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arranging his affairs to minimize the tax legally due. For example, a U.S. taxpayer may operate a business as a sole proprietorship or in the corporate form. His choice of the form most favorable from the tax standpoint is tax avoidance and perfectly legal.
Under U.S. concepts, tax evasion is another matter. It includes failure to pay the tax legally due and it is a crime. Some of the basic criminal provisions of the Internal Revenue Code are:
Section 7201.-Willful attempt to evade or defeat any tax imposed by the Internal Revenue Code or the payment thereof is a felony with a maximum fine of $10,000 and a maximum prison term of 5 years.
Section 1203.—Willful failure to pay tax, file a return, keep records or supply information is a misdemeanor with a maximum fine of $10,000 and a maximum prison term of 1 year. .
Section 7206(1).-Willfully making and subscribing under penalties of perjury a return which is not believed to be true and correct as to every material matter, is subject to a maximum
fine of $5,000 and a maximum prison term of 3 years. There is, of course, a good deal of overlap among these three sections, but it is clear that in the United States it is a crime to willfully fail to report income which is clearly taxable or to willfully claim as deductions amounts that are clearly not deductible. The Swiss divide our crimes
our tax evasion-into two categories,
— ordinary evasion which is not a crime and tax fraud which is generally a crime. The mere omission of taxable income is not criminal tax fraud in Switzerland-it generally would be a crime in the United States—but the presentation of false documents to a tax official to substantiate that there was no omission of income would be criminal tax fraud in most Swiss cantons if the official accepted the documents as accurate.
Senator BENNETT. Failure to check the box is that evasion or fraud ?
Mr. Rossides. The present penalty for failure to declare or in effect check the box has been unfortunately very little used. I will ask Mr. Cole to answer the specifics on what the current penalty is and whether or not it amounts to a misdemeanor.
Mr. COLE. Senator, there is a criminal penalty for failure to file a complete return, but that is not ordinarily imposed in the case where information which is not directly related to the tax liability is omitted from the return. That is why we are considering the possibility of a special penalty for failure to supply this particular information.
The criminal penalty under existing law to which I refer is set forth in section 7203 of the Internal Revenue Code, which provides:
SEC. 7203. WILLFUL FAILURE TO FILE RETURN, SUPPLY INFORMATION, OR
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return ... (other than a declaration of estimated tax by individuals), keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 1 year, or both, together with the costs of prosecution.
Senator BENNETT. And you are considering making this tantamount to a fraud or subject to the same kind of penalty as failure to file a complete return?
Mr. COLE. As far as a criminal penalty for failure to file a complete return, the existing law would appear to provide all that is required. Section 7203 which I quoted above already provides that if a person required to supply any information by the Internal Revenue Code or regulations made under the authority thereof willfully fails to supply such information, he is guilty of a misdemeanor, subject to a maximum prison term of 1 year. That provision would cover the case where a taxpayer failed to answer the question as to whether he had a foreign account. If, instead of failing to answer the question, the taxpayer supplied false information, then section 7206 (1) could be applicable. Section 7206 (1) provides that any person who willfully makes a return which he does not believe to be true and correct as to every material matter shall be fined not more than $5,000 or imprisoned not more than 3 years, or both.
Our main thought, however, with respect to legislation would be to provide for a civil penalty for failure to respond or correctly respond to the question on foreign accounts. Civil penalties can be imposed administratively and there are cases where it might be appropriate to impose a civil penalty where imposition of a criminal penalty would seem unduly harsh or could raise evidentiary or constitutional problems. There are a number of examples under existing law of civil penalties with respect to specific statutory requirements. For example, section 6652 provides a $10 penalty for each failure to file a statement as to the payment of interest or dividends, with a maximum annual penalty of $25,000, unless it is shown that such failure is due to reasonable cause and not to willful neglect.
Senator BENNETT. I understand. I am sorry to have interrupted you.
Mr. Rossides. Not at all, Senator, I think it is helpful having you interrupt, sir.
The second area is on the question of recordkeeping of international transactions. This was a subject which was discussed at length in the House hearings, and in my original testimony in December we pointed out that we simply did not know enough. We had the Treasury task force which was investigating this area, and I asked for a few months to complete our work, which we did in March. The administration's position after extensive study and detailed work with the banking and brokerage houses that are involved in international transactions was that we proposed a substantial recordkeeping requirement for the banks in six categories.
1. Records of foreign remittances transferring funds abroad.
2. Records of foreign remittances transferring funds to the United States.
3. Records of large checks negotiated abroad drawn on banks located in the United States and records of large foreign credit card purchase by U.S. citizens and residents.
4. Records of foreign checks transmitted abroad for collection. 5. Records of foreign drafts.
6. Records of letters of credit and documentary collections. Attachment A discusses in detail each of these six categories. Originally, when we had the discussions in the House, we felt that the normal way would be to give the Secretary discretion to require recordkeeping of items that would be highly useful in criminal, tax or regulatory investigations or proceedings, and indicated that these were the six categories that we intended to specify in regulations.
We now see no problem in actually listing these six categories in the bill itself, in the statute, providing, of course, that the Secretary has discretion to add to or subtract from those items as experience dictates.
We also propose a 6-year retention period for these records.
The question comes up regarding domestic recordkeeping. What has happened is that in this bill there are really two separate areas involved. Number one is the problem of foreign bank accounts and the problem in pursuing an investigation on inquiry. Our investigators cannot operate in foreign territory; the sovereignty of a foreign nation is involved, and only cooperation of the foreign country could lead to direct access to those records.
This bill also deals with the question of domestic recordkeeping, and in that area we have not done the study sufficient to determine what should be or should not be held by the banks.
Naturally, we felt that the normal legislative technique is you give your standard—that is, you require the kinds of records that you believe would be highly useful in criminal, tax and regulatory investigations or proceedings and vest in the Secretary of the Treasury discretion within that standard to require recordkeeping.
We got bogged down in a dispute on aims and means and so on, and the bill presently before the committee has a listing of various bank records that should be photocopied, et cetera, and the thing I want to stress is that this is largely in the domestic area.
In other words, we favor a bill with the international transactions on the one side, which lists those which we have studied and come up with. In the domestic area nobody has done even an adequate study of the kind of records that are needed.
In our judgment, we feel that the discretionary approach here should require the Secretary to continue the study that we are undergoing at the Treasury, and then issue regulations pursuant to the Administrative Procedures Act before we saddle not just the banks—and also the public-because the cost involved here is not going to be borne by the bank, it is going to be borne by the public and the depositories in the bank.
Getting back to international transactions recordkeeping, there are two aspects that I want to stress. You have recordkeeping and then, first, the question of access to the records. Access to these records would be under the normal legal processes that are in being currently—the various discovery procedures and the protections that are involved with respect to access in regard to a particular taxpayer.
The other aspect is possible reporting requirements. You can have recordkeeping and access in a particular taxpayer investigation. The other possibility is to make the taxpayer's banks report all of the transactions to the Government and then the Government can then browse through those records in its own warehouse or office.
This has been under very careful study; it involves one of the key provisions of the bill, sections 241 and 242, which we oppose, because of questions on which we feel quite strongly, unconstitutional searches and seizures, and the right to privacy.
I would like to read that section, Senator, because it is important, and it does
Senator BENNETT. What page are you on in your testimony?
Mr. ROSSIDES. It would start, Senator, in the middle of page 8 of the testimony. I mention this because if you had general access to recordkeeping without aiming at a particular individual, the use of those records for the strictly law enforcement aspect would be enhanced. There is no doubt about that, but we have balanced these factors, and that is why we have come up with a firm decision to delete sections 241 and 242 of the bill. I would like to read in full the testimony in a very sensitive area.
. It starts on the bottom of page 8. If the Internal Revenue Service could survey the foregoing records of the international transactions, either by examining them on the premises of the bank or other financial institutions or by requiring information returns as to some of the contents of the records, the usefulness of the records in providing initial leads to cases of possible tax evasion would be enhanced.
Such surveys, however, would extend the utilization of the records beyond their traditional role as a source of information and evidence in an examination of a particular taxpayer.
The Internal Revenue Code authorizes the Internal Revenue Service to obtain and examine records maintained by banks and others in connection with the determination of the tax liability of particular taxpayers. There is also a statutory basis for arguing that the Internal Revenue Code authorizes the use of compulsory process for a survey of the records of a financial institution located in the United States.
Nevertheless, the Internal Revenue Service has not generally asserted such survey authority, the scope of which has not been reviewed by the courts. We decided against seeking specific statutory authority extending the rights of the Internal Revenue Service to survey the record of international transactions in banks and other financial institutions.
In deciding this, we considered the constitutional prohibition against unreasonable searches and seizures and the need to avoid unnecessary incursions against the right of privacy. While it is clear that obtaining records by established discovery procedures from banks and other institutions in connection with the examination of a particular taxpayer would not violate these rights, provision for a survey of such records raises a much more serious question.
We are also concerned that surveys or information returns could have an adverse effect on legitimate foreign investment in the United States. It has been the tradition overseas to place great emphasis on the privacy of financial transactions and a breach of this tradition could adversely affect the flow of foreign funds to the United States.
Balancing these factors, we concluded that it would not be appropriate for us to suggest legislation extending the rights of the Internal Revenue Service to survey the records of banks and other institutions.
Next we considered the approach taken in section 241 and 242 of S. 3678 and H.R. 15073 which could be used to accomplish the same result by requiring banks and other financial institutions to file information returns setting forth the information contained in the international records.
For the same reasons that we have concluded that we cannot support new legislative authority for the survey of records not tied up to a particular taxpayer investigation, we believe it inappropriate to support legislation requiring reports of information obtained from the records of international transactions. Since sections 241 and 242 of the bills authorize such reports, we cannot support their inclusion unless they are substantially amended. This is a very delicate area which requires full consideration of the constitutional prohibition against unreasonable searches and seizures, the need to avoid unnecessary incursions against the right of privacy, the international reaction, and the needs of the Internal Revenue Service for information. We intend to do additional work in this area with the thought that if a sound proposal can be developed, it will be presented to the Congress.
The third area, Senator, in our five-point program for obtaining information is the area of reports of exports and imports of currency. Certainly one of the methods of operation and concern, particularly in organized crime, is to just take cash out of the country.
So, we are trying to develop a system here of reporting when it comes to $5,000 or more. This is a tough one to administer and would require substantial manpower in Customs, and even then we don't know how effective it will be. But it certainly will be more effective than at present.
The fourth area concerns rebuttal presumptions that U.S. citizens and residents engaging in certain foreign transactions are dealing with their own untaxed income. In that area, Senator, we will be making proposals to the Ways and Means Committee and the Senate Finance Committee on these rebuttal presumptions.
Very simply, a particular case would be the following, where a taxpayer would take an interest deduction on a foreign loan, we would ask for information and he wouldn't give us the information on that loan. The records are in some foreign bank.
Our assumption would be that the taxpayer is dealing with his own untaxed income. We can make certain inferences now, but we feel a statutory presumption would add to our ability to deal with that.
Point five deals with administrative measures. We are thinking here of an intensified enforcement program. We focused on this and the Revenue Service has now focused on this more clearly as well as other Treasury services. For instance, before where an agent may have come across some information in this area, knowing the problems and difficulties of obtaining information from the foreign banks, he might not have pursued a particular audit. Well, now new guides are being presented, new guidelines in the Revenue Service.
There may also be development of a group in the national office of the Internal Revenue Service that may become experts in the area of foreign banks and foreign financial transactions and that can be called upon by the agent in the field. So there is going to be a much more intensive effort administratively, and the number of man-years applied to this, we hope, will increase substantially. That completes the fifth part of the five-part program to obtain additional information and make use of that information.
Now, to turn to page 13 of the prepared testimony where I discuss the administration's proposal for obtaining domestie information, as I mentioned before, basically this bill involves two areas.
One, the international recordkeeping and information gathering, and two, domestic. In the international I pointed out that we came ip with several areas, six areas to be specific, that we now recommend be