not even file returns in many instances. I understand, for example, that a high percentage of the NTP cases-perhaps 25% or more-involve persons who have failed to file income tax returns. (2) Public Reaction to IRS Enforcement Policies The only recent professionally conducted attitude survey related to IRS enforcement policies appears to have been the one sponsored in 1966 by the IRS and the Tax Division of the Department of Justice. It was conducted by the University of Michigan and the results were contained in a study published by the IRS in 1968. The survey clearly shows that the public wants people engaged in illegal occupations to pay their rightful taxes and expects the Government to discriminate in prosecuting and penalizing tax violators. The attached newspaper clippings indicate the favorable publicity developed for the IRS in connection with some of the NTP cases prosecuted in period 1971-1974. (Attachment A) (3) The Use of the Authority to Terminate Tax Years and to Make Jeopardy Assessments The Commissioner's memorandum does not state how many times NTP terminations and jeopardy assessments have resulted in substantial reductions and refunds. The frequency is only described as often. It is my understanding that in more than 4,000 such cases, involving assessments of more than $140,000,000, relatively few taxpayers contested the assessments. In the four years the Office of Law Enforcement was actively involved in the operation of NTP, the IRS reported no more than 8 or 9 cases in which there was adverse court action. The service also makes seizures in connection with its routine collection activity. Those seizures have probably resulted in more adverse publicity than the seizures based on NTP terminations and jeopardy assessments. However, no one has suggested that they be abandoned. Obviously, any summary authority should be used with discretion; nevertheless, virtually none of the revenue realized as a result of the NTP seizures would have been collected if the special assessment procedures had not been used. I fail to see why the use of these procedures should be condemned because they also happen to remove working capital from the illegal traffic in drugs. The precipitious drop in such assessments and seizures from $14,000,000 in FY 1973 to less than an estimated $3,000,000 in FY 1975 may have been a factor in the apparent increase in drug traffic during that period. In my opinion, the IRS has a duty to use terminations and jeopardy assessments to protect the revenue whenever necessary; there should be no reluctance to use its powers, based upon probable cause and in compliance with the statute, just because illegal income is involved. (4) Cost Effectiveness of the NTP vs Other IRS programs The Commissioner's memorandum does not contain enough information to make a meaningful analysis and is, in fact, misleading for the following reasons: (a) The $35 million revenue figure appears to be very questionable. (b) The cost figure used in the comparison is more than twice as large as it should be. The revenue is understated and the cost is overstated. The IRS normally does not have the capability to determine the amount of revenue collected as the result of the assessments made in connection with a given program. To our knowledge, there has been no attempt to develop similar figures for any other program. While we have not examined the procedure used to develop the figures for NTP, the figures cited in the IRS memorandum are suspect. From the inception of the program through the 3rd Quarter of FY 1975, the IRS reported seizures of $32.7 million and total collections of $35 million. The spread of $2.8 mililon is not realistic. Most of the cases against major traffickers which did not involve seizures should have produced several million additional dollars in revenue. Furthermore, the 3rd Quarter FY 1975 report from the IRS (Attachment B) shows a $34.5 mililon figure for collections through FY 1974. It also indicates that collection figures are not available for FY 1975. Under these circumstances, we find it difficult to rely on $35 million as a true indication of what has been collected. On the cost side, the IRS memorandum states that $53 million was expended to collect whatever revenue was actually collected. Included in the $53 million was $32 mililon expended by the Intelligence Division. As most IRS managers well know, the Intelligence Division does not raise revenue. Audit programs are judged on the basis of additional assessments recommended versus Audit costs. Collection programs are evaluated on revenue collected versus Collection costs. The activities of the Intelligence Division are not directly related to revenue collections; its principal purpose is to encourage voluntary compliance with the self-assessment system. Therefore, Intelligence costs of $32 million should be subtracted from the $53 million cited. The NTP revenue raising activities actually cost $21 million. |