INTELLIGENCE

ACTMTIES
SEMTERESOLUTION 21
-. -~- ~..- __~.-~~ ..-

HEARINGS
BCI‘ORE THX

SELECTCOMMITTEETO STUDY
GOVERNMENTAL OPER~ATIONf3
WITH
RESPECTTOINTELLIGENCE
ACTIVITIEi3
Or THE

UNITED STATESSENATE
NIX’ETY-FOURTH CONGRESS
FIRST SE9YIOV
L *

VOLUME 3

INTERNAL, REVENUE SERVICE

OCTORER 2, 1973

I’riutc-rl for the uw of the> Selrcl C’ommittee To Study Govc’rnmc?xta:

Operations With Respect to Intelligence Activities

U.S. GOVERNMENT PRINTING OFFICE

-__--I-__-_______--
For sale by the Supsrintenrlent of Ikxuments. U.S. Government t’rinting Olfice
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SENATE SELECT COMi\lITTEE TO STUDY GOVERNMEKTAL OPERATIONS
WITH RESPECT TO ISTELLIGENCE ACTIVITIES
FRASK CHURCH, Idaho, Chairman
JOHN G. TOWER, Texas, Vice Chairman
PHILIP A. HART, Michigan HOWARD H. BAKER, JR., Tennessee
WALTER F. MONDALE, Mnnesota B.1RRT GOLDWATER, Arizona
WALTER D. HUDDLESTOS, Kentucky CHARLES JIcC. MATHIAS, JR., Maryland
ROBERT MORGAN, Sorth Carolina RICHARD SCHWEIKER, Pennsylvania
GARY HART, Colorado

WILLIAM G. MILLER, Staff Directo?

FREDER~CI~ A. 0. SCHWMZ, Jr., Chief Counsel
CURTIS R. S~IOTHERS. Counsel to the Jliuwitv
AUDREY H.ITRY, Clerk of the Committee

(II)
 CONTENTS

HEARING DAY
Page
Thursday, October 2, 1975------------------“-------------------------- 1
WITNESS
Donald C. Alexander, Commissioner, Internal Revenue Service ; accom-
panied by Singleton Wolfe, Assistant COmmiSSiOner, Compliance; War-
ren Bates, Assistant Commissioner, Inspection ; Meade Whitaker, Chief
Counsel ; Thomas J. Clancy, Director, Intelligence Division ; William E.
Williams, Deputy Commissioner--- _____ - ______------_-_-_--- -------- 4
HEARINGS EXHIBITS 1
No. l-November l-2, 1972 IRS report; Subject: The Special Service
Staff ; Its Origin, Mission, and Potential----- ____ - ______-_----- - 39
so. P-August, 1969 memorandum to the Director, Federal Bureau of In-
vestigation from the Assistant Commissioner (Compliance), IRS ;
Subject : Request to be placed on Dissemination List.
August 15, 1969 memorandum for Mr. W. C. Sullivan from D. J.
Brennan, Jr. Subject: Internal Revenue Service (IRS) Investiga-
tions of New Left and Extremist Organizations and Individuals-- 42
So. 3-April 14, 1964 excerpt from communication to Director, FBI from
Special Agent in Charge, Atlanta----------- __-__ --_- _________-_ 45
No. PFebruary 2, 1967 memorandum; Subject: IRS Briefing on RAM
PARTS -__----______-_-__-----~~-~~-~~-~--~-~~--~---~~~-~~~~~ 46
No. j--December 6, 1972 memorandum to District Director, St. Louis Dis-
trict, Internal Revenue Service from Chief, Intelligence Division,
San Francisco District; Subject : Tax Protest Movement, with ex-
cerpts from attached lists of individual,s and organizations------ 48
No. GJuly 9, 1974 memorandum to Special Agents, IG C R Group, Jackson-
ville District from Group Manager. IG & R Group, Miami, Florida ;
Subject : Payment to Confidential Sources (Informants).
Handwritten note entitled, “Instructions from J. K. W.“---------- 53
So. 7-Chart of the Organization and Functions of the Internal Revenue
Service: Organization of the Office of Assistant Commissioner
(Compliance).
Map of Regional and District 05ce.s of the Internal Revenue Serv-
ice --_______-__--__-_--____________________------------------ 57
So. %-June 6, 1974 letter to Donald C. Alexander, Commissioner of In-
ternal Revenue from Assistant Commissioner (Inspection) with
attached Internal Audit Report on the On-Line Audit of the Nar-
cotics Traffickers Program-Termination Assessments, with attach-
ments ---__-____-_--_--~--____________________~~~~~~~~~~~~~~-~ 59
NO. 9-April 18, 1973 memorandum to Chief, Audit Division, Chicago,
Illinois, from Chief, Intelligence Division, Chicago, Illinois ; Sub-
ject : Request for Services of Accounting Clerk [deleted]--------- 78
R'O. l@-Excerpt from 1974 IRS Internal Audit Report- _________________ 79
NO. U-April 15, 1975 letter to U.S. Attorney, Los Angeles, California from
Group Manager, Intelligence Division ________ - ______ - ____ -___-_
NO. 12-List of Intelligence Gathering and Retrieval Unit (IGRU) Data--
 IV

Iio. 13--august 24, 1971 memorandum to District Directors, Midwest

Region, Attention : Chief. Intelligence Division from ARC-Intel-
ligence, Midwest Region ; Subject : Operation Mercury.
August 11, 1974 memorandum to Regional Commissioner, Mid-
west Region, Attn : ARC-Intelligence from Intelligence Division,
Washington. D.C. : Subiect : Oueration ~~ercurr~-----~--------- 87
so. 14 Sol-ember 5, 19iO ‘memorandum to : All District Directors, South-
east Region from ARC (Intelligence) I, Southeast Regional Office ;
Subject: Operation Bird Dog. -
Zjovember 5, 1970 memorandum to Director, Intelligence Division,
National Office from ARC (Intelligence), Southeast Regional
Office; Subject : Operation Bird Dog.
Sovember 17, 1970 memorandum to Regional Commissioner, Mid-
west Region. Attention : ARC-Intellieenre from Director. Intelli-
gence Dyvision, Washington, D.C. ; cub&t : Birddogging Opera-
tion involving Muhammed Ali-Jerry Quarry Fight.
November 8, 1971 memorandum to Regional Commissioner, Mid-
west Region, Attention : ARC-Intelligence, from Chief Intelligence
Division, St. Louis District; Subject: Operation Bird Dog.
Involving : Muhammed Ali-Jerry Quarry Fight, Final Report---- 89
So. 15-October 1, 1971 letter to Sprlngfleld Police Department, Spring-
field, 1Iissouri from Special agent. Internal Revenue Service.
October 11, 1971 letter to Special Agent, Intelligence Division,
Internal Revenue Service, from Chief of Police, Springfield, Mis-
souri, and Detective. Identification Dirinion~~~~~-~~~~--________ 94
So. l&-December 1, 1969 and November 2, 1970 examples of bi-weekly
reports of the Specal Service Staff of the Internal Revenue Service
to Assistant Commissionr (Compliance) dated December 1, 1969
and November 2, 1970--__-_--_--_________________________---- 96
No. 17-List of Federal Agency Requests for Tax Information----------~ 103
APPENDIX
Questions by Senator Goldwater to Commissioner Alexander Concerning
IRS Activities. and Commissioner iilexander’s Resuonses------------- 104
Attachment 1-.4greement on Coordination of Tax Administration
with the State of Ohio Provided to the Senate Select Committee
by Commissioner Alexander-_---------------------- _____ - _____ 106
Attachment X-Internal Revenue Service Manual Supplement----- 116
 IYTELLTGENCE ACTIVITIES-ISTERN.4L REVENUE
SERVICE

THURSDAY, OCTOBER 2, 1975

SF,I,F:CT COMMITTEE TO ST1-DT GOVERSJfEST;\L @%RhTIoNS

WITH RESPECT TO ISTELLIGESCE AC~TIVITIES~
Washington, D.C.
The committee met. pursuant to notice. at lO:O:‘, a.m.. in room 318,
Russell Senate Office Building, Senator Frank Church (chairman)
presiding.
Present : Senators Church. Tower. Mondale. Huddleston, Morgan,
Hart (Colorado). Raker, Mathias. and Schweiker.
Also present : V’illiam G. Miller, staff director; Frederick A. 0.
Schwarz, Jr., chief counsel. and Curtis R. Smothers. counsel to the
minorit\-.
The CIIAIRX~S. The hearing will please come to order.
The Internal Revenue Service is one of the largest repositories of
raw intelligence information in the United States. It has ‘700 offices
spread across the country. and it employs over 88.000 people? includ-
ing more than 2.jOO spe’cial agents. The data collected by this behe-
moth lay bare the lives of 80 million individuals who file their tax
forms each year.
In meeting our obligation to pay taxes on our earnings and thus
support this country, we reveal to the IRS some of the most private
and personal aspects of our lives. We tell the IRS for whom we work
and how much money we make. We tell the IRS not only how many
children we have, but additionally their educational achievements.
We tell the IRS how me spend and invest our money, what charities
we favor, and how we contribute to the churches we attend.
Upon examination of the lo40 income tax return, which the vast
majority of us are required to file with IRS, one can determine if
we suffered an extensive illness during the previous year, whether we
bought eyeglasses, and the extent to which we traveled. In short,
informatlon we furnish the IRS constitutes an accurate profile of
our lives and our lifestyles.
Moreover, the IRS conducts special tax audits and investigations to
gather still more information. Unlike other intellsigence agencies, the
IRS can obtain financial information upon demand, without a
subpena.
The IRS is an intelligence agency in two respects. First? it is a vast
reservoir of detailed personal information about Americans, and sec-
ond, it conducts intelligence-collection activities through its own in-
telligence division.
(1)
 2

The committee intends to explore both aspects of the IRS. In par-

ticular, we mill examine closelv wavs in which other intelligence serv-
ices have made use of the IRS-as a lending library of tax information.
This great storehouse of data on American citizens has proved to be
irresistibly tantalizing to other Federal agencies, particularly the
FBI.
The controls over the use of tax information which the IRS releases
to other agencies are inadequate. The committee has found evidence
indicating that. the FBI has widely misused IRS tax information to
disrupt ,olitical activists. Tax return confidentiality has eroded to the
point w Inere our Federal Government. has turned these supposedly
private documents into instruments of harassment used against citizens
for political reasons.
If the law does not assure that tax returns filed by Americans will
not be turned against them. our system of voluntary compliance with
the tax laws faces a doubtful future. The committee will go into this
misuse in detail nest month. wi-ith our hearinps on the FBI COINTEL
PRO (Counterintelligence Program) activities.
Today, though, we wish to open this subject by looking at the IRS
as a collector of intelligence.
Most Americans pay their taxes voluntarily and honestly. A few do
not. Because of these fe\r, the IRS has an Intelligence Derision com-
prising 2.700 special agents. whose job is to investigate cases of crim-
inal tax fraud.
The principal area of inquiry the committee will consider this
morning with Commissioner Donald C. Alexander has to do with the
scope of intelligence practices required by the IRS to do its job of
collecting the taxes. We especially wish to learn to what extent the
IRS intelligence capacity has been. and to what extent it should be,
employed in the service of objectives which fall outside the strict
realm of tax compliance. For example, a branch of the IRS, called the
Special Service Staff [SSSl. now defunct, had the task of inresti-
pating political activists. It was abolished by Commissioner Alex-
ander shortly after he took office in 1973.
One wonders horr an agencv designed to collect revenue got into
the business of defining and ihvestipating political protesters. There
vere some 8.000 individuals and 3.000 organizations on the SSS list.
The incredible overbreadth of the Special Service Staff target list can
only be appreciated by hearing some of the SSS list of suspects.
Let me refer to some of the organizations that were on the list: the
American Civil I,iherties IJnion. the American Lihrarv Association.
the Conservative Book Club, the Ford Foundation. the Headstart pro-
zram. the S,4A42cP. the Law,vers Committee for Civil Rivhts Under
Law. the University of Sorth Carolina. and approximatelv 50 branches
of the National Urban League. ,4pparently, someone in the IRS or
the FBI, and other outside contributors to the program, felt that
these groups and individuals, plus many more, warranted special tar-
geting for a concentrated tax-enforcement prosram. In essence, they
were to be punished bv the IRS for their political views.
Lists like this one highlight a most disturbing asnect of the IRS
and other intelligence services. Thev seem to hare an almost inexorable
need to amass information for its’own sake, and to find new reasons
 3

for expanding intelligence collection-in the case of the IRS. reasons

which mav brar little relationship to the needs of a tax collection
apencv. Worse vet. the giant agencits bcpin to run out of control
as administrators face the diflicnlt task of knowing what is going on
within their own mnshroonling organizations. These are the dilemmas
we wish to discuss today with the Commissioner of the IRS.
Refore n- I move to the Commissioner, I Avant to tlefer to Senator
Tower. if ., ou lvould like to make an opening st.atement, Senator.
Senator TOWER. Thank you. Mr. Chairman.
Amplifying on your statement that an abundance of intelligence
data may pose a danger in and of itself. I am of the view that toda,y’s
hearing moves the committee into another phase of our examination
of the impact of governmental intelligence-gathering activities on
fundament.al concepts of privacy and individual liberties.
Agencies involved in clandestine collection on the international
scene have acknowledged some incidental threats to the privacy and
safety of American citizens. The rationale has been the need to main-
tain a vigilant watch on the national security.
Our examination of the Huston plan revealed a coming together of
national security and concerns for enforcement of the domestic crimi-
nal 1alv-s. The potential threats posed bv both areas of activity are real,
and I do not seek to minimize our concern. We are indeed fortunate
that deadly biological agents never left the governmental laboratories
where thev were stored.
Our N&on and fundamental freedom are the winners when, for
whatever reasons. a comprehensive spving effort like the Huston plan
is vetoed. The need for national security and criminal law enforcement
are clearly legit,imate concerns7 and I firmly believe that needed legis-
lative reforms can be fashioned to correct abuses n-hile preservmg
necessary and proper intelligence efforts in these vital areas.
When I apply the same standards to the intelligence activities of the
IRS, Mr. Chairman, I am far less sanguine on the issue of the need
for such efforts by the tax collector. I am deeply concerned about the
purpose of IRS intelligence-gatherin, v activities. This concern is two-
fold. First. there appears to be a belief that enforcement of the tax
laws, as they relate to evasion of payment. is viewed as a matter to be
handled completely within the IRS structure, as opposed to a situation
warranting the attention of agencies charged with enforcement of the
criminal statutes.
Evasion of taxes is a crime. However, I question the need for IRS
surveillance of nightclub patrons as an investigative technique. I am
uncomfortable with the notion that. driving an expensive automobile
to the parking lot of a stadium Iv-here a prize fight is being held should,
standing alone? subject one to IRS scrutiny. In a nation which has al-
ways insisted upon the presence of reasonable grounds or probable
cause as a basis for the focusing of its law enforcement apparatus upon
the private citizen! there may be, a real need for reassessing the pro-
priety of vesting police pan-ers in an agency which is, or should be,
primarily concerned with collecting revenue. But at least these efforts
purport to be in discharge of the agency’s basic mission.
Of far greater concern to me is a second purpose for much of the IRS
intelligence effort. That is the apparent reliance upon intelligence-
gathering as a vehicle for protecting the image of the IRS. I refer par-
 4

titularly to the intelligence activities which were apparently initiated

in rrsponse to c~ongressiwal or cxwutive branch inquiries questioning
the vigor or e~ei~hni~dediiess of IKY efForth agxjnst prominent, in-
diriduals and orgauizntions.
\Ve must not allow any agency of thi.; Crovcrnment to insure its
cxistcncc or prestige h,y amassing files on citizens solely for the pur-
pose of heinp in a position to represent that it has spied on the right
as t~horoughlp as it has scrutinized the left. t,hat it is as vigilant wit,h
nonprofit corporations as it. is with gang5ters. The invasions resulting
from such actions far outweigh any need for wsurances of IRS ob-
jectivity and only open wicler the door that wmld make IRS an un-
ITittinp tool of thaw who wonld make imp1opc~r or illegal use of such
information.
Jlr. Alesander. I hope that you might shed some 1iEht on the per-
ceived nerd for IRS in~~~lligence. if any. and t?w need for spending the
rapabilities of IRS in the field. as compared with other law enforce-
llleiit agrencies w11o nli,ght assist in fcrretiii~ wit criminal tns evasion.
.\nd. finnllv. n-hat. if XJIV. ndclitional o.uirlance the Congress might
legislate to’ insure that, the revenue will be collected with minimum
invasion of the taxpaver-citizen’s rights.
Thank you. Mr. Chairman.
TEJP C&RMAS. Thank mm. Senator ‘rower.
And now, Mr. Alexander, if you r~ould please stand and take the
oath.
no you solemnly s\war thnt all the testimony you will give in this
proceeding will be the truth, t,he whole truth. and nothmg but the
truth, so help you God ?
Mr. ALE~AINDER. I do.
Mr. WIIITAKER. I do.
The CHATRMAS. 1ir. Schwarz will begin the questioning.

TESTIMONY OF DONALD C. ALEXANDER, COMMISSIONER, INTER-

NAL REVENUE SERVICE; ACCOMPANIED BY SINGLETON WOLFE,
ASSISTANT COMMISSIONER, COMPLIANCE; WARREN BATES, AS-
SISTANT COMMISSIONER, INSPECTION; MEADE WHITAKER,
CHIEF COUNSEL; THOMAS J. CLANCY, DIRECTOR, INTELLIGENCE
DIVISION: AND WILLIAM E. WILLIAMS, DEPUTY COMMISSIONER
Mr. SCHWARZ. Bccompanying you is your Chief Counsel, Mr.
Whitaker ?
Mr. ALEXU-DER. Yes, Meade TT’llitaker. Chief Counsel of the Inter-
nal Revenue Service. Mr. Chairman. I’d like to introduce some of
the ot.hers who are with me. if T may. To the rear of JIr. Whitaker.
on the far right, is Mr. Singleton IVolfe, our Assistant Commissioner
for Compliance.
Senator TOWER. Why don’t gou have them stand so ye can identify
them 8
Mr. ALEXU-DER. To JLr. \Volfc!s left is William E. Williams. the
I)eputy Commissioner of the Internal Revenue Service. And to Mr.
Williams’ left, is 1T’arren &&es, our &sistant Commissioner of In-
spection. To the rear of Mr. Wolfe is Mr. Thomas Clancy, the &xx-
tor of our Intelligence l)irision.
 6

viously had the same concern about. the workings of the Special
8clrvice StafT, another cx~mplr of the use, if you will. of the IRS
and its people and its powers in a way that can at best be described
as inappropriate.
We set about to SW what WC were doing, and why Tee were dying
it, why we. needed to be engaged in generalized intelligence-gathermg,
as contrasted with obtainin g the specific information that we must
obtain to suppleincnt that which is given to us! or to correct that
which is given to us. Many taxpayers comply with the law? as you
pointed out. JIr. Chairman. but sornc do not. And we have an obliga-
tion to see to it that the tax burden is spread as the law requires.
To fulfill that, obligation. we must pather information. but we need
to gather onlv that which is related to that job of ours, of tax adminis-
tration and tari collection. and we 11eed to be cognizant of individual
rights and the Constitution. in our efforts to g:ltlleY it.
Senator TOWER. I think we do need this function. I think it is
badlv needed. to have an etFectire twforcenwnt of the internal revenue
laws: am1 I think our people are generallv tine people doing a diffictdt
job well. I think there have been some ‘isolated instances of aberra-
tions and departures from these principles, and I think we need to
correct these instnnws and to control our operations for the future,
rather than to eliminate the intelligence gathering.
Mr. SSCITW.AII~. I am sure there are going to be specific esamples
that people come to, but trying to set the framelvork at the outset, have
vou taken steps to cut back on what can be characterized as generalized
intellir*ence gathering or finding out information at random about
,\me&an citizens?
Mr. ATXX~SDFCR. Yes. In fiscal vear 197.3. this generalized intelli-
pence gathering cost the IRS and, ‘therefore. the ,Qmerican taxpavers,
almost $12 million. That was reduced in fiscal year 1975 to $4.3 million.
These dollars are a measure of the reduction.
Mr. SCYTW~IRZ. Tn a couple of vow answers, ~-on have referred to
the powers. or lawe powers, of the IRS. Xow’, everybody kno\vs the
IRS collects taxes. hut what did you mean by focusing on large l~owers?
What powers does it have that other Government agencies may not
hare 1
>Tr. -iTXSASDER. IYe have powers that other agencies do not have to
obtain information, peremptory poxvers, po3vers to issue summonses,
to require information to be furnished to us. JYe have, flIrther powers :
powers to seize property : powers to terminate a tasnble year. and then,
by assessing the tax immediately, and taking collectron action, take .
money from a taxpayer : tlic povcer to make a jeopard\- assessment.
SOW. these powers arc neccssarv to tax enforcement. but because they
are SO great. because they are so peremptory, beranse thev can be erer-
cisrd bv the TRS Tvithont the intervention of other a,rren&es or courts,
assuming we’re acting in pood faith. x-e have an added obligation to
USP them wisely and only n-hen necessary.
lfr. f+TTW.\Rz. You drew an important distinction there. did volt
not ? Snpl,osedlr-altlloll~ll we have now seen evidence to the con-
trnrr-ao’encics like the FRT cannot enter somebodv’s house and Kct
t Ilrir palmers. n-ithottt having a search warrant anj3roved bv a court
and !winn through some l~rocrss of checkinc~ and limiting, whereas the
IRS has the power to compel an individual to provide the most inti-
 7
mate details about his financial life, peremptorily, as you ~7, or
without going through other processes. of the courts, for example. Is
that right?
Mr. ,;\LESASDER. Well. subject. of CoIII’sc. to the tiftli amendment
privilege. 1T’here appropriate. w-e rcrivc a Jlirandatype warning im-
nicdiatrlv to the taspaycr. in order to n~akr sure that. the taspayer is
aware of his or her rights. Rut we do have po\vers to call up011 third
parties, for example. to supply financial information about a tax-
payer to us.
Mr. SCTIWARZ. I hare nothing further at this point. JLr. Chairman.
The CHMRJIBS. Mr. Smothers, do you have any questions at this
point Z
XI-. SMOTHERS. Xr. Chairman, just one brief area of inquiry.
I have been concerned, Mr. -1lesander. and the conlmittre has
received information regarding how the IRS deals with its enemies,
if you \vill. particularly the tax protestor groups. We have informa-
tion indicating that there has been an effort made to infiltrate these
groups. if vou \vill. primarily based on their anti-IRS activities,
including things such as etforts at. physical destruction at your offices
and the tiling of reanls of blank returns. Is it .your view that IRS
investigators should be used in this capacity, or is this a matter better
handled by other investigative agencies like the FBI?
Afr. AL~x.\snnn. Mr. Smothers. there are instances where the use
of the techniques that you have clescribecl would be necessary. Those
instances are few indeed. I think that the IRS has a responsibility
to see to it that those who attempt to defeat tax administration and
tax enforcement do not succeed. And, accordingly, as to tax resisters,
we have an interest, and shall. I think, maintain an interest in making
their efforts fail. But we also have a duty in the fulfillment, of this
limited goal to live up to the constitutional principles and the law.
because we camrot enforce the law properly by violating the law.
Mr. SMOTHERS. Mr. Alexander. my question ,goes to who should
be involved in this enforcenlent ? For example. if we had dissidents
bombing the State Department. then n-e would certainly ask the
Federal Bureau of Investigation to look into that. We would attempt
to apprehend the culprits. Should the IRS be devoting its energies to
the essential task of catching criminals, criminals whose activities
are really unrelated to your fundamental mission?
AlI'. ,kLESASDER. SO.
Mr. SMOTHERS. Vould it then be vour recommendation that these
efforts not be dedicated to these kinds of functions?
Mr. ~LEXAXDER. It is my recommendation that the efforts that the
IRS makes in this general area, as I\-ell as the limited area that you
first described, should be limited to those necessary to achieve our
mission of administrating and enforcing tax laws, rather than other
goals. This accounts. I might suggest, for the action that I took that
the chairman described with respect to the Special Service Staff. That
also accounts for certain other actions that. the IRS has t,aken.
Tax protesters are indirectly related to tax administra,tion, in that
those who preach resistance to the tax laws are likely to practice
resistance as well. We do have an obligation to see to it that the tax
laws are enforced. and we are concernecl about scofflaw. We should
not be overly concerned, however, so as to devote undue resources to
 8

this task, or to go about this task in a way in which our enforcement

teolniiques descend to the techniques of some of those who are opposed
to taxes.
3Ir. ~MI.THERS. Thank you. I have nothing further at this time, Mr.
Chairman.
Tbc ~'liMRM.\X. Thank you.
Mr. Commissioiicr~ when you became the Commissioner: .were you
L~for~ned by the stati of the IRS about the existence of this Special
Service group ?
Mr. hr.tx.\s~~m Mr. (‘hairuu~u. I had heard about the Special Serr-
ice Staff from press reports prior to the time that I took office. The
day after I took office. or the day after I was sworn in on May 35 I had
a meeting in my o&e with respect to the Special Service Staff and its
then activities.
The CHAIRM.~. And was a full disclosure made to you at that time
of the activities of the Special Services Staff?
Mr. Amsomm In iiiy opinion, not.
The CHAIRXIS. In your opinion not ?
Mr. ALEXANDER. Right.
The CHAIRMAN. Khat is the basis for that opinion?
Mr. ALEXAS~ER. The basis for that opinion, lfr. Chairman, iS my
recollection-which I consider entirely correct-that I was not told
on May 30 of a fact which some others in the room knew; that a
memorandum describing activities vvhich are antithetical to proper tax
administration was, indeed. an expression of the Sational Office of
the Internal Revenue Service about the attitudes and the activities of
the Special Service Staff. That nlemorandnnl suggested that the IRS
should concern itself with rock festivals. where youth and narcotics
may be present. I find nothing in t.itle 26 of the Internal Revenue Code
to suggest,that we should have a concern about rock festivals.
I find that particular illustrat.ion. as well as the rest of that mem-
orandum, to be antithetical to OLIY job. And Iv-l-henI found out it’ was a
National Office memorandum rather than an aberration in the field, I
ordered the Special Service Staff abolished.
The C~.4nw\ras. When was this memorandum which defines the pur-
poses and objwtirrs of the Slwial Serric-e Staff called to your
attention S
Xr. ,~LF.S.WDER. It was called to my attention, as a National Office
document at the end of a dialog that I had with the then-Regional
Commissioner of our Sorth Atlantis region. I was trying to find out
lvhy on earth the North Atlantic region issued this memorandum,
and did ther reallv believe this sort of stuff: and if they did. I wanted
to correct their attitude.
I finally learned. as I recall. on A1ugnst 8 of 1973-
The ~rr~unx~x. Was that 4 months after you took office that you
first. learned of this memorandtrm defining the functions of the Special
Service Staff 8
Mr. AI,ES~~SI~ER. Almost, 4 months.
The CH~TRM.~S. ,ilmost 4 months.
Calling your attention to the memorandum. which I think for the
Senators purposes is-
jfr. %TIW-.tRz. It is ma.rked exhibit 1.l
 The CHAIRJLW. I)o you have that, ,\lr. C’ommissioner?
Mr. ALEXAXDER. Yes I do, Mr. ChGrman.
Mr. ScrImaRz. JIr. iUexander3 it is exhibit 1.
The CHAIRJIAS. Sow, I read from the memorandum the following
excerpt :
Functioning under the Assistant Commiasicwer (Compliance) a special com-
1)liauw group was rstalllished in August 1960 to receive and analyze all available
information on organizations and individuala promoting extremist views and
1Ailosophiea.
Now, stopping right there, do you think that it is the proper busi-
ness of the IRS, which is set 771~ to collect taxes for this country, to
receive and analyze all ;lvnilable information on organizations and
individuals promoting extremist I-iews and their philosophies?
all’. ALESAWER. NO.
The CIrAIR3fAS. Reading fnrther from the mc77~0rancl7~77~ : “These
organizations and indi\-iduals can be geuerally categorized as, (11,
Violent Gro77ps”: and then, “in cntrgo7.y (2). there is ample evidence
of activities inrolvi7?g so-called Son-Violent Groups: who by alleged
peaceful dcmonstrat7on~ oftenti7ncs drlil~cr:~tel;v initiate \-iolence and
destrl7ction.”
h-o\\-, stopping right there. e~c71if tliat \vcLreso, does it not follow
that protection aganist violeiicc ant1 ilcst Inction is properly the work
of the l~olicr-inc~l~7tli77~ the Federal policr. the FI’,J--and not, the con-
cern or the pork of the Intrr:ial Ke~cii71r Service !
311.. ~~LESASDEl:. y’(%.
The CHAIRM.W [Icontinuing].
Included are those who publicly destr0.v and burn draft cards, destroy Selective
Service office records, participate in an [sic] organize JIay Day demonstrat!ol:s,
organize and attend rock festivals which attrxi-t youth and narcotics. aid in
funding the sales of firearms to Irish Rel~ublican Army, Arab Terrorists, cl,
cetera; travel to Cuba, Algeria. and Xorth Vietnam in defiance of existing
statutes relating to seditious acts : inciting commotion and resistance to authority
b.v encouraging defectors in the Armed Forces to enter into alliances to subvert
this nation.
SOW. leavinp nsitle whether or 77otthe actual names of individuals
and oqwG:~tions that ~-t’rc placed on this watc11 list by the IRS--
whether or not they fit in this categol;y. that whole category has
nothing to do \\-ith collecting taxes, does It !
Mr. A1~~x.\s~)~~. It has nothing to do with it, except insofar as two
things are concerned : First. if an orpt7lization claimi?g tax exemption
is not eutitlcd to it, it is our obligation to do somethmg about it, and
it is our obligation to determine n-hethtsr an organization claiming that
status is entitled to it. Second. if son7eonededucts a contribution to
an organization that is not tax-eselllpt. L *777(1therefore not entitled to
receive decl77ctibIe contribt7tions. it is 0771’
ol)ligation to do something
about that.
T3eyond that. we hnrr no concerus in these areas, and these areas
are not a normal part of tax administration.
The CH.URJI.~S. Hut this me777orandl7mwent way beyond that.
?tfl’. &EX.\SDER. lyav be\-Old tht.
The Cm~mr.~s. 17’ai- b&ond that. and it eren went-in actual prac-
tic?--tlw Special Scrr’icc Staff went wav beyond these groups. I think
it must hare. n-e look at some of the>in&,-id77als; what. did columnists
,Joseph ,1lsop hnrc to do with rock f&r-als ?
 10

;\ll'.A~LEX.lSDF,R. 1 kLw 110 idea,~[r. Chairman.

SC~IWO~ TOWER. That is an intriguing tliottgl~t, l~r. Chairman.
The CII.~II<JNS. Or funding the sale of firearms for the Irish Re-
publican Army, or violating sedition laws by traveling to North
~‘ictnam ? 1 rr1ea11. what was ,Josel)h ,1lsop’s name doing on that list ?
Do you lmon- ?
Jfr. ~~LE:x.ISDER. I llave no idea. Mr. Chairman. I have no idea why
my name was on the IGRS (Information Gathering and Retrieval
System) file.
The (‘IHAIRXIS. 7Tllat about Mayor dohn Lindsay? Do you know
what connection IN had with an\- of these organizations that would
justify pltttinp his n:une on tlie list ?
111'. ,~LESXSDER. SO. 1 d0 IlOt.
‘the Crrarn~r.~. What about Sohel Prize winner Linus Pnnling, who
just last. \wek received from the President of the cnited States the
‘Sational Science ?iledal ? Do you know why he QXS on this list to have
his taxes looked at. this list of violent and nonviolent activist groups?
JCr. *hEXASDER. so.
The CEIAIRMAS. 7Yhat about Senators Charles Goode11 and Ernest
Gruening? Do you know why they were on the list ?
Jh. &ESASDER. SO.
The CII.URM.~S. What about Congressman Charles Diggs ? Is there
any reason why he was put on a special watch list for examination of
his taxes?
III'. ;\LES.\SDER. SO.
The ~I~AIRXIS. l\'ell. tbcl'e :II'P other mines here that are equally
puzzling-writer .Jimmy I3rcslin, rock singer James Browi-
Mr. ALESASDER. That would come under the rock singer category.
[General laughter.]
JIr. A~~~~Acc~~~~. There was apparently quite a concern about that. I
suppose some. of our people did not like rock music. Sow, I share that
view. I don’t like rock music. Rut I don’t think it has anything to do
with tax enforcement or tax admil~istration.
The CHAIRMAS. \Vhat about ci\-il rights leaders Aaron Henry and
*Jesse *Jackson and Coretta King’?
XI-. AIJXASDER. The same answer, no.
The CI~AIRX~S. Or actress Shirley MacLaine ? Was that, because she
went--did she go to Sort11 Vietnam at one point ? I do not think so. You
do not. know whv she ~-as on it ?
~~I-.~~LEXAND~R. 1 don’t.
The CHAIRMAN. Well. when you discovered names of people and
organizat.ions that even went, beyond a memorandum, which you your-
self have described as unrelated in its thrust to tax collection as such,
what did you do!
Mr. ALEXISDER. I ordered the Special Service Staff abolished. That
order was given on August 0: 19fz3. It was implemented by manual
supplements issued on August 13. 1073. We held the files. I ordered the
files to be held inta.ct-I’m not going to give any negative assurances
to this committee-in order that this committee and other committees
could review these files to see what. was in the.m, and see what sort of
information was supplied to us on these more than 11,GOO individuals
and organizations as to whom and on which files Tvere maintained.
 11

I snggestecl~ Mr. Chairman. that at the end of all of these inquiries,

I wmld like to take those files to the Ellipse and have the biggest bon-
fire since 1814.
Thr (‘r~~rn~ss. Well. I concur in that judgment. I would 011lp say
this to you : iii a way. it niiglit be ;I more iniportant bonfire than the
Boston Tea l’artv \\-hen it comes to protecting individual rights of
-1nicrican citizens. I am glut1 yo11 feel tllat way. I nrn glad you took that
action.
What. concerns me, and lvhat should be of concern to this committee,
is that there is apl)arentlv no law on the statute books restricting the
extent to which tlie IR,S‘caii hc used as the vehicle for harassing Or
inrcstigating citizens who are engaged in other kinds of activities quite
unrelated to the qwstiou of their tax liability. Though in po~ur hands
as (‘onimissioncr these abuses might be stopped. in the hands of a less
scrupulous Commissioner thry could be reinstituted. And I think it is
the work of this couunittee to write the law in such a way that that
will not liapl~eii in the future.
Mr. Ah2~.n-~)~~. Mr. Chairman. there is one provision in the Internal
Revenue Code that does provide :I restriction on part of the improper
activities that you have described. In section 7214 of the Internal Reve-
nue Code. there is a provision making it, a crime for an Internal Rere-
nue rinl~lo~ee to knowingly demand from a taxpayer a tax other than
what~ the law reasonably requires. That does not go all the w-ny. What
the IRS, the administration, and Congress need to do to safeguard the
future is to have sound lalvs. sound procedures. good people, continual
oversight. and continual vigilance, by the press.
The f?r~.un~ras. I agree with that. We will be \vorkinp on recommen-
dations after we conclntle~ this investigation that will help protect us
against. abuses of this kind in the future. ,$nd Ive lvould solicit your
0~11 rrcollllllrlldatiolls in that regard. Ton tried. as Commissioner,
t0 put a Stop to these activities, and we naturally welcome any recom-
mendations you might ha\-e to make. Senator Tower?
Senator TOWER. Thank vou. ?cIr. Chairman.
First. I would like to commend Mr. A1lexander for rvhat he has done
to cure some of the problems that we found lvithin the IRS. Nr. ,41ex-
ander. who decides when to utilize the intelligence apparatus of IRS,
and how much discretion do the district directors exercise in determin-
ing when to employ this capability. and against whom it should be
targeted?
Nr. ALEXASDER. Senator Tower, I will respond generally, and then I
would like for Mr. TT’olfe. who has been in Internal Revenue far longer
than I. to supplement my ansJver.
Our special agents are freouentlv called in by revenue agents in our
audit, activity. or by revenue officers in our collection activity. Tvhen the
revenue agent or revenue officer finds reason to believe. in the course
of his audit inrestipation or his collection investigation. that fraud
has been committed. This accounts for thr greater part of investipx-
tions made by our special agents in our Intelligence Division.
Some cases. however, arise bv reason of communications that. n-e
rewire. from informants or otherlvise. which indicate that tax evasion
has been committed. and that the chances of fraud warrant the expend-
iture of time and money in an investigation. Some cases are developed
 12

41r. Worz~:.
Mr. Tower. NJ lwrcent of tlif> work that our Intelli-
g?‘raJl(‘:’ IhvisinJJ ii1 co~iies fu)u~ rr~f~rrt~ls, either from the Alidit
cJJgxgf>s
!)i%-ision of tile T~tt~rnal Rcvc~~l~eService or the (‘ollwtion TXvision.
‘I.!ic wst of it coJiIPs throu$~ i?li’ormnnts or tllroilpl? information that
ijli:’ SpPCiill agents $Xt:IPl. 1’1 tlwi?. jOIlS.
Evei-y inwstipntio?J JJJnst
by h
the pYHl] nppo\w1
lllnlln~el’ of
the g?.r&l, to which t lie q?ecial nprnt is ass@~ied.Q-e hnw Tery strict
w~lr~ concerning the use of any investigatlre techniques. They must
not only be legal but tlw must have the approval of the cjlief of
+lic’ ;i!t(~llipllW dirisioi1 of tll;\t district.
-411of tiiae people are then under th c direct control of the District
I! hlwtor. ,)f the district to whicll they are assizywd. They also are
pr.>videc! wit.h ver,v good n~anllal il:strnctions. Tn other words. the
~J-tanw~l inst.rnctio?ls ??~?clr~~ IThicll they are to operate are prepared
hpre irl Washington.
They are also provided with lrandbooks, which are distributed
from here in Washington. outiining the procednres which they are
to follow. So those are. in general. the means by which we operate.
Senator TOWER. Thank you.
Jfr. Alexander. who sets the limits for determiniqz when to employ
~I?:drrwvcr agents and when to accept n11t1 11s~information from an
informant ? For esnm;,l(l. our cnnm~ittee has been told that nndercover
agents at a meeting elf tax protestors listened to the protesters’ legal
defense plans and then passed that information 011 to the 1T.S. at-
to?-nw’s office.
This would appear to me to be an abuse of IRS intelligence canabil-
it.\-. I would appreciate ;vour comment on the propriety of tactics of
that kind.
3fr. ~~LFXAS~ER. 1 agree w-ith .vour conclusion. Senator Tower. I do
:I& think that. TRS ~~nrlrrcorer n,Fents shonld interfere with the right
ill: nnyonc to cwinsel. .2nd t?ie inl4dcnt that y-oi~ mentioned is of
cwnsiderable concern to me.
Ke hare tightened up materially on the use of undercover a,oents.
WC now have. T h?lieve. only- t1y-o nndercorer agents in the country
at, this particular time doi+~‘this. And Totehave called for strict con
trols and drcisions at. 1-11~
top level before further undercover projects
mav !w nndertakm.
Senator TOWER. Mr. Alexander. the data bank of IR8 wntains a
preat, deal of information in addit;on to the tax return documents
that are supplied bv the taxpvyrs. Why is 40 mnch additional infor-
rr!ntion nweswry if no <lilcstion has been raised concernin,rr rptnrns
filc:l by a @:-al mdi+dllal?
13
 14

IRS but at other agencies which may hare been involved directly and
indirectlv with this connterintelli~ell~e cavabilitv developed in various
agencies‘in the. Federal Government, of &hi& \ve have seen some es-
amples here.
3lr. A~r,~:xasm:~~. l-es: I think tliere was a syndrome at that time. I
would like to add that I greatly appreciate \vhat you have said when
you opened your qnestiow. There are some, apparently highly vocal,
that disagree flatly with your statenient of approval of what I have
been trying to do.
Senator Jlosn.~r,~. So doubt. T worlld like to return to that point J
raised in my first question. because 1 think it is central to understand-
ing what it was that vou were dealing with and the more fundamental
issues that this comnrittee mitst deal with.
I think wha.t you saw was just a part of a broader: more basic project
by which various agencies- the FBI, the CIA, and even the White
Rouse-decided that the criminal 1:~~s weren’t adequate to deal with
the threat to this nation and that therefore they needed a new tactic.
That, tactic was really borro~ved from our tactics overseas against
mainly Communist threats, called counterintc~lliffence. Without any
probable cause to believe a crime was being committed and taxes being
unpaid, we \vonld throw out a huge net: we vionld open mail. even
though we did not know Iv-hat was in it. and intercept communications
with no grounds, thinking we ntight find something. 1T’e would send
out Internal Revenue agents to look at people’s tases, not because we
thought they weren’t. paying taxes. but because we might find out some-
thing. It is that concept of counterintelligell~e turned in on the -imeri-
can people which I think vou had to deal with. That was a piece of it,
because the IRS was getting these requests. as I understand it, from the
FBI, from the CL1, and even from the White House, to investigate
these people. and the question is why. since it was unrelated in most
cases to taxes. The answer is because of a fundamental philosophy that
the only way to protect this country WE to start spying on a broad
cross-section of Americans thought to be dangerous by someone some-
where in the bureaucracy without legal authority. without definition.
without any restraints and laws. Is that accurate?
Mr. ,-~LESASI)ER. There certainlv ~-as a feeling of that kind, Senator
Mondale. And this may well have heen a cause. if not the cause. of such
things as the Special Service Staff. Some perceived a need to accom-
plish a parficular result. fill a void in the law. a void in capability to
enforce a law. And IRS is a convenient vehicle, in the eyes of some,
to fill the void. Tf a law is absent that someone wishes were there.
there is alwavs a tax law. If the people were absent that someone wishes
were there, there are always the tax people.
Senator JInsn.ux. ?111 right. Sow do you agree with me that these
tendencies of ill-defined counterintelligence activities. secretlv pur-
sued. without legal restraints, constitute tendencies that could destroy
American democracv. if unrestrained?
JIr. ~~IAX~SDER. If unrestrained, yes.
Senator X-~XL-\LE. So this is a very serious and profound matter of
continuin,g a vital. uninhibited democracy.
Mr. ,\I,l?XAXDER. It is.
The CHAIRMMAS. Senator Mondale. mav I just say nt that point it
has just been called to my attention, this is how the FRT greeted the
IRS program we are discussing. I have a memorandum here that was
 15
written bv Mr. I3rrnnan, directed to Mr. Sullivan, in Iv-hi& he made
the follo&ng coiimlent as to the FBI’s reaction [exhibit 2 ‘1. “9 con-
centrated progranl of this nature. if properly implemented, should
deal a blow to dissident elements. This action 1s long overdue.” That
just underscores the point that, Senator Mondale made. The purpose
had nothing to do with taxes. The purpose was to use a tax co!lecting
agency to strike, in the words of Mr. Brennan, “a blow to dissident
elements.”
Senator Jlosn~~z. Kow: happily, what we hare here is a Commis-
sioner-and I hear this from all sources-who once again believes in
the law and resisting these kinds of pressures. But can you be sure that
these pressnrcs have, in fact. been frustrated completely under your
administration. and is there anything to guarantee that, it won’t hap-
pen again ?
Fundamentally-. I guess what \re are up against is this : If you have
a President and people around who are paranoid enough to believe
that Jve need this illegal. spooky capability, of spying on the American
people, how do agencies such as yours exist? HOW do J-ou say no to
a President ?
Mr. ALEXAS~ER. I would suppose wi.ith extreme difficulty and some
trepidation. Luckil?, I have not had to say no to a President because
I have not been asked to clo anything illegal and I won’t be by Presi-
dent Ford.
Xom you asked several questions-
Senator M~SIL~LF:. Let LB just take President A and President B and
Commissioner B 10 years from now. I don’t want to get into person-
alities. but we have seen so nluch evidence of orders going down direct-
ing subordinate commissioners and officials and the rest to do things
that are illegal and very, very dangerous. I think one of the questions
Iv-e have to answer. if possible. is how do you sap no to that kind of
pressure emanating from the White House and from the highest offi-
cials in American Government ?
Mr. A4~x~~m-~~~. You have to be ready to do what I have stated sev-
eral times that I would do. And what I absolutely would do. If I were
asked to do anything improper, I would refuse to do it. The requester
then would have t1v-o choices. One, to agree. with my refusal. The other,
to remove me from office. SOJJ--, I don’t think that future commissioners
should be subject to this particular difficulty. Particularly when a com-
missioner is new in ofice, the commissioner may think of all the great
things that he or she is going to achieve and be concerned about the
ability to stand LIP to an improper request. I think future commis-
sioners, as I have testified before, should have s-year terms of office.
SOW ;VOU asked me whether I am sure that the attitudes and actions
that we have been discussing this morning have pervaded t,he entire
IRS. I am not. I wish I could give that assurance, I cannot.
Senator ~~~SDAI,E. Thank you. Thank you. Mr. Chairman.
The ~ILURX~S. Thank YOLI, Senator Mondale.
Mr. SNOTHERS. Air. Chairman, Senator Goldwater has an opening
st.atenlent and some questions [see questions. p. 10-C] he would like sub-
mitted for the record.
The CHAIRMAN. Without objection it is so ordered.
 16

The Internal Revenue Service receives more information from more lxwple
nljout, more 1)rirate affairs than any other a:eniy in the Vnited State?;
Goverll1M?nt.
And therefore. it has in its hands tremendous ~to\vrr to harass and intimidate
American citizens.
It seems that nearly tver)-hotly that files a tax retnrn xitli the IRS can assume
that someone else will hare access to it. Tax rrtnrw have shown ul, in the hands
Of ilisnrance adjusters. llriratr tlrtec.tires. (~~wlty c.lrrl; officw :llltl even llilVC? bern
printed in newspnl~rs.
Even tliowh leaks that allo\\- these retnrns to be distril)nted around inns not
be the fault of thr Internal Revenue, the right of the taslbayer to l)rirac*y is bein::
eroded because of it. In fact. the IRS i., I)ecoming a l~ul)lic kntlin- library of
private information.
Out of 81 million tilS returns filed in 197-4. al)out 69 milli<m were furnished t0
State antlloritip!: in 3s States. L1s sllrl)riaing :IS tilehe nnnllwrs sc~rmrl. this is a
routine llrnrtice ant1 it \r-oultl 1x1lkossil,le for all 81 million rfm1rns to lw available
for inspfxtion if the remaining 1’1 States wantf4 them.
These returns hare Iwen provided to Slate gowninlents with little or no control
orer the information. And, this may account for speculation over the J-ears that
tax information has been released during statewide lwlitical campaigns.
Earn the jnrr Ijrwess has not Iven exempt from IRS meddling. .Jurors’ tax
returns have been audited.
Combine the polTer of the IRS with modern conq)utn tec*hnology and the door
is open to wholesale :I~WP of privacy and the humhlinp of pwid and honest
citizens.
Our tax system is based upon voluntary cooperation. That cooperation Kill
erode and f&e away. if the unconcerned bureaucrat uses his mighty computer
to harass our friends and neighbors.
The CHAIRXAS. Thank yen, Mr. Smothers.
Senator Mathias is nest.
Senator ?(IATIIIAS. Thank you, 1lr. Chairman.
Commissioner. I think we ought to try and get the record in as
accurate shape as we can here. 1j’hen you abolished the SSS. had you
become aware of the circumstances undt>r which it was created?
Mr. Arxx4sr)Ix So: I was aware of sonle of the circumstances. but
by no means aware of the circmnstancw as later developed and the
details as later developed.
Senator MATHIAS. Had you been told that Mr. H&on, who
appeared earlier before, this committee. had been critical of the IRS
in June of 1969 becauseit was not being active enough in investigating
some of the organizations that were later investigated.
nlr. Ak~~x~~~~~. I think I heard something about the Hnston plan:
and of course Mr. Dean had testified.
Senator MATHIAS. Of course: this interest on the part of I\Ir. Huston
predated the Huston plan bq’ several wars. Were you also aware
that, the Senate Permanent Subcomm’ittee on Investigations had
expressed a great interest in the IRS files on activist organizations and
had been very critical of the IRS because it was not doing enough in
this area 1
?Ilr. ,bX\xlXR. yes : I was pfnerally aware of that.
Senator Marrrras. And that 111fact the SSS was established on the
very day that JZr, Green testified before the Senate Permanent Sub-
committee on Investigations and after he had been roasted by the
committee hecause the IRS hadn’t really bee11active enough.
?Ifr. A~r,~s.\srx?~. I think T ltarnrd that later. Rnt I am quite con-
cerned about pressures from all sides.
 17
Senator MATJIIAS. Well I think you ought to be concerned by pres-
sure from all sides. I thiiik the ~-hole purpose of this effort that. me
are making non- is to insulate the IRS and other agencies from those
pressures. The pressures can come from the Congress. They did come
from the Congress in 196(3 as \vell as from the White Rouse. And I
think, in considering what we arc going to recommend to the Senate
and to the House m the way of remedial legislation, me ought to
remember that Congress itself was contributing pressure in the wrong
direction in 1968 and 1960. So me have to provide against mistakes
that we and our successors lvill make. as well as against mistakes that
future Presidents may make, in trying to put, the IRS and other
agencies to improper uses.
There has been some conversation here this morning about inform-
ants. And I wonder if you could tell us exactly how you use informants
for intelligence purposes. Do vou still pay them a bounty?
Jfr. ALEXAXDER. I would he&ate to use the word bounty, but section
7623 of the Internal Rel-enue Code does provide for 1R.S paying for
information that would aid t.he tax system. There are several types
of informants. There are those who have grudges and want to do some-
thing about them and have no idea of monetary revvard. There are
those who supply information in a particular instance and would not
only like to satisfy whatever grudge they may have but) would like to
gain 8 reward as well.
Senator MATHIAS. It is almost as sweet, not quite but almost as
sweet, as a tax refund for yourself if you can be sure your neighbor is
paging as much as you are.. is that not right?
Mr. AI~~s~~s~~~~. I alppose it would be. Sweetness is! of course, in the
eyes of the beholder.
Senator ;\L~~rrras. Bittersweet.
Mr. ALESSDER. Tt may be bittersweet to the neighbor. but some are
concerned not only about Tvhat they pay but about what others pay.
and the law does provide-:~ltlloll~h we do not make niass efforts to
encoura,ge informants-for payments for information of value in tax
administration. -4nd finally me yet to the third type of informant.
And that is the Sarah *Jane Moore type. if I mav- use a name that has
been in the papers lately. a paid informant, an” informant regularly
furnishing information to a lavv enforcement agency and regularly
being paid for that information.
This is, T am toltl. a very effective law enforcement technique and
R technique wry widely used. Tt is also a ~-cry dangerous t,echnique
alId a te.chnique that must bc wry carefully controlled.
Sena.tor MATIII.~ That brinps me to the question of control. Is this
controlled in accordance with a centralized system or cloes each
regional office, area, office, control the informants. set up t.he standard
of payments. and penernllv set out the program?
Mr. ALEXANDER. This last type of informant. the confidential in-
forma.nt seeking payment.. frequently on a reasonablv regular basis,
for infornuttion furnished to us, is now controlled ‘in the national
office. Mr. Wolfe controls this. We have instituted tight controls in the
IRS. We did not have these controls before, Senator Mathias, and this
has accounted for some of our problems.
Senator ~~.~TIII.w. It n-as verv decentralized in the past?
 18

Mr. ALEXANDER. Well, decentralized if you will, uncontrolled if

you will. I am not certain that the question of control is governed by
centralization versus decentralization. We operate on a. decentralized
basis as, indeed, we think we must. Our job is largely tax adminis-
tration, so we are unlike la,w enforcement agencies whose jobs are
strictly law enforcement. Law enforcement is ancillary to our major
job. Our major job, as we seeit, can best be performed free of political
mfluences. performed objectively and etlicientlv, on a decentralized
basis. ,4nd we have had the same general relationships. the same gen-
eral system since?1952.
Law enforcement activities are also decenttalized with certain ex-
ceptions. The narcotics program, for example, was controlled out of
our national office. So, it was centralized rather than decentralized.
That propram was not a good program for the IRS, and we have dis-
continued it as such.
Senator RLZTHIAS. 1 think you should. Tt was a wise move to dis-
continue it because this whole area, the use of informants, is, it seems
to me. a very dangerous kind of area to operate in. and one that has
side effects that can be very dangerous, far more dangerous than the
information that an informant may produce.
Let me ask you this: In your year or two as Commissioner, have
you ever been faced with a decision in this area of investigation, this
area of intelligence, the area of confidentialitv of returns? in which
you were puzzled as to know what was the right thing to do, what
was the right decision for you to make; and that you had recourse
to the law and could not find the answer or any guidance as to what
was right?
Mr. ALEXASDER. Yes. There have been some tough calls.
Senator MATHIAS. Could you tell this committee, either now or
perhaps you might like to submit it later in a memorandum, what
some of those areas of decision are in which you felt the law did
not give you the proper support, the proper guidance ; which you
felt the Congress had neglected to provide statutory guidelines for
the proper conduct of the IRS!
Mr. ALEXANDER. I would like to think about that question, Sena-
tor Mathias. It seemsto me generally that. the law as it exists today
provides the mechanism for proper and effective law enforcement,
and at the same time, for responsible and responsive law enforce-
ment. One of our problems in the IRS has been that in certain iso-
lated instances the controls that then existed were not respected, or
controls were lacking.
W7e are attempting at this time, and have been attempting this
year, to institute new and considerably stricter controls in a number
of areas, particularly the one that concerns you and concerns us, con-
fidential informants. Now the institution of controls, strict controls,
where controls did not previously exist, is a disturbing, unsettled
thing to people. And the reaction of certain of those people has been
very clear in the media this last weekend.
We also, the Chief Counsel and I, are reviewing and have revised
a prior policy of the service toward illegal evidence; we do not be-
lieve that we have any business using it. This is unsettling and dis-
turbing to some.
 19

Senator J1.i~m.s I thank you. Commissioner. I think I would. for

one. value any thoughts you have in order to expand on this thing.
I thillli you should impost controls, even in the absence of statutory
direction. But I do not think the Congress can pass the buck to you, and
I do not, think it. is a discharge of OLW responsibility for the Congress
to pass the buck to you, to take all of the heat on the proper regula-
tion of other agencies. It might JVOrli for Commissioner AIrsander.
It might not work with another commissioner, some years hence.
The Congress has a duty to perform and I do not think we can lay
it all on vour shoulders.
JIr. A&X.~SDER. I am grateful to you for that statement.
The Crr.~r~~.~s. We certainly cannot.
Senator Huddleston ?
Senator HUDDLESTOS. Thank vou, Mr. Chairman.
I think that we could agree \vith the statements that have been
expressed bv Senator Mathias, that certainly the IRS is not totally
at fault with whatever abuses may have occurred. However. I think
we have to accept the fact that, the IRS does probably gather more
information on more Americans than any other agency. Certainly it
is a very important aspect of this committee’s work in achieving its
objective. Probably more than anv other agency, it, like Caesar’s wife,
ought to be above reproach. It is the one area of law enforcement
where the fundamental right of a citizen to be considered innocent
until proven guilty is reversed. He generally is considered guilty until
he can prove himself innocent when a charge is brought.
So I do not think that we can stress too much the necessity for a
high caliber operation of great integrity when we talk about the IRS.
And that brings me to exploring a little further another area that
Senator JIathias was touching upon, and that is the use of inform-
ants-whether or not this might cause some substantial infringement
upon citizens’ rights, the rights of privacy and other constitutional
rights. I recall, for instance, the operation in Miami that is gener-
ally referred to as Operation Leprauchaun where a special agent
there had a number of informants working under him. Those in-
formants also had informants working under them that the special
agent did not even know. He certainly could not be aware of the total
types of operations that they were engaged in, in order to get the in-
formation. They talked about it on various occasions. At one time a
woman informant suggested to the agent that she could use her sexual
prowess in order to secure certain information. He maintains that he
did not suggest to her t,hat she should do this. But at the same time, he
did not suggest that she not do this. She could use whatever means that
she might want to employ. Sow it seems to me that if an informant
that is directed by an agent and paid by the Federal Government
becomes an agent of the Government, an arm of the IRS, and to
whatever extent they abridge rights and freedoms, then the IRS is
abridging rights and freedoms.
And I do not know how you can operate without more control than
was demonstrated by the operation, for instance, in Miami; when an
agent does not even know who the informants are, where there at least
appeared to be regular payments rather than payments just for specific
 21

Senator HI-DDLESTOS. But. in other vortl~ when you supplied the

FBT Tvith a list. for instance, of contributory to a certain civil rights
organization. you had no lino~~l~dp that ihey niig!it have at the time
]"'O~'OS.d to tFlk' th:l: ! is: of coctl~ihiit 01’s to cant J,i\xa n fraudulent
letter with the signature of the in&J idual heat1 of this organization on
.stationery that they had secured surrept itiowly from this organiza-
tion. and mail out a letter tn that list of contributors designed to dis-
courage thein from fiirtllc~r‘ contrii~iutions. further participation?
JIr. Ah~~.~~~~~. ,\bsolutrly none. 73-e have no knowledge of that.
Senator HKXXUXSTOS. If you thought that action was going to
happen, what would your reaction hare been to releasing that list?
JTr. h~~s~sne~. Ti’ell. in the bureaucracy, the last one to sign off
generallv has the upper hand. all things considered. So. I have an
itlea thai a request like that would find its way to the bottom of the
pile and hare great difficulty in emergiy to the top.
Senator Hmnrxsros. Rut it is a possihilit~? It was a suggestion on
the part of a responsible member of the other agency, a strong enough
suggestion. in fact. to be put into n-riting as a I.econln~en(latiol~ that
this be done. a memo [exhibit 3 I] of n-hlch Ire happen to haT-ein the
possession of the committee.
;\Ir. :h?X.2SDER. The law needs tightening up, Senator Huddleston,
badly.
We need two things. Wr need good lavs. and x-e need pod people.
Senator H~IIDT.E~T~X. Mr. Illesander. a number of methods xrere
used bp the IRS to try to pinpoint areas x-here tax wasion is a way of
life. a normal thing. and snmcthing that, ought to be checked. Thisen-
able VcJlll' :pllcy to pi,-;< o~v,+groups and do a broad-based
inr-esti$aticin.
For instance. in one district. at least, there was an effort made to
clitck the fire top(‘lected offTrials in crerv colmty. just as :I routine
thing, even though there Tras no indication that there had been any
1 see Jl. 45.
 22

kind of corruption, any kind of tax evasion there, ,4nother group went
to a fight of the world heavyweight champion, Mohammed X-who,
I am glad to say is still the world heavvweight champ-in Atlanta, Ga..
and took down the license numbers of all of those who attended. and
conducted a survey of their returns. We have already mentioned the
ideological groups that have been routinely checked.
First, of all, among these kinds of checks, what is the percentage of
returns of those individua.ls that are actuallv checked?
Mr. ALEXASDER. That are actually checked in this kind of thing?
Senator HUDDLESTOK. Right. After they have been spotlighted or
pinpointed.
Mr. ALEXASDER. 1 don’t know.
Senat,or HUDDLESTOS. Would it be 50 percent ‘?We have heard evi-
dence that perhaps 50 percent of them would actually be checked.
Mr. ALEXANDER. I’m going to ask Mr. Bates or Mr. Wolfe or Mr.
Williams whether they know. I will dig that out and, to the extent
we have anything, Senator, I will supply it for the record.
But I would like to comment on this method of using our resources.
I think checking license plates is an ineffective way to use resources.
Senator HODDLESTOX.They checked go-go dancers. incidentally, too.
J\Ir. AI,EX.WDER. Go-go dancers ? I didn’t know there was a special
concern as to go-go dancers. Perhaps we found tax evasion among that
group.
But this sort of thing is not the best way to use our people and our
money and our powers. It may be fun and games to the person-
Senator HUDDLESTOS. It might be a little bit more serious than fun
and games.
1%. ALEXASDER. I agree with you. Some may consider it fun and
games; I consider it very serious. We have a prob,lem not only of sound
and effective and proper use of resources, but we have a problem of
living up to the Caesar’s wife stricture that people should expect from
an agency with the vast powers, people, and information that we have.
Senator HUDDLESTOS.The fact. is that if our figures are right, some
50 percent of people who are targeted like this have their returns in-
spected. That means. for those who happen to get. on the list because
somebody disagrees with them at, the White House or the FBI, chances
are 25 times better than for the normal citizen that his tax returns will
be audited. And he will be at least harassed to that extent, by the Fed-
eral agency.
,4nd, to go one step further. when you roll all of this together-the
ideological effort. the blanket provisions of picking out politicians,
office-holders or whatever-what has to emerge is an agency here that
has a great propensity and a great ability to conduct a very strong,
thought-policing effort in this country. I think this is where the dan-
gers lie, in the misuse of the kind of power that resides in the IRS.
Thank you, Mr. Chairman.
The CHAIRMAX. Thank you very much. Senator.
Our next member to question is Senator Schweiker.
Senator SCHWEIKER. Thank you, Mr. Chairman.
Commissioner Alexander, you have thrown this committee off bal-
ance a bit and to some extent caused us some difficulty, because the
usual scenario that this committee follows is, first.. we have to fight
tooth and nail to get any document we can place our hands on. Sec-
 23
ond, \Te are told \ve do not have a right to see the documents anyway.
Third, we have a bottleneck, that the staff is not available to provide
US with that information, and we hare to wait a couple more weeks
t,o bring some staffers in. Sext, they argue that under the Constitution,
the Bill of Rights rea!ly does not corer the points that we are trying
to raise in their testimony. After that, they insist that no abuses
existed ; but whatever occurred, they stopped doing several years ago.
And where you throw us off ba.lance is, you sort of reversed that
scenario all along the way and made it a little bit more difficult for US
to operate, because you have given us documents right from the start.
Even over this weekend, I understand there were some 50 people work-
ing in your offices to give us information for these hearings.
In addition, you are telling us what the Bill of Rights means, in-
stead of our telling you, which is a very pleasant change of pace. And
also, you acknowledge that abuses have existed, and, I think more im-
pressive than that, your record. beginning in 1973, began with correct-
ing some of those abuses, which no doubt has gotten you into some of
the controversy that you have gotten into.
So it is just a pleasant surprise to run into these kinds of scenarios
instead of the kind we are used to. An+? I think, to keep the record
straight and to be objective, our committee should also make that a
matter of record.
I would like, Commissioner, to go into a couple of thin s that were
happening before you came into office. One of them that %isturbed me
particularly-which, Fgain, your office very helpfully supplied infor-
mation on-was a project called Operation Mercury, where, in essence,
any individual who submitted a, money order for over $1,000 through
Western Union, their name was given over, as well as any person who
submitted a money order over $5,000 in the 1969 to 1972 time frame.
As I understand, the result was that anyone Fho submitted an order,
particularly over $5,000. probably had his tax status looked into in
some degree.
JTould that be a fair sum-up, or maybe you can elaborate anything
you know about it. even though I know it was before your time.
Mr. ALEEXASDEFL I think that is a fair summary of that project, as I
understand it. And I don’t have a high regard for that project for two
reasons.
The first goes to the utilization of resources. This sort, of dragnet
approach would seem questionable at best. A second goes to the prob-
lem that Mr. Wolfe and I have been discussing with you this morning,
and that is the question of illegal, or illegally acquired or improperly
acquired, evidence.
Senator SCHWEIRER. And one other project that I would just par-
ticularly like to cite-and this goes back probab!y into the late 1960’s
time frame. The CIA gave the IRS names of individuals who recently
traveled to Vietnam, the implication being t.hat their tax returns
would be audited.
I wonder if you could tell us what your present. policy is in this
area at all, not necessarily Vietnam, but that kind of technque or any-
thing else you might R-ant to say.
Mr. ALESAXDER. That technique isn’t a good technique. People
should be audited and celected for audit on an objective basis without
regard to their travel. If they attempted to deduct the cost of going to
 24

Vietnam, then we would be interested in examining the T-alidity of that

claim. nut ~-e are not interested in csnmining people becanse of theil
views with respect to Vietnan1 or anything else.
Senator Sczrwei~~~~ Comniissionrr. one of the nlost friphtcGng as-
pects, T think. of the awesome power that your department has. we
have touched on in a llunlber of our questions. 11’~ have actllnjlg seen
it abused. We are going to come back with a nlullber of hearings on
that with the FISI and their COISTETJ’RO activities. Again. this is
something preceding you.
But T think the larger question is how to keep politic31 inflllence and
political pjqoses out of an>- IRS actions or audits. I know this is
y01ir concern. too, and I raise the question as to what. legislatively. we
might do to back up a Commissioner like gourself who wants to lay
tlow~~ I,olicies that might chanpe when a new administration or a nen
Commissioner comes in. Do you bare any suggestions that we might
hear to keep aspects of political life out of the IRS system, and That
yc.-otlhave been doing to do that.
Mr. AIXS.CCDER. Onr siqggestion is that of a :i-rear term for future
Commissioners. Xnother sngyestion is continual, constructive over-
sight, over the IRS and other agencies having broad powers like ours.
Tax enforcement is too important to leave to the enforcers.
TT’hat TTP hare bern doin,g is not only attrmptin,rr to inrtitnte nen
controls. not only attemptin? to dispose of aberrations in the tas sys-
tern as we find thrm, such as the Special Service Staff. and to prevent
aberrations from hnppeninc in the fntnre. but to onen up the process
by providing our manual. that tells what we do and how we do it. and
making everythin,g nbollt our organization open to the publir. so that
all will hare access t.o infnrmation that thcv need to have. and so that
the creation of a Special Service Staff ~oiild come io light when it was
created, unless sc,me future CommisGoner decided to close the process.
And no futnre Commissioner shoul~l be l,ermitted to close the Drofess.
Senator SCHTTEIRER. Following up the awesome po\rer that’ YOU
have with the informat,ion that comes to pour attention. power that is
provided to you and no other Gorernment agency. one of the concerns
I have-and I know it is a difficult area. because you have to strike
some kind of a balance-is the relationships you would logically and
ri~htfnllv have Tl-it11 State? and mlinicinnlities on exchanging mfor-
mation. You call this a tax treaty with the States.
Snd I want to make it clear that my question does not imnlv that
States and municipalities should not hare proper RCCWS to informa-
tion. But, it just strikes me that if lve go to great lengths in your De-
partment and in pour area, even with new Ian-s. we still have a tre-
mendous area here that. to some extent. is a back-door problem.
vhereby a State unit. politicallv. or even a city unit, politically, would
want to make use of this material in a political or adverse vav to your
jnstmctions. X%at advice can vou give this committee about leqisla-
tion to somehow re,rrnlate that: withont denyiy the State tas func-
tions and citr tax functions rightful use of this information. because
here is a wide-open barn door that you really have not dealt n-ith
ci ther.
Afr. Ai,FX.ISnER. As you l,oint out. we hare a halancin,rr of comPeting
interests. First, the interests that all of us have in effective State tax
 25
administration: and second, the interests that a11 of us have in pre-
serrinp taspayer privacy and in preventing abuse of poll-er.
Secretary Simon has sent to the Speaker of the House a recom-
mendation for a nex lag to replace the current law wit,h respect to
disclosure of tax information. That new Ian- will govern our future
relationships with the States. It IT-ill tighten up on present lawr: in that
Federal tax information would not be suppli&d to localegovernmental
units for tax administration purposes. We think. in striking a proper
balance, the place to stop is the States.
In the meantime, we are tightening up administratively b7 review-
ing our agreements with the various States. 48 in all. and bp nnposinp
new restrictions on them \Cth respect to their use of information, new
requirements on them to safeguard information: and new rights in the
IRS to terminate the agreement immediatrl~ if the States don’t. live up
to their obligations.
Senator SCHWETRER. Might there be some wrap of having-and
maTbe vou do : I do not know-hnrinp SOJUP kind of inspector general
or ombudsman that nlight just be assigned to sort of freelance around
YOUI’ whole structure to look out for this? Maybe there is a more
‘f ormnl thing. I do not know.
JIr. A~r.~~.~~~~~~. Ire hare that, noTT. Senator Schn-eiker. hfr. Rates is
in charge of our Inspection Service. and Inspection reports directly
to the I)e.puty Conimissioner. JIr. Williams. and to me. And their
dnt,y is to freelance around. to look around. to see what we are doing
and horn we are doing it. And t.hev have reviewed the very problem
we were just discns5ing about disclosure of t.as return information to
State tas authorities and local tax authorities, and the use by them of
this information. and the safeguards that they hare instituted or failed
to institute. So they hare bcrn lookin,rr into this rcrF area. Inspection
is a vitally important par-t of tax a.dministrat.ion.
Sellatol~ S~~l\VlXItl?R. Thank poll.
That is all the questions, Mr. Cha.irman.
The CTIATRI\~AS. Thank vou. Senator Schmriker. Senator Morgan.
Senator ;\Ionc,.~s. Jir. Conmli?sioner. I want to ioin in with the
comments of mv colleagues. and especially those. of Senator Mondale.
in complimcntiiq TOU for tryincr to administer JYN~ department.
while at, the same time living within the law.
I think OJIC of the things that. this committee, if 1 map sav SO, is
involved in is not onlr the abuseof I)OVW. bnt also the actual vi6lations
of law tl1n.t. are being carried on by agencies of Government. And r
do not, know hog- we can talk about curbing: incrensiw crime, how we
can talk about generating more respect for la\y, when Fe ourselves
violate it.
So T commend rou for what you arr doincr. ,4nd while 1 do not k-non-
the facts in the’most recent case for which ~011have come under
criticism. T certainly again compliment yen on’the position >~OU have
taken publicly with regard to nsin,c proper law enforcement m&-m&
and t.echniclues.T knorr it is not an cnsv position to take. 1 had difficulty’
in the same area with people who wwe workin,p for me when I was
twin,? to administer the law of the Statr of Sorth Carolina.
We were tnlkiny nbont intellirrcncr ~ntlwriny in thig committee’s
work. Ai~~tl it seemsto me that pan have probably got more confidential
 26
information on individuals and their finances than any ot.her agency
in Government. Do you agree with that?
Mr. ALEXANDER. Well, I surely hope so. If another agency has more
than we have, t,hey have no business having it.
Senator llORG.4X. And of course, most of this information is sub-
mitted to your department voluntarily by the citizens of this country
who willingly, as a general rule, try to uphold the tax laws.
Mr. ALEX~WDER. That is correct.
Senator iVoncszs. And I think, as you have pointed out previously,
Mr. Cornmissioney, if the taxpayers of this country ever conclude that
t,his information 1s bring misused, I think you may have substantial
difficulty enforcing these laws.
Mr. ALEXANDER. We would.
Senator MORGAN. But now, in addition to this information that is
submitted to you voluntarily, you have certain powers that have been
granted to the revenue department, the Internal Revenue Service, to
gather information that other law enforcement agencies do not have.
Is that not true?
Mr. ALEXANDER. That is correct, Senator Morgan.
Senator MORGAN. Such as--could you give us an illustration?
Mr. ALEXASDER. Such as one whiih I mentioned earlier, the right
by administrative summons to call on a third party to give us infor-
mation with respect to a taxpayer; the issuance, of course? of an
administrative summons to a taxpayer; the right, with limitations
that we have imposed administratively, to issue a John Doe summons,
a summons issued not with respect to the liability of a named person,
but in an effort to get us to first base where we believe that there has
been a taxable event but we do not know the identity of the particular
taxpayer.
We also have other rights, more in the enforcement area than in
the area of acquiring information. I have touched on those earlier:
terminations of taxable years, levies, and seizures.
Senator MORGAN. In other words, to give an illustration that is
easily understood, JTOU can go down to my bank, or any taxpayer’s
bank, and find out about my account, can you not 1
Mr. ALEXAXDER. We can, and we need to do that.. We need to have
that power. But we need to understand that a power of this nature
can lead to misuse or abuse or excess.
Senator MORGAN. You need the power, but it was given to you for
the purpose of enforcing the tax laws of this Nation, was it not?
Mr. ALEXANDER. That is correct.
Senator MORGAN. It was not given to you for the purpose of stifling
dissent, was it?
Mr. ALEXANDER. That is correct ; it certainly was not.
Senator MORGAN. It was not to be used for the purpose of harass-
in the steel manufacturers?
!%Ir. ALEXANDER. That is correct.
Senat.or MORGAS. It was not given to you for the power of enforc-
in the drug laws of this country either?
q_ Ir. ALEXASDER. That is correct.
Senat.or &RGAS. Then how can anvone justify-I know you do
not-but what is the rationale behind those who try to use these
powers for purposes for other than which they were given!
 27
Mr. ALESANDER. People perceive a need. Thev perceive in their own
minds a great need. Perhaps they perceive a void in the law in certain
areas-or perhaps in th\\, capability of enforcing a law. Perhaps law
enforcement people are r.ot there. The people are being used in other
ways; perhaps one couldn% persuade the FBI to divert itself from
things that the Attorney General called “always foolish and some-
times outrageous.”
So IRS, then, may be considered by those people to be a convenient
vehicle for filling a void that they have discovered; the use of the
tax laws to achieve this perceived good, such as depriving narcotics
traffickers of cash, for example: is not surprising, because narcotics
traffickers mould not be at the top of our list, I would say-if we had
one-of people who come forward to comply with the tax laws.
Senator MORGAN. In other words, to put it more simply, in the minds
of many well-meaning, well-intended public officials, the end justifies
the means.
~~.ALExAKDER.Y~~.
Senator NORGAS. Xow, and to do this, you have probably the larg-
est intelligence-gathering organization. You have about 14,000 investi-
gat.ors and 2.500 special agents.
Mr. ALESASDER. Well, those 14,000-actuallv, it’s about 15,000-
are revenue agents, and they are not criminal ‘investigators. But we
do have a large investigative force in the broad sense of the term. We
have about 2,700 special agents, and our people are good.
Senator MORGAS. And so? because of these rather unusual laws
which grant to the IRS spel:ial powers which are not normally given,
and could not be given, to law enforcement agencies, and because of
this vast reservoir of manpower, it is quite often tempting for others
to look to your department. for assistance in carrying out what they
perceive to be Forthwhile objectives.
Mr. ALEXANDER. It certainly has been tempting, and they would
like to enlist us as foot soldiers in the wars against whomever they
choose to do battle.
Senator MORGAN. I wish to sav to you, Mr. Commissioner, and to
others, that, I think this pattern ‘is not. something that came about in
recent years. As long as I have been a lawyer. I have been concerned
about what, I consider to be this pattern of abuse, or misuse, of our
tax lalvs. For instance. as you may have pointed out, you have the right
to make a jeopardy assessment and to take a person’s property into
possession without affording that individual any of the due process
remedies that we now use.
Jlr. ALE~AXDER. That is a peremptory right. That person can chal-
lenge only the good faith of our action.
Senator MORGAX. Sow. a good examnle of that would be 1971, I
believe, when the President. in his well-meaning and well-intended
action, ordered the IRS to cooperate with law enforcement officers in
drug enforcement. didn’t he?
?Qr. ATXUAWER. That is correct.
Senator MORGAN. And the purpose of it being that, if the law en-
forcement officers were not able to make a case against someone that
they suspected of being involved in a crime, then they would call on
you to come in and make a ieopardg assessment, or exercise these
extraordinary powers that you have.
 28

MT. AI,EX.\SI~:. .T’m li:c yure in -\;orkcil that ~vav. but I will state
that the narcotics l)rogran~. which has been trrmiLatrd. was. in mv
judpmt, nnt 11sound IIS~ nf IRS’s resotirces. And. in some instawc$
it, was not a sound use or proper use of IRS’s powers.
Senator 1101iu~s, Well: I can tell y-on of a personal esperience, Mr.
(lommissioner. somewhat similar lo vow own. As attorney general-
as the committee has heard 11if say l~f&rc~--tlkr~ State Riireau of Investi-
gation was under my charge. And T had the finest and most enlightened
director that I think you \vo~ild find any~vherc. Put he was SO intent
on doing something about t?~e drug traffic-and it was such an emo-
tional thing---that if he could not :~ntke out R ~3s~. then he would
turn to vou people and vou would seize the money or the automobile.
And I fourid out nbotit’it. and tlwn he and I had some rather-not
heated exchanges-but it was a position that was just as hard for me to
defend publiclv because of emotion as it is for you to defend your
position. I think that’s another reasw! v.-!~J-we need strong men in
1~Gtions where they we called upon to csercise extraordinarv power.
Mr. Commissioner. my t.ime is up: I n-ould like to pursue this much
further, and I hope that after Tvego into the COISTIZLPRO activities
that, then ore vii1 be able to come back and put. our fingers on some
illustrative casesso that, the America.n people can fully comprehend
how dangerous it can be for t,he people of this country for your power
to be abused and misused.
Thank vou, Mr. Chairman.
The C&RMAS. Thank \ou. Senator 3Iorpan.
I \\-ould like to follnw up on Senator Morgan’s remark by giving a
concrete illustration. This comes from an interrut memorandum of the
CIA [exhibit, 4 ‘1, and it had t o d o with the CL\‘s request to the IRS
to do an aitdit. on the magazine “Ramparts.” ,4nd T read the memoran-
rim11which relates to tll& cons ersations between the CL4 and the IRS
working out this arrangement.
The CT,4 agent who writes the memorandum n-rites the followincr :
“I told them of the i nformntinn and rumor’: v e have heard”- “them”.
being the IRS--“about ‘Ramparts: proposed expose with particular
reference to the I’.S. National Stutlrnts Association.” Kow that. yell
will remember. was the association that the CL4 was hearilv involved
in, and helped to finance. Vhen that, was exposed, I am told that the
CL-1 then. after removing its connectio!i from the organization. urged
the 1R.S to no longer give it. tax-esrmpt~ status.
Reading on from the memorandum, “1 impressed upon them the
nirector’s”----this n-orilrl be Direct or I-Telm--“the Director’s concern
and expressed our certainty that this is an attack on CIA in particular.
and the administration in general.”
Reading from the next page of the IIIC~IC):
I suggested that the corporate tax returns of “Ramparts” be examined, and
that any leads to possible financial supporters be followed up by an examination
of their individual tax returns, Tt is unlikely that such an examination Trill dr-
relol~ mnch worthwhile informnrion a& to the magazine’s source of financial sup-
port, hut it is possible that some leads will he evident. The returns can be ralletl
in for review 11s the Sssistant Commissioner for Compliance without causing
anr part,icular notice in the rrslwctive IRS Districts. The lnoposed examination
would he made b.r Mr. Green vho lr-r,uld adrise me if there appeared to be anp
information on the returns worth following up.
.---
1 see ,I 46.
 29
Now I can’t, imagine a more clearcut case of the CIA attempting to
IIX the IRS for the purpose of getting a magazine that proposed to
expose activities that the CIA wanted to conceal, or a more threaten-
ing use of governmental polver to undermine the freedom of the. press
in this coumry.
The question I have to ask you. Mr. Connnissioner, is, is it legal for
the IRS to examine individual tax returns. or organizational tax re-
turns, and then supply the informatio!r it obtains to the CIA or to t.he
FBI for purposes unrelated to tax collection?
Nr. ALESAXDER. Two points. Sumber one. the IRS has no business
engaging in the use of its processes to harass people, to harass so-called
enemies of any kind, the magazine you mcntioncd or anyone else.
Number two, the Director of the CIA can ask the IRS for informn-
tion in connection with a matter officially before t11~ Director, and the
IRS would hare a responsibility! under present law, to supply that
information.
The CEI~IRM~~. Do you know how a magazine publishing in this
country, operating under the protective umbrella of the first amend-
ment to the Constitution. could be officially a matter of concern, or be
officially before. the Director of CIA, for the purpose of entitling the
agency to obtain the assistance of the IRS to do audits of its accounts?
Mr. ALEXASDER. No: I don’t. But the one best capable of answering
that would be the Director of the CIA.
The CHAIRMAS. I think we Jvill have Mr. Helms back again and
again and again.
These are the lists that we are referring to today-4.000 organiza-
tions appeared on the Special Services Staff list, for audits, and 8,000
U.S. citizens. It is our understanding that about half of the names,
organizational and individual names, came to the IRS and were in-
cluded on the list at the request of the FBI.
The point that I made earlier I would like to make again at this
time. It is established by the evidence that even the names of indi-
viduals and organizations that lvere connected with the war protest
movement, or might have had some connection with the problem of
violence at that time, were not. a proper use of the tax-collecting power.
I shall ask the committee to release the lists in their entirety; time
does not permit that now. When you look at these lists you will seehow
far afield they went even of the official purpose that, under the memo-
randum to which we have referred, they were supposed to be put. For
example, here are some groups that I have taken from the list since I
have been able to move through it this morning, in addition to those
that I gave at the commencement of the hearing, groups that are
well known to all of us, that appear on this list for purposes of having
t.heir tax returns audited. And it is very difficult to find any possible
justification for such church groups as the American Je&h Corn-
mittee. the American Jewish Congress. the *issociated Catholic Chari-
ties, the Baptist Foundation of America, the B’nai B’rith Antidefa-
mation League, or such Government institutions> if you please, as the
U.S. Civil Rights Commission, or such professional ass&ations as the
American Law Institute and the Legal Aid Society. Or such political
organizations as Americans for Democratic Action.
And, yes, on the other side of the spec,trum as well, the Liberty
Lobby. the John Birch Society: and the United Republicans of Amer-
ica. Or such citizens associatrons as Common Cause, the Legal Aid
 30

Society, the Committee for a Sane Nuclear Policy, the National Educa-
tion association, the Women’s Liberation Movement.
Somehow, the Women’s Liberation Movement is on all of the lists.
The Fund for the Republic, such foundations as the Carnegie Foun-
dation, and such publications, magazines and newspapers in this coun-
try as “Human Events”, “Playboy”, “Commonweal”, “Rolling Stone”,
“The National Observer “, “The New York Review of Books”, and
“The Washington Monthly”.
I just think that going down the list and pointing out how far afield
the IRS was tasked to go, demonstrates the tremendous dangers to our
privacy and to our liberty that are implicit in this kind of under-
taking. We fought the Revolutionary War over a problem of taxation,
and we had better make certain in the future that the IRS attends to
collect taxes, and doesn’t become the instrument for the harass-
ment of other organizations and other citizens in this country, in con-
nection with which, or with whom, there are no questions of tax
liability.
Senator Schweiker has a question.
Senator SCHWEIKER. I do have one question for the Commissioner.
I realize again, Mr. Commissioner, this is before your time frame;
maybe you could shed a little light. It has to do with another memo
called “Tax Protest Movement” and a tax protest list, and it is dated
December 6,1972, to District Director, St. Louis District, from Intelli-
gence Division [exhibit 5 ‘1.
It says:
Attached herewith, for your information, is a copy of a list of various members
involved in the tax protest movement. These individuals have been identified
through investigations conducted in the San Francisco District relative to various
tax protest groups. It is believed that some members of these groups are capable
of violence against IRS personnel.
And going through the list of names, the name that obviously comes
to attention first is Senator Joseph Montoya of New Mexico. I wonder,
is there any light you can shed as to why you think Senator Montoya
is violent, or is on a tax protest list? Can you help enlighten us how
this got through the system!
Mr. A4~~~~x~~~. I’m afraid I can’t help very much because 1 can’t
put myself in the place of the author of that list. The only connection
that I can think of immediately is that Senator Montoya is, after all,
the Chairman of the IRS Sppropriations Subcommittee, and some-
one might have thought that he did violence to our appropriation. I
can’t, think of anpthinp else. I think that points up the absurdity of
someof the lengths to which a few people have gone.
Senator SCHWEIKER.Thank you.
Thank you, Mr. Chairman.
The CHATRMAS. Thank you, Senator.
Senator Mondale?
Senator MOSDALE. Commissioner ,Qlexander. in response to the
chairman’s question about the CIA inquiry about the tax status of the
Ramparts magazine reporter who might be about to disclose CL4
funding of the National Student Association, I thought I heard you
say, in your opinion, it is still your duty under the law, should the
1 See p. 48.
 31

Director of the CL4 request access to information, to turn it over to

him 1
31X'. ,kLEXASDER. It is.
The head of an agency-
Senator MOSDALE. In other words. this could still happen today?
J1r. ALEXASDER. It could. The Director of the CIA is the head of
an agency, and under these presidentially approved regulations, under
present law, t.he head of an agency can call on the IRS to furnish tax
information with respect to a matter officially before him. It would
be difficult for IRS to question the Director of the CD4 as to what’s
officially before him.
Senator MONDALE. So, if you had a Director who wanted to do the
same thing today, and he asked you officially for the returns, you would
provide them to him today, and you would not inquire of him as to
what he had in mind.
Is that correct?
Mr. ALEXASDER. Let me modify what 1 have just stated.
The Chief Counsel has just pointed out that there is a word, “may,”
in that regulation, rather than “shall.” We have been interpreting that
to be “shall,” except in these rare instances, of which I gave an ex-
ample. It would be very difficult for me to make material changes in
this established practice without a change in the law.
I think you are-
Senator MOSDALE. Have you, since 1973, ever inquired of either the
FBI, the Justice Department, or the CIA when they have requested
tax information as to their real reasonsand useZ
Mr. ALEXANDER. Oh, yes.
Senator MONDALE. You have!
Mr. ALEXASDER. Iye certainly have.
I have personally, and the Chief of our Disclosure Division in our
compliance function has. Yes, we have.
Senator MONDALE. Do you inquire? under all circumstances, when-
ever you receive a request to determine that the use of that material
is solely for legitimate and official duties within the law?
Mr. ALEXANDER. The letter request.ing the tax returns, under our new
procedures, comes to me.
XOW, I look at that letter-there are a number of them, a great
number-in 1974. the tax returns of more than 8,200 people were
requested.
Senator MOSDALE. From the FBI Z
Mr. ALEXASDER. x0. These were total requests from governmental
agencies.
Senator MONDALE. And roughly, what agencies?
Mr. ALEXASDER. Mainly from the Department of Justice and U.S.
attorneys.
Senator MOSDALE. Were some from the CIA 1
Mr. ALEXASDER. according to the lists that have just been handed
me, for the calendar vear of 1974, which I believe to’be correct, there
are none from the CIA. The Department of Justice, which acts on its
own behalf and on behalf of the FBI and U.S. attorneys, is, by far,
our largest customer.
Senator ?~~OSDALE. Which other customers do you have ?
Mr. kF,XASDER. The Department of Sgriculture. the Bureau of
L41cohol, Tobacco and Firearms, the Department of Commerce, the
 32
V.S. Customs Service, the Federal Deposit Insnrnnce Corporation. the
Federal Home Loan Bank Board. the General Acounting Office. the
Interstate (‘onlmerce (‘ommission, the I)epartment of Labor. the SEC,
and the Renegotiation Board were the requesters in calendar year
1974. And a total of 29.~~9 retnrns were requested, Senator Mondale.
Senator MOSIL~LE. Under VOW interpretation of the regulation and
statutes. any agency of the J?ederal Govermnent can request these re-
tllrns if they certify the purpose is official.
Mr. Ar~x.\sm:~r. Thcr need to do sonlething more than that. They
need to give IIS RSSIII’AI~C~ that they will hold the information confi-
dential. They need to give us. and are giving us. sonle detail as to \vhy
thev need it, rather than just a simple statement that it. is needed.
*ow, Mr. Whitaker. would vou amplify on that statement ?
Se&or MOSI)AT,E. .Just a mi;lute.
This is really disturbing. in my opinion, because I think you are
doing a good job. But T thmk the horse is still out of the, barn, and the
IRS is still serving as a private investigative arm for these agencies
whene.ver there is something they want to know, no matter what
agency it is. As I read the law, there is supposed to be an inquiry into
whether this is within the oficlal duties of the ,Justice Department or
the I-.S. attorney requesting it. But instead, just about anybody in gov-
ernment can inquire. and I am not at all convinced that you are in a
position to know what on earth they have in mind with those returns.
Afr. ~~XANDER. Senator ~~ondale. the concerns that you express,
that we share. account in considerable measure for our request that
the law be tightened up. so that the law and the regulations will give us
the right to refuse to furnish tax information where we believe that
the request is not a proper one. where we. believe that there is not a
real need for the infornlation or it can be reasonably acquired else-
where.
Senator JIosn.\r,l~. The reason yen want to tighten up is that right
now these retnrns. as we sit here, can be rerlnested and used for illegal
purposes.
?tfr. ,~LEX.\NDF,R. 1 believe that that statement is correct, and T he-
lieve that under the present regulations. it would be difficult. it would
be awkward at. best. for us to effectively police requests so as to be
able to give gon absolute assurance that the return was requested for a
proper purpose.
Senator Mosn.\r,~:. Sow. I want to give one further example here
of ~11~ I think the failure to have proper controls on this information
could: if unrestricted. destrov this conntrv’s freedoms.
Senator Huddleston earli;r referred to” a civil Tights orpanization
in Atlanta, and T think you are familiar with this case. We do not
know what, actnnllr happened. and the chances are that, it did not PO
beyond what was ~~ecomn~endcd here, but we do know that the FRT
ob’tained information. that was sul,posed to be classified in the IRS.
listing the donors to this civil rights organization. And this is what
t.he officer in the Atlanta office proposed to do-and I’m going to refer
to this or~nnixation simply aq “or~anixation” and its nationally known
leader as [deleted]. [S ee exhibit 3 ‘1. Here is what he said :
It is believed that donors and creditors of the organization present two im-
portant areas for counter-intelligence activities. In regard to the donors it is
 33
suggested that official organization stationer)- hearing [deleted] signature, copies
of which are available to the Atlanta office and n-ill be furnished by separate
co1llnlmlication to the Hnrean lal)oratorF for reproduction pinposes, be utilized
in advising the donors that the IRS is cnrrently checking tax records of the
organization. and that [deleted] through this phony correspondence”-in other
n-ords. they are going to sign [deleted] name for him-“wants to advise the
donor. insnring that he reported his gifts in accordance with the IRS require-
ments so that he will not become inrolred in a tax investigation. It is believed
that such a letter of this t)-lw from the organizntion may cause considerable
concern and eliminate fntnre contributions.
Kow this was a decision based upon information they -were able to
obtain froul the IRS. which they were going to use to destroy the
funding of a moderate civil rights organization which apparently
displeased them.
Now. in answer to JIr. Huddleston’s question, you said such a request
would go to the bottom of the pile. It didn’t go to the bottom of the
pile. They got the information from the IRS. and-we don’t know
whether this actually happened. apparently it did not-but at least
one agent was going to use it to try to chill and undermine one of our
moderate civil rights organizations.
So, do you not see. in the failure to have the tightest kinds of con-
trol on this information so that it is limited solely to tax enforcement
and carefullv defined other official lcpl uses, that the present loose
control of this infornlation makes it possible to resort to these kinds
of outrageous and totally indefensible and exceedingly dangerous
practices that threaten ,1inerica’s freedom?
Mr. ALEXASDER. Yes. Senator JIonclale. We certainly believe that
t.he laws should be tightened up. We are accountable for our own
actions. The actions of other agencies are matters for which they
should be held accountable. We rely upon the present law. u on ood
faith, and we think WChave good reason to so rely. We WOLI f d li B-e to
be able to give 100-percent assurance. but we cannot.
Senator Xosnar,~. Can there be any solution to this privacy matter
so that they are not, abused in these ways unless the Commissioner of
the IRS possessessole authority over those documents and power to
determine whether or not their usesare proper and legal? If you must
continue under present. policy, that vests that authority in the FBI,
the Justice Depsrt.nwnt and all the other agencies mentioned on those
other lists, can there reallv be anv control P
Mr. ALEX.~NDER. There’cnn be some controls.
Senator MONDALF:. But. not much.
Mr. ,'LExANDER. Rut not absolute c011tro1s.
Senator ~IOSDALE. All right. Thank J’OU.
The ~FL~IRM.~S. Anv other questions ?
Senator HC-DDLISSTO'X. ,Just a loose end or two, Jlr. Chairman.
The CHAIRMAX. Yes; certainly, Sena.tor Huddleston.
Senator Hrnnr2F,S’ros. In respect to the information that, you have
given us that certain procedures are now in eft’ect to tighten up the use
of confidential informants. we have a memo from the IRS to t,he spe-
cial agents in the ,Jacksonville district which sets out the procedures
to be used. This is dated ,Julv 9. 1974 rexhibit 6 ‘I.
77’e also have a tax Inerno’\~-l.ittt’ll bv one of the agents. at least, t0
whom this Iv-assent. which is headed ‘:Instructions from dI<W,” who
 34

is Mr. J. K. Wishwell, and apparently his comments on these sup

gestions-he writes, for instance, “No 1, reduce fund to $500 for (a
confidential informant) ))’ on which he writes “ha, ha, ha.”
Senator HUDDLESTOS. There is’ another entry in which he says,
“restrict payout to $250 without prior approval,” on which he writes,
“ha, ha, ha.”
Another provision, “after each payout rendezvous with another
special agent or JKW and hand deliver receipt, voucher and import
and pick up reimbursement check.” He writes? “ha, ha, ha.”
“No. 7 said he would give me instructions m writing to minimize
misunderstanding,” and again he notes, “ha, ha, ha.”
Is this the kind of response that you have been experiencing with
these instructions that may have gone out to the agents in the field?
Mr. ALEXANDER. I don’t think so. I think this gentleman obviously
was a man of few words.
[General laughter.]
Mr. ALEXANDER. This is not typical of the IRS special agent. I think
there are many fine, dedicated people doing a tough job well. I think
there are a few, and a very vocal few, that are impeding efforts toward
making our tax administration system sounder and more responsible,
and this gentleman’s repetition of his word “ha” would put him in
this category.
Senator HUDDLESTON. I’m wondering, though, about a gentleman
who’s been out in the field dealing with informants who are not people
who would be characterized ‘aspillars of the community. There is one
who turned in his own father as a tax evader. I am wondering if this
is not a commentary on the workability of any set of rules or standards
if you are going to deal with that kind of people.
Mr. ALEXANDER. Well, tight controls, sensible tight standards, are
surely better than the alternative of lax or nonexistent controls and
standards.
6enator HUDDLESTON. I agree with that. I was just suggesting it is
an area that would require continual supervision if it is to be employed
at all.
Mr. ALEXANDER. It does, Senator Huddleston. ‘This is an area fraught
with danger, the danger of misuse, the danger of actually employing
people of, st best, doubtful character, doubtful reputatio?! and doubt-
ful veracity by the IRS, with its great powers. An addltlonal fact is
that the institution of a criminal investigation itself, when made known
by third party contacts. is a very severely damaging thing to the per-
son investigated.
Senator HUDDLESTOK. Now, the agency has also used undercover
agents, as I understand. and there is at. least one instance where under-
cover agents infiltrated the inner circle of an individual who was
undergoing a tax investigation and tax prosecution, as a matter of
fact. Because of this, he was able to learn what the defense strategy was,
what kind of ,affidavits were to be filed, what plea was to be made, and
did, in fact, convey this information to the prosecuting attorney.
Is this the kind of thing that undercover agents are expected to do?
Mr. ALEXANDER. No ; it is not.
Senator HUDDLESTON. Do you know of any other incidents besides
the ones I cited. which is a case out in Los angeles? Calif.. where this
might have occurred ?
 35
Mr. ALEXANDER. I am aware of that case, and I am disturbed by it.
I do not know personally of any other inst.ances. I don’t know whether
those with me today know of any others.
Mr. WOLFE. I know of none.
Senator HUDDLESTOIY. The system which utilizes undercover agents
and informants certainly lends itself to that kind of abuse.
Mr. ALESAKDER. That is one of the dangers in the use of a confiden-
tial informant, particularly if the confidential informant is encouraged
by silence, or by action, or by knowledge and acquiescence, to engage
in activities beyond the line, beyond the line legally, beyond the line
ethically and morally. These present very great dangers and I question
whether the benefits to the enforcement of the tax laws are worth the
cost to enforcement of the tax laws.
Senator HUDDLEST~~. We also have information that documents
which were maintained in the IGRU system were destroyed contrary
to the regular document destruction schedule by the IRS.
First, what was t.he IGRU?
Mr. ALEXANDER. The IGR,U, to which I referred earlier, was the
Tntelljpence Gathering and Retrieval Unit in the IRS. IGRS was the
Intelligence Gathering and Retrieval System. This was to be a com-
puterized system for maintaining general intelligence information
that the IRS had gathered. It resulted from a study instituted, I
believe, in 1969, implemented in 1973, and modified in 1974. The Deputy
Commissioner and I suspended this system in January of this year. It
was a system that ,accumulated a great. deal of information of some-
what doubtful value. But, the system itself, the idea of computerizing
this information, is ‘a sound idea. The implementation of the system
was the problem.
Senator HTDDLESTON. Is there any way to make distinctions among
that evidence that might have been collected illegally, if the evidence
were valid 1
Mr. ALEXANDER. I think this operated as a vacuum cleaner; every-
thing went in, in some districts; very little went in, in others. The
district offices were encouraged to build up the system, and some of
them reacted with great vigor to do precisely that, Miami being one
of such offices.
On January 15, we found that 465,442 names were in the system,
and included in those names was mine.
Senator HUIDLESTOS. What about the destruction of these docu-
ments contrary to procedure ZKere you aware of that Z
Mr. ALEXANDER. I became aware of that recently, and it is very dis-
turbing to me.
Senator HL~DLESTON. How could it have happened, or how did it
happen Z
Mr. ALEXASDER. I don’t know of my own knowledge how that hap-
pened. We give instructions in the national of&e. We expect those
instructions will be carried out, and in almost every instance they
are. In some instances. people, through misunderstandings or through,
I’m sorry to sag. a willful act, refuse to carry them out.
Senator HUDDLESTOS. Are you aware that in at least two instances
documents wet-e destroyed related to extremist organizations or ex-
tremist individuals?
MI'. ALEXASDER. I have become aware of that, yes.
 36

Senator HIJDDLESTON. Do you attach any significance to that 1

Mr. ALE~~SDER. Yes: I do. It causes me deep concern because it
would appear that someone thought that thrse should be destroyed
because of the adverse impact on. perhaps, the assembler or perhaps
the holder of the document. if they were not destroyed. Of course,
that is a concern for the head of a law enforcement agency.
Senator H~nnr,esros. Also the revelation of how the information
might have been obtaiued would leave some question.
Mr. ALESASDER. That is another problem.
Senator H~-~KEsT~s. Thank vou. Mr. Chairman.
The CII..URM.IS. Mr. Commissioner. did you testify that in 19’74.
something in excess of 20.000 income tax returns were turned over to
other agencies of the Government ?
Mr. ALEYASDER. Yes: I did. The number, I believe. was 29.520
plus.
The CH~IRX~. 29.520 plus ?
Mr. ALEX.ZSDER. Yes. The returns were for those 8.210 taxpayers,
Mr. Chairman.
The CHMRXW. 8,210 taspayers. Now, does that include returns
that may have been requested and turned over to State governments?
Mr. ALEXANDER. No ; not at all.
The CHAIRMAN. Do you have the figure for the latter?
Mr. ALEXASDER. I have a figure, and I would like to supplement this
for the record, to give you the full figure, Mr. Chairman. You see,
returns turned over to the State governments actually consist in large
part of taped transcripts.
Now, my understanding is t,hat in 1974, the taped transcripts of
some 63 million individual returns were turned over to State govern-
ments; but in addition to that I receive a number of requests from
State governments for individual returns that are not included within
this figure. We have agreements Jvith 48 of the 50 States. We do not
have agreements with Texas and Nevada. and I would like to supply
for the record, if I can, Mr. Chairman, a full and complete listing for
you [exhibit 17 ‘1.
The CHAIRMAS. I wish you would.
You see, as the record stands now! in 1 year alone, nearly 30,000
returns involving more than 8.000 taxpayers, were turned over by the
IRS to other Federal agencies. You have said this is a very loose ar-
rangment. The laws need to be tightened to give a greater measure of
confidentialitv.
This committee. is concerned about what is becoming obvious in the
course of these hearings, and that is the spreading of “Big Brother”
government methods, and what your testimony shows is that, at least
as of no-w. every taxpayer in this country is on notice that when his
tax return is filed in the TRS, it means anv agency in the Government
that can claim an official interest can pet-into that tax return for its
own purposes. That is what it. means. A4nd. what better form is there
to intimidate people, harass people, force them to comply with what-
ever it is some other arencv may have in mind, than to have his tax
ret,urn and information that it, may contain.
1Seep. 103.
 37

This morning we have seen further that, until recently at least,

the IRS itself maintained a list of 8.000 individuals and 3.000 orga-
nizations which other agencies of the Government asked them to com-
pile for the purpose of making tax audits, though clearly from the
nature of these organizations, they are not suspected of owing taxes.
Now, if that isn’t an abuse, I don’t, know what abuse is.
firthermore, some of these agencies had no lawful right to request
that these names be placed upon such a list. I gave you an example a
few minutes ago of the CIA making such a request on “Ramparts”
magazine because it feared that “Ramparts” might print something
that the CIA did not want printed. Yet the law on which the CIA
derives its powers provides expressly that the Agency shall have no
police, subpena, or law enforcement powers, or internal security func-
tions. It was to stay out of domestic affairs. But it didn’t, it hasn’t,
and it won’t until we begin to write the laws much differently and
prescribe penalties for their violation.
I want to thank you, Mr. Commissioner, and I want to thank your
assistants who have come here. I want to thank you for the coopera-
tion you have given us and the information you have turned over to
us. It is very helpful to the committee.
The committee now stands adjourned.
Our next hearing will be announced by the Chair.
[Whereupon, at 12: 32 p.m., the committee recessed, to reconvene
upon the call of the Chair.]
 HEARINGS EXHIBITS’
EXHIBIT 1

1 Under criteria determined by the Committee in consultation with the Internal Revenue
Serrice and the Federal Bureau of Investigation, certain materials hare been de!eted from
these exhibits some of which were previously classified to maintain the integrity of the
internal operkng procedures of the agencies involved, and to protect intelligence sources
and methods. Further deletions were made with respect to protecting the privacy of certain
individuals and groups. These deletions do not change the material content of these
exhibits.
(39)
41
4”
43

::
;.

/
 --.----. -
./ I
 EXHIBIT 3

-
[Tax return% - and information 'irom IRS]
investigative files were recently received and analyzed.
[Paraphrase
***
 EXHIBIT 4

.: .

Dcclasqified by authority
I
 : : .- : . -’ _. . - -_.
-.. .-
._‘- -_,. . - --.-

.
._ ‘- 1 ._

. f _----_ . i--r- _ _ .

CC : .
 .48

EXHIBIT 5

Y
lij.iX CITY t: STAT;:

g (Cont'd)

Nontoya, ‘Joseph (Sen)

pa-l.cmio, CA

ssx Diego, Ch 92116

Brid,:eford, Connecticut

l’arEdClIa, Ch

Names deleted ‘i’acoiira) \,iashm&on

Red Blxff, Cfi

1h2zx0 ( CA

vdlcy Sprill~r, CA 95252

Kcrced, CA

Cincjnatti, Ohio 45205

 :. .. . 7,ist of Orj:ani-:,tions
_: .. c.
\
Student. Ken-viplcnt Coordinating Coornfttec -_ .
.’ .. _ - ‘; . . ..‘...y’.“.’ . :
stuclcnt voice, Inc...’ *:* 1 \I.,’
i .
;. i,. ‘.i,@‘:.‘i:
:.,.:..- ..“. . .
a.;

Sojourner kbtor Fleet, Inc. ’

:_ ,‘.’ .;
Southern Education and Acseorch Inctitutc, Inc.

Congress of Racial Equality .

I .:. ..’ ;..
,‘,
Students far a Democratic Socfety’ .i ,..“,:
:...- .-
Ulack Panther Party .. .:..I ...‘? . : . ...
J _ ‘; :. .,‘. ..
.
Revolutionary i’.ction I~lovement’ ;
.. ....:‘., _
3cxons for Dcirnse ad Justice ‘.’ ., *j I. __.
, .,
,,;: - ‘... .. , .. ‘.
. ,.,! :. .:.’ ,.‘( -., .” .,
Naticn of 151311. .- _. .a’ .
i
‘,
ILiro-b.;.-cricnn P.cse.-.rch Inr.t:itL~I:e, .Tnc.
_’
v: .,i*., :
Sot;thcrr, Conference CiucntFon !‘uad . :,
.,..’ :
‘.

Tri-Lj?c Offset Company, Inc. _ ‘,:’ _ ‘,, ::..‘;‘.; _ “.:;“i”

. . :. .
The lledicnl Coxnittcc for ILmnn Rir,ht? .

‘l%c Fund for Educnticll 2nd 7,e~nl Defense

.
,_-‘. ,;,‘, ‘, ,‘.. : .’ .
tic I4fnu tcmen ,:,,.<.’. .:
: *
” :. . ... .:I.-. ‘.
The Amerlcon Hazi F;rty
‘., 9. . I
The United Klans of h-ncrica, Inc.’ ” : ‘:‘;
,..’ ,c
The White Knights of the KKK .. .
:. -.
The llational States Rights Party
 31

_.

.*, . 1. ,; .I‘;\,. ‘:. c,:‘; ,,

B&- Brbth+pod ., ,:;‘.,j: .,;~“.‘~&:.’ ., . . .
. , ::’ : . .. * .‘_.. ,*,‘. .“‘.:‘.. . . .’ ‘..T. .‘:..
Blcck &ks .. ..:. .; . . *., . ,‘y:; _:
I’ ‘.. : ..;:’ ,. . :, , .*.:s 1: : ‘.I I _“
Black United Strategists ‘. ..-,‘..’
,,*. :-:. .‘
.. . ., ‘,-. .:, ;,
Black United Youths ’ ‘:‘;..i”\, ,,

.Citywide Citizens Action Coaittec ‘.J

‘: .
civi1.ia.n Resiztancc Coxnand 1,:
. , .- ..“.:.
.:. 1.
Comnandos L
. . ._
~cnmunict Marty You~b Club 1.:
.

conpx.;s of j‘xcdon ... -. ‘;-:i,:

. . ,:. . ~
Conscrvntive Vice-Lords, Inc.
.‘. . /_
-Daytqn Allinncc For I’.;cic? Cqtiality
‘.
Fair Play For Cuba Cwaittec
./..--.
F,rce corps .. 1,’ .‘, .: ..::I
9. :..:,.,. ..:’
Free Speech Novcmcnt ,. ‘ .,:.
-;
Fund for The Republic, Xnc. ’ ‘. “, ‘.:I,.
.. .. ..
Group l:or Advanced LenJcrsl\ip :
-( .’ .’
InGtLtuCc for Awr.icsn Democracy, Inc.

InstituLc,for the Study of alnck Unity

_.
Intcrnntional rIdrl:crs Order .’ :
I
 Life Lin: Foundations, Inc. , I ;.;I ., *.i ; ~ ,“:“. .;.: ::I .’
. . . ., .’ .. .. ..L,’ ‘; _’. :..
,..._. :.’ .,,,. -.r.:...:-e.,:.. , -.
. flalcOim .. .
x Society . .‘* *,,.. a. . . . . . . . *. -,
*.~“(.;*. ._. . ...)’ - :..
Ifedgar Evers Rifle Club j’ ..:..;::, .;“’ ” ‘, ‘3 :.
. , .( ,. ,
. . . (>., . ,.’ _.
Militant Labor Forum ” ’ t ” ..-:.::“. y : * . , : . ;,,
. ‘I ‘..
‘. . . .
“Nonroe Defcn:c Cow2ittee ‘_,.._.
.-. .‘.‘, s
. ._
. .. ., . .. .
.
,._ t:uslim Ilosquc, Inc. ’ .iJ-Z.I!, 1. .,, ‘. .,
.. ‘: ., ‘. .”
;/. ..*
Nntion.?l. Student Associatfon ”
.I’ ;
J ‘(Formerly U. S. l:atFonoj. Studci:t AssocintLon) I
‘. : .’ j”
Operation Brca%tl;roug?j *’
;. .-.: ‘. .”
.’ ‘_ . .I. 1 i: ” 1, ..
Oxgzniznl-ion of Afro-/an-r’ican Unity, Inc. :‘
;:. . ,,.,. . . . .
.(, : ..,,. t
Patriotic Party ’ ,.” -;. . ..“. ‘.
,
,,. . . ,,d _... . . :j
.“.. ..‘_,.,,. ,, I,.
Tlic Pence Foundation . :.:

: ) ,' s
RabLnOi4iti Foundation . .. :
‘f,:,. ‘; ‘,. ,..1 ,.’ .
. iv... ‘j.‘...: : ,;. ;‘ ,“,
Republic of New A~ricc . : ,, 1: : ‘L
. . ,: . .: ;.. . ( . . . . . ‘.
; ;.. . .‘ ,, :’ ; * ,) .., . .”
. Sccc&7I.csc I ,,_.., :‘,“. “.;) :r+,-;:.,:- ‘., . i ;, :,! :‘,i. ‘y, .;,
‘. ‘. . .
;‘. ,,’ ” .. ..*
:’ .’ * ‘....,, .,
..: -
__ .: . . . ,. ., ..:‘, ‘- .- ., ..: . .
: : :
. Soldiers of Tl?C cross ‘,. .,: .:* . ; ,a_ ; .’ .
. . .i: : ,, : . . \ :
,
Gouthorn Student Crganizing Comittc?.
.”
Unitarinn Society . ,.. . ..*
. I . ’ \ ,.‘“: .
United Black Co;nnwnity Organization ’ ‘,
.’ . ::
J W. E. D. Duboi; Clubs ’ ‘.. ‘:. ” * ’
.., ‘.,‘::‘.a .. - .-
Bar‘kcrs Uorld Party -.
.-,
Young Socibllst hllinncc ,;
EXHIBIT 6
 34

Tyuc::
-...‘y_--- of I’ :)’ :\‘:,t i,utib,:-L.
._.. -..-.------ <:<l
 NAMEJEETED

Attcchmcnts

CC: Chief, Xntelli~fncc Div.

Jach.oixillc Dictxict
 I
-I-
OffIr? of
Appellate Division Audit Divtrion Intell~qznce Division nternational Operations

Coordination and Offlce Services Staff Administrative Office Administrative Office

Management Staff Staff Assistance
(Visitation) D,ws,ons:
--
AUdlt
Branches: Branches’ Br;lnchrr:
Collectlol~ and
Programs and Centrallad Activities Opcwtionr
Taxpayer Service
Procedures Exempt Orgamzation Program
Foreign Programs
Special Services Examination Technical
and Research
Programs Develooment
Rerources and Branches: Staffs
Analysis Chef Clawfymg
OfflCW
Conference Staff
Examination Branch
Field Branch I
Field Branch II
Foreign Programs
Branch
Offace Branch
Research and
Technical Branch
Review Staff
Service Branch
Special Procedures
Staff
38
 39

EXHIBIT 8

L‘
Honorable Donald C. Alcxandcr
Comnissioncr of Internal Revenue
Kashington, D. C.

Dear Commissioner Alexander:

This transmits a copy of our report of results Of

the special on-line nudit of narcotics tcmination
assessments.

The Service has made approximately 3,500 narcotics

termination nsscssncnts totaling 5104 million since
August 1971. ‘lhcsc asscSSInents have gcncra1ly been
mndc under tight time constraints bnscd on iniormntion
furnished by local law eniorccmcnt nl;cncics with little
or no indcpcniicnt investigation by the Srrvicc. The
information furnished is generally not sound cvidcnce,
but pri!narily consists of projections, opinions or con-
clusions of the local lab: cnforccment officers. The
invcsticatjcns al-c not of the s;o,le depth as normal
audit exzs:il?zt ions.

In these casts, field acents initiate inuncdiatc

asscssucnts ill order 1 o scizc n5scLs in custody of
local nuthoritics before the assc~s are rcclaimcd b)
t.hc taxpayers or their nttorncys. The jndivi duals ar-
rested by locnl police ;,‘.~~crally remain in tllcir
custody for less rhon 24 hours.

\k found that procedures and practices used in

tcrminntin:: the 1:)s ycnrs va1.y n;itionally frcw district
to district and ni 3 I-c!;lilt tnx 12~;s and rc~,ulntiol~s
are not al,piicd consistc!ltly and equitably to all tax-
payers.
 60

Commissiorlcr Alcxnndcr

Sjncc the Service does not issue Stnttltory I<nticcs

of Drficjcllcy in thcsc cases Llic t2:.paycrs do not liavc
tllc ntl::ijnisLr:it ivc 3ppc;11 ri::llts srfol~c!c~il to t~ixp3)‘CrS
subjcclcr! to jeopardy asscss~:cnts or Las dcficicncics
arising from nor~:nl auc’it III-occtl~~res. This fact c~uplcd
with tile rnct L.hat the r;njoriLy of the termination
asscssmcnts arc not supportcil by 11;‘rtl documcntcd cvi-
dcncc gives rise to 111~ tlit;tinct possillilj ty tllnt: (a)
irreparable harm may he srlffered hy some of the LaxpaycrS;
and (b) the Serxrice n:ay bc accused of assessing tax
liabilities without due process of 13~.
The ~~cnkncsses in the tcrminntion asscssmcnts are
illusLrnted by the results of full year follow-up exnmi-
nations !:lLich often result in substantial reductions
a11d rcfLll1ds to the taspsycrs when detailed cxaminatjons
arc 1:1nde . In other instnr:ccs where the tnxpaycrs do Ilot
file full year returns, qunlity cxnminntions arc often
not conducted. In these casts, the full year liability
generally approximates the short period liability.

In order lo gain more time to conduct an invcstigo-

tion, one district issues R summons to local poljcc for
assets in possession of the narcotics law violator at
the time of arrest. The local police hold the property
for up to ten days while the Service conduct-s 311 investi-
gation. A similar prncticc in another district v:ns
cliscontinLLcd in late 1973 zftcr Regional Counsel rendered
an opinion that this practice ~3s an improper use of a
summons .

DLIC to the common characteristics of thcsc termina-

tion assessments, one ati~e1-SC Suprcmc Court c!ecision
could affect huntlrcds of casts, For instnncc, if the
Slll~l‘Cnc Court sl1oLr1 tl affj.rI:i a recent (lcc:isj on 1,~ tllo 6th

nnt ion ~i~sCs.siiicllt , all tcrminhtion assessments m;Ly bc

rcntlcrctl invalid. The Service has rcccivcti other ndvcrsc
decisions on tcrminntjon asscssmcnts in lo~r courts,
and has compromiscd’other cases after the taxpayers filed
suit,
 61

Commiscioncr Alexander

Copies of the report have been transmitted to the

Assistant Comnissioncr (Compliance) and the Assistant
Comrnissi oncr (ACTS).

We will be pleased to discuss the report with you

if you wish.

Sinccrelv.

Name deleted

-Assistant Commissioner
. (Inspcctiori)

Attachment
 Internal Audit Report
on lnc
On-Line A;lltlit cf r :.;lrcot:cs Traffickers
iGyY--T~~i.!r 1or, :!Tcc:;!':'c~r.i!;

This report surmnrizcs results of a special on-line

audit rcquc5tcd by the Commissioner. The audit objectives
were to determine lihethcr Service policies, procedures,
and procticcs used in termiwting the tax years of nar-
cotics subjicts arc in accordance with income tax lows and
regulations and !:hether these policies, practices, and
procedures are applied consistently and equitably in
arriving at fnctually supported tax dcterninations.
Rcvicvs were made in the Los Angeles and Snn Francisco
Districts in the I,Yestern Region, in the Chicago and St.
Louis Districts in t?le Hidwest Reeion. and the Jacksonville
and Columbia Districts in the SouTheast Region. This re-
port consolidates the findings resulting from thcsc reviews
as well as findings resulting from other recent 2udits.

Summery of Rcsu!ts of Review

We found that procedures end practices for terminating

tax years of narcotics law violators vary nationally from
district to iistrict, and that as a result, tax laws and
regulati.ons are not applied consistently and equitably to
all taxpayers. For instance, all six districts included in
the review ecncrally set a minimum value of assets seized
ranging from $500 to $2,000 in determining whether a case
should be considered for termination action. Also, the
employees responsible for preparing termination reports
(rcvenr.lc officers, rcvcnue agents, or special agents)
vary from district to district.

Pivc of the six districts rely primarily upon informn-

tion furnisllcd by other IX: cnforccmcnt agencies 2nd
informants in maliinj; termination asscssmcnts. The informa-
tion is gcncrnlly rcceivctl telephonically, and is often
bnscd on personal opinions, projections, conclusi.ons or
hearsay cvidcncc rothcr than specific documented facts
 63

concerning the subject. In some cnscs other minimal

indcpcndcnt investigations arc made by the Service;
however, they are not of the sap;e depth as normal audit
examinations.
The sixth district, Jacksonville, issues a summons to
local police for assets in the possession of a narcotics
subject at the time of arrest. The police then hold the
taxpayer's property for up to ten days uhilc the Service
c011ducts an invcsfigation. A similar practice in one
district in the Soutll:jcst Region was discontinued in 1973
after Regional Counsel rendered an opinion that this
practice was an improper use of a summons.
Generally, all six districts terminate the tax years
of narcotics law violators on the basis that the taxpayer's
illegal narcotics i.nvolvcment constitutes a "prima facie"
case in which termi.nation assessments should be made (IX,1
4585.3). With Lev7 exceptions, there is no other hard cvi-
dence thatincome taxes arc due or that the collection of
such taxes are in jeopardy i.n these cases.

Although the burden is upon the Government in proving

taxable income in these cases. the tax assessscnts are
generally based upon taxable income estimated by a variety
of methods. Due to the limited inforrdation available,
these methods are generally not effective in determining a
factually documented taxable income. For example, when the
net worth and expenditures method is used, the taxpayer's
net worth at the beginning and the end of the tax period is
generally unltno1:n. In addition, estimated costs of living
expenses, which are often included in the net worth and
expenditure computations, are generally not supported by
facts in the case file. Other methods arc usually equally
incffrctive in arriving at a factually documented taxable
income due to the lack of detailed information.
The weaknesses in the termination tax assessments are
further illustrr!tc(l by the fact that the full j'CLlr folloii-up
of thcsc esamination casts often results in substantial
reductions in the tax assessments and refunds to the tnx-
payers. For instance, the full year examination of 24
termination assessment cases in the Chicago District re-
sulLcd In reco:::-;cnt!ntions that the termination tax
asse:,sC?ents bc: rcic!uccd in all 24 cases. I t was
rccor !::ondctl Ih:!t :'ss(l:::,;.:cnts totaling $910,200 be reduced
by $172,500 LO $137,700. If the cases arc settled on
this basis, the tzxpzyers will be due refunds totaling
appro>:iniatc1y $136,000. Conversely, in the Los Angeles
District tl,c rcvic:j oi 55 cases ~:l?crc the substitute for
return proccr!i:re \:as used disclosed that the substitute
returns liere bcsed prj!.:;:rily on the same information used
to cornputc the tcrmjnatj.on period income. As a result
there r:cre 30 cases ~licrc the full year income 7;'as the
same> as the tclT>ir,ation period income. In the remaining
25 cases the inccrlc wzs more or less than the termination
period inco:ne, however, facts to support the changes were
not fully documented in the file.
Due to the common characteristics of these termination
a s s c s r me n t s , one advcrsc Suvrernc Court decision could affect
hundycds of cases. For instance, if the Suprenc Court should
afiirr:) a rccc,rlt decision bv the 6th Circuit Court of Appeals
requiring the issuzncc of > Statutory Koticc of Dcficikncy
within GO days of a termination assessment, all termination
assessments may be rendered invalid. The Service has rc-
ccived other adverse decisions on termination assessments in
lower courts, and has compromised other cases after the tax-
payers filed suit.
On June 17, 1371, the President anpounced the Administra-
tion's expanded effort to combat drug abuse. Included in the
Presidential 1~essage 1.~3~ a charge to the Jnternal Revenue
Service to conc!uct systematic tax investigatzions of middle
and upper echelon narcotics traffickers.
Generally, the interpretation of the Service policies
and procetlui-cs by the field has been to terminate an indi-
vid\lal wi-th a hi.story and bacl:;;round of illegal activities
coupled with 3 current arrest for narcotics violations.
The field agent-:: of the Service have hccn faced with a
rcquircment to make iulTll:cdiatc assessment to prevent
dissipation of the assets seized by local authorities at the
time of nrrcc: . Usually it bcco;:les a race with tile taxpayer
and/or his attorney. The majority of these assessments
arc bascc! primaril.y on the infor;lation' from the arresting
officers becau:;c of tllc short time pressure factor. The
indi.viduals arrested usually have liquid assets only and
remain in the custody of police less than 24 hours,

During the review, a District Director stated that

there is not sufficient tine to perfect a case to the
extent that it would hold up in Court.

Appendix A summarizes the number and amounts of termi-

nation assessments made in the six districts tested and
United States totals by Region for fiscal years 1972, 1973,
and the first. three quarters of 1974.

&y<ag&---
Director Internal
Audit Division
 Dct:lil.s
-- of Results of Review -

General
-__ Procedures

\Je found that thti procedures and practices for

tcrninating tax years vary fror, region to region and
within t!lc rc;ions ircci distric: to district. As a
result. tL!x lC>i.S and re,qulations arc not applied con-
sistently to all tnxpoyGrs. For fxamplc, nil six
districts inclctlcd in this special rcvicw Lenerally
set a mi.nirx~~ veluc: of assets seized in deteroining
whether a case should be considered for termination
action. The Col~~xbia Distrtct requires a mininun of
$500 cash seized for a termination action while the
Jacksonville District requires $2,000 in total assets
seized.
In Los Angeles termination assessments vlere made
against taxpayers \:ho had been arrested for Essession
and or szle of narcotics
---1- ?:ith cash or readily identifiable
assets In excss of $1,000. In San Francisco termination
assessments I:cre made against ta::pavers r.;ho had been ar-
rested on cherces of sale of narcbtics T.,+ere there is
information to she\: th3tincome has been earred from that
activity and that the taspaycrs had cash or readily iden-
tifiable assets of at least $1,000.
In the St. Louis and Chi.cag,o Districts generally only
those taxpayers ~1~0 lind at least $1,000 in their possession
at the time of the arrest wre terminated.
Internal Revenue Code Section 6551; Policy Statement
P-4-09; and Internal Revenue ;\Iallual Section 4585, generally
set forth specific circumstances and/or action by taxpayers
that would jcopartiize collccticn of taxes when subsequently
due, and th(:rcfcrc provide a basis for tax year termina-
tion, asSc!CSl.!c?llt, anti collection of taxes not otherwise due.
The speciric co::ditions and circuxtanccs for tas year
.
termxiiatlori and a~;:;css~:icnt under II:C Section 6551 are sum-
marized in Policy St.atcment P-4-89 (Approved 10-2-70) as
follows:
 “Termination of tnxahlc pcri.od and assessment
shoultl he used sparingly and care should be
taken to 3voi.d c;lcessive and unreasonable
3SSCSSICCntS They should be limited to
amounts wllich reasonably can be expected to
equal the ultimate tax liability for the
tcrminatcd period. Tach tcrmi.nation of tax-
able period end assessment must receive the
pcrsonnl nl>provnl of the District Director or
the Director of International Cperations.
“A termination of taxable period and assessment
will not bc made without the existence of at
least one of the three following conditions,
unless prior approval is obtained from the
Director, 11udit Division :

(1) The taxpayer is or appears to be designing

quickly to depart from the United States
or to conceal himself.

(2) The taxpayer is or appears to bc designing

quickly to place his property beyond the
reach of the Govcrrment either by removing
it from the United States, or by concealing
it, or by tral:sferring it to other persons,
or by dissipating it..

(3) The taxpayer’s financial solvency is or ap-

pears to be inpcriled. (This does not
include casts r.~hcrc the taxpayer becomes
insolvent by virtue of the accrual of the
proposed assessment of tax, penalty and
interest. )”

Internal Ecvcnuc P!anual Section 4535 and Section 3(11)4

of the Tccl!niquos Ha~idbool: for In-Depth Audit Investigations,
1131 (1235. nro\lidc requircmcnts and sneci:.ic r:uidclincs for
tax year tkI-1::inati on:; nnc! docuzjcntation rcquirecl, to the
extelit practicsble, for termination investigations, and
reconi;ncndations and approval of termination actions. The
required documentation, to the extent practicable, includes:
 68

(1) T!ic nnr!,e, atldress, and filing history of

the taxpayer.

(2) Tar, and penalty to be assessed by periods.

(3) The nature of the tnspayer's business or

activity; the taxpayer's financial condi-
tion; infornntion regarding the taxpayer's
activity giving rise to the termination
reco::;mcntlztion such as transferrjng
assets r.~iti:cut'considc rat.i.0i-i or attempts
to hide assets, etc.; information rcgard-
ing business losses; the nature and
Location of the taxpayer's assets and
sources of income; and the taxpayer's
record of resisting payment of taxes in
the past.
(4) Any other information regarding the
taxpayer's financial condition, prospects
for future losses, etc.

Review? of recent termination recommendation reports

and case files in the six districts showed that the files
and reports T.:erc genera1l.y not documented with facts to
show specific circuistances or acts by the taxpayers that
would mc::e collection of the taxes, when due, ineffective.
Instead, the districts generally terminated the tax years
on the basis th:.t the ta::payer's illegal narcotics involve-
ment constituted 3 "prima fnci.e" case in which termination
assessments should be made (II%1 4585.3).

Iiowever, IRJI 45135.3 specifically requires that "prima

facie" tax year tc:rmi.llations for taxpayers arrested on
chnrgcs of possession and/or sa1.c of narcotics should be
suppported by docu~~.~~nted informnticn to establish a factual
foun<latjon to show that subsequent collection of the taxes,
not yet L!CC, was in jcopnrtly, ant1 that the tcrmi.nation
actions ~:erc Vittlin the statutory provisions of IRC Section
GS51.
 Operatin:; pcrsonncl stated that assessments must
be IIKI~C imzcdiatcly in order to prevent the ta:<payers
from assir~nin- their liquid assets to attorneys or other
pCrSO!lS h:>'t!l ';bc cficct Of placir:, tllcr2 beyond ti;c reach
of the Service and that it is pncrally not possible to
obtain specific factual documentation in the tine avail-
able.
In the Jncl:sonvillc District the revicy? indicates
that the problem of irmediate assitr.n:ent of assets to
others has been circumvented, at least twInorar,ly by
the iirmediate issuance of an IRS suxnons to the arresting
officers. On receipt of the sum.c.ons, local police retain
posse scion of the ta::payer's "proFerty", including cash,
for 10 days. llhile having: no leeal cffcct on the abili.ty
Of a narcotics violator to assir,; atray his liquid assets;
it has been effective in preventing the dissipntion of
his assets in t!?is manner and has alloTred the examining
agent additional time for case preparation.

HoY?cver. a recent revictr in the Oklahoma City District

shoved that SurT-011scs have been usc:d in that dist;ict also.
In Kay 1973, Pey,ional COUi2SCl interpreted the issuance of a
summons for t!lis Iburpose as cn innroper applicaticn of the
nrovisions of IZC Section 7602 and rccoz::endcd discontinu-
ance of the practice.
Differences x,?ere noted also in the placerrent of
responsibility for preparation of termination documents.
In Los An~eles terciii:ation reports arc prepared by rcvenuc
officers in the Offer-in-CocFroi-iise Group \,:hil.c in San
Francisco the reports arc prepared by revenue agents in the
Narcotics Group.
In the Chicago District the special agent assigned to
the team will ini.tially be advised of the referral and
in-turn 1li.11 coiltact the revenue ay,ent and rcvcnuc officer.
The rcvcnue aCent has the responsibility of prepnrin:, all
docuwn.ts neccss,try for a valid asscssl?cnC unon apl:roval
of the tc::rl leac!er.. The special ni:cnt has the prime
rcsponsi.bility for the coordi~tation v:ith other agencies
and the control of any criminal aspects of the case.
 In the St. Louis District any division may originate
the recom::endation for a tc rninztion assessment althou~,h
the Intclligcncc Division is generally the initial contact
poi.nt for the other law enforcement agencies.
In the Jacltsonvi.llc District the revenue agent initi-
ates the termination act-i-on, while in the Columbia District
the special agent lins primary rcsponsibi.lity.

In four districts in the Central Region the use of

termination assebsmcnts has been restricted because of a
rcccnt . decision by the 6th Circuit Court of Appeals requir-
ing issuance of statutory notices of deficiency.
Instructions in the North-Atlantic Region require
that Regional Ccvnsel be consulted in each case where a
tax yecr ter;.iination assessment is being considered.

Examination
--- Procedures - Short Y&r Terminations

The burden is on the Service to prove the existence of

taxable income in ter:ninaticn actions. However we found
that gcncral.ly these a ssessmcnts were based on income esti-
mated by a vari.ety of methods T:hich have for the most part
proven ineffective in factually determining taxable income.
The folloT:in,g assumptions r,:cre usually ncccssary in the
income dctei.i-linations : that income ~,!as earned during the
period tcrriillatcd; thcit funds on hand or used to purchase
the drugs x:ere from taxable sources; and that the funds
were tasablc to the individual in possession of the cash
and/or narcotics.
In the Los Ancelcs and San Francisco Districts compu-
tations of taxable income were based primariI.y on informa-
tion provided by law enforcement officers regarding the
circumstances of the arrest for sale or possession of
narcotics.
In 14 of 13 recent termination assessment cases reviewed
in Los At:SeIcs, the net: l:orth and expcnditurcs method \;as
used in computing, taxciblc incot-c. In 4 of the 14 cases a
 71

COST. of livin;: cstinntc: VTAS not included in the income

co~,,putatic,n. .Ln tl:e ot!kr 10 cascc cost of livino
estimpltcs r;lr!fx(:d iron! S400 to $1.500 per month. LEt
the files X!CT-~ not dncuzented l,?i;h sp;ciiic facts to
support the c:~tir:3te~. For 11 of tile l(t cases, the
taxpayers i:;iri.tal status \:as not determined. In one
CitSC, the ta:<payc:r w;is allor~:ed n deduction for dcpend-
cntr:, but the files in the: other 13 cases did not
cst<zblish r,llether the tnzpayers were entitled to
deductiurs for dependents.
The esticatcd p,ross sales method was used to com-
pute tcrnination inccj:le in the rcmaininy, five cases.
In four of the five cases the taxpayers were allox:cd
dcdilctior?s from gross sales for the cost of narcotics
sold. In the other cast the tclxpnycr VRS not allowed
the deduction. Also, the cnse fi.lcs sho\;ed that three
of the five taxpayers I!crc married; ho\:cver, the terni-
nation incor!c 1~2s assessed against thz taxpayer only
and was not: divided between the taxpayer and spouse in
accordance with cor;fiunity property provisions.
In 24 of 26 recent termination assessment cases
reviclled in the San Francisco District, the net worth
and expenditures method WCS used in col::putir?g taxable
income. In these 24 cases, cost of living estimates
ranged from $500 to $1,500 per month. In 20 of the 24
cases, the estimates were not supported by specific
facts or infornation i.n the case file. For all 24
cases, the investigations included a determination of
the taxpayer’s carj tel scatus. For the cases where
the ta::paycr wns mnrricd, the termination incoize was
divided in ;Iccordsncc with corr;l:unicy property and in-
come provisj.ons. Also, l,?hcre it TQSS dctcrmincd that
the taxpayers were entitled to deductions for dependents,
those deductions were al-lowed.
In the remainins t\jo cases, termin,ztion income was
cowput-cd by the estic\;ited gross sales r;lcthod. The
ta::p;:ycArs T.:CI-CL173rricd al:d the income v~:‘.s divided in
accol-dznce \,,ith corl’munity i~.con:c provisions The pro-
jected gross sales V:CI~C based on specific admissions by
thr taxpayer.
 7%

In Chica;:o the net worth and expenditures method

F:ns used in computing; income in 13 of ID recent termina-
tio11 2s:; c.~.:!:lcnts
P’ rcvi ~WCd, In the 13 cases, cost of
1 ivin:: e!;L,I.!~!tr :, rat:-cc! from $50.00 per week to $40.00
a dayI- b!one of t.hc esti.matcs vere sbpported by specifi.c
facts in t!le files.
In t!ic other five cases the income ;,:as computed by
the esti.1 :atccl gross sales metilod. In one of the cases,
cstimtcd sale:; r:ere b,lsetl on licarsay cvidcnce from an
informant In the other four cases, the assessments
were based on specific information rcgardin: periods of
survcillsncc, "controlled" purc'nases, and statements
from infoi--rants .
In 19 of the 25 recent termination assessment cases
reviev:cd in the Jnclsonville District the computations
of incoi::e \;ere b nsed on a projection of sales over the
terminntcd period. In 10 of the 19 cases the files did
not clearly shol: the basis for the figures used for
estjmtcd i:eckly sales. In most instances the tax lia-
bility de;c:-mined V:as closely related to the assets
seized. In this regard, the Croup linnager explained
that in determining the arrount to be assessed, the
amount expected to be realized from proceeds of the
seizure and sa1.c of taxpayer's assets is taken into con-
sideration; that c.akini: a larrle assessment based on
information froai Lnforkmts or police estimates would
probably leave the Service in an indefensible position
in Court if the Service could not show that the taxpayer
had assets to support the income estimates.
The income in the other six cases was computed on
either the cost of drugs or cost of habit method and the
support was consjdered adequate.

In 1:hc St. Louis District taxable income was computed

by the cstii;iat-ccl rross snlcs method ill wo of three tcrni-
nation nssi ssiil( 11~s rcivic\:cd. The incol-c computations 17crc

not s~ipportctl b\r c'ocu.:cntcrl facts in the case file. The

income col.'putat>on in the thi.rd case ~3s bnscd on a
specific income item. In all three cases information that
tile ta:rpnyers wcrc marric~d U:!S not used, and in two cases
illformation t-hat the t:nspaycrs had dependents 11~s not used.
 The computilt: 011s of income in the cighl: casts rwicwcd in
the Cole-:bja iji:;Lrict c:crc ba:;cd on a projection of cstjnlsted
sale:; over Lhc CC!.:‘ itl:iLrd pcrioti. l'oy+:tvcr , jn tcio of tllc
eight cases, Lhc’ case files eithc,r did not clearly show the
basis for tile c:.tj;:-aced ~.:cckly sales figures that wrc used or
the file did not clearly r;hc:~ thi:I: the length of time the tax-
payer Ilad been selling narcotics had been established.

A recent on-lire audit report showed that in six of the

ten most rccer:t teri lir,ztion cases in the Austin District the
files did not co::tnin substantiafion for one or more sta;e-
merits r:lnde by narcotics c::perts cjhich were used in computing
taxable j nco:::e. In one case the file did not substantiate the
sales \~olu!..e of SO I:ilos rclr week or the cost price of $80 per
kil.0. In another care, tllc file did not substantiate the
source or basis of the cost pri.cc of seized heroin, nor did
the case file incl.ude substantiation for estj.mated living ex-
penses of $13 per day.

Another recent review in Atlanta showd that the case

fil.es did not co;:t,jn prc.scri.bed support for the basis used
in estii::ating receipts from sales of r.crcotics in 24 of the
29 casts testec1 ;:o info:I::ation was sho:..n regarding the
length of time ;e:,:payer \,‘;.s in the narcotics business and no
support V:ils shovm for the basis used in estimating gross
sales except tliat: the estir.atcs were those of a narcotics
expert. In five of the:!ses<he assessments wcrc supported
by docwcnted facts.

--Examinnti~on Proccdur-es
----- - Full Year Tns____-Returns

Full year tax returns of narcotics violators previously

terminated arc subject to an audit examination whether the
taxpayer has voluntarily fil.ed a return or not:. If the tax-
payer has not filed a full. year return, substjtute for
return procedures are follov?ed.

In the Los AnGeles Dj.strict 61 full ycnr 1972 examinations

(63 tel-ninatiol::;) ~~;erc rcvicv:cd. Sn six cases \,hcrc ttle tax-
payers hai! filed fc! 1 yc?i' tn::
returns, the esomj.nntions !Icrc
of ndcciu”te scoi:c, zr:c! ~dCyllMi,. In f i\Tc cares, tllc cxaminntions
resultctl in siznificnnt rc,tluctions to the sliort period tax
1iabil:ity while the sixth case resulted iri no change to the
short period liability.
 i4

In thr: rcn;lir!in:; 55 cases substitute for return

proccdilrc:; ~:crc u: cd. \,ie round tl:at in-depth o:nmination
procctlurt I; v:eri noL ('71ployc~l to include : (a) ZlLtClilptS t0
contact ta::p;lycr:; or ot!:cr third p,?rtics who would have
knowlcdgc: 01 Clic t::::p;.ycrs ' income producing activities!
(I,) spccj fj c ::tc,ps to iclentiry chanscs during the year In
the tz:-:p;:ycrs ' i?~t: ,:ror'ih by rcvicI:ing bank accounts, (c)
attcxp1:; to i(lCiltqLf~? ::sLctS acquired or Sold, and (d)
at tc:::u t :, to iletc~rr-.i& the ta::pzycrs' style of living. The
o:al;,ihnLl'~ons pi-i.;: ;I:rily rclj eci Epon iniormation dcvcloped
by the tcri:Jor:ztiol: 5cvesti~stion. The full year income
ConputnLioi:~ :,.'crc tl,c sar.'c as the termination period
i.nco;;.c colzputation in 27 cases and were the same as the
tcrmj natio!: pcrioti income scljusted for annualization of
the estil.lat-cd cost of living rate in three cases. In the
otlicr 25 cases the iull ycnr income computations were more
or less then the terl.:inntjon period inconc; hol:ever, facts
to suppo1-t the chanc;cs in income l:ere not fully documented
in the case fi.lc. ;.incteen of the 30 exami~nations where
the full yczr incolIc was the same as the termination
period incol.:e invol\;cd cases ~~herc terminati.on period in-
come co:nputatiGns wire not supported by specific facts.
In San Francisco 12 full year 1972 examinations were
reviewed. In four crises, the ta:;payers had filed
full year returns and in the other eight, substitute for
return procedures wre usec!. Ve found that in-depth exam-
ination procedures, to the extent practical, were used in
all 12 cases.
The full year examination of 24 termination assess-
ment casts r-c\ricr:ctl in the Chicago Dl.strict resulted in
recorri:lcndntio~ls For reductions in the termination tcx in
all 24 cases. Tt ~~3s recommended that assessments
totaling $910,2GO be reduced by $772,500 to $137,700. If
the czses are scttlcd on this basis, the taxpayers will
be due rcfllnds tot::ling cpproximatcly $136,000.
In the St. T,ouis District four full year examinations
had hecn closed v:itl~ rccoI::mcndcd asscssmcnts of $1?,727.46.
'L'crmirlntj.on LI~SC:I:I~!PIILS for t!lese casts origi.nally total1 ed
$63,140.15. Tllcr~ioI-c, full year es:lminatioils resulted in
retlucti.ol:s totalin:; $63,4G2.G9.
 The full year cr:er?inntion of 29 tercination assessment
cases rcvicx:cd in tl:e J::c!::;orll;j 11 c Iji:.tri.ct resulted in
tpnnination assc:::;mcnts totaling (.668,250 being rcduccd by
$329,406 to $338,8&4. ?!or,t of this diffcrcncc \rns attribut-
able to seven cases.

In Colurrbin the ful 1. year cxani.nati.on of 1.2 cases

results-c’ ir. I-cccl!..:..~i~d;iricns to rcciuce tcrmi.nation tax assess-
ments from $G?Jb,253 to $7C,701.

Contcstcd
---____ Cases

RcvieT:s were conducted in the San Francisco, Los Angcl.es,

and Jnci:sonvil.lc Districts to letermine the Service’s expcr-
icncc in dcfcr.dl.ny, termination assessment cases i.n court, with
particular e?pl-iasis on reasons for the Service having lost any
contested cases.

Revicx?s of the Regior,al Connsel General. Litigaticn files

for Los f?1;2cles and San F’:-anci.sco Dj strict cases dlscl.oscd
that tl~c.re“h;l\~c been six conccstctl 1:nrcotics caseb since
June 30, 1.972. TV:0 crises i.vre in the Los Angel cs District
and four cas(:s ~:erc in the S,:n Francisco Discric:. Five of
these C<?SCS r:cre reviewed to dctewinc \:hy the taxpayers had
initiated litigation to enjoin the Service from assessment or
collection actions. In these crises Rc~ioncl Counsel identified
potent-ja.1 \:ealtnesses in the Service’s position Es foll0V~S: (1)
terr7ination inccx ant1 tax cor,:>utation l)crc not fully supported
by specific fact:; (3 cases) ; (2) taypilycr had not received a
Statuto::y i!otice of Dcficicnc: for the terminot.ion asscssmcnt
(1 C;ISC)~; and (3) collection nction had been initiated beiore
the taxpayer could have received the terxination letter (1
case). - -

In two casts tllc coq?la%nts WY-c dismissed by the tax-

payers based on tlx Service’s aLreewen1. to compromise the
liability. In the thirc! case tllc taxpayer ‘G suit 1~3s dis-
missed on the basis tliac ‘;lie Coll:rl- lacked jurisdiction to
enjoin the as.st?ssli C’ll’lz ant 1 co1 1 c:ct:ion cf Fcticr-al fnxcs. In
the fourth c;:sc the juc:zc co~?t:iliuc,~! the c;isc in open status
with procccclin:;:; susl~endctl, pcndinr, scttl.eillcnt of appeals on
si.mil:ir casts invol\~i.ii~ issuancc~s of Statutory Kotices of
Dcficicncy ior t;lx ycnr tcw:I‘n:tions. ‘1’11~ fifth cast Isas -
cl oscd ~:hcn tllc full. yczr e:-:x.:i.nntj on sllifl.cti substantially
all of the termination i.nco:x to plier t;kz: ypnr,
 T(i

Reviews of 11 contcstcd cnscs in the Jac1:sonvil.l.c Dj.strict

discloscld that tl!r2 Covcri ;:i,i:t 's position had 11ccn upheld in
seven cases, the Govcrr;~.~nt hail 10-t one cn:;c in District
Court, and Ehrcc cases l:c'rc still pending in District Court. In
the cast the Govirx:ent lost:, Chj L.F Counsel ,-ccoiwcndcd that the
Govcrn;~ c-nt ;:ppcal. the decision. In this care, the Government
was cniojlled fro:.: collection of the ass~ssmc~lt and ~<as ordered
to return tile r\onc ys sci;:cd. 'The ta::payer had alleged that the
Di.strj ct: Director's fi.niij.iics wre rratlc r:ithout su37ficicnt in-
vcstigatzion 110 support his uconclusions and rlithout any true
facts to reasonablv support the isscance of tlie tercinntion
letter; ttac :hi: !istrict Director had not issued a notice of
deficiency; and that the tcr:;ination ~:as made at the request of
the local ].a:< enforcenent of;icicls to harass, annoy, and punish
the taxpayer and ~2s not docc in order to protccr. the revenue
and collect a tax that seei-..ed to be in jeopardy. The taxpayer
further nllc&ed ttat unless the District Director !:as restrained,
the taxD;?\'erA ,
\:oulti i:c irrcnarablv i::iurcd. inconvcnicnced. and
dam,zr,ed zr.d his property ~:ould bc ta!l:cn from him in violation of
due process and equal protection clauses of the Constitution of
the United States.
In addition, the St. Louis District forlxrded seven tcmina-
tion . . files to Rcc-io;:al Cocnsel in J:.inuary 117f~ requesting advisory
oplnlons as to r..i;ethcr tile cases mul(! be upheld in Court if the
taxpayer protcstcd t-he assessments. The responses from Regional
Counsel shorwd that five oi :hc cases wrc wr~k from the stand-
point of litit;;-ticn and indicated little probnbil~ity of success
should the cases go to trial.
In the Central Region a decision by the Gth Circuit Court
of Appenls on E’cbrunr~~ 12, 1974. (Charles R. Rnmbo v. United
states, ct. al .) held’ thak notice; of deficiency must be
issued xithin 150 days after r.:zking tenninat;.on assessments
under Section 6851. However the Service position is that such
notices zrc not required until a full year return has been
fikd. Due to the C2e;bo decision, Ccgionnl. Counsel suggested
that tcrmi.nation assessncnts be resrricted and that jeopardy
asscss~!;c~~ts unticr Section 6661 be used when pos.sible.. Regional
Counsel also s~~,:~,c"~~ecY thnt 1:hcn terni.nation asscssxcnts arc
matlc tht prcprriy he protected by iiljr!g s notice of lien or
noLice of levy i.1; order to freeze the funds or property rather
than to seize and sell.
 APPENDIX-A

SUMMARY OF TERMIN4TION ASSESSMENTS

Number of Termination .Total Dollars Assessed Average Dollar Amount

Assessments of Assessnent
Fiscal Year Fiscal Year Fiscal Year
9 Mos. 9 Mos. 9 Mos.
1972 1973 1974 1972 1973 1974 ---1972 1973 1974

Six Test Districts

Columbia 6 29 17 $ 24,563 $ 240,479 $ 75,385 $ 4,093 $ 8,292 $ 4,434

Jacksonville 9 128 100 166,562 2,842,626 1,356,985 18,506 22,208 13,5.69 -1
Chicago 28 116 91 584,526 3,997,378 13,928,487 20,875 34,460 153,060 -1
St. Louis 3 24 16 11.730 807,275 218,953 3,910 33,636 13.684
Los Angeles 72 273 188, 5,119,267 9.564.026 6,343,312 71,100 35,033 33,741
San Francisco 37 109 115 2.251.063 1,053,864 902,913 60,839 9,668 7,851
.
Regional Totals

North Atlantic 110 179 48 $6,626,955 $9,498,634 $ 1,129,044 $60,245 $53,064 $23,521
Mid-Atlantic 44 106 47 1,380,959 3,331,251 755,427 31,385 31,426 16,072
Southeast 76 283 207 1,424,068 4.750.542 2,247,444 18,737 16,786 10,857
Central 43 161 114 2,458,891 2,124,753 1,561,355 57,183 13,197 13,696
Midwest 59 205 174 1,423,068 6,723,714 15,746,075 24,119 32,798 90,494
Southwest 65 308 184 1,125,315 4,983,487 4,991,736 17,312 16,180 27,129
Western 145 538 375 8,054,995 15.480,964 8,543,360 55,551 28,775 22,782
United States Total

542 1,780 1,149 $22,494.000 $46,893,000 $34,9?4,441 $41,501 $26,344 $30,439

EXHIBIT 9

Name deleted
 EXHIBIT 10

Brorpttfrarap74 IBS Internal Audit Ibport

EXHIBIT 11
 5; /.:“:
Jm&‘I.:!C

1372
1.973
1973.

G,72:.:9
3,93.‘L . 37
 Cil!?lT ‘f:,S: aili: cJ,(.‘:; .: .i ; :c: iy.y
.-..-. .-. -- --- _ -_-. ,, ._.. .--L.-t

1370 9c 5 . 6 3
1971. Z,36?..%
1072 1,473.G;’
1370 1.,!.73.C0
1571 242.UG
1970 ?_,r!I/i.f:h
1971 2,525.s’:

197: 3,?C7.1.!1
1970 IG,G3.7.96
lS71 9,237.N
1.970 1, r;!? 0. GO
1971 fi35.5;;

1.470 J.13 ‘ 00
1971 707.82
1371.
1972
137% -73

1972-73 ES71 234.31

J-972 633.32
 EXHIBIT 12

IGRU D:‘bTA
__--

Number of Entitles Intelligence Division

(Names) Investigations Initiated
1-15-75 7-l-73 thru 12-33-74

955
961
574 ;
1421 4
3511
298 2
es61 20
8918 27
1684
278 45
6720 12
6218 6
3773 5
14996 7
29431
4403 6
89417 4
5907
33469 28
6626
2680 3
4539
275
872
460
14 0 4
1072
26
2A67 8
17224 51
Louisvillr 4788
Nashvi!!e 552 5
Birmingham 3414 2
Little Kock 1420 1
NCW Orleans 1298
Oklnhcma City 6654 1
Aust 111 88b8 3
Dallas 4407 3
Denver 33921
Albuquerque 3768 5
Phoenix 8944 9
Rem3 18118 7
Portland 15062 28
San Rancisco 8997 5
Las Angeles 85387 45

TOTAL 465108 350

XX=
 87

EXHIBIT 13

District Dlrcctcrs
to Hidwest Region
ATTENTION: Chief, Intelligence Division

froln ARC-IntPlli~,ence
Midwest Region
____ _____-_ ._--_=-_ ^.,, .-,.. ~liY.X.L.--I~TI-,-..T-.-.I-. .-m-l .c C..I.i,V
SUlJ,L~ / Operation HErcur)’

Transmitted herewith for your information and utilization arc detnilcd

listings with respect to the captioned subject. I also am forwzrdiy
to you a copy of a letter dated Au~usL 11, 1971, received lrom Acting
Director, Intelligence, regarding the listings.

Attachment Name deleted

 SS

10: Rogiond Commis3ionor, Midwest Region

Attn: ARC-I"telll@3"ce

from: Intolligenco Division

WashinGto", II. C. CP:I:P

subject: operation Mercury

As you will recall, the National Office requested each r&on to

make nrrJnvemcnts for transcribinrr six rolls of microfiln which con-
tained i"f&notio" relative to the transmission of money orders, in
excess of $1000, during the year 1966. 'Ihis phase of tho operation
was completed and punch cards wel‘o prepared from tho transcription
sheets.

The enclosed listings wzre processed. The information is arraged

by state, and payee names are in alpha order by city. The data
olcmr.nts 22-o: payee, to city, state, sender or purchaser, from city,
state , mcunt, date, and reel number.

WC rcalizo that the statute for the year 1966 will BOO” cxpiro and
that the tax year is closed for civil pupoccs. Therefore, the Chiefs
should make ovcry effort to utilize this infollilatio" in such a fashion
as to achicvo mudmum bcnofits. We suCgeut that this i"fomatio" be
match03 against opo" case files, and those "amos showine oubstantial
activity should'bo~tchcdaejin3t background filco.
-- .~
The strike force raproocntntivos nhoulrl bo <alortod 'LU thq-cast.
that thio.informc\tion ia.nvailaplp.il~:_thi~~r~t~ -.. ~--

Deleted
Acting Dlrocto:

Attochmonto
 EXHIBIT 14

Bmcmber 5. 1970
All District Directors 900
Southeast Begiou

ABC <Intelligence) I
southeast B.egfcma1 Office

Operation Bird Dog

Attached ia a copy of a -random to the Director, Intelligence

Divfafon, dated this date, which in self-explanatory.

The list of elgcnaive automobilee frm your atace obeerved in

Atlanta during the recent prize fight is also attached for your
use as leads to possible fncome tax violations.
.- .,

Deleted

Acting

Attactments

DD-Atlanta
DD-Birmingham
2l@Q&mbia
DD-Greensburo
DDJackson
rJD-Jac!cRonVille
DJ-Xa&Wille
 November 5, 1970
Director, intelligence Division CP:I
&tioua1 Office

ARC (Iotelligence) I
Southeast Regional Off ice

Operation Bird Dog

The RoarLrng 20’0 returned to Atlaata. Georgia, on Occobcr 24-28,

1970. People came In sleek liBlousiBes, custimieed automobiles,
mLnk and flamboyant dress for the Unhaumsd AU-Jerry Quary fight
cm Umdoy night, October 26. The styles of rhc 20’s prevailed
with mles challenging the females for the extreme in dmss and
the brilliaocs of colors, wearing wide br<mped IsaCs, double-
breasted jackets, two-pieca suits vith coats to the knees and
sonp vith full length mink coats.

After obserg2ng expensive custom built anbwobtles at the Regency

Hyatt House, Atlantr’a svankiest hotel, arrangements were made
for the Atlanta District to conduct some old-fashioned bird
dogging; that is, the taking of liceilse nuu,bcra of the most cxpcn-
sive looking automobiles. The agents reported that the wearing
apparel and Lho autoloobilea vcre fauuntbc rir11 mmy of !.hc
automobiles in tbe $20,000 to $25,000 cost range.

Attached are lists by states (&her ttaa Southeast Region) of

the wore expensive automobiles, vith their respective license
numbers, that vere In Atlmta for this orcaaion. The list. VBE
compiled from autowbilea observed at the Letter hotels and
motels vhexe fight fans were lodging avd in and around the
Lhmicipal Auditorium, the site of the ffghi.

Also attached are seven copies each of three nevspapet articles

relative to a robbery of after-fi&t partygoers. Writlen invtta-
tfons vere sent out to a large number of pereona for the after-
fight party at the home of Name deleted (I local
racketeer who has been engaged in t\w ambcrs racket. It ie
reported that guests were robbed of from $100,000 to $200,000
in currency, jewelry and clothlug. ZL sbc-i~ld bc liotcd, hoocvcr,
that ooly the following six of the victims were villing to give
F.heir -n and file complaints vi.Lb the Atlanta Police DCpRrtmQt:
 91

Director, Xntelli~enca Divisioo CP:I

Name deleted
xew York City, N.Y.
[
Name deleted
Rev York city, N.Y.

Name deleted
-Nav York City Detective
Ne aaid he lost $485 in cash. a $175 watch, a
$5,600 solitary diamnd ring and his police
badge, number 359.

Nme deleted _~
?At lanta, .Georgia
They lost about $l,ooO in cash and jewelry.

Name deleted
Cleveland, Ohio
Ba said ha lost $3,250 in caab and jevelry.

Name deleted
Atlanta, Georgia
He was stripped of $348.

The police reported that several of the uatfon’s top racketeers

WBTB ammg the victima of the holdup and that it was felt that
these racketeers would be out eurching for the robbers alao.

This information is being furnished you for possible distribution

to the other regions, or whatever disposition you deem appropriate.

Name deleted

Acting

Attachments
Attachments

1..
.,
/
.:.,
 Novmbcr 8, 1971

Regional Condorjianer, X!dwcct. Rqion

Attention: ARC-Irltell~mco

Name deleted
EXHIBIT 15

October 1, 1971 DIR:STL: T-3 - ?*;!:n

 Name deleted
<;::,I’ %,: F:-,,.
 EXHIBIT 16

?&ample? of Bi-Weekly Reports of;‘.TSpecial

c .' > :I- I.,%-vice Staff
,I,".,

Three Organizations
Deleted
 97

i.;,.! ,: i.: i: ..:,,,‘~‘,_^’ 2 _2 “-2 2, ,I ,‘*‘j

(Co ,1‘1.1::1~::!)
:
A black militant organization and leader deleted
Three Organizations deleted
 99

i’ll.J~~i~l~t :cm 12-l-63

 100

Black Militant Organization deleted

lb Organizations deleted
 101

‘, 71 : : -. . L’
(C;. .:j : )

rc\,jc,;cj, : .
f ., ‘.
I c_
‘.

lbu Individuals deleted

102
 103

EXHIBIT 17
FEDERAL AGENCY REQUESTS FOR TAX INFOR..ATION
CY 74

Incc.me Tax Information Requested by Federal Agencies

Which was Authorized Under 26 CFR 301.6103(a)-1
No. of NO. of No. of
Federal Agency Requests Taxpayers Returns
Department of Agriculture 4 14 48
Bureau of Alcohol, Tobacco 1 2 ! 2
C and. Firearms
Department of Commerce 2“ 7 13
Comptroller of the ,l 2 2
Currency
U. S. Customs Service 1. 3 12
'.
Federal DeposTt Insurance -2 -14' 16
Corporation
Federai .HbmeLokT Bag Bbara'... . '--. "5 :- - : - 56.. :. .178 i
_ .- .%..Y_ .:
Comptroller General (GAO) ' - - - 3:" r' -1;406 li40;.*‘ -
:
Iliterstate Commerce ': ... --Y-.. '2 1. :' -9: -:. .4.5
Commission .;_. ._.: .. ...e-.. I- _ . _. ...-... _) ..- _..
. -:.;-
Department of Justice .. 304 3,228. 10,446
(other than U.S. Attorneys)
-
United States Attorneys 1,594 4,440 ' 18,062
Department of Labor .l '. 2 6
Securities .and Exchange 19 95 389
Commission .
Renegotiation Board - l- 11- 21
TOTALS 2,020 9,291 30,646
l Returns of 710 taxpayers were not furnished but selected
information was extracted from the returns by IRS and
furnished to GAO.
 104
APPENDIX
QUEETIONS BY SENATOR GOLDWATER TO COMMISSIONER ALEXASDER CO~CER;~IKG
IRS A~TIVI~ES, AND COMMISSIONER ALEXANDER'S RESPONSES
Question 1. (a) Out of 81 million tax returns that were filed in 1974, about
69 million, or 85 percent, were furnished to tax authorities in 38 States under
an Internal Revenue Treaty arrangement. What is the nature of the treaty?
( b) What safeguards, if any, are provided?
(c) What prevents States from distributing personal tax information to
lawyers, bankers, credit agencies or any one else?
Response. (a) Under authority of section 6103(b) of the Internal Revenue
Code, and under arrangements worked out between the Internal Revenue Serv-
ice and the National Association of Tax Administrators, the Service makes
available, each year, a selected list of data elements in magnetic tape mode
taken from our Individual Master File (IMF). These data show taxpayer
identity and certain income and tax information for individuals flling Federal
individual income tax returns. Our Federal-State Agreements on Coordination
of Tax Administration provide a means for formalizing the efforts of the Service
and the States to continue their cooperative programs and to enter into additional
arrangements for improving the administration and enforcement of tax laws
of each respective jurisdiction. A copy of one of our recent agreements, with
the State of Ohio, is attached (Attachment 1. See page 106.)
(b) Each year, when notices are sent out to the States informing them of the
current year program for tape extracts from our IMF. conies of the Service’s
Publication 664, Federal-Staie Exchange Program containfng a detailed listing
of the participating States’ data usage responsibilities, and a reminder of the
penalties for unauthorized disclosure of Federal tax return information, are
also furnished. (Copies of this publication are available as IRS Publication 664.)
Additionally, our Federal-State agreements contain similar provisions for safe-
guarding Federal tax return information.
(c) State employees are subject to the same penalties, under section 7213(a)
of the Internal Revenue Code, for unauthorized disclosures of Federal tax
return information as are Federal employees. These penalties provide, upon con-
viction. for a fine of not more than $1.900 or imarisonment of not more than 1
year, or both, together with the costs of prosecuiion. State tax personnel using
Federal tax return information furnished them on magnetic tape are reminded
of these penalties in the aforementioned Publication 664.
Question 2. Why was it necessary to suspend operation of the Information
Gathering and Retrieval System earlier this year? What changes were made?
Response. These information gathering actirities were suspended bv telegram
on January 22, 1975. These activities were suspended to allow a review of our
procedures when it was alleged that some employees were collecting and retain-
ing non-tax-related items.
After a review of our nrocedures. I issued new guidelines for information
gathering in Manual Supplement 39G-162 on June 2% 1975. This document is
available to the public. The new guidelines were issued to afford clearer deflni-
tion of tax related data. They also require management involvement through
Prior authorization in writing before an agent can gather or retain information.
The new procedures also require stringent review of information gntberinq
activities. A copy of the new guidelines is attached (Attachment 2. See page 116.)
Question 3. What is your electronic surveillance program in which telephone
calls are monitored?
Response. The Service has a program for taxpayer assistance in which tele-
phone calls are occasionally monitored by a supervisor or designated Taxpayer
Service Representative to see if correct answers are being given in a courteous
manner. However, “electronic surveillance” would not he an appropriate term to
describe this program. When monitoring taxpayer assistance calls. the identity
of the taxpayer is not even known unless he volunteers it, or unless the question
is so complicated that it cannot he answered without snme research. In the
latter situation, it is mnre practical for IRS to cell the taxpayer back when the
answer has been found. so we would ask for the taxpayer’s name and phone
number in such cases.
Except in a call-back situation, no notes of the conversation are held. and in
no case are conversations recorded in any way. Since the purpose of the moni-
toring is to oversee the quality of the answers and the manner in which our em-
 105
ployees deal with the public, a specific instance of monitoring is done without the
employee’s knowledge, even though all employees who serve in the taxpayer as-
sistance program understand that the monitoring occurs as a regular practice.
So that taxpayers are aware that telephone calls in taxpayer service offices are
monitored, we have highlighted the following statement on the front page of
the tax package sent out to all taxpayers at filing time : “To help us provide cour-
teous responses and accurate information, IRS supervisors occasionally monitor
telephone calls. So record is made of the taxpayer’s name, address, or social se-
curity number except where, at the taxpayer’s request, a followup telephone call
must be made.”
As a matter of Service policy, the use of electronic devices to intercept tele-
phone conversations without the consent of at least one of the parties to the
conversation, frequently referred to as “wiretapping,” is absolutely prohibited.
In our investigations of suspected illegal activity, we do on occasions use the
legally permissable technique of intercepting telephone conversations by the use
of electronic devices if at least one of the parties to the conversation consents.
Such instances are strictly controlled and require the approval of an IRS official
designated by the Commissioner.
Question 4. Was the formal establishment of the Special Service Staff really
an extension of the checkine that was started on the 22 extremists -groups- in 1961
and later expanded to include 25 more in 1963?
Response. Although the Special Service Staff activities were similar in some
resnects to the checking that was started on extremist grouts in 1961 and 1963,
the Special Services Staff was not an extension of the earlier activity.
As noted in the June 5, 19’75 staff report of the investigation of the Special
Service Staff for the *Joint Committee on Internal Revenue Taxation, the exam-
ination which began in 1961 of the 22 organizations was largely completed in
1963. The examination which beean in 1963 of the 25 organizations was com-
pleted, for the most part, in 1966. -
In Sovember of 1967, a status report on the cases involving these organizations
was given to Commissioner Sheldon Cohen. The report noted that the major
purposes of the study were fulfilled early in 1966. The Joint Committee Report
says that Commissioner Cohen told of his decision to wind down the project,
putting such examinations back into the normal channels, after he became
Commissioner (Januarv. 1965 to Januarv. 1969).
The origins of the Special Service Staff were in the summer of 1969. The
reasons for its creation are accurately discussed in the Joint Committee staff
report of investigation.
Question 5. In 1974 more than 8,996 Federal income tax returns were made
available to other Federal agencies for police work. Did the IRS receive adequate
assurances that these returns were being used for law enforcement purposes?
Was there any checking?
Response. Treasury regulations require that requests for tax information from
Federal agencies must state the reason for the request, and only if this and all
other reouirements under the regulations are met is authorization granted. Most
requests contain paragraphs similar to the following :
“Unless it is determined that such documents should be filed with the Court or
otherwise used in evidence in such case, access thereto, on a need-to-know basis,
will be limited to those attorneys or employees who are actively engaged in the
case. Under no condition will they be made public except to the extent that pub-
licity necessarily results if they are used in litigation. Persons having access to
these documents will be cautioned as to the conildentialitv of the information
contained therein and of the penalty provisions of Section”‘7213 of the Internal
Revenue Code and Section 1965. Title 18. USC.. .-regarding _ the unauthorized dis-
closure of such information.”
In addition, all our responses contain a paragraph which reminds the re-
quester that the information is being furnished only for the purpose for which
it was requested and again reminding them of the penalty provisions of the
Internal Revenue Code. Althoueh we do not check further to see how the in-
formation is being used (or have the-resources or ability, as a practical matter,
to do so), it should be noted that all federal employees are subject to the sanc-
tions contained in the Code (fine up to $1,909 or imprisonment-up to one year,
or both). We also feel it is the responsibilitv of the agency to ensure that an
unauthorized disclosure is not made of the information it has received.
AGREEMENT ON COORDINATION OF TAX ADMINISTRATION WITH THE STATE
OF OHIO PROVIDED TO THE SENATE SELECT COMM~EE BYCOMMISSIONER
ALEXANDER

The State of Ohio and the United States Internal Revenue Service,

U. S. Department of the Treasury, recogr?ize the mutual hexfits to be

derived through coordination of their tax adminlstraticn programs to

secure retllrn~~, determine t-xcl liability , and effect collecticn of taxes;

and the parties, updating and renewing their agreement CT December 28,

1971, do hereby agree to contkue cooperative programs already established

and to enter into additional arrengements designed io improve the adminis-

tration and enforceslent. of the tax laws of their respective jiiriadictions.

Wit.2 these oh,jectives, cfficjjls of the State, acting t:nder a:lthority-

vested in or delegated to them :o a%vinister State tax l&s, and the

District C'ircctor and other Kppropriate officials c1 the Internal Revenue

Service will consult from tin- to Lime reparGng iheir respccLi-re criForr+

moct fzsilitiez xd problems, and will establish mutually agreeable pro-

grams for the exchnnge of information and assistance.

‘I . -&:;is for Instituting Actions -- This agreement provides the

general hasis for achieving the stated objectives in the cocrdination

of tar administration and the general nature of the actions to be taken

in accordance with these objectives. Specific arrangements to achieve

tii‘:ze objectlT!es wil 1 be initiated in a manner and at such tide as is

n!lk3lly agreeable to the appropriate State and Internal R?venuc Service

of!Ycialr U. They shall explore and adopt mutually acceptable techniques

and nodes of exchange which will be most beneficial to improved tax

 107

administration, with least possible interruption to their respective

operating routines, and with strict adherence to rules, regulations,

and laws for protecting the confidentiality of tax returns and tax

return information. To this end, they will seek to attain the maximum

exchange of data by electronic and mechanical means.

2. Incoection of Tax Returns -- This agreement shall constitute

the requisite authorization for designated personnel of the Internal

Revenue Service to inspect all classes of State tax returns. This

agreement shall also constitute the requisite authorization for desig-

nated tax personnel of the State to inspect income, eststr, gift,

errployment, excise, and all other classes of Federal tax returns

administered by the Internal Revenue Service (except the return re-

lating to the occupational tax on coin-operated devices, Subchapter B

of Chapter $1, for the purpose of administering State tax iaws or for

the purpose of furnishing information to local tax officials for use

in administering local tax laws.

This authorization shall continue in effect until such time as

the Commissioner of Internal Revenue, by written notice to the Governor,

provides that such inspection will be permitted only on the basis of

periodic applications therefor. The inspection of Federal returns pur-

suant to this authorization will be for the purpose of administering the

following State tax laws: Rereonal property tax, franchise tax, income

tax, estate tax, excise tax and all other State tax laws.
 108

AS a prerequisite to inspection bjr State tax personnel of Federal

returns or receipt of related information, the Governor agrees to furnish

to the District Directors of Internal Revenue at Cincinnati and Cleveland

a list showing the names, official titles, and the social security numbers

of all State tax persome designated by the Governor to inspect Federal

tax returns or receive related infoymntion. Such list will note whether

any State tax personnel so designated are limited to the inspection of

certain classes of Federal tax returns or related information. Additions

to and deletions from the list will be furnished as they cccur. Likewise,

information concerning Internal Revenue Service personnel designated to

inspect State tax returns or related information shall be furnished to

the State in the form and manner requested by the State.

Federal tax return or taxgayer naii- e and address informal,ion may be

furnished by State tax authorities to tax officials of a political sub-

division of the State for use in administering the tax laws of such sub-

division only after the Governor has requested and obtained written

authorization from the Commissioner of Internal Revenue. Any request

for such'authorization shall state the official titles of the local tax

officials who will receive the tax return information, shall indicate the

specific data to be furnished, snd shall refer to the local tax laws

which such officials are charged with administering. Any such authori-

zation is conditioned on the agrement of the State to furnish to local

tax officials only such tax return data as is directly pertinent and

essential to the administration of the local tax laws, to ensure that

such local officials establish and enf oreeadequate safeguards to prevent

 109

unauthorized use or disc?oxurc of such info::?ntion, and to rr,aintain

a list of the names of the local tax officials to whom the informtion

is furnished.

3. Delinquent Returns and Collection of Taxes -- Under such

arrangements as may be practicable and Feasible, the agprolzriate State

and Internal. Revenue Service officials wiil furnish each other infor-

mation which will assist in locating the whereabouts, sources of income,

employers, or real and personal property of persons vhose tax accounts

are delinquent. Additionally, they will exchange lists of taxpayers and

other information relevant to the identification of persons who have

failed to file tax returns.

4. Cooperative
--_.. Audits arid A:?dit Adjuztr?ents -- Within the

frmevork of available enforcement resources, the appropriate State

and Internal Revenue Service officials will develop cooperative return

selection and examination programs with the objective of minimm dupli-

cate audit effort, increased Federal and State audit coverage and minimum

taxpayer.contact. They wil.1 furnish each other, in accordance with

mutually agreed schedules and routines, infomation on audit adjustments

made by their respective offices, and such other information as will

assist in determining final tax liability,

5. Scope of ?&change -- Other information relevant to the atiinis-

tration of State and Federal taxes may be exchanged, if feasible, under

 110

arrcingements made by the appropriate State and Federal tax officials.

Such information may include, but shall not be limited to, lists, mag-

netic tapes, transcripts or abstracts pertaining to: (a) taxpayer

identity and address, and tax return and related data; (b) tax refunds

and rebates; (c) registrations of automobiles, trucks, tractors, and

other highway motor vehicles; (d) distl~ibutors and augpliers of motor

fuels and special fuels; (e) or g anizations exempt from taxes under State

or Federal law and revocation of exeqt status; (f) individuals, partner-

ships, and corporations engaged in a specific type of business or pro-

fession; (g) ineorporatiins and dissolutions of corporations; (h) valua-

tions and appraisals of real or personal property; (i) inventories of

lock boxes of decedents; (j) employers, together with their addresses

and identification numbers; (k) data relating tc the production, proces-

sing, and transportation of fossil fuels, minerals, and other natural

resources; and (1) other data, including information relating to the

regulation of tax return preparers, which the appropriate State tax and

Federal tax officials may deem to be useful in tax administration.

6. Other Cooperative Activities -- In addition to the exchange

of tax information, State and Internal Revenue Service officials will,

to the extent feasible, extend to each other assistance in other tax

a3mlnistration matters. This may include such activities as taxpayer

assistance, stocking tax forms for the public, training of personnel,

special statistical studies and compilations of data, development and

improvement of tax administration systems and procedures, and such other

activities as may improve tax admi.nistrZ.

 111

7. Limitations -- The extent of exchange of tax return and related

information between the Internal Revenue Service and the State is con-

ditioned upon similarities in tax structures and rates, statutory

authority, regulations, aclmin:strative procedures, and available

resources. Differences in the two tax systems Cl.1 be taken into

consideration in detcr?nining the extent of the exchange.

All tax information furnished pursuant to this agreement, irre-

spective of the manner, form or mode, shall be used solely for the

purpose of tax administration. No person shall disclose any infor-

mation acquired by him to any person in any manner whatever not provided

by law.

Information generally will not be furnished respecting any case

in which prosecution is pending or is under consideration, but may be

furnished after the criminal aspects of a case have been finally

disposed of, irrespective of the method of disposition.

Because some targayers may be unaware that State tax officials

are authorized under Federal law to obtain Federal tax return infor-

mation for State or local tax administration purposes, letters to

taxpayers from the State or its political subdivisions will clearly

state that such information was obtained pursuant to law.

State tax officials may not disclose any Federal tax return or

return information to tax officials of any other State, or to political

 112

subdi-Jisions of any State, without written authorization from the

Commissioner of Internal Revenue.

8. Officials to Contact for the Obtaining of Information --

Requests by the State for tax return information in magnetic tape mode.

will be made to the Ccrr?.issloner of Internal Revenue, attention ACE:A.

Requests for physical inspection or copying of Federal tax returns

shosring addresses within the State will be made to the Director,

Internal Revenue Service Center, 201 Vest Second Street, Covington,

KenfucQ 41011; requests for inspection and copying of audit abstracts

and repcrts pertaining to such returns will be made to the District

Directors at Cincinnati and Cleveland, who will be responsible for

making proper arrangements for such inspection. For tax returns

shoving a&dresses outside the State, the requests vi11 be made by

the Governor to the Commissioner of Internal Revenue, attention CP:D.

Requests by Internal Revenue Service personnel fcr inspection or copying

of State tax returns and related documents will be made to the Tax

Commissioner of Ohio.

9. Protecting the Confidentia!.ity of Tax Returns -- The State

of Ohio and the Internal Revenue Service recognize their mutual

responsibilities to protect the confidentiaiity of tax return infor-

mation, as pro‘iided by law, and to assure that such information is

disclosed only to those person:, and for such purposes, as are

authorized by lab. In recognition of these responsibilities, each

 113

party to this agreemnt shall, when requested by the other party,

review with the other party its safeguard measwcs to protect the

confidentiality of tax return inforrmtion mde available to it under

Federal-State cooperative exchar.ge programs.

l'iie State or Federal tax officials, as appropriate, having

custody of tax return data nade available to the% under this agree-

mnt -- whether in hard copy, photocopy, magnetic tape or other form --

shall take a11 steps nece ssary to insure that the safeguard measures

established for protecting its confidentiality are carried out. These

measures include establishing and maintaining a secure area or place in

which the return or return information exchanged chall be stored, rc-

stricting access to the return or return information only to these

officials and swloyees raving a need for access to such return or

return information, and providing such other safeguards as are deemed

necessary or appropriate or as may be reasonably requested by the party

furnishing the information.

Processing of Federal tax return information on the magnetic

tape file (including tape reformatting or reproduction, or conversion

to punch cards or hard copy printout) will be performed only under the

immediate supervision and control of authorized employees of the State

tax authority, in a manner which ~Lll. protect the confidentiality of

the information on tine fiie.

 114

The State agrees that it will destroy copies of Federal returns

or return information in its possession after they have served their

purpose.

The Governor hereby designates the Tax CoTmissioner of Ohio to

be responsible for Iraintaining the safe&lards necessarv to preserve

the confidentiality of Federal tax return infcmation in the hands of

State, and-if applicable, local tax authorities, and for mintaining

the list of local tax officials to whom infomation is furnished.

10. Temination, or :,lodification, oE Agreement -- The provisions

cl this agreement are subject to the provisions of the Irkernal Revenue

Code and Regulations, and to the provisions of State statutes and regu-

lations, and this agref;:ent Kay be tencinated or modified at the

discretion of the Commissioner or of the Governor on account of

changes in Federal or State statutes and regulations or whenever in

the administration of Federal or State tax laws that action seems

appropriate.

Any unauthorized use or disclosure of tax returns or data therefrom

furnished pursuant to this agreement, or inadequate procedures for

safeguarding the confidentiality of such returns or data, 21~0 consti-

tutes gro~~nds for the immediate temination of this agreement and the

exchange of icfomation theremder.

 ormissioner of Internal Revenue

Signed at 0 -/Cd 0
20th
__ day of
this / 9 Ixdny of
 116

ATTACHMENT 2
INTERNAL REVENUE SERVICE MANUAL SUPPLEMENT
dune 23, l9- InformationCatherine Guidelines

section 1. Purpose
.Ol This Supplement implements Policy statement P-l-l w.pPro”ed 6-23-E), attached,
and provides guidelines for the gathering of information that may be solicited, obtained and

section 2. Background

commissioners on January 22, 1975 (reissued in the Internal Revenue Manual as Manual Supplement
91k?DD-7, CR 41FoD-18 and 51m-20 and 71RDD-1) arid by telegram to All Regional commissioners,
District Directors and Service Center Directors on February 7, 1975 (reissued in the Internal
Revenue Manual as Manual Supplement 93G-148, CR 4X-323, 4X-223, 5(12)6-22, and 7X-3) may be
resumed in accordance with the guidelines and definitions set 0°C in this Manual Supplement.

section 3. Record Retention and Destruction

.Ol NO information documents of any type presently on hand or hereafter acquired in the
service concerning Intelligence Information Gathering, Joint Campliance Program,Coordi”ated
Compliance Projects and Returrw Compliance Program will be destroyed until the Senate Select
committee and au other official re”fevi”~ bodies complete their investigations of intelligence
activities carried out by or O” bshalf of the Federal Government. The suspension of destruc-
tion procedures does not preclude “se af such informaCfon for civil or criminal tax adminis-
tration purposes. provided Such use does not include destruction. Instructions concerning
recc’rds disposition Will be issued as SOO” as the investigations are completed.

.02 District Directors till ensure that documents and information relating CO or arising
from information gathering activities (including projects and pragrams), whether solicited or
u”soliciCed, which are not necessary to the administraeio” of the eax laws an.3 do not indicate
a violation of a Federal law enforced by a”“ther agency “ill be segregated and placed in a
separate storage area with access limited to Division Chiefs. To the extent practicable, the
data shauld be filed according to taxpayer name. A” index of all documents from the dis-
continued Information Gatherlne and Retrieval S”6tem should be retained. These records ma”
be transmitted to the Federal i&cords Ceneer, .; destroyed in accordance with IREI 1(15)59,
when the Congressional investigarions specified in Section 3.01 are concluded.

.03 Directly tax related documents (defined in Section 4) remaininS after the re”iew
specified in Section 3.02 shall be maintained in accordance with the ,,rovisio”s of these
g”ideli”eS.
 117

Section 4. Definitions

1 Personal expenditures or i”“esCme”ts not come”s”raLe with knovn income an*

assets;

2 Receipt of ““reported income;

3 overstatement of itemized deductions, business expenses, cost of sales. Cax

credits, etc.;

4 Improper deduction Of capita1 or personal and living expenses;

6 omission af asset.5 or improper deduction or exclusion of items frm estate and

gifL tax retllms:

7 Violations of conditions and requirements relating to tax exempt seatus of

organizations;

8 Improper operation of a qualified employee plan and tr”SL; or

9 Other acttons substantially similar to 1-8 above

.02 me above factors do not Stand alone, but should be considered in light of the
taxpayer’s accupacian, prior accmulacion of wealth and data shown on tax returns and the
results of prior examinations or investigations. Prudent judgment must be exercised in
making the decision whether types of informaria” in 4.011-4.019 are directly tax related.

.03 Documents and data relating to agents’ daily activities, eime reports and other
case management an.3 internal ma”agemenC documents are not considered to be backgro”“d material
or taxpayer related information and may be retained for management purposes.

,04 The folloving definitions of Other LenIS apply to these guidelines:

1 A “Cae.e*’ is an accumulation of facts concerning a paxpayer, vhich are segregated

and associated with ehe taxpayer’s name and evaluated for potential assignment to a” employee
for appropriate action.

2 An “assigned case” is a case what has bee” assigned t” a” employee or group of

employees for action and chat is subject to a requirement for a written repart or a” enCry in
a lag indicattng the action take” “hen the case is completed.

3 A ‘fcaSe file” is the acc”mulared notes, documentation and information assembled

as a result af Service inquiries of and abaut a taxpayer which contains the taxpayer’s name
or identifying “umber or symbol assigned to tile taxpayer.

4. An “informant’s communication” is a communication from anyone outside the

service, Yritte” or oral, “olunrarily submitted to the service identifying one or more tax-
payers and providing some information abmtt the taxpayer. The infamant may be anonymous.
 118

section 4 -- Caned.

5 A “project” is a study, survey or canvassing acrivity involving a limited “umber

of taxpayers within such categories as an occupation, an industry, a geographic area or those
involved in a specific economic activity, undertaken to identify noncompliance with the fax
laws.

section 5. Broad service Guidelines Governing All Functions (Except Inspection)

.02 Indications of noncompliance identified by Service Center, Regional and National

Office employees will be forwarded to the Chief. IntelliSence Staff at the appropriate
service center.

.03 Information received by service employees, which indicates a violation of B Federal

law enforced by another agency, will be forwarded thro”Sh channels to the Director, Intelli-
gence Division, for forwarding subject LO disclosure provisions, to the appropriate agency.
(Reference 1P.M 9382.4).

.04 NO employee shall maintain background or historical files o” tax,~~yers except

where such files are an integral part of the case file pertaining to a currently assigned
case, unless specifically authorized to gather information as provided in Section 8.03.

.05 Employees assigned to a project involving information gathering must ensure that
all information received is included wirhin the project files.

.O6 Employees assigned to projects or individual infomaCion gathering may obtain

information from sxrce~ outside the Service for purposes of verifying the filing of required
rerurns, payment of fax, exempt status, proper reporting of income, deductions or credits. or
otherwise determining compliance with the tax laws. However. the information obtained must
be directly tax related and necessary to the administration of the tax laws. (See Sections
4.01 and 4.02).

.07 The Information Index System will be used whenever if is necessary to index infom-
tion.

.08 Any employee who receives information concerning Service employee misconduct will
forward the information directly to Inspection.

.09 Informants’ communications vill be forwarded to the Chief, Intelligence Division

for transmittal to the Chief, Intelligence SLaff at the appropriate service Center. The
infomants’ communications will be evaluated by appropriate personnel at the Service Centers.

.lO Infomancs’ communications concerning violations of other Federal laws will be

forwarded by the Chief, Intelligence Staff, subject to disclosure provisions, to the awro-
priate agency.

.ll Information received which is not directly tax related and does not indicate a
violation of other Federal laws will be segreSared and stored, as provided in Section 3, for
disposition when instructions are issued.
 119

.03 DiStrICt Directors are responsible for ctie approval of all dist=ict informacio”
gathering projects. while the Chief, Intelligence Division may authorize information
gathering on specific taxpayers outside the scope of projects as and to the extent provided
in Secrion 8.03, the District Director shall provide for quarterly reviews of all information
gathering activities on projects and specific taxpayers, to ensure compliance with Service
pdicy and these guidelines.

.04 Each employee is responsible, in the inreresc of safeguarding taxpayer privacy, for
ensuring that information other than that necessary for the admlnisrration o= enforcement of
the tax laws is not solicited, indexed o= associated with the name o= ocher identifyinS
symbol of a taxpayer. (See Section 3.02 fo= the disposition of any s”ch information
described therein as may be o= may have been received.)

section 7. Initiation of Projects to Defermine kipayyzr Compliance

.Ol Projeecs, as defined in Section 4.045, msc be authorized in witinS by the Assis-
tant Commissioner, Regional Conmissioner or the District Director. Authority to initiate
projects may not be redelegared.

.02 Auchorizacions for p=o,ects must state the purposes and define the scope of the
project. Prefect activities may include obtaining and analyzing data from sources outside
the Se=“ice, but only information meeting the requirement of Section 4 may be sought,
obtained, indexed and analyzed. AuCho=izatio,,s must also specify the estimated life of the
project and specifically state vhar type of informarion is fo be indexed.

section 8. Intelll~ence Division Procedures

.Ol The Intellinence Information Catherine and Retrieval Svstem (1P.M 9390) is dis-
confinued. All disc&s will utilize the Info-&ion Index Sys;em, vhfch vill.be described
in a separate Hamal Transmittal, to file and index directly fax related information. Such
tax related infmmation now in the discontinued Information GatherinS and Retrieval System
may be retained in dist=ict files and indexed only if it relates to a taxpayer included in
a” authorized project o= fo= whom the Chief, IntelliSence Division, has authorized
information gathering.

.02 Where authorized by an Assistant Commissioner. P Regional Conrmissio”er. or a

District Director, pro,ects, as defined in Section 4.045, may be initiated for the purpose
of idencifvina tama”e=s involved in tax evasion o= other criminal violations of the Internal
revenue cc&. - The’a;tho=ization for a p=oJect my identify one o= nm=e taxpayers at the
outset far information gathering acti”Icy and additional taxpayers may be identified 88 the
pro,ect progresses. Imediately upon terminafion of the informafion gatherinS phase of the
project any information not associated with the case file of a taxpayer must be removed from
the Information Index System and destroyed unless it relares to a taxpayer for whom infom-
tie” gathering has been specifically authorized by the Chief as provided in Section 8.03.
(Note. however, that Section 3.01 prohibits destruction pending the completion of certain
inquiries. Information removed will be stored in the district until rhis suspension is
released.)
 120

section 8 -- Contd.
.03 I” addition to project information gathering, the Chief, Intelligence Division, may
authorize individual employees to obtain information on a specific taxpayer who is or appears
to be involved in activities which have tax significance for purposes of making a decision as
to whe.her or not to initiate an investigation. This authority may not be redelegated. The
Chief’s authorization must be made in advance of the information gathering activity. Only
i,,fomacion or data directly related to administration of the tax lavs which the Service is
authorized and directed to &force will be solicited or indexed, as specified in Sections 4.01
and 4.02. The Chief. intelligence Di”ision, may authorize only inforrmtion gathering activi-
fies which relate to a taxpayer of interest to rhat district. The district’s interest may be
the result of the taxpayer filing returns in the district, residing in the districf or having
a principal business or other economic =cti”iey in the district. In the e”ent the interest of
another district becomes apparent, the Chief will coordinate with rhe ocher district or
districts to establish which district has the principal interest. That district will, tbere-
after, control information gathered and coordinate information gathering activity relating to
that taxpayer.

.O4 When the Chief, Intelligence Division, approves the gathering of information re-
lative to a specific taxpayer (described in Section 8.03) the Information Index System “ill
be used to index the information. The authorization of the Chief must be in writing and must
specify the known or assumed identity of the taxpayer and the reason information gathering
has been authorized. The written authorization will be indexed.

.05 ~,,fo-tion gathered pursuant to Section 8.03 till be maintained =t tb= loc=tion
specified by the Chief, IntellifWnce DiViSiOn. me information may be maintained in the
custody of the employee authorized to garher the infot’m=tiOn. the employee vi11 be respon-
s<ble for preparing the necessary forms co enter the authorization and each ifa of
infoma~ion gathered in the index.

.06 The Chief, Imelligence Division or Assistant Chief will conducC quarterly reviews
of samples of information gathered and entered into the Information Index System LO ensure
that only directly tax related information is being retained and indexed and that information
no longer needed by the Service is being removed from the Information Index System to be
destroyed or retired to rhe Federal Records Centers. A vritten record of rhe quarterly
reviews vi11 be submiLted to the District Director who vi11 review them.

.07 Information obtained during the course of an assigned pro,ect or inveetigation

indicating a “iola~ion of a Federal law enforced by another agency till be forwarded co the
Director, Intelligence Division for transmittal co the appropriate agency in accordance with
the disclosure provisions (Reference IFA 9382.4) and the Privacy Act “hen effective.

.08 Information in the Information Index S”stem m” not be retained in the S”stem for a
period longer than six years exce,,t that. with ti =ppro;=l of the Chief, Intelli&nce
Division, specific information may be retained for a longer period if if has continuing
material significance LO a taxpayer’s tax affairs. information in the System “ill be removed
and associated vieh the taxpayer’s case file when a case is assigned. kill other information
removed from the System will either be destroyed, or retired to the Federal Records Center,
in accordance with the provisions of IRH 1(15)59. Records Control Schedule 207, Intelligence-
Regional and District offices when the restrictions in Section 3 have been rescinded.

.09 Intelligence employees who learn of indications of tax noncompliance will report
information on Form 3949 or, if authorization to gather information is being requested, by
memorandum. through appropriate management channels. to the Chief, Intelligence Division.

.lO Special Enforcement files are eliminated. The National Register is discontinued
and Forms 4860. National Register Input Form, will no longer be prepared.
 121

.Ol All Audit employees will be alert for indicarions of noncompliance with the tax
laws. They will continue to seek facts and evidence necessary to resolve issues in assigned
xses and projects; however, care must be take” to ensure that only directly tax related
information is sought. mply,ees will not maintain any individual files or background
informacio” on taxpayers ocher than project files which they have been specifically
authorized to maintain by the District Director.

.02 If potential fraud is discovered relating to a taxpayer upon wham the employee
has a” assigned case, Lhe matter will be referred to Lhe Chief, I”Lellige”ce Division 0”
Form 2197, Referral Report.

.03 All ocher information received which may involve potential fraud and all inform-
ants’ communications received by Audit employees will be recorded 0” Form ,949 and forwarded
throu@, channels to the Chief, Intelligence Division. All other directly tax related
information received by Audit employees will be forwarded with Form 4298, Audit Requisition
and Information Report, TV the Refurns Program I(a”ager for processing. Croup Managers will
ensure that only directly fax relared information is forwarded. Information indicating a
violation of a Federal law enforced by another agency will be forwarded through channels to
the Direcfor, Intelligence Division for transmittal to the appropriate agency subJect to
disclosure provisions.

.04 All Forms 4298 not selected by the RPM will be batched and sent to the Service
center Files Management unit for association with the returns. All Forms 4298 selected by
the F.PELwill be handled as provided in IF.” 4175 and will remain with the tax return upon
dispasirian by Audit.

.05 Information received indicating “ancom~liance by a large “umber of taxpayers

should be fowarded through channels to the Chief, Audit Division, and as appropriate, to
the District Director, the Assistant Regional Commissioner (Audit) or Director, Audit
Division. far consideration and appropriate action

.06 Joint Compliance, Coordinated Compliance and similar pro~~“s will continue.
Projects now in progress will be completed and new prajecrs may be initiated if approved by
*ssistanc commissioners, Regional co*issioners or the DiStriCt Director. me provisions
of this Supplement do “of change program reporting requirements on retention or indexing of
information. Care should be exercised to ensure that only directly tax related information
is sought.

.O, Informaeian necessary for the determination of comparable sales prices, a~~ro-
priace ineercompany pricing practices, allocation of income and expenses, useful life of
ae.sets and similar data necessary to sustain Service positio”s o” valuation and costs
allocation matters may he obtained and retained for use as reference material. Such material
is to be used by examiners in arriving at timely, fair and reasonable determinations and is
not to be indexed and associared vich the name or other identifying symbol of a taxpayer.

.08 The historical files used in the Large case Program are considered a part of the
case file.

Section 10. Collection Procedures

.Ol me Collection function will continue an-going activities in the Returns Compli-
ante Program area. Nev programs initiated at the National, regional or local levels will
require the approval of the Assistant Canmlissioner, Regional Cownissioner or District
!.lirector, respectively. Returns Compliance Programs may involve obtaining lists of tax-
 122

section 10 -- Cantd.
payers’ names and addresses and other general information which identifies groups of tax-
payers who are probably required to file particular tax returns. Other types Of Returns
Compliance Programs may involve direct contact with individual taxpayers to assure compliance
With specific filing requiremenls. Employees will not maintain any individual files “T back-
ground infarmatio” o” taxpayers.

.02 Only directly tax related information will be obtained in the Retur”~ Compliance
Program.

.03 Information gathered for the purpose of generating Returns Compliance Program leads
is normally retained for a relatively brief period until this purpose has bee” accomplished,
and the” destroyed as soon as permitted under section 3.02,
.04 returns Compliance leads assigned for field follow up will be considered as
“assigned cases” and, as such, come under the exclusions in Section 1.02.

.05 collection employees who learn of indication of tax noncompliance will report the
information to Audit or W/E0 o” Form 3449, Referral Report. If potential fraud ls indi-
cated, the information will be reporred CO Intelligence on Form 3949, 1nre11igence Informa-
tion Item, unless the referral resulted from a” assigned case where Farm 3212. Referral
Report, will be used. Information alleging ocher offenses against the ““ited States will be
forwarded through channels to the Director, Intelligence Division.

.06 Actions that are deeaed necessary to verify the current compliance of previously
delinquent taxpayers or taxpayers for whom the Service believes such verification is “eces-
sary, will be considered delinquency prevention actions. Such actions will be considered
assigned cases and will be documented as outlined in 4.042.

Section 11. Employee Plans and Exempt Organizations Procedures

.Ol All EPlEO employees will be alert for indications of noncompliance with the tax
laws. Thev will continue to seek facts and evidence necessary to resolve issues in assigned
cases and brojects; however. care must be taken to ensure that only~ directly related infor-
mation is sought. Employees will not malntai” any files or background inforioatio” 0” tax-

.02 If potential fraud is discovered relating to a taxpayer upon whom the employee has
an assigned case, the matter will be referred to the Chief, Intelligence Division, a” Form
2797. Referral Report.

.03 All other information received which may involve potential fraud and all inform-
ants’ cormnu”icatio”s received by EP/EO employees vi11 be recorded on Form ,949 and forwarded
through channels to the Chief, Intelligence Division. All other directly fax related infor-
mation received by EPiEO employees will be forwarded with Form 4298 t” the Chief, EP/EO
Division, for processing. Group Hanagers will ensure char only directly tax related infor-
mation is forwarded. Any information alleging other offenses against the United States will
be forwarded rhrough channels to the Director. Intelligence Division for appropriate disposi-
tion pursuant to Section 5.

.04 The Chief, W/E0 Division, or a” appropriate designee, will promptly screen all
Forms 3949 and 4298 received. Forms 4298 not involving exempt organizations, exempt status
of an organization or employee plans will be forwarded to the Returns Program Ha”a&w, Audit
Division, for the district office servicing the principal place of business of the taxpayer.
If it is determined a” exempt organization or employee plan refur” is to be secured, the
return will be requested from the service center and the information associated with the
return. If the return does not warrant selection for examinarion because of prior
 123

Section 11 -- Contd.

year returns, workload capacity or other factors, the Form 4298 and return will be senL back
to the service center. However, if the information relates to a taxable period for which no
return is due or one for which the organization does not have to file a retlirn, such FOrID
‘298 will be placed in a suspense file until the return is filed and secured, or until the
accumulated information warrants compliance action. Any instances of apparent failure to
file Will be referred to the Collection function.

.05 Projects as defined in Section 4.045 may be initiated when authorized by a*

Assistant Commissioner, the Regional Commissioner or by the key District Director. care
should be exercised to ensure rllar only directly tax related infomation is sought.

section 12. Effect 0" Other Documents

.Ol
This supersedes Manual Supplement 91Fm-7, CR ‘lRDD-18, 51RDo-20 and 71RDD-1, dated
January 31, 1975 and Maanual Supplement 936-1‘8, CR ‘26-323, 456-223, 5(12)G-22 and 716-3,
dated February 20, 1975 and Amendment 1 thereto. Annotations made at IRM ‘2(1‘)0, ‘568,
5(12)‘0, 9311, 9330 and 9390 referring to Hanual Supplement 936-148, CR 426-323, ‘56-223,
5(12)G-22 and 71G-3 should be removed.

.02 This amends and supplements 1RM 4175, ‘2(14)0, ‘568, ‘569, 5(12)‘0, 6100 (to be
issued), 7100 (to be issued), 9311, 9330, and 9413. This "effect" should be annotated by pen
end ink beside the text cited with B reference co this Supplement.

.03 This supersedes IRM 9390 which will be revised and reissued as soon as poesible.
P-l-l (Approved b-23-75) The mission of the service is to encourage and
achieve the highest possible degree of voluntary
Mission Of the compliance with the tax laws and regulations and
service to conduct itself so as to warrane the highest
degree of public confidence in its integrity and
efficiency. The Service should advise the public
of its rizhts and resoonsibilities. determine the

and enforcement of the tax laws.

Programs and In order to fulfill this mission. the Service

facilieies to be must establish ~roeram* and facilities for receivina
established to and processing ;ee;,,,, far collecting all taxes du;.
accomplish Service for auditing, far detecting fraud and delinquency,
missioo for hearing and adjudicating appeals, far providing
taxpayer assistance and information, for recruiting
persons with a professional outlook and maximizing
their ability LO perform through training in both
the ethical and professional aspects of their jobs,
for developing evaluation methods desi&med to measure
these aspects. for the uniform interpretation and
application of the tax laws, for the preparation of
regulations and tax guide materials. for clarification
and simplification of tax rules. for maintaining the
integrity of the service and its efficient operation.
and far performing such other duties as may be
required by laws and reg”laLions.

Taxpayer privacy Since compliance with Internal Revenue laws

will be safeguarded canno? be determined solely with reference to informa-
in the acquisirion tion on returns and documents filed with the Service.
and use of the Service will obtain information from outside
information sources. However. only information necessary for
the enforcement and adminis~ratian of the tax laws
which the Service is authorized and directed co
enforce will be sought. To safeguard taxpayer
privacy, any information received by the Service,
other than that described in this paragraph, will
not be indexed or associated with the name or identi-
fying symbol Of a taxpayer. NO disclosure of informa-
tion will be made except 88 provided by law.