REPORTING OF FOREIGN BANK ACCOUNTS

Section 241 of the bill requires reports of transactions with foreign financial institutions that do not make records available to U.S. authorities, which are made by U.S. residents, citizens, or persons doing business here, both acting for themselves or acting on behalf of others. This provision seems to require excessive reporting and raises many serious issues.

Perhaps a more productive approach would be to require that U.S. citizens and residents be required to disclose the existence and identification of accounts they maintain in foreign financial institutions. We are exploring whether such information might be filed with the annual income tax return. Once the Internal Revenue Service knows of an account, it would be in a position to make necessary inquiries.

PRESUMPTIONS

While under the Internal Revenue Code the taxpayer generally has the burden of proof in connection with his tax liability, we are considering whether it would also be helpful and appropriate for certain special presumptions to be established so that information can be effectively used in tax cases where the taxpayer hides behind the bank secrecy laws of other countries and refuses to supply the Revenue Service with information that the taxpayer has a right to obtain.

In discussing the use of foreign secret bank accounts with Internal Revenue enforcement personnel, we have been informed that in a substantial number of cases, it has been established that taxpayers have engaged in transactions with foreign banks in countries that recognize bank secrecy under circumstances in which it was reasonable to presume that the taxpayer's unreported income was involved in the transaction. However, the Service has generally concluded that the evidence available to it would not be considered adequate by a court. We are reexamining this from two points of view.

First, whether under current case authorities, courts might be willing to make factual inferences as to transactions with foreign banks along the lines of the inferences courts now make in passing on determinations of tax made by the Commissioner of Internal Revenue by the use of such methods as the net-worth method and bank deposit method. Second, whether legislative recommendations to effectuate comparable results should be made either because of the limitations of, or uncertainty as to, existing law.

It might be useful if I indicated, by way of example, a specific type of case in which a presumption might be used. In a number of instances, U.S. taxpayers have borrowed money from foreign banks and have claimed interest deductions on the basis of the interest paid. The loan might or might not be perfectly legitimate, but the bank secrecy laws prevent the Revenue Service from obtaining the facts necessary to make that judgment itself. The taxpayer might have deposited his own funds in the foreign bank which could represent unreported income, earned legally or illegally, and have failed to report the income earned by investing such funds. In order to obtain the use of the funds, he might arrange to have the foreign bank purport to lend him his own money. In addition, he could claim deductions for the alleged interest paid on the purported loans.

In such a case, it might be reasonable to require the taxpayer to obtain a full statement from the foreign bank as to the source of and security for the borrowed money and other appropriate details of the transaction and related transactions. For example, a customer of a bank is generally entitled to a full report on his transaction with the bank. In cases where he fails to do this, we are considering whether it would be appropriate to presume that he has obtained from the bank his own untaxed income.

In other cases where U.S. citizens or residents cannot explain their participation in international transactions, and they refuse to make available to the Internal Revenue Service information which they could obtain from foreign banks, we are considering whether it might also be appropriate to presume that the amounts involved represent the citizen's or resident's untaxed income. The Treasury task force referred to is actively looking into the presumption area.

Mr. Chairman, this completes my discussion of areas which the Treasury is studying. We have not submitted a technical analysis of the bill nor discussed all aspects of the bill going beyond the foreign bank account problem. The Treasury task force has the bill under technical review, and our comments in that regard will be made available to the committee in the near future.

In developing new approaches in this area, we are mindful of our responsibilities and the special role of the dollar as the world's major transactions currency and reserve currency. The ability to use and invest dollars is fundamental to the functioning of the international monetary system and has been an important element in the great expansion of trade and investment and has facilitated the prosperity which the world now enjoys. Nothing should be done which would adversely affect the usefulness of the dollar for these purposes. We must proceed carefully in this area since any legislation which inadvertently had the effect of lessening confidence in our currency or our economy could do substantial damage without furthering our objective of improved law enforcement.

In addition, it must be recognized that the use of foreign banking facilities is a necessary and vital element in today's world where international trade and investment play such major roles.

We are also mindful of the precious freedoms recognized by our Constitution, such as the freedom from search and seizure and the privilege against self-incrimination. We also recognize that fundamental to our society is the concept of the right of privacy. And measures which deal with the foreign bank account problem must be consistent with these freedoms.

Mr. Chairman, the Treasury will continue to work on these matters and continue its meetings with banks and other financial institutions. At the completion of this study, the Treasury will be in a position to offer the committee further help in this important work.

In conclusion, the Treasury recognizes that evasion by U.S. citizens and residents through the use of foreign secret bank accounts is a serious enforcement problem for which strong measures are required. The Treasury fully supports the objectives of H.R. 15073 to deal with secret foreign accounts which aid tax evasion and other violations of U.S. laws. We feel, however, that the bill goes too far and that additional work is required to determine the best way to achieve this objective without hampering the free flow of international commerce,

without creating undue cost and administrative burdens on both the private sector and government, while preserving the status of the dollar as the major transactions currency and reserve currency of the world. We believe, Mr. Chairman, that measures can be developed which would not create these problems and which would be effective in helping us fight tax evasion and other criminal activities of U.S. citizens and residents.

The Treasury has given this effort high priority and in so doing will continue its work with other governments and will actively pursue its review of measures which can be developed administratively and by legislation.

Thank you, Mr. Chairman.

Chairman PATMAN. Thank you, sir. Before yielding for questions by the committee members, we will hear from Mr. Thrower.

Mr. Thrower, you may identify the members of your staff who are accompanying you.

STATEMENT OF HON. RANDOLPH W. THROWER, COMMISSIONER, INTERNAL REVENUE SERVICE; ACCOMPANIED BY LEON C. GREEN, DEPUTY ASSISTANT COMMISSIONER FOR COMPLIANCE; BERNARD MEEHAN, STAFF ASSISTANT IN COMPLIANCE; AND PAUL PEPPLER, COORDINATOR, INTELLIGENCE DIVISION

Mr. THROWER. Mr. Chairman, here with me today, to my left, is Leon C. Green, the Deputy Assistant Commissioner for Compliance; sitting immediately behind, are Bernard Meehan, Staff Assistant in Compliance, and Paul Peppler, Coordinator in the Intelligence Division.

Chairman PATMAN. We are glad to have you, gentlemen.

Mr. THROWER. Mr. Chairman and members of the committee, I am happy to appear before the committee today to discuss the experience of the Internal Revenue Service in attempting to assess and collect revenue due the United States in the face of tax evasion using foreign banks under the protection of secrecy laws. The Internal Revenue Service has a real need for information regarding foreign financial transactions in order to properly enforce the tax laws, and we are gratified to see this committee turn its attention to the problem. The secret bank account is the latest in a series of devices designed to frustrate the payment of taxes. We in the Internal Revenue Service are deeply concerned at this sophisticated evasion technique because it saps the vigor of our system of self-assessment of tax liabilities. Indeed, I fear the secret bank account is gradually being associated in the public mind as a way of life for a growing number of individuals and corporations flouting their tax responsibilities.

The extent of our concern about the practice of tax evasion through the use of foreign banking transactions protected by secrecy laws is not measured solely by the amount of tax dollars involved. These practices have a corrosive effect upon our revenue system itself. Perhaps a word or two will indicate the nature of our concern in this respect.

Our tax system is unique in that it is based upon self-assessment. That is a taxpayer consults his own records, searches his own conscience, works up his own tax account, and then pays his bill. Annually

we have more than 100 million tax returns voluntarily filed. That is a phenomenon in many ways unmatched anywhere in the world. And the backbone of the American system is the essentially voluntary nature of the process.

Let me emphasize our regard for the self-assessment system by noting that in all our actions when we decide on IRS policy, when we consider application of available manpower and facilities to fulfill our mission our yardstick in determining priorities is always the extent to which our decisions contribute to strengthening voluntary compliance.

The vast majority of our citizens who willingly assess themselves each year do so on the assumption that others in like manner are meeting their Federal tax responsibilities. We, within the IRS, feel a very heavy responsibility toward those who do comply to assure that the small minority who would avoid their responsibility do not succeed. We seek to assure full compliance across the entire spectrum of our economy, and our society. To the fullest extent permitted by our limitations of manpower, we are giving attention to areas wherever we find evidence of noncompliance.

Applying these standards, we cannot but be alarmed at the apparently accelerating utilization of secret accounts in foreign banks in tax evasion schemes. These practices have been widely publicized and have been utilized both by members of organized crime and by business and professional people. Some of the latter would seem to be the very people upon whom we ordinarily would expect to rely heavily to set a high standard for compliance. For these reasons we welcome the attention being given to this subject by this committee, and we can assure you of our fullest cooperation in seeking to find ways and means through both legislative and enforcement eflorts to eliminate these unfortunate and unhealthy practices.

Special emphasis should be placed upon the fact that the operations of organized crime within this country, a subject of great national concern which has been given high priority within the present administration, are being facilitated by the availability to these criminals of secret foreign bank accounts. To have our enforcement efforts defeated by such devices is especially galling because oftentimes a thorough tax investigation is the only avenue by which the Government can bring leaders of organized crime to justice. Information on these foreign accounts would enhance our effectiveness in this vital

area.

We feel confident that U.S. banks will cooperate with the Treasury Department in determining an effective but not unreasonable burdensome way to make the desired information available to the IRS. Furthermore, it would not seem unreasonable to require the initiator of the transaction with the foreign bank, where he is a nominee or agent, to identify his principals. The Treasury task force described by Mr. Rossides will be considering possible approaches to obtaining information needed by the Internal Revenue Service.

The variety of schemes to conceal financial transactions which we have encountered is indicated by the following:

1. Racketeer money. We have strong evidence of a substantial flow of funds from racketeers in this country, particularly those associated with gambling casinos, to banks in Switzerland, the

Bahamas and other bank-secrecy countries. Some of these funds appear to have been brought back into the United States under the guise of loans from foreign sources. We have reason to believe that this provides a substantial source of funds for investment by the criminal element in legitimate business in the United States.

2. Personal accounts with foreign banks. Accounts in foreign banks are often used as repositories for money representing income not reported on U.S. tax returns, much in the same way as bank safety deposit boxes have been used in this country. False and misleading statements to tax investigators regarding the existence or true ownership of the accounts are the rule in these cases. For information on the existence and nature of the accounts, we generally have been dependent upon informants and the subsequent tracing of transactions through banks in this country.

3. Evasion of collection of tax. We have found taxpayers who, faced with the prospect of enforced collection of substantial amounts of additional tax, have converted assets to cash and transferred the funds to banks in countries with secrecy laws. Practically speaking, collection efforts can be greatly handicapped or thwarted altogether in such cases, I should note here that willful efforts to defeat collection of tax are criminal offenses under section 7201 of the Internal Revenue Code.

4. "Arrangements" with foreign customers and suppliers. In some cases U.S. taxpayers have arranged with their foreign customers or foreign suppliers for the preparation of false commercial documents overstating amounts received from the U.S. taxpayers or understating amounts paid to them. The funds placed in the hands of the foreign conspirators as a result of these falsifications are then deposited with banks in bank-secrecy countries for the credit of the U.S. taxpayers. 5. Transactions in securities. We fear that many taxpayers, by opening accounts with foreign banks and financial institutions, have been able to buy and sell on the U.S. stock markets without disclosing their interest in, or taxable income from, such transactions.

6. Arbitrage and speculation in the money markets, gold dealings, diamond smuggling, and so forth. Reports of deposits of large amounts of currency with New York City banks for the credit of banks in a secrecy country have triggered a number of investigations by the Internal Revenue Service that generally have been inconclusive due to the combination of foreign bank secrecy laws plus extraordinary efforts at concealment by the depositors. Facts and circumstances developed in these investigations, some of which are currently in progress, have led to strong suspicions of arbitrage and speculation. in the money markets, gold dealings, diamond smuggling and similar transactions.

At this point, it may now be helpful, by way of illustration, to review the facts of a few actual cases, some of which, as you indicated, Mr. Chairman, are now under consideration. Examples of alleged loans to racketeers. In one case a payment of $425,000 was made in connection with the purchase of a well-known hotel and gambling casino. Of this sum, $275,000 in the form of a check drawn on a foreign bank was allegedly borrowed from the foreign secrecy bank. In another case an investor in a well-known gambling casino in supplying required information to State authorities reported borrowing $200,000