[Senate Hearing 105-598]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 105-598

 
                             IRS OVERSIGHT

=======================================================================

                                HEARINGS

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                   APRIL 28, 29, 30, and MAY 1, 1998

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance

                               ----------

                    U.S. GOVERNMENT PRINTING OFFICE
49-650 cc                   WASHINGTON : 1998





                          COMMITTEE ON FINANCE

                WILLIAM V. ROTH, JR., Delaware, Chairman

JOHN H. CHAFEE, Rhode Island         DANIEL PATRICK MOYNIHAN, New York
CHARLES E. GRASSLEY, Iowa            MAX BAUCUS, Montana
ORRIN G. HATCH, Utah                 JOHN D. ROCKEFELLER IV, West 
ALFONSE M. D'AMATO, New York         Virginia
FRANK H. MURKOWSKI, Alaska           JOHN BREAUX, Louisiana
DON NICKLES, Oklahoma                KENT CONRAD, North Dakota
PHIL GRAMM, Texas                    BOB GRAHAM, Florida
TRENT LOTT, Mississippi              CAROL MOSELEY-BRAUN, Illinois
JAMES M. JEFFORDS, Vermont           RICHARD H. BRYAN, Nevada
CONNIE MACK, Florida                 J. ROBERT KERREY, Nebraska

           Franklin G. Polk, Staff Director and Chief Counsel

      Mark A. Patterson, Minority Staff Director and Chief Counsel

                                  (ii)


                            C O N T E N T S

                              ----------                              

                             APRIL 28, 1998
                           Opening Statements

                                                                   Page
Roth, Hon. William V., Jr., a U.S. Senator from Delaware, 
  chairman, Committee on Finance.................................     1
Baucus, Hon. Max, a U.S. Senator From Montana....................     3
Grassley, Hon. Charles E., a U.S. Senator from Iowa..............     5
Kerrey, Hon. J., Robert, a U.S. Senator from Nebraska............     6
Breaux, Hon. John, a U.S. Senator from Louisiana.................     7
Murkowski, Hon. Frank H., a U.S. Senator from Alaska.............     8
Nickles, Hon. Don, a U.S. Senator from Oklahoma..................    10
Moynihan, Hon. Daniel Patrick, a U.S. Senator from New York......    11
Bryan, Hon. Robert H., a U.S. Senator from Nevada................    12
Mack, Hon. Connie, a U.S. Senator from Florida...................    13
Conrad, Hon. Kent, a U.S. Senator from North Dakota..............    13
Lott, Hon. Trent, a U.S. Senator from Mississippi................    15
Moseley-Braun, Hon. Carol, a U.S. Senator from Illinois..........    40

                          Department Witnesses

Patsalides, Harry, Deputy Assistant Inspector General for 
  Investigation, Department of the Treasury, Washington, DC......    16
DesJardins, Yvonne D., Chief, Employee and Labor Relations 
  Section, Personnel Branch, Internal Revenue Service, 
  Washington, DC.................................................    18

                            Public Witnesses

Davis, Robert E., attorney, Dallas, TX...........................    48
Epstein, Earl J., attorney, Philadelphia, PA.....................    51
MacNaughton, Philip, attorney, Houston, TX.......................    54
Mayo, Ray Cody, Jr., Assistant District Attorney, Caddo Parish, 
  LA.............................................................    57

                             APRIL 29, 1998
                           Opening Statements

Roth, Hon. William V., Jr., a U.S. Senator from Delaware, 
  chairman, Committee on Finance.................................    73
Moynihan, Hon. Daniel Patrick, a U.S. Senator from New York......    74
Chafee, Hon. John H., a U.S. Senator from Rhode Island...........    74

                            Public Witnesses

Colaprete, John..................................................    75
Gardner, Richard.................................................    79
Moncrief, W.A., Jr...............................................    81
Warren, Leroy W., Jr., NAACP National Board of Directors, 
  Chairman of the Board's Criminal Justice Committee.............   105
Long, Susan B., associate professor of quantitative methods, 
  School of Management, Syracuse University; and David Burnham, 
  associate research professor, Newhouse School of Public 
  Communications, Syracuse University; co-directors of 
  Transactional Records Access Clearinghouse.....................   119

                             APRIL 30, 1998
                           Opening Statements

Roth, Hon. William V., Jr., a U.S. Senator from Delaware, 
  chairman, Committee on Finance.................................   129

                            Agency Witnesses

O'Dwyer, Maureen, international examiner, Manhattan District, 
  Internal Revenue Service.......................................   130
Johnson, Minh Thi, revenue agent, Los Angeles District, Internal 
  Revenue Service................................................   145
Ayala, Michael, analyst, Georgia District, Internal Revenue 
  Service........................................................   148
Jarvis, Ginger Mary, acting team coordinator, Manhattan District, 
  Internal Revenue Service.......................................   151
Henderson, Tommy A., special agent, Criminal Investigation 
  Division, Internal Revenue Service.............................   170

                            Public Witnesses

Gernt, Patricia J., former special agent, Nashville District, 
  Criminal Investigation Division, Internal Revenue Service......   175
Latham, Barbara, former tax fraud investigative aide, Nashville 
  District, Criminal Investigation Division, Internal Revenue 
  Service........................................................   179
Baker, Hon. Howard H., Jr., former U.S. Senator from Tennessee...   182
Quillen, Hon. James H., former U.S. Representative from Tennessee   185
Crockett, David, District Attorney General, First District of 
  Tennessee......................................................   186

                              MAY 1, 1998
                           Opening Statements

Roth, Hon. William V., Jr., a U.S. Senator from Delaware, 
  chairman, Committee on Finance.................................   195
Moynihan, Hon. Daniel Patrick, a U.S. Senator from New York......   196
Gramm, Hon. Phil, a U.S. Senator from Texas......................   210
Mack, Hon. Connie, a U.S. Senator from Texas.....................   211

                        ADMINISTRATION WITNESSES

Rossotti, Hon. Charles O., Commissioner, Internal Revenue Service   197

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baker, Hon. Howard H.:
    Testimony....................................................   182
Baucus, Hon. Max:
    Opening statement............................................     3
    Prepared statement...........................................   233
Breaux, Hon. John:
    Opening statement............................................     7
Bryan, Hon. Robert H.:
    Opening statement............................................    12
Chafee, Hon. John H.:
    Opening statement............................................    74
Colaprete, John:
    Testimony....................................................    75
Conrad, Hon. Kent:
    Opening statement............................................    13
    Prepared statement...........................................   234
Crockett, David:
    Testimony....................................................   186
    Prepared statement...........................................   235
D'Amato, Hon. Alfonse:
    Prepared statement...........................................   235
Davis, Robert E.:
    Testimony....................................................    48
    Prepared statement...........................................   236
    Supplemental statement.......................................   238
DesJardins, Yvonne D.:
    Testimony....................................................    18
Epstein, Earl J.:
    Testimony....................................................    51
    Prepared statement...........................................   239
Gardner, Richard:
    Testimony....................................................    79
Gernt, Patricia J.:
    Testimony....................................................   175
Gramm, Hon. Phil:
    Opening statement............................................   210
Grassley, Hon. Charles E.:
    Opening statement............................................     5
Hatch, Hon. Orrin G.:
    Opening statements.........................................242, 245
Henderson, Tommy A.:
    Testimony....................................................   170
Jarvis, Ginger Mary:
    Testimony....................................................   151
    Exhibits.....................................................   241
Johnson, Minh Thi:
    Testimony....................................................   145
Kerrey, Hon. J., Robert:
    Opening statement............................................     6
    Prepared statements with attachments.........................   243
    Letter to Senator Moynihan (April 30, 1998)..................   246
Latham, Barbara:
    Testimony....................................................   179
Long, Susan B.:
    Testimony....................................................   119
Lott, Hon. Trent:
    Opening statement............................................    15
Mack, Hon. Connie:
    Opening statement............................................    13
    Prepared statement with attachment...........................   253
MacNaughton, Philip:
    Testimony....................................................    54
Mayo, Ray Cody, Jr.:
    Testimony....................................................    57
Moncrief, W.A., Jr.:
    Testimony....................................................    81
    Responses to questions from committee members................   268
Moseley-Braun, Hon. Carol:
    Opening statement............................................    40
Moynihan, Hon. Daniel Patrick:
    Opening statements..........................................74, 196
    Prepared statement...........................................   269
Murkowski, Hon. Frank H.:
    Opening statement............................................     8
Nickles, Hon. Don:
    Opening statement............................................    10
O'Dwyer, Maureen:
    Testimony....................................................   130
Patsalides, Harry:
    Testimony....................................................    16
    Prepared statement...........................................   270
Quillen, Hon. James H.:
    Testimony....................................................   185
Rossotti, Hon. Charles O.:
    Opening statement............................................   197
    Prepared statement with attachments..........................   274
Roth, Hon. William V., Jr.:
    Opening statements..................................1, 73, 129, 195
Warren, Leroy W., Jr.:
    Testimony....................................................   105

                             Communications

Bjerke, Terry....................................................   287
Granata, Samuel J., III..........................................   287
International Coalition for Religious Freedom....................   293
National Audit Defense Network, Inc. (NADN)......................   297
Schiller Institute, Inc..........................................   299


                             IRS OVERSIGHT

                              ----------                              


                        TUESDAY, APRIL 28, 1998

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 9:06 a.m., 
in room 216, Hart Senate Office Building, Hon. William V. Roth, 
Jr. (chairman of the committee) presiding.
    Also present: Senators Chafee, Grassley, Hatch, Murkowski, 
Nickles, Gramm, Lott, Mack, Moynihan, Baucus, Breaux, Conrad, 
Moseley-Braun, Bryan, and Kerrey.

OPENING STATEMENT OF HON. WILLIAM V. ROTH, JR., A U.S. SENATOR 
         FROM DELAWARE, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will please be in order.
    Let me start out by pointing out that I have discussed with 
Senator Moynihan, the Ranking Member, that opening statements 
will be limited to 7 minutes for himself and for me, and we 
would ask each of the other members to limit theirs to 3 
minutes.
    When it comes to the questioning of witnesses, Senator 
Moynihan and myself will enjoy equal time, and all other 
members will be asked to limit each round, if there is more 
than one round, to 5 minutes.
    This morning we continue our oversight hearings concerning 
the practices and procedures of the Internal Revenue Service. 
Last fall was a milestone in establishing the rights and 
expectations of the American taxpayer in dealing with the IRS.
    Our hearings in September disclosed abuses against 
taxpayers and employees alike and prompted the agency to 
initiate investigations and new policies that are already 
beginning to change the way IRS does business.
    I am pleased with Commissioner Charles Rossotti's 
leadership and the commitment he has made to strike at the 
heart of the problems we have uncovered, the use of goals and 
statistics, the reckless disregard of taxpayer rights, 
harassment, retaliation against employees, and inefficiencies 
in management and service.
    I support Commissioner Rossotti and his efforts. We realize 
that one of the most important ways we can continue to support 
his efforts at reform is through oversight. I am pleased that 
our investigation and related efforts have already prompted 
action from the IRS to take the steps they announced yesterday 
to improve the Criminal Investigation Division.
    History is filled with examples where one or two 
Congressional hearings led to promised reform, but when the 
lights were turned off and Congressional interest waned, the 
reform efforts too often died and the agency returned to 
business as usual.
    The taxpayer and the employees of the IRS deserve our 
vigilance. The IRS is full of talented, hardworking employees. 
They suffer under this current system and they need to see how 
serious we are.
    Many thought our September hearing were a one-time event, 
and they now know differently. I applaud their courage and 
determination to speak with us, to work with us, and to testify 
before this committee. Without them, there would be nothing 
here but an empty room.
    Certainly, Congress' efforts must go beyond oversight. We 
have heard compelling testimony about the complexity of the Tax 
Code. I will say now that in the near future we will turn our 
attention to that. Seventeen thousand pages of rules and 
regulations, 5.5 million words, yield a Tax Code that has 
become a mine field for most Americans, and even too complex to 
be efficiently and consistently administered by the Internal 
Revenue Service. It needs to be simplified. This, too, is our 
responsibility.
    Over the next 4 days, however, we will be taking another 
step in our important and ongoing oversight efforts. We will 
hear of disparate treatment between high-level executives and 
other employees within the service, how they are treated 
differently even when they have committed the same offense. 
Such inequities for the benefit of executive-level employees 
send the wrong message to the average worker and destroy morale 
throughout the agency.
    We will focus on a number of serious issues which weigh 
heavily on the integrity of the IRS. We will hear how 
investigative techniques to deal with violent and dangerous 
criminals are used against taxpayers who are neither violent 
nor dangerous.
    We will hear from taxpayers who have experienced armed 
raids of their homes and businesses, raids that were conducted 
on the flimsiest of evidence which later proved to be 
unwarranted and the taxpayer exonerated of any wrongdoing.
    We will examine the sensitive issue of racism and 
discrimination, an issue that has come up from the moment we 
first started our oversight. We will hear that the IRS internal 
oversight is so bad that the agency is unable to track what its 
employees are doing, and we will also examine significant 
compliance problems.
    Without a doubt, we have a full agenda over the next 4 
days. Our goal is to put a spotlight on those areas of the IRS 
which demonstrate a need for immediate change, to continue our 
work with Commissioner Rossotti and the employees of the 
Internal Revenue Service who have waited for far too long for 
real reform.
    With these hearings we continue to send a message to the 
agency and to the taxpayer that we are serious about changing 
the IRS, it is not beyond the control of Congress, it is 
subject to the will of the people it is here to serve.
    At this time I would call on Senator Baucus.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
                            MONTANA

    Senator Baucus. Thank you, Mr. Chairman. Mr. Chairman, I 
heard your request that members keep their remarks to, I think 
it was, 3 minutes. I might say that I will not be here very 
much during the day. The ICET conference is going on and I will 
not be able to ask very many questions of the panelists. So, 
with your indulgence, I have a few more than three minutes in 
my opening statement.
    The Chairman. Please proceed.
    Senator Baucus. Mr. Chairman, one of the earliest 
controversies facing the newly independent United States of 
America involved the taxing power of the Federal Government. 
After all, unjust taxes were the chief causes of the war for 
independence.
    But our founding fathers had fresh memories of raising an 
army and running and embattled government mostly on borrowed 
funds. They knew they would need revenue to provide for the 
common good. So, in an act passed by the very first Congress, 
we gave the central government the power to collect tariffs and 
taxes, so long as they were fair and uniform.
    During the past couple of months in every household across 
the country, Americans went through an annual rite. They sat 
down at the kitchen table, pulled all of their financial 
records together, and figured out what they owed the 
government. Nobody likes doing their taxes and they probably 
dislike paying them even more. Yet the vast majority do it, and 
they do it honestly.
    Americans realize they have a bargain with their country 
which is their duty to uphold: they pay their taxes so that 
their money, when pooled together with the money contributed by 
all their friends, neighbors, and fellow citizens, is used 
wisely for the common good.
    Americans expect their money to defend their families from 
hostile nations, to educate their children, to provide for a 
clean and healthful environment, to improve their highways, to 
help keep them healthy, to help provide for them in their old 
age and to give a helping hand to those going through hard 
times. In short, Americans expect their money to be used to pay 
for all of the things that help make this Nation great.
    In return, though, the American people want their 
government to do two things. First, the American people want 
their government to treat them with respect and dignity as the 
revenue is collected. They expect to have their privacy 
respected and to be treated fairly.
    Second, Americans expect that everyone else who enjoys the 
benefits that taxes pay for will shoulder their share of the 
burden as well, that their neighbor down the street is not 
hiding part of his income and thus avoiding paying his fair 
share of the tax, that everyone is filing returns and the 
amounts claimed on those returns are accurate and true.
    Mr. Chairman, I truly believe the American people have the 
right to have both of these expectations met. I believe we here 
in the Senate shoulder a great deal of the responsibility for 
making sure of it.
    We were placed on this committee because, presumably, we 
understand the need for revenue to keep this country moving. We 
also understand the grave responsibility that goes along with 
the power to tax. After all, John Marshall said, ``The power to 
tax involves the power to destroy.''
    It is our duty as members of this committee to make sure 
this country does not use its power in that fashion. How do we 
do that? We must stay above partisan politics and petty 
squabbles. We must make sure our laws reflect good public 
policy and that the Tax Code is used for the benefit of the 
American people.
    That is why I have watched the process we have gone through 
in anticipation of these hearings with a measure of personal 
regret and disappointment. I do not believe these hearings are 
balanced. I believe they fail to rise above party politics. I 
do not believe they will ultimately benefit the American 
people.
    Mr. Chairman, if you look at ``Webster's New World 
Dictionary,'' under the word oversight you will find it 
described as ``vigilant supervision.'' As members of the Senate 
Finance Committee, we must be vigilant that individual 
taxpayers are being treated right by the Internal Revenue 
Service.
    However, it is every bit as important that we are vigilant 
to make sure that taxpayers are treated fairly. Let me make it 
clear, I do not object to investigating the IRS to make sure it 
is operating correctly and treating taxpayers right. We must, 
and we should, do so. That is part of our responsibility.
    But I also believe we have a responsibility to look at the 
whole picture, not just place a spotlight on the issues that 
give political advantage to one party or another.
    How can we spend 4 days talking about a handful of cases 
that the IRS might or might not have mishandled yet not spend a 
single minute talking about how some Americans are flouting the 
tax laws? Our entire system of collecting revenue would unravel 
if taxpayers stopped paying their fair share because they 
believed everyone else is cheating.
    Estimates of tax avoidance are soaring, with many believing 
the numbers could reach $100 billion per year. How can we 
ignore this issue or ignore the dangers that IRS employees face 
every day as they try to do the job we have hired them to do?
    Mr. Chairman, we have a new Commissioner of the IRS, Mr. 
Charles Rossotti. He is an honorable man and a good public 
servant. We have given him a mighty challenge, to reform an 
agency that has resisted reform in the past. He has asked us 
for a few simple tools to make the IRS work better: changes in 
personnel rules so he can put a good working team in place; the 
ability to reorganize the agency so he can eliminate layers of 
duplication.
    Most of these provisions are included in the IRS 
restructuring bill that the House passed 6 months ago by a vote 
of 426 to 4. That bill still awaits action by the full Senate.
    Mr. Chairman, if we are going to spend our time on these 
hearings I wish that they could be balanced. But since that 
apparently is not possible, I urge you to move quickly to pass 
a good IRS restructuring bill through this Senate.
    Passing a solid restructuring bill will do more to get the 
IRS on track than 100 of these hearings where we sit, posture, 
pontificate, and play politics. It is our responsibility as 
members of this committee, and more importantly it is our 
responsibility to the American people.
    Thank you.
    The Chairman. Well, thank you, Senator Baucus. I would 
point out that we expect the legislation to come up, hopefully, 
next week. To expedite its consideration, I am hopeful that we 
are able to reach some kind of unanimous agreement.
    I do want to point out that, insofar as these hearings are 
concerned, many of the examples that are cited happened under 
Republican administrations as well as Democratic, so there is 
no partisanship in our pursuit of the facts.
    I would point out that these hearings will deal, in part, 
with the problem of compliance. But I think the important thing 
is to get on with the job.
    [The prepared statement Senator Baucus appears in the 
appendix.]
    The Chairman. Senator Grassley?

 OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR 
                           FROM IOWA

    Senator Grassley. Mr. Chairman, I would caution all my 
colleagues to forget about points of partisanship or forget 
about the issue of balance. We heard those same statements made 
the first day of our hearings last September, and, after that 
first 24 hours, the things that were laid out were so bad to 
demonstrate how things are so wrong in the department, that for 
those hearings and the hearings last February there was never a 
charge of partisanship after that first day.
    I think that we also want to remember that when it comes to 
the IRS trying to bring changes on their own, that through the 
evolution of the legislation, the Kerrey-Grassley legislation 
last year, there were always points being made by the IRS that 
we are going to change this, we are going to change that, we 
are going to fine tune that, and everything else, always the 
IRS coming on as a Johnny-come-lately to make change.
    Just yesterday they announced a seven-point program to 
improve oversight of the IRS Criminal Investigative Division. 
Why is the IRS only willing to make change at a point where 
Congress is exposing some very bad wrongdoing?
    So I want to begin by saying thank you to the witnesses who 
will testify before this committee today. I know that for all 
IRS employees or any government employee there is great peer 
pressure to go along, to get along with those in the 
organization. Anybody who wants to say that anything is wrong 
is kind of treated like a skunk at a Sunday picnic.
    It takes courage and conviction to sit before us, before 
the glare of television cameras and before the watching eyes of 
the IRS and tell your stories. Such courage is rare. Such 
courage must be encouraged and it must be commended.
    Such conviction is admirable, for it is the sort of 
conviction, the conviction to stand up against abuses, to stand 
up for what is right, that is the backbone of freedom and 
fairness. Freedom and fairness is what America is all about.
    This week we will hear testimony about horrors caused by 
IRS agents that happened at the IRS. This does not mean that 
all IRS employees are bad. To the contrary, these hearings 
would not happen without the assistance of good, hardworking 
IRS employees.
    These hearings are part of a bigger process, a bigger duty 
of Congress. One of Congress' most important duties is the 
oversight of Federal Government. I am not a newcomer to 
Congressional oversight because it has been a centerpiece of my 
career. These hearings will demonstrate the importance, the 
necessity, of Congressional oversight.
    At this moment, these hearings are about these people and 
the horrendous acts that have taken place. But in the bigger 
picture they are proof that more oversight and more diligent 
oversight is vital.
    Hopefully these hearings indicate that Congress is willing 
to step up to the plate and do its part and its constitutional 
responsibility of continuing IRS oversight, as well as other 
government agencies.
    The IRS restructuring legislation recently reported out of 
committee has strong oversight provisions in it. It is 
imperative for any legislation to be effective that the Senate 
continue its diligent oversight.
    So I commend Senator Roth, and particularly his staffer 
Eric Thornton, for their work on these hearings.
    The Chairman. Thank you, Senator Grassley.
    We, next, have Senator Kerrey.

OPENING STATEMENT OF HON. J. ROBERT KERREY, A U.S. SENATOR FROM 
                            NEBRASKA

    Senator Kerrey. Mr. Chairman, first, I cannot even say 
hello in 3 minutes, so I would like to ask unanimous consent 
that my statement be a part of the record.
    The Chairman. Without objection.
    [The prepared statement of Senator Kerrey appears in the 
appendix.]
    Senator Kerrey. To begin with, throughout this you and I 
have had some disagreements, but I want to continually and 
consistently congratulate you and thank you for holding these 
hearings. I think it is very important. I hope, as Senator 
Baucus said, we are able to get some hearings on the compliance 
issue.
    A week ago Sunday there was an article in the New York 
Times, a long one, in the Business Section talking about a 
company, I believe that was in Montana, actually, the Columbia 
River Aluminum Company, that not only ripped their employees 
off for $100 million, but parked all their income in the 
Bahamas so they would not have to pay any taxes. There is an 
awful lot of that that goes on.
    I am no apologist for the IRS. Congressman Portman and I, 
and Senator Shelby before that, launched this effort over 2 
years ago. Indeed, the three points that I intend to make 
during this hearing is that most of the problems we are going 
to hear about are addressed in the legislation.
    If they are not, then we ought to get it in the law so when 
it comes up on the floor we are able to change the law to take 
care of the various problems that we are identifying, and that 
there is an urgency to do so, that there is an urgency for us 
to get that law changed.
    The second point I intend to make during the hearings is 
that during our restructuring process from the public we heard 
over and over and over from citizens that, because the IRS has 
535 members of its board of directors called the Congress, the 
IRS is not Sears and Roebuck, it is created by law, they 
believe that Congress is the problem and they do not have to 
look much further than a piece of legislation we passed last 
week, the Coverdale Education IRA bill. That is the 64th tax 
law change since 1986.
    Now, who is going to have to administer that? I mean, just 
look at the detail of that tax law. It allows tax-free 
withdrawals, but taxpayers are going to have to keep receipts, 
detailed receipts. We tell the IRS to go out and audit. We are 
going to tell the IRS to go out and make sure the taxpayers 
have those receipts.
    If you look at the detail in the law and the requirements 
upon the IRS, you can imagine all sorts of additional problems 
that will be created as a result. So I say that with great 
respect and I look forward to the Chairman's hearings on tax 
simplification. There is tax simplification analysis required.
    The IRS Commissioner, under the legislation passed by this 
commission, would be at the table when tax laws are written so 
they could comment on behalf of taxpayers, who spend, some 
estimate, up to $200 billion a year just complying with the 
Code. But I intend to make the point that much of the problem 
that we hear about occurs as a consequence of laws that the 
Congress passes.
    So I am hopeful, Mr. Chairman, that we are able to get some 
additional hearings on tax compliance. A significant number of 
Americans believe that they pay higher taxes as a result of 
somebody else paying lower because they have lawyers, 
accountants, and all sorts of people hired to figure out how 
they can avoid paying their fair share.
    I hope as well that we can get quickly to the simplicity 
issue because I think it is an overriding issue in terms of our 
ability to be able to say to the American taxpayer, we are not 
only going to give the IRS Commissioner authority to run the 
agency, but we are going to reduce the complexity and the cost 
to you.
    The Chairman. Thank you, Senator Kerrey. As I already 
mentioned, these hearings will deal, in part, with compliance. 
I agree as to the importance of that matter.
    I would, next, call on my good friend Senator Breaux.

  OPENING STATEMENT OF HON. JOHN BREAUX, A U.S. SENATOR FROM 
                           LOUISIANA

    Senator Breaux. Well, thank you, Mr. Chairman, once again, 
for putting together these hearings.
    I was talking to someone from Louisiana this weekend and 
they said, well, what are you folks going to be doing this week 
in the Senate? I said, well, we are going to start off with 
some more hearings on the Internal Revenue Service and the 
problems within the service.
    His question back to me, which I think was somewhat 
appropriate, was when are you fellows going to quit talking 
about it and do something about it? I think that is a valid 
point.
    We could probably do this for the rest of the year and 
still hear the problems, but at some point we have to put the 
problems aside and say, all right, we know what the problems 
are, what are we going to do to correct the problems? I think 
that we have a vehicle that goes a long ways towards doing 
that. We have passed it out of this committee. It has already 
passed the House of Representatives. It is now waiting to be 
taken up in the Senate.
    So the question back for my constituent, when are you going 
to quit talking about it and start doing something about it, I 
think is a very legitimate and valid question. We have to do 
something about it more than just continue to talk about it, 
because we could do that for a long time.
    The second point, however, is all of us know at least 
various versions of the two greatest lies ever told, one of 
which is, I am from the Federal Government and I am here to 
help you. Most people in our country do not believe that the 
Federal Government is there to help them, and in many cases do 
not believe the Federal Government is even on their side.
    We will hear today from a witness from my State of 
Louisiana, Ray Mayo, who has a very impressive tale to tell as 
a lawyer representing people before the Internal Revenue 
Service.
    Senator Kerrey talked about the complexity of the law and 
how much we make it complex, and he is right on target on that. 
But I think even more important than the fact that everybody 
has a difficult time interpreting the law is the attitude of 
Federal agents that go to the point of actually threatening 
people who practice before the IRS and represent clients. That 
is a far more serious problem, in my view, than carrying out 
the intricacies of the Federal Code.
    We cannot tolerate, in a free society, any government 
agencies or government employees that threaten individual 
American citizens for trying to follow the law. That, more than 
anything else, is what disturbs me the greatest about what we 
are fighting through these hearings.
    His story is very frightening in a free society, to think 
that because we do not like you representing your clients, 
well, we are just going to go out and audit you, and then carry 
out that threat with actual audits that continue ad infinitum. 
That is wrong. That is the most serious type of concern that I 
think we need to be following and following up on, but 
eventually we have got to do something about it.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Breaux.
    Senator Murkowski.

 OPENING STATEMENT OF HON. FRANK H. MURKOWSKI, A U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Good morning, Mr. Chairman. I very much 
appreciate and join with my colleagues in commending you for 
initiating this series of hearings this morning. The 
information that was developed by this committee last 
September, and I think earlier this year, really provided the 
foundation for the IRS reform legislation which was reported 
unanimously from this committee and which will be considered on 
the Senate floor next week. So, as we reflect on where we have 
been, at least up until now, Mr. Chairman, we have been working 
in a bipartisan manner and our action has been unanimous.
    I think that this latest series of hearings examining the 
workings of the Criminal Investigation Division, the CID, at 
the IRS, I believe it is not a coincidence that just yesterday, 
as has been pointed out by you and others, there was the 
announcement of a seven-point plan to improve its Criminal 
Investigation Division.
    The IRS had plenty of time to initiate this. It is 
coincidental. I commend them, but it is rather interesting to 
see the sequence of timing here, just before our committee 
hearing they announce the seven-point plan.
    I do not think this is surprising. It is a reality that far 
too often Federal agencies tend to act as if they are a law 
unto themselves, believing they are accountable to no one. I 
can think of several Federal agencies that would fit into that, 
the Forest Service, for one, under its current management.
    It is only when Congress exercises its constitutional 
obligation of oversight to the people, only then do the 
agencies begin to reconsider how they are doing business 
because they know they are being examined, as they should be, 
as a consequence of our oversight.
    So it is my hope that, as the Congress passes the IRS 
reform bill, we will not end this oversight process, that we 
can change laws, but we must be vigilant in our efforts to 
ensure that the people within the IRS are held accountable in 
how the law is enforced. This is the one key purpose of our 
oversight.
    I would remind my colleagues, particularly relative to what 
we have accomplished here, is when we sat down we agreed that 
there was no accountability in the IRS. We agreed that the 
system was designed to avoid accountability. If we have any 
obligation in an oversight capacity, it is to ensure that there 
is accountability in the IRS.
    So I have read through the testimony that has been 
submitted. I want to express my concerns about one aspect of 
the testimony that we will hear. I understand that one of the 
witnesses will testify about the harassment and intimidation he 
faced because he as an attorney who represented a taxpayer. I 
think that has already been mentioned this morning.
    But if the IRS uses threat of criminal or civil proceedings 
to punish taxpayers, and particularly a taxpayer's legal 
advocate, I think we have an extraordinarily serious problem.
    Our system of justice is based on the belief that a citizen 
has a right to counsel who will represent his client without 
hesitation. If counsel believes that representing a client 
before the IRS carries with it the threat of personal audit or 
an IRS criminal investigation of counsel, then the scales of 
justice are fundamentally undermined.
    No legal system can survive if legal counsel fears personal 
retaliatory threat from the government merely for representing 
the interests of a client. I think this is a very serious issue 
and I hope that the committee will closely examine this matter, 
and other testimony before us.
    I was disappointed in the comments from my good friend, the 
Senator from Montana, relative to the partisanship of this. I 
think the issue is accountability. If we do not get 
accountability out of this process we are wasting everybody's 
time, Mr. Chairman.
    Again, I commend you for your diligence and commitment to 
proceed in this, and the American public is yearning for reform 
of the IRS, make no mistake about it.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Murkowski.
    Now it is my pleasure to call on Senator Nickles.

  OPENING STATEMENT OF HON. DON NICKLES, A U.S. SENATOR FROM 
                            OKLAHOMA

    Senator Nickles. Mr. Chairman, thank you very much.
    For our colleagues that said they want to see some action, 
I talked to the Majority Leader yesterday, I think we are going 
to have the reform bill on the floor next week, so we are going 
to see some action.
    Also, this committee is directly responsible for cleaning 
up a lot of the IRS abuses, and done in a bipartisan way. No 
one can say that the bill that we put together is partisan. It 
was not partisan.
    I will just give you a couple of examples. Some people were 
saying, well, let us just pass the House bill. We can pass that 
unanimously and it can be signed into law by the bill. But we 
are adding a provision that came out in Oklahoma, and also the 
hearings here, that a taxpayer would be given the opportunity 
for a court hearing before liens, levies, or seizures of his 
assets. That is a very important provision. It was not in the 
House bill, but is in the Senate bill.
    We are putting in a provision that IRS can only seize a 
taxpayer's business or home as a last resort. We are putting in 
a provision that says that penalties and interest would not 
accrue to the deficiency if the IRS does not notify the 
taxpayer within a year.
    I could go on with several. I have got about a dozen things 
that we added that was not in the House bill, is in the Senate 
bill, that are very, very positive in protecting taxpayers. So, 
we are going to see some action as a direct result of the 
hearings that we had in this committee.
    So, Mr. Chairman, I want to thank you for doing it. I want 
to thank you for your persistence, because a lot of people were 
saying, let us just pass what the House did. We are going to 
come up with a bill that is much better than the House bill. We 
are going to put in some provisions for innocent spouses, for 
example.
    One other thing, Mr. Chairman, I will just mention. We had 
hearings in Oklahoma. Every once in a while I think IRS is 
getting it because I hear, oh, yes, they are going to come up 
with some reforms, and that is good.
    We had a hearing, Mr. Chairman, of a woman who was a pet 
groomer and 10 years ago realized she owed $4,000, was willing 
to work it out and make payments on a monthly basis and pay it 
off in two or 3 years, and the IRS said no. They accumulated 
interest and penalties up to $30,000. We exposed this in the 
hearing in Oklahoma.
    As a result of that, she has made offers to the IRS. 
Supposedly IRS said, well, we accept your offer. They will take 
the $4,000 and settle the case. She presented a certified check 
to the IRS for $4,000, which they said by letter they would 
accept, and then they said, no, we cannot do that because of 
interest.
    Interest on $4,000--she paid 2 days after they accepted 
it--was $1.37. They still have a lien on this woman's home, who 
is a pet groomer, from a case that goes back 10 years. What was 
the dispute now? The interest of the $4,000 over 2 days, and 
the lien still exists. So I am not sure the IRS gets it yet.
    In the bill that we will take up next week we say that 
liens will not be allowed if the original tax debt was less 
than $5,000, and would have solved that case. The IRS will be 
required to adopt liberal acceptance policies for offers and 
compromise.
    Clearly, you have a case where an agent was not willing to 
do that, for a couple of bucks. It is ridiculous, the 
harassment, the anguish that taxpayers go through because 
sometimes people do not show common sense.
    We also put in a provision to fire employees that abuse 
their power. We found cases in Oklahoma and Arkansas where 
power was clearly abused and, to date, no one has been 
disciplined; a couple of people have been transferred, one 
person retired early.
    So, Mr. Chairman, I think your hearings have resulted in 
good legislation. As the hearings go on, the legislation is 
improving. I think we have improved the House bill 
considerably, and I compliment you for it. I also compliment 
you for the hearings this week as well.
    The Chairman. Thank you very much, Senator Nickles.
    It is now my pleasure to call upon my distinguished 
colleague, the Ranking Member, scholar in residence, Senator 
Moynihan.

   OPENING STATEMENT OF HON. DANIEL PATRICK MOYNIHAN, A U.S. 
                     SENATOR FROM NEW YORK

    Senator Moynihan. A 10:00 scholar, Mr. Chairman. Forgive 
me. I was informed the schedule had been changed, and I am here 
a bit late, so I will not take but a moment to thank you again 
for resuming these hearings.
    These are the first such in a century and a half. The 
Internal Revenue Service was established in 1862, which was the 
first time the Federal Government enacted an income tax, and it 
has grown very considerably and with very little oversight from 
this committee. Now it is receiving just that, and I think it 
is all to the good.
    We have seen in the first instance the appointment of 
Charles Rossotti, who was appointed as Commissioner, 
unanimously approved in this committee and unanimously approved 
by the Senate. We are already seeing the energy in which he is 
proceeding.
    In one specific, he has asked Charles Bowsher, the former 
head of the General Accounting Office with a great range of 
interests and ability in the area of public administration, to 
perform an independent review of the IRS Inspection Service. I 
think we shall learn a good deal from that, and I look forward 
to it.
    I look forward to these hearings, and ask that my statement 
be placed in the record.
    The Chairman. Without objection.
    [The prepared statement of Senator Moynihan appears in the 
appendix.]
    The Chairman. Next, we have Senator Bryan.

OPENING STATEMENT OF HON. ROBERT H. BRYAN, A U.S. SENATOR FROM 
                             NEVADA

    Senator Bryan. Mr. Chairman, thank you very much for 
calling this hearing this morning.
    The abuse of taxpayers is inexcusable. Once the facts of 
these cases can be demonstrated, I will eagerly join with you, 
Mr. Chairman, and the rest of our colleagues in demanding that 
Commissioner Rossotti take immediate and decisive action to 
eliminate any injustices that we discover this week.
    Taxpayers have the right to be treated with courtesy, they 
have the right to be treated fairly and honestly by the IRS, 
and no taxpayer should be subject to or fearful of some kind of 
arbitrary star chamber treatment at the hands of the IRS.
    Any Federal employee or organization that abuses the public 
trust should be dealt with harshly, and the IRS is clearly no 
exception. We need to pass legislation to address the many 
problems in the agency that our hearings last fall and the 
hearings this week will indicate.
    We need to pass the IRS reform bill that we reported out 
earlier this year sooner rather than later. Commissioner 
Rossotti has already proven himself able and ready to meet the 
many challenges at the IRS, and we need to give him the tools 
to achieve the real results.
    While the outrages we will hear of this week certainly 
deserve our immediate response, I think it is important to 
retain some perspective. Millions of Americans pay their taxes 
every year. Yes, April 15th is a painful experience for each of 
us, but the vast majority of Americans pay their taxes each 
year. Protecting these honest, hardworking taxpayers needs to 
be our highest priority.
    One of the biggest grievances that I hear about our tax 
system is that many people feel that not everyone is paying his 
or her fair share. Most Americans file a relatively simple, 
straightforward 1040 form with a few simple deductions, maybe 
some modest capital gains.
    But there is a growing suspicion among typical taxpayers 
that somehow someone else is getting better treatment, taking 
advantage of complicated special tax loopholes that relieve 
that person or that entity of his, her, or its proper share of 
the tax burden through tax shelters, corporate loopholes, and 
the like.
    Even worse, in my opinion, Mr. Chairman, are those who 
cheat the government, the tax evaders. The general public knows 
that if individuals do not pay their taxes, that the burden is 
shifted to them and it means that they will pay higher taxes.
    Some estimates show that Federal revenues lost to 
noncompliance may approach $100 billion a year, a staggering 
sum. Pols show a very real suspicion that not everyone is 
paying their fair share. On average, Americans believe that 
one-third cheat on their taxes. Noncompliance is a serious 
problem, one that hits every honest taxpayer in the pocketbook 
each and every April 15th.
    I would hope, Mr. Chairman, in the interest of providing 
balance to these proceedings, that we might have some hearings 
addressed to the tax cheat and the tax evader as well. I look 
forward to working with you in the hearings this week, and in 
the future week, in moving the IRS reform legislation to 
enactment in this Congress.
    The Chairman. Thank you, Senator Bryan.
    Senator Mack?

  OPENING STATEMENT OF HON. CONNIE MACK, A U.S. SENATOR FROM 
                            FLORIDA

    Senator Mack. Thank you, Mr. Chairman. I have a prepared 
statement which I will ask to be put in the record, and just 
make this observation.
    The Chairman. Without objection.
    [The prepared statement of Senator Mack appears in the 
appendix.]
    Senator Mack. Senator Moynihan said a few moments ago that 
there has been very little oversight of the IRS. I would say it 
has not just been this committee, it has been the Commissioner, 
it has been the Treasury. Virtually everyone has kind of looked 
the other way when it has come to the IRS.
    So my point here is, while I understand the frustration 
some members may feel with getting on with it, the reality is, 
we have just begun to focus. So I would encourage you to 
continue to have oversight hearings. In fact, the Majority 
Leader is fond of saying that one of the things that we have 
not done well is oversight.
    I think you are to be commended for the effort that you are 
making. Those who are anxious to get on with it will have the 
opportunity next week, as I believe the legislation will move 
to the floor. So I commend you for oversight and would 
encourage you to continue it.
    The last point that I would make is, fortunately we have 
what I would consider brave taxpayers, practitioners, and 
others who are willing to come forward and speak the truth 
about abuses that they have seen, regardless of the fear that 
they have about being intimidated by those who want to see that 
the status quo is maintained.
    So again, I commend you for these hearings and I look 
forward to hearing from our witnesses.
    The Chairman. Thank you, Senator Mack.
    And finally we have Senator Conrad.

  OPENING STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM 
                          NORTH DAKOTA

    Senator Conrad. Thank you, Mr. Chairman.
    I just would indicate that I have a prepared statement as 
well that I would ask to be made part of the record.
    The Chairman. Without objection.
    [The prepared statement of Senator Conrad appears in the 
appendix.]
    Senator Conrad. Instead of going through that, Mr. 
Chairman, I would just make some observations as well. First of 
all, I agree with what Senator Mack has said. We do have an 
obligation of oversight and there has been too little of it, 
not just with respect to the Internal Revenue Service, but I 
think that is a general indictment of those of us in Congress 
who focus more on getting the budgets done every year, the 
appropriations bills done every year, and new legislation. Part 
of our responsibility is oversight, and there has clearly been 
a failure of oversight of this agency.
    I think one thing we need to say loud and clear and up 
front, is that abusive treatment of taxpayers is totally 
unacceptable. Anybody in any agency who abuses taxpayers ought 
to be punished. That is just unacceptable. If we do not treat 
the taxpayers with respect, that breeds disrespect for the 
system, so that is something we cannot tolerate.
    I think it is also important to acknowledge that there are 
many in the Internal Revenue Service who are honest, who are 
capable, and who do not disrespect taxpayers. Those people 
should not be sullied or marred by the few who have abused the 
system, who have acted unfairly, inappropriately, and even at 
times illegally.
    Mr. Chairman, I would also want to add my voice to that of 
Senator Bryan. As a former tax commissioner myself at the State 
level and a former chairman of the Multi-State Tax Commission, 
I know there are a small percentage of taxpayers who also abuse 
the system and abuse everyone else who is in the system. That 
also should not be tolerated.
    It is not fair to the vast majority of taxpayers who do pay 
what they legitimately owe to have more of a burden put on 
their shoulders because of the small percentage of people who 
think they are above the law and beyond the law and have no 
obligation to pay what they legitimately owe.
    The word should go out from this committee, just as we say 
it is intolerable that IRS agents abuse taxpayers, it is also 
intolerable that some who are supposed to be taxpayer are 
abusing other taxpayers by failing to pay what they owe.
    Mr. Chairman, finally, I would say I also agree that the 
legislation that came out of this committee to reform the IRS 
is far superior to what came out of the House. You are to be 
commended for a much better bill than what came out of the 
House. And it is important that we pass that legislation on the 
floor of the Senate.
    I know that is not your responsibility, but I would address 
my remarks to the Majority Leader, who does control the 
schedule, and urge him to take up the IRS reform bill at his 
earliest possible opportunity. I know the Majority Leader has 
many competing demands for floor time, but I would hope we 
would move that IRS reform bill at our earliest opportunity.
    I would just alert the Majority Leader that Senator Nickles 
indicated that you may intend to bring that bill to the floor 
next week, and I think that would be an excellent move 
following these hearings.
    So again, Mr. Chairman, thank you for conducting these 
oversight hearings. I think it is important and I think we have 
got an obligation to do it. I again commend you for the 
excellent bill you helped produce in this committee.
    The Chairman. Just let me repeat what I have said before, 
that you are living proof that you can be a tax collector and 
still elected to office. So, I congratulate you. [Laughter.]
     It is now my pleasure to call on the Majority Leader, 
Senator Lott.

   OPENING STATEMENT OF HON. TRENT LOTT, A U.S. SENATOR FROM 
                          MISSISSIPPI

    Senator Lott. Well, thank you, Mr. Chairman. I know that 
several Senators have already had statements to make, and I do 
not want to give one at this point. I am very interested in 
hearing the witnesses and the other witnesses we will have this 
week.
    I want to commend you and the Ranking Member for going 
forward with these hearings. I want to assure the Senators on 
the committee and the full Senate that it is my intent that the 
IRS reform bill come up next week. I believe that we should be 
able to begin, if the Chairman is ready, Monday.
    We do have a number of other important issues that we will 
be trying to get done before that and immediately afterward. I 
hope that we can do it within a reasonable period of days, but 
it is our intent for it to be first up next week.
    Thank you, Mr. Chairman, for the leadership you have 
provided on this issue.
    The Chairman. Thank you very much, Senator Lott.
    Before I recognize the first panel I would like to welcome 
Jennifer Long, who was a witness at our hearings in September. 
We appreciate her being here today.
    We now come to welcoming the members of our first panel, 
employees of the Department of the Treasury. As I said earlier, 
there could be no hearings if it were not for the willingness 
of employees to come to us and testify about their concern.
    Senator Conrad, I just want to once again echo what you 
said and what I said in my opening remarks about the employees 
of the IRS because I do think it is critically important that 
everyone understand that the vast majority of employees of the 
IRS are intelligent, hardworking, and doing the best they can, 
sometimes under very adverse, difficult circumstances.
    But these employees that are on the first panel, I think, 
will provide the committee with information and insight about 
the problems within the IRS involving investigation of employee 
misconduct. They will also address what appears to be a lack of 
internal disciplinary action taken against employees when 
allegations of wrongdoing are substantiated.
    Our witnesses include Mr. Richard Calahan, who is the 
Deputy Inspector General, Office of the IG at the Department of 
the Treasury; Mr. Harry Patsalides, who is the Deputy Assistant 
Inspector General for Investigation at the Department of 
Treasury; and Ms. Yvonne D. DesJardins, who is the Chief of the 
Employee and Labor Relations Section, Personnel Branch, of the 
Internal Revenue Service.
    I will now ask the witnesses to stand and raise their right 
hand.
    [Whereupon, the three witnesses were duly sworn.]
    The Chairman. Thank you very much. Please be seated.
    Mr. Calahan, would you please begin.
    Mr. Calahan. Mr. Chairman, members of the committee, we are 
pleased that you asked us to appear before you today to discuss 
our investigative work at the Internal Revenue Service.
    It is my pleasure to introduce to you Harry Patsalides, the 
Deputy Assistant Inspector General for Investigations, who has 
overseen our IRS investigations. He will discuss some of our 
recent investigative work.
    Harry?
    The Chairman. Thank you.
    Mr. Patsalides?

   STATEMENT OF HARRY PATSALIDES, DEPUTY ASSISTANT INSPECTOR 
    GENERAL FOR INVESTIGATION, DEPARTMENT OF THE TREASURY, 
                         WASHINGTON, DC

    Mr. Patsalides. Mr. Chairman, members of the committee, I 
appear before you today to discuss our investigative work at 
the Internal Revenue Service. As the Deputy Assistant Inspector 
General for Investigations, I have overseen our office's 
investigations of the IRS and will discuss some of our recent 
efforts.
    The hearings held before this committee last September 
produced several groups of allegations which were referred for 
investigation to the Treasury Office of Inspector General. In 
addition, telephone calls to the OIG hotline more than doubled 
in response to those hearings.
    This provided a serious challenge to our investigative 
resources, as the OIG Office of Investigations has the 
responsibility for investigating all employees at the eight 
non-law enforcement bureaus, as well as senior level officials 
and all employees in the Offices of Inspection, Internal 
Affairs, and Chief Counsel at each of the four law enforcement 
bureaus.
    Our staffing was insufficient to conduct a number of 
significant cases that warranted investigation. Because of 
this, many issues had to be returned to the bureaus for action, 
since we lacked the resources to conduct the necessary 
investigations.
    Our efforts were focused on four significant investigations 
involving misconduct by IRS officials. All of the allegations 
were investigated. Due to limited resources, we could only 
fully staff one of the investigations. We requested IRS 
Inspection to conduct two investigations, with OIG review. The 
fourth investigation was conducted by the OIG, but assistance 
was needed from three IRS inspectors and two Bureau of Alcohol, 
Tobacco, and Firearms agents.
    The four investigations pertained to a series of complaints 
involving: (1) IRS mismanagement and mistreatment of taxpayers; 
(2) the use of collection statistics by IRS Collection Division 
managers to determine employee and group performance ratings; 
(3) the establishment of an IRS national policy regarding the 
use of collection statistics; and (4) reprisals against IRS 
employees who testified before this committee.
    Because of its large scope, we referred the allegations 
regarding the questionable use of collection statistics to the 
IRS Chief Inspector's Office. Subsequently, we reviewed their 
work with the assistance of experienced investigators on detail 
to us from other Treasury law enforcement bureaus of ATF, the 
Secret Service, and the Customs Service. We appreciate the 
support provided by the department and those bureaus in this 
endeavor.
    Senator Nickles, in the February 5th Finance Committee 
hearing, requested that we investigate a group of allegations 
he received regarding the Internal Revenue Service. We obtained 
the assistance of investigators from ATF and the IRS 
Inspections to work under OIG supervision on these allegations.
    On October 23, 1997, our office initiated an investigation 
regarding the allegations raised to the Senate Finance 
Committee by IRS employee Jennifer Long. During the 
investigation of the allegations raised by Ms. Long, additional 
issues were identified which have led to possibly six new cases 
being opened by our office.
    As a result of the investigation of Long's allegations, we 
noted several areas of significant concern. IRS management 
appears to treat managers differently than employees when it 
pertains to disciplinary action. We were advised that IRS 
managers are allowed to voluntarily step down from their 
management position rather than being involuntarily removed. 
IRS management stated this was done to avoid the cost of a 
potential lawsuit.
    An inspection manager stated that, ``IRS managers are 
punished less severely than IRS employees.'' It was this 
manager's opinion that, since most managers have worked well 
for years with little or no prior problems, that their 
transgressions have been viewed with less severity.
    We are also concerned that if an employee files a 
grievance, an EEO complaint, or a lawsuit against an IRS 
manager and the employee wins the settlement, usually no 
disciplinary action is taken against the manager for allegedly 
violating the rights of the employee.
    This lack of disciplinary action may send a message to 
managers that they are free to harass an employee without being 
personally accountable. This also sends a message to employees 
that they cannot bring action against a manager who harasses or 
retaliates against them because only the agency is held 
accountable.
    Employees may fear retaliation by management for reporting 
complaints to Inspection. Long alleged that Inspection advises 
IRS management of allegations provided to them and who provided 
the information.
    There appears to be disagreement among Inspection employees 
regarding whether or not complainants' names are provided to 
management. Several of the Inspection employees interviewed 
said the complainants' names are provided to management, while 
others indicated the names are not provided.
    When employees bring a complaint to Inspection they are 
routinely not advised whether the information will be 
investigated by Inspection or referred to IRS management. When 
management decides to address the complaint it does not advise 
Inspection of their action taken regarding the issue.
    If the complaint to Inspection concerns a manager and is 
subsequently referred to management, the manager may 
unnecessarily be advised of the complaint and the complainant's 
name. Once management is alerted to the complaint, the employee 
may fear retaliation for lodging the complaint.
    Before concluding my oral statement I would also like to 
mention one of the most significant problems that our office 
has with the current oversight arrangement. With regard to 
accessing tax information, our office does not have the same 
level of access to IRS information that is afforded to the 
Office of Chief Inspector.
    While for the most part we have been able to obtain the 
needed information, we have had instances where access was 
refused or delayed and we had to expend unnecessary time and 
effort to resolve the matter or find alternatives to accomplish 
our objectives.
    Legislative impediments center around two provisions in the 
1988 Inspector General Act amendments. First, the OIG is 
required to provide notice to the IRS of its intent to access 
returns or return information.
    Second, with reference to Chapter 75 of the Internal 
Revenue Code, the OIG may report to the Attorney General only 
offenses under Section 7214 without first obtaining the consent 
of the IRS Commissioner.
    This provision restricts the authority of the Treasury OIG 
to refer violations of the Internal Revenue Code such as 
Section 7213 pertaining to unauthorized disclosures of returns 
or return information to the Department of Justice.
    Both of these provisions have affected our work. One, is a 
process totally inconsistent with independent investigative 
procedure because it requires OIG investigators to needlessly 
notify others of the direction of their investigation.
    The requirement for obtaining IRS Commissioner consent on 
referrals to the Department of Justice creates the possibility 
for conflicts of interest and precludes an objective review of 
the prosecutive potential.
    In conclusion, while performing our normally extensive 
investigative responsibilities at the IRS, we were tasked, in 
response to this committee's September hearing, to intensify 
our investigative efforts in specific areas.
    Through the extraordinary efforts of our entire staff, we 
met this additional challenge and maintained our normal duties 
and responsibilities in an effective and timely manner. I can 
state to this committee that I am proud of the performance of 
our staff.
    Thank you for the opportunity to share my thoughts with 
you. I will be happy to address any questions that you may 
have.
    The Chairman. Well, thank you, Mr. Patsalides.
    [The prepared statement of Mr. Patsalides appears in the 
appendix.]
    The Chairman. We will hear from the final member of the 
panel first, then we will address questions to all of you.
    It is now my pleasure to call upon Ms. DesJardins.

 STATEMENT OF YVONNE D. DesJARDINS, CHIEF, EMPLOYEE AND LABOR 
RELATIONS SECTION, PERSONNEL BRANCH, INTERNAL REVENUE SERVICE, 
                         WASHINGTON, DC

    Ms. DesJardins. Mr. Chairman and honorable members of this 
committee, I appreciate the opportunity to appear before you 
today to share with you some of my experiences since working at 
the Internal Revenue Service.
    During the period March 1991 through October 1996, I was an 
employee of the Internal Revenue Service. Since October 1996, I 
have been employed with the Office of Chief Counsel, Internal 
Revenue Service, where I currently serve as the Chief of the 
Employee and Labor Relations Section of the Personnel Branch.
    During my tenure with the IRS I have worked in both 
supervisory and non-supervisory personnel positions and have 
had responsibility for providing advisory services to IRS 
managers regarding employee performance and conduct issues, up 
to and including the executive level.
    During this time, I have observed how higher graded 
employees of the organization are not held to the same 
standards as employees of lesser grades, particularly when 
misconduct occurs.
    My statement should not come as a surprise, particularly 
when one recalls the comprehensive investigation in 1988 into 
alleged ethics and integrity violations by IRS senior officials 
which culminated in hearings referred to as the Bernard 
hearings, and reported to the 102nd Congress in House Report 
1021065 entitled ``IRS Programs to Combat Senior Level 
Misconduct: Getting Stronger, But Still A Long Way to Go.''
    This report identified serious problems with the manner in 
which IRS failed to properly handle misconduct of senior level 
officials, particularly with respect to appropriate 
disciplinary actions.
    The report concluded that the IRS culture needed to be 
changed to demonstrate that misconduct by anyone, including 
senior level officials, would not be tolerated and that 
employees could report misconduct without fear or reprisal or 
retaliation against whistleblowers.
    As a result of this report, the IRS implemented an 
aggressive ethics program which required every IRS employee to 
participate in training, and included ethics publications and 
extensive internal communications efforts.
    Unfortunately, ethics is something that a person cannot be 
taught with brief classroom training. Therefore, I am here 
today to report that ethics in the IRS still has a long way to 
go in order to persuade taxpayers and the IRS work force that 
fair, equitable, and consistent treatment of all is paramount 
to the IRS.
    I can only speak from my personal experiences and 
observations since working for the IRS. Unfortunately, a good 
portion of what I have observed leaves much to be desired when 
it comes to consistent treatment of individuals regarding 
discipline and in the manner in which the IRS deals with 
whistleblowers.
    The whistleblowers are ostracized and careers destroyed, 
and those senior officials who engaged in the misconduct which 
was reported and substantiated are not only protected from 
receiving any disciplinary actions, but are oftentimes rewarded 
during the same year the misconduct occurs. Again, I speak from 
personal experience.
    During the period May 1994 to October 1996, I handled the 
many reports of misconduct that were made against any senior 
IRS officials grade 15 and above. These reports were in the 
form of investigations, telephonic hotline complaints, and 
written complaints. For approximately a 2-year period I had 
program responsibility for these matters and recommendations 
were made to the Deputy Commissioner of IRS.
    While a good portion of these complaints were made by 
disgruntled employees and resulted in either closing without 
action or possibly a counseling of the individual, there were 
instances of serious misconduct which ultimately required 
disciplinary action against a senior official. In some 
instances, actions were taken. However, in many instances they 
were not.
    In those instances where no action was taken it appeared 
that those individuals were being protected by the organization 
by either being reassigned, with payment of relocation 
expenses, or until they either retired or sufficient time had 
elapsed to make the matter moot.
    As an example, I recall one instance of an executive who 
was investigated by the Office of Inspector General, Department 
of the Treasury, for travel fraud. The allegations were 
substantiated, yet no action against this person was 
forthcoming. Rather, the report remained in the Deputy 
Commissioner's Office for an extended period of time with no 
action taken.
    Another example involved a senior IRS official who had a 
reputation for abusing and mistreating subordinates, regardless 
of where this person worked in the organization. The OIG 
investigated this individual and the results of the 
investigation supported a serious disciplinary action. Again, 
however, the case remained in the Deputy Commissioner's Office 
for well over one year with no action taken.
    A third case involved another travel fraud issue by an 
executive. This particular case was closed with a minor action, 
although it was substantiated that the individual provided 
false statements not only during the course of the 
investigation, but to the Commissioner as well when required to 
petition for a waiver of the funds in question.
    Another case involved sexual harassment by a senior 
official. Although a disciplinary action was recommended, it 
remained on the Deputy Commissioner's desk for over 2 years, at 
which time the executive retired and the case was closed. The 
disciplinary action was never issued to the executive.
    In a more recent action for which I was personally involved 
as the whistleblower, senior officials were not disciplined 
even though the allegations of fraud, waste, and abuse were 
substantiated by the OIG and reported to the Office of Special 
Counsel.
    These allegations involved serious misconduct by certain 
IRS officials with responsibility for carrying out the 
personnel programs of the IRS. These actions, which included 
the processing of illegal performance appraisals and awards, 
would have had a detrimental effect on any reduction in force 
that the IRS would have had to run, yet no actions were taken 
even though the misconduct was reported, investigated by the 
OIG, and substantiated well in advance of IRS plans to run a 
reduction in force. A subordinate manager was directed to 
provide a false report regarding this matter.
    Additionally, time and attendance fraud was brought to the 
attention of this same official, and I and others were directed 
to not report the matter to Inspection merely because this 
person was new in the position and did not want to confront the 
matter because of who the individuals committing the fraud were 
and the potential political problems which would have resulted 
with the confrontation. Even though this matter was raised 
numerous times, no action was ever taken.
    Again, this issue was reported to the OSC and substantiated 
by the OIG during its investigation. To date, the person 
responsible for this misconduct remains in this position of 
trust and is authorized to carry out the personnel program for 
the IRS.
    The egregious misconduct, as well as misconduct by other 
officials, was substantiated by the OIG during its 
investigation and interview of approximately 20 witnesses, yet 
was ultimately viewed by the Deputy Commissioner of the IRS as 
a minor infraction of rules and no disciplinary action was 
taken.
    In the meantime, because I challenged this misconduct and 
ultimately reported it to the OSC in October 1994, I have 
suffered retaliation and continue to suffer retaliation as a 
result of my whistleblowing activities and participation in the 
OIG investigation.
    Additionally, I have expended an outrageous amount of 
personal funds for legal expenses, yet no relief is 
forthcoming. When I attempted to seek employment outside of the 
IRS, my efforts were stopped by my present organization through 
false and misleading information, as well as disclosure of my 
protected activities during the background check.
    I have been told that my first- and second-line managers no 
longer have trust and confidence in me, and my attorney was 
told by the executive for whom I work that I am a liar and a 
manipulator, a statement which he now denies.
    There are other examples that can be cited, but it became 
clear to me and others that senior level officials were 
consistently protected by their fellow executives. Many of the 
professional personnelists who were charged with the 
responsibility of handling these cases often joked and 
commented that a trained personnelist was not necessary in 
order to put a ``Close Without Action'' letter on the cases.
    It was often commented that the skills of an Employee 
Relations Specialist were considered to be a detriment rather 
than an asset, particularly when we attempted to ensure 
consistency of penalties in our actions.
    The executives of the IRS are close to each other, 
frequently socializing with each other, and often developing 
lifelong friendships. Because of this, it is extremely 
difficult, if not impossible, for one executive to recommend 
and take an action against another.
    I observed that in most instances warranting disciplinary 
action, more effort went into how to clear the person rather 
than what needed to be done to ensure the misconduct did not 
recur. Exceptions were made and preferential treatment was 
granted. Excuses were readily accepted and misconduct was often 
reduced to being minor.
    In several instances it became clear that the IRS applied 
different standards to the higher graded individuals, which 
oftentimes resulted in one set of rules for executives and 
another for the remainder of the work force.
    Unfortunately, it is an indication of how misconduct by 
senior officials is viewed. There is always justification and 
good reason for their actions, even if a double standard has to 
be applied.
    My purpose in appearing today is to assist you in 
determining the best course of action in addressing the manner 
in which senior level misconduct is investigated and dealt with 
in the IRS.
    My appearance today is certainly at great personal risk, 
however, it is something that I believe is necessary. I 
sincerely believe that much needs to be done in order to raise 
the level of ethics and integrity in order to increase the 
public trust of the IRS. Until the IRS is sincerely willing to 
deal with misconduct and not retaliate against those people who 
report it, a healing process cannot begin.
    Thank you.
    [The prepared statement of Ms. DesJardins appears in the 
appendix.]
    The Chairman. Well, I want to thank both of you, Ms. 
DesJardins, and Mr. Patsalides, for being here today. I know it 
takes a great deal of courage to appear here, that there is 
considerable risk. I want to thank you for discharging your 
responsibility.
    Ms. DesJardins, you were responsible for receiving the 
reports of investigation conducted on various IRS managers and 
providing them to the Deputy Commissioner for action. Could you 
explain further how this process worked and what was supposed 
to be done?
    Ms. DesJardins. Yes, sir. The cases would come in to the 
Deputy Commissioner's Office and they, in turn, would then be 
brought to my office, where I would log the inventory and 
complete a case analysis and refer the cases out for action to 
the appropriate regional commissioner or chief officer who had 
responsibility for the investigation. They, in turn, would 
conduct further inquiry.
    They would make recommendations to the Deputy Commissioner. 
The recommendations would come back to me. I would prepare 
another case analysis and finalize it and make a recommendation 
to the Deputy Commissioner as to whether or not the proposed 
action would be acceptable.
    The Chairman. Now, are misconduct reports on senior IRS 
executives being shelved at the Deputy Commissioner's level?
    Ms. DesJardins. Yes, sir, in some instances.
    The Chairman. How often is this a practice, could you 
comment on that?
    Ms. DesJardins. My observation was that, in those instances 
where there was serious misconduct which would support a 
disciplinary action against an individual, they tended to be 
shelved and no decisions were made in terms of recommendations 
or what actions would be taken.
    The Chairman. So it was not an exception, but more often a 
practice.
    Ms. DesJardins. Yes, sir.
    The Chairman. Mr. Patsalides.
    Mr. Patsalides. Yes, sir.
    The Chairman. As you are aware, we have reviewed a number 
of investigation files from your office and the IRS Chief 
Inspector's Office. I would like to ask you about a couple of 
them that concern me.
    Let me give you information from one IRS Inspection Office 
report completed in 1995. It appears that a manager in the 
Criminal Investigation Division who was responsible for 
overseeing undercover operations in his region managed to steal 
20 government-owned vehicles for his personal gain.
    Also, this person's supervisors were aware of his misuse of 
government credit cards, yet failed to notify Inspection of his 
misconduct. How could such a thing like that happen? What 
happened to the individual, was he prosecuted?
    Senator Moynihan. Mr. Chairman, did you say 20 automobiles?
    The Chairman. Twenty.
    Senator Moynihan. Twenty.
    Senator Gramm. Did he have a used car business or what?
    The Chairman. Mr. Patsalides?
    Mr. Patsalides. Mr. Chairman, the person was prosecuted by 
a method called deferred prosecution, which is not very often 
used. He had to repay $20,000 and he was put on 2 years' 
probation. After that 2-year probation, the case is dismissed. 
The records show that the case was dismissed.
    The Chairman. Is he still with the IRS?
    Mr. Patsalides. No, sir, he has left the IRS.
    The Chairman. How long was he there after that?
    Mr. Patsalides. I am not sure, sir, but I believe he 
retired during this process.
    The Chairman. So he was ordered to pay $20,000 restitution, 
but he stole, what, 20 government-owned vehicles.
    Mr. Patsalides. Basically, the investigation disclosed that 
the CID's office failed to account for all seized vehicles in 
the possession of that IRS office and to verify that their use 
was for undercover operations. So, there was a lack of internal 
controls there.
    The Chairman. Now, let me ask you this. Has your agency had 
any involvement in auditing or investigating the IRS undercover 
operations?
    Mr. Patsalides. No, sir, we have not. I checked with the 
Office of the Chief Inspector and their last national audit of 
this area was conducted in November 1995.
    The Chairman. In 1995.
    Now, I understand that the former IRS National Director of 
EEO and Diversity was investigated by the Inspections Office 
for allegations against him involving sexual harassment. 
According to the report, the allegations were substantiated and 
involved several victims. I have a few questions I would like 
to ask.
    Was that individual the top EEO manager in the IRS?
    Mr. Patsalides. Yes.
    The Chairman. What happened to that individual?
    Mr. Patsalides. He received a letter of official reprimand 
and was reassigned without a demotion.
    The Chairman. Did this individual have any previous 
complaints of harassment alleged against him?
    Mr. Patsalides. Yes, sir, he did.
    The Chairman. What happened to these complaints?
    Mr. Patsalides. The first complaint that was made was at 
the point where this gentlemen was entering the Executive 
Development Program and his manager did not want to address 
that complaint because he did not want to in any way, I guess, 
detract from this person's management development.
    The Chairman. So in spite of concerns about alleged 
misconduct by this individual, is it correct that he was 
transferred to the IRS national office as the National Director 
of EEO?
    Mr. Patsalides. Yes, sir.
    The Chairman. Now, I have a 1996 report from the IRS 
Inspection Office where an IRS revenue officer was arrested by 
a State trooper for drunk driving and the IRS employee 
threatened to audit the State trooper unless he allowed the IRS 
employee to go.
    Now, it seems to me that the State trooper was just doing 
his job. But when the trooper was interviewed he stated he was 
extremely concerned and afraid of what the IRS employee could 
do to him in terms of causing him economic hardship. What 
happened to that IRS revenue officer; where is he today?
    Mr. Patsalides. He is still employed. He entered into what 
they called a last chance settlement agreement where he agreed 
to enter a rehabilitation program for his alcohol abuse, and 
also agreed that if he had any future violations related to 
that, that he would be fired without appeal.
    The Chairman. So he is still dealing with taxpayers today.
    Mr. Patsalides. Yes, sir, he is.
    The Chairman. The next case I would like to ask you about 
involves a distinguished tax practitioner who has provided 
testimony before this committee's hearings. The practitioner 
received an anonymous written threat that was received prior to 
our September hearings when the practitioner testified which he 
believes was sent by an IRS revenue officer.
    In fact, I have the letter that contained the threat in 
front of me. The following statement was typed on the top of a 
newspaper article that involved the IRS arresting a tax 
mediator. The statement is, ``You and your clients are next. If 
you don't think it can happen, call David Kay and numerous 
attorneys in Los Angeles. You are currently under investigation 
and I am waiting for the day your name is in the paper.''
    Now, when the IRS Inspection Office investigated the matter 
they clearly determined that the letter had been typed on a 
typewriter within the revenue officer's immediate office. What 
happened to that IRS employee who made the threat; is he 
dealing with taxpayers today?
    Mr. Patsalides. Yes, sir, he is. He is still there.
    The Chairman. Can you say what happened to him?
    Mr. Patsalides. The investigation was not able to 
completely substantiate that he was the one that typed this 
note, even though the forensic lab identified that the letter 
came from that particular office, was postmarked at that 
office, and the typewriter ribbon was obtained and indicated 
that the letter was typed in that office.
    We feel, and the report did not show that, but potentially 
some additional investigative work regarding that situation, 
some additional interviews of the employees, review of their 
case loads to see if there was any other involvement with that 
practitioner, plus a statement analysis might still be of help 
in identifying and pinpointing who might have sent that letter.
    The Chairman. In other words, you feel that they called off 
the investigation too early.
    Mr. Patsalides. Potentially, yes, sir. I do not have the 
full case file, so I do not know the extent of their full 
investigation. However, in reviewing it there is no indication 
that they did these other things that I just mentioned. I 
believe that they might be able to help identify who the person 
was.
    The Chairman. That concludes my first round of questions.
    Senator Moynihan?
    Senator Moynihan. Thank you, Mr. Chairman.
    I am trying to make some sense of the organizational 
structure here. I suppose that the fact of the Section 6103 
confidentiality of taxpayer returns makes for a culture of 
compartmentalization in the IRS that is different from other 
places. I do not know that, but I feel that. You seem to 
indicate some agreement.
    I would ask you, Mr. Patsalides, why do we mention no names 
here? That fellow who robbed us of 20 automobiles, that was a 
crime, was it not?
    Mr. Patsalides. Yes, sir.
    Senator Moynihan. Well, what is his name? The names of 
criminals are not confidential records, are they? I just find 
this unusual.
    Mr. Patsalides. I am sure they are listed in the public 
records.
    Senator Moynihan. What is his name?
    Mr. Patsalides. But I believe I would have to check with my 
counsel.
    Senator Moynihan. Have you got a counsel around?
    Mr. Patsalides. Yes, sir. But I believe there are some 
privacy issues there and it is not normally our process to 
disclose those kinds of issues publicly.
    Senator Moynihan. Counsel, come forth.
    [Pause.]
    Mr. Patsalides. Sir, with the records that we had, we were 
unable to determine if this is a matter of public record. All 
we had were the investigative files. If, in fact, it is a 
matter of public record we would be very pleased to provide the 
Senator with that name.
    Senator Moynihan. No. I am not sort of pressing you to know 
who the name of this man is, or where that Woodstock typewriter 
came from and who was using it, and so forth. One is impressed 
by how tightened up your procedures are with respect to names 
and individuals. I think it rises out of the confidentiality of 
tax returns.
    Mr. Calahan, do you have any sense of that? Or tell me if I 
am wrong. I am not infrequently wrong.
    Mr. Calahan. Well, it arises also out of the process of 
conducting investigations. That entire process is on a need-to-
know basis. We are very careful.
    Senator Moynihan. Well, should the public not have a need 
to know?
    Mr. Calahan. Not until it is completed.
    Senator Moynihan. Not until it is complete.
    Mr. Calahan. Yes, sir. And as I said, if it is a public 
record, we would be happy to provide that information to you.
    Senator Moynihan. I do not need the information.
    Mr. Calahan. But we are taught to be very close-held 
regarding this kind of information.
    Senator Moynihan. Closely held.
    Mr. Calahan. Yes, sir.
    Mr. Patsalides. I would just like to add that our office 
takes the Privacy Act very seriously and we are very careful in 
terms of how we exercise our work in accordance with its 
provisions.
    Senator Moynihan. Sure. Sure. I understand and appreciate 
that. We have comparable agencies in the government who are 
equally buttoned up, not internally, but from external inquiry, 
which may be part of the problem that the Chairman has 
identified here.
    I certainly would like to know more about this matter of 
David Kay and that typewriter. That is unacceptable, ``You and 
your clients are next.'' Now, if that came from an IRS 
employee, that is abuse of power. You would be the first to 
agree, would you not, Mr. Patsalides, Mr. Calahan?
    Mr. Patsalides. Yes, sir.
    Mr. Calahan. We would. We would.
    Mr. Patsalides. I would and I can assure you that, after we 
get back to the office, we intend to meet with the Office of 
the Chief Inspector and discuss this case and see if there is 
any additional work that can be done.
    Senator Moynihan. All right. If a prothonotary warbler 
shows up in the evidence, we know we have a large issue that 
may go beyond the confines of the U.S. borders. I am referring 
to those inquiries about Woodstock typewriter and the sighting 
of the prothonotary warbler. You youth know so little about our 
history.
    Mr. Patsalides. Yes, sir. [Laughter.]
    Senator Moynihan. But do look into that, will you not?
    Mr. Patsalides. Yes, sir.
    Senator Moynihan. This is something that we will not have, 
nor would you.
    Mr. Patsalides. I agree. No, sir, we would not have that.
    Senator Moynihan. Of course you would not.
    So, Mr. Chairman, can we hope that we will learn more about 
that?
    The Chairman. Absolutely.
    Mr. Patsalides. Senator, we will take that as a request 
from you at this point.
    Senator Moynihan. Perhaps you would take it as a request 
from the committee, sir. Is that all right, Mr. Chairman?
    The Chairman. That is fine.
    Senator Moynihan. Thank you.
    And thank you, gentlemen. Thank you, Ms. DesJardins.
    The Chairman. Thank you, Senator Moynihan.
    Senator Grassley?
    Senator Grassley. I think as we listen to the testimony 
that we have before us that we can both be pleased that things 
like this are coming out, but I think we obviously have to be 
outraged at the same time.
    I am pleased that these allegations are finally coming to 
light, but obviously we cannot stand this sort of activity in 
our government. People want to be proud of their government. 
People want to have trust in their government.
    It seems to me that the agency that deals with more 
American citizens than all other government agencies put 
together, which happens to be the IRS, is the one that can set 
a standard for all other bureaucracies, and ought to set that 
standard.
    Obviously, as a result of just this first panel, anyone 
watching would be very outraged at what is going on and wonder 
whether or not we are a government of the people, whether or 
not we are really a participatory democracy, whether the rule 
of law is followed in a bureaucracy like it is expected to be 
followed by the citizenry.
    You never get used to these sorts of allegations. You never 
get desensitized to these sorts of happenings. I would like to 
tell you what it would be like to be a U.S. Senator and trying 
to justify this sort of thing at the grass roots meetings of 
the State of Iowa.
    Or for instance, if any of us in the Senate did exactly 
these same things or we conducted the employment in our office 
these ways, we would not be tolerated for a minute. We would be 
out so fast on our ears that we would not know what happened to 
us. So that is why it is very important that we have a standard 
that we can all be very proud of.
    Ms. DesJardins, you discussed many cases where wrongdoing 
was found but no disciplinary action was taken. Could you, and 
if you could, would you be willing to, after these hearings 
give us more specifics so that we, either as a committee, or 
myself as an individual member of the committee, can pass these 
on to Commissioner Rossotti? Because I think the new 
Commissioner shows a willingness to get to the bottom of all 
these things right away, overcome these problems, and 
reestablish the credibility of the IRS. I would like to make 
sure that action is taken on these, if it is warranted.
    Ms. DesJardins. Yes, sir. I would be happy to do that.
    Senator Grassley. All right. Thank you very much.
    You state in your written testimony, Mr. Patsalides, that 
you have these limited resources that are a challenge to your 
office.
    Mr. Patsalides. Yes, sir.
    Senator Grassley. Is that something that you would find 
within the bureaucracy of the IRS, difficulty fighting for the 
amount of resources you need, regardless of the amount of money 
that the IRS gets, or is this something that you think relates 
to the fact that Congress just is not giving enough money in 
the first place?
    Mr. Patsalides. The Treasury Office of Inspector General is 
independent of IRS and is dependent on funding from the 
Congress.
    Senator Grassley. All right. Then take out the word IRS and 
put in place of it the Treasury Department officials. Is this a 
battle that you have within the bureaucracy, getting resources? 
Are you always told, well, Congress just does not give us 
enough money?
    Mr. Patsalides. Mr. Calahan, do you want to answer that?
    Senator Grassley. It is all right with me if you answer.
    Mr. Calahan. Thank you, Senator. The amount of resources we 
have is obviously a function of the budget process. That goes 
through several levels of review, the department, the OMB, and 
the Congress.
    Mr. Patsalides. Senator Grassley, from my standpoint in the 
Office of Investigations, all our investigations are done 
professionally and with high quality. I demand that of our 
investigators. The problem is, we have too many significant 
allegations and not enough staff to investigate all those 
allegations.
    We will never have enough staff to investigate all of the 
allegations, but the more significant ones, the ones we feel we 
should be involved with, we cannot even do, therefore, we are 
forced to refer many of these allegations back to IRS 
management for resolution.
    When we do, we do request that they respond back to us with 
the results of their review, but we are unable to do those 
ourselves independently of IRS.
    Senator Grassley. Mr. Chairman, I guess my time is up.
    The Chairman. That is right.
    Senator Grassley. Thank you.
    The Chairman. Thank you, Senator Grassley.
    We will now call on Senator Kerrey, please.
    Senator Kerrey. Thank you, Mr. Chairman.
    Mr. Patsalides, you described, and then later identified, 
two significant issues. One, is your authority and the other is 
the problems that are associated with alleged inadequate or 
disparate discipline.
    You have identified it as a problem, as well as alleged 
sexual harassment and racial discrimination as issues that are 
not being addressed.
    What I would like to direct your attention to--in fact, all 
of the witnesses attention to--is the legislation as passed by 
the House and as passed by this committee dealing, first of 
all, with the Inspector General, second dealing with a new 
board that will have significant authority and 
responsibilities, and last, dealing with new powers and 
authorities granted to the Commissioner.
    I have got to say at the beginning, my own view is that, 
unless and until just sort of common sense judgments are made--
I appreciate you are going to get back to the committee on what 
happens if somebody sends a letter out threatening action 
against an individual, a taxpayer or somebody helping the 
taxpayer comply with the law, but I have got to say, you should 
not have to--you say, oh, yes, Senator, we are going to go back 
to the office and we are going to check on that one. I do not 
know what additional authority you need. It troubles me. I just 
will take this right up the food chain to Mr. Rossotti.
    It seems to me that we have got to take immediate action 
when something like that happens and people have to know, as we 
do in other areas of the law, that you are going to pay a 
penalty for doing it, otherwise it continues. I mean, that is 
the problem with lax enforcement of any law, is it encourages 
other people to say, well, there is no punishment, there is no 
penalty, why worry about it?
    I would like for you to comment, rather, on the specific 
provisions. You are saying you have identified a number of 
things. The IRS does not refer complaints about high-level 
employees, the IRS has been slow in taking administrative 
action, the IG views some adjudicative actions taken by the IRS 
against high-level employees as weak decisions, and so on.
    In the legislation, both the House and Senate legislation, 
we significantly change the power and authorities of the 
Inspector General. We shift over to Treasury, first of all, and 
make the IG independent.
    I wonder if you would comment on the legislation itself. I 
presume you have reviewed the legislation, both that as passed 
by the House and strengthened by this committee, and I wonder 
if you would comment as to whether or not the proposed change 
in the law that this committee is looking at will solve the 
problems you are identifying. If not, what additional 
suggestions would you make to this committee when we take it up 
on the floor?
    Mr. Patsalides. I would make a personal observation. The 
proposed legislation that I viewed calls for two independent 
Office of Inspector Generals within the Treasury Department. I 
believe that that is not necessary.
    I believe that one Office of Inspector General within the 
Treasury Department, one independent IG overseeing all the 
bureaus including IRS, is more workable. The problem is that if 
that was proposed, we would need the sufficient resources to be 
able to oversee the operations of IRS.
    Senator Kerrey. Under the bill that was passed out by this 
committee, the Treasury IG has all the current 
responsibilities, but in addition it would assume all the 
duties and responsibility currently delegated at the IRS Office 
of Chief Inspector. Is that adequate?
    Mr. Patsalides. Yes, sir, I believe so. I am not familiar 
with that.
    Senator Kerrey. Well, I would appreciate it if you would 
review that because we are about to change the law. One of the 
things that is awfully difficult in solving problems, is if we 
do not connect the problem with the law, again, I emphasize the 
IRS is not Sears and Roebuck.
    We are not talking about a private sector entity here, we 
are talking about an agency that grows from the law. We have to 
pay attention to how we write that law and pay attention to the 
circumstances that you are identifying here and try to change 
it by changing the law. Again, in parentheses, some of the 
stuff the law cannot provide for.
    I should not need a law that says that somebody gets 
terminated if they write a letter out threatening a citizen as 
a consequence of something he said publicly. I mean, if we have 
to have a law for that, we have got trouble. I should not have 
to have you go back and check it out and see what you are going 
to do about it.
    Mr. Patsalides. The other situation was brought to our 
attention as a result of this meeting.
    Senator Kerrey. I appreciate that. But there are a lot of 
things----
    Mr. Patsalides. We do not have that kind of oversight over 
IRS when they do their investigations. That is one of the 
problems right now, they do their own investigations. We do not 
have sufficient resources to oversee everything they do.
    Senator Kerrey. I appreciate that. I do not think you have 
a sufficient amount of authority, I think you need to be 
independent, I think you need to be in Treasury, I think the 
issue of resources is important. What I am saying is, even 
without resources judgments have to be made about what people 
are doing, whether they are right or wrong.
    Mr. Patsalides. Yes, sir.
    Senator Kerrey. It seems to me that if I have got evidence 
that somebody has sent a letter out threatening a taxpayer or 
somebody that is helping them prepare their taxes, I do not 
need a law to tell me that is wrong and they ought to be 
terminated. I mean, if you need a law for that, it seems to me 
that we are never going to get where we want to go.
    Mr. Patsalides. I agree, sir.
    Senator Kerrey. If you have got to go back and check that 
all out and come back to us----
    Mr. Patsalides. Yes, sir.
    Senator Kerrey. If somebody steals 20 cars, somebody 
sexually harasses employees, should not be promoted to be in 
charge of EEO for the whole agency.
    Mr. Patsalides. We certainly agree.
    Senator Kerrey. So why does it happen? Why do you get to 
this point where you are coming here and saying sort of lamely 
that we will go back and check it out?
    Mr. Calahan. Senator, could I make a clarifying point? Our 
office typically investigates grade 15s and up, higher level 
employees.
    Senator Kerrey. Yes.
    Mr. Calahan. I believe that the employee involved in this 
matter was not at that level, and so I do not think we became 
aware of that issue until it was brought to our attention.
    Senator Kerrey. Well, I appreciate that. My red light is on 
and I will take up some of the personal items in the second 
round. But I hope you will review the legislation and tell us 
whether or not the problems you are identifying will be solved 
by the bill that was reported out by this committee.
    I think it does, by the way. As I hear your testimony, I 
think in both cases the problems are going to be solved. But 
please pay attention to the law, because I think it matters a 
great deal.
    Mr. Calahan. We would really be happy to provide you 
comments on the new bill.
    Senator Kerrey. Thank you.
    The Chairman. Mr. Kerrey's time is up. Mr. Breaux has to 
leave to make a speech.
    I would just make one observation. Obviously, what we write 
into the law in addressing these problems are of critical 
importance. I would also note that I think they make clear the 
importance of management changes as well. It is not just a 
matter of revising the law, but assuring that there are people 
who will faithfully pursue the law as it is written.
    With that, I would like to call on Senator Nickles.
    Senator Nickles. Mr. Chairman, thank you very much. Again, 
these hearings are kind of shocking. Correct me if I am wrong. 
I did not catch all these stories. But one individual was 
responsible for stealing 20 cars and he is still an IRS 
employee; did I hear that correctly?
    Mr. Patsalides. No, sir. He is no longer an IRS employee.
    Senator Nickles. Was he fired or did he retire?
    Mr. Patsalides. I believe he retired or left, resigned, 
before termination.
    Senator Nickles. Any criminal penalties whatsoever?
    Mr. Patsalides. That was the issue where the person 
received a deferred prosecution and was placed on two years' 
probation and had to repay the government the $20,000.
    Senator Nickles. Twenty thousand dollars. Most cars, that 
is pretty light. His restitution was $20,000 and he stole 20 
cars?
    Mr. Patsalides. The person may not have stolen all 20 cars. 
It was documented that he misappropriated at least two or three 
of the vehicles. But, because of the inadequate controls of 
that office, they could not determine the disposition of the 
other vehicles under his control.
    Senator Nickles. That is pathetic.
    Mr. Patsalides. Yes, sir, it is.
    Senator Nickles. An 18-year-old steals a car in Washington, 
DC could go to jail for years. And I do not want to paint all 
of our IRS employees with the same brush that implies that, but 
that is criminal conduct. To get off with 2 years' probation 
and to pay $20,000 restitution when you may have 20 cars that 
were stolen, is just a pat on the back. That is embarrassing.
    Mr. Patsalides. Those issues were handled in the courts and 
not by the agency, either IRS or the Treasury OIG. They were 
adjudicated by the Department of Justice, and that was the end 
result.
    Senator Nickles. By the U.S. Attorney.
    Mr. Patsalides. Yes, sir.
    Senator Nickles. Or Assistant U.S. Attorney.
    Let me ask you another question. You mentioned somebody had 
several sexual harassment charges filed against him and was or 
is in charge of EEOC for the IRS; is that correct?
    Mr. Patsalides. He was, yes, sir.
    Senator Nickles. He was until when?
    Mr. Patsalides. I do not have the exact date, but he is no 
longer in that position. I believe he was removed maybe about 6 
to 8 months ago.
    Senator Nickles. Six to 8 months ago. But several of these 
charges were filed against him.
    Mr. Patsalides. Several charges were filed against him 
before he even obtained that position.
    Senator Nickles. Yet he still obtained the position to be 
head of EEOC with the IRS.
    Mr. Patsalides. Yes, sir. Then subsequent allegations 
followed him, then he was removed from that position.
    Senator Nickles. Removed from that position, but he is 
still a current employee.
    Mr. Patsalides. Yes, sir.
    Senator Nickles. One individual on this letter that we saw, 
do you know which individual that was? I mean, you said it was 
not investigated quite as thoroughly as you had hoped it 
possibly should be.
    Mr. Patsalides. Yes, sir. In reviewing the report of 
investigation by the Office of Inspections, the allegation is 
listed as ``Not Substantiated.''
    Senator Nickles. Are you pretty sure who the individual was 
that had typed that note?
    Mr. Patsalides. No, sir, I am not. But I believe that 
potentially additional investigation might help to determine 
that.
    Senator Nickles. Will there be additional investigation?
    Mr. Patsalides. Yes, sir. We have committed to meet with 
the Office of Inspections. If they do not want to do it, we are 
going to do it.
    Senator Nickles. You mentioned one other case where an IRS 
agent was stopped by a policeman and threatened the policeman 
with an audit. Is that IRS agent still employed?
    Mr. Patsalides. Yes, sir, he is.
    Senator Nickles. Should he not be terminated for that abuse 
of power?
    Mr. Patsalides. Again, sir, that is part of the 
adjudication process and there are many factors that are 
involved in that. We do not normally get involved in the 
adjudication process. Our job is to gather the facts and 
present them in a report of investigation to management for 
appropriate action.
    Senator Nickles. Well, just a couple of comments. In these 
four cases I have cited, I guess nobody was fired. One person 
was moved. This is a real lack of control.
    I understand your job is to do the investigation, but IRS 
has a hard time firing people. I know in the cases in Oklahoma 
where we had real abuses, and you mentioned that you are 
investigating those and I do not know that we have time to get 
into it, but to my knowledge no one was fired. We had one 
district director who retired early and went to Texas. One 
person moved. Did not want to testify for our hearing, frankly. 
But to my knowledge, there was no real disciplinary action. We 
still have IRS employees that say they are being harassed 
because they participated in the hearing.
    Ms. DesJardins has mentioned the fact that she, as what I 
am going to say is a whistle blower, somebody who is presenting 
some facts, is taking a risk and has the courage to do it--and 
I compliment you for doing it because I know that is not easy. 
I know you can be ostracized. That is what I am hearing from 
people that testified in Oklahoma.
    So I am concerned, one, that the IRS never fires anybody 
and seems to be very cliquish, and the fact that we are going 
to keep all this hush-hush and keep our power and keep 
everything private within their own house.
    Frankly, as I said before, most IRS employees, I think, are 
fine, outstanding public servants, but you have got some that 
need to be fired. Obviously there has been a reluctance to do 
that, either by tradition or by inept management, and I think 
that has to change.
    Mr. Patsalides. Senator Nickles, the issues about the 
investigation that you mentioned where some people retired, 
that is still open and it is before a review panel right now 
who will recommend appropriate action against as many 
individuals as they determine warrant action.
    Senator Nickles. Can you also assure me that people will 
not be retaliated against, are you checking into that, because 
they participated in a Congressional hearing?
    Mr. Patsalides. Yes, sir. We are still currently conducting 
that investigation. It is still open and we will report back to 
you when it is completed.
    Senator Nickles. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Nickles.
    Senator Mack.
    Senator Mack. Thank you, Mr. Chairman.
    I want to ask Mr. Patsalides about Treasury Directive 40-
01. As I understand it, that requires the immediate referral of 
allegations involving senior officials and employees of 
Internal Affairs and Inspection Offices and that the IRS has 
violated this directive. Is that correct?
    Mr. Patsalides. The directive does require immediate 
referral and there have been instances where referrals were not 
immediately made.
    Senator Mack. Do you consider that a problem?
    Mr. Patsalides. Yes, sir, we do. We have a current review 
that our Office of Oversight is conducting to help address that 
issue and report back to us.
    Senator Mack. All right. Frankly, that does not help me 
much. I am kind of surprised that a specific directive could be 
violated, and you do consider it to be a concern. How long has 
this been going on? I guess I got the impression, too, that 
this is something that happens. It is not an unusual occurrence 
for it to happen.
    Mr. Patsalides. I think for the most part we timely receive 
the referrals, occasionally we do not. However, there is no way 
to tell----
    Senator Mack. When you find out that there has been a 
delay, what responsibility do you have? Who should you be 
reporting this to? If you do you report it to somebody, do they 
take action? If they do not take action, why do they not take 
action?
    Mr. Patsalides. Yes, sir, we do. We identify it and report 
it to the appropriate officials.
    Senator Mack. And who would be the appropriate official?
    Mr. Patsalides. The Commissioner or Deputy Commissioner of 
IRS.
    Senator Mack. And the Deputy Commissioner does not react?
    Mr. Calahan. I should point out that these are two current 
matters. The first obligation of our office is to investigate 
the issue and determine the seriousness of the matter, and then 
determine who it should be reported to.
    The Chairman. I think the question was directed at Mr. 
Patsalides.
    Mr. Patsalides. Pardon me, sir?
    The Chairman. I think the question was directed to you.
    Senator Mack. I think he is suggesting that maybe you 
answer the question as well.
    Mr. Patsalides. I have been given some information that 
indicates the OIG completed a review of 40-01 and they are 
going to be making recommendations as to how we can better work 
those. They said they have made recommendations. That is our 
Office of Oversight, and I am not familiar with that. However, 
whenever we run across these situations we do provide them to 
the attention, as I told you, of the appropriate officials.
    Senator Mack. Let me ask you this. This was in your 
testimony that I have read that from.
    Mr. Patsalides. Yes, sir.
    Senator Mack. You obviously consider it to be a problem 
worth noting.
    Mr. Patsalides. Yes, sir, it is.
    Senator Mack. Are you implying anything with respect to the 
failure to immediately notify? I mean, is it, in essence, being 
used? Are people keeping information from you, putting it in a 
drawer, keeping it out of your view? Is there some pattern that 
you have been able to determine; are people using it to avoid 
having to pursue wrongdoing?
    Mr. Patsalides. We have not seen a pattern, but we have 
seen it on some significant issues that raised concerns.
    Senator Mack. Would you tell me what those issues are and 
what concerns they raised?
    Mr. Patsalides. As Mr. Calahan mentioned, we have some open 
issues right now, and the examples that we used were open, so I 
am not able to discuss those right now. However, we are 
planning on addressing that the next time we talk with IRS.
    Senator Mack. I have this feeling I am just kind of being 
left out there. I mean, I understand the point that you are 
trying to make, but I am very uncomfortable with this response. 
Is there not some way we can get more information now? I mean, 
this was in your testimony.
    Mr. Patsalides. Yes, sir. The examples are factual. What 
you are now trying--since it is an ongoing investigation, we 
may be----
    Senator Mack. Let me move off of that for a second.
    Mr. Patsalides. I do not want to compromise anything 
regarding that and that is why I am hedging.
    Senator Mack. All right.
    Mr. Patsalides. The issue that you raised is a valid issue 
and it does give us concern. The other issue is, since it is a 
voluntary system, we have no way to know whether they comply 
with 40-01 or not. We do not know how many times allegations 
have come to the attention of managers or employees and they 
fail to provide them to the Office of Inspector General. There 
is no way to control that.
    Senator Mack. But you are not suggesting that these two 
matters that you say are under investigation now, that this is 
the only times that this has occurred.
    Mr. Patsalides. No, sir, it has not.
    Senator Mack. Were these unusual?
    Mr. Patsalides. Yes, sir. They were significant ones.
    Senator Mack. Can you give me a sense of the timing of when 
these occurred?
    Mr. Patsalides. In one issue I think it was several months, 
maybe 5 or 6 months after the incident occurred.
    Senator Mack. And how long ago? When did you begin this 
investigation?
    Mr. Patsalides. That was recent. I am really reluctant to 
answer some of those because I do not want to compromise what 
we are doing.
    Senator Mack. All right. Mr. Chairman, I would just ask 
that the committee be kept informed. I understand the concern 
about, I guess, divulging information while there is an ongoing 
investigation, but----
    The Chairman. I think your request is a reasonable one, and 
we direct the witness to keep us advised.
    Mr. Patsalides. Yes, sir. I would be happy to.
    Senator Mack. Thank you, Mr. Chairman.
    The Chairman. Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman.
    First of all, in this last round, I would just say I think 
it is a little questionable that we are talking about cases 
that are not completed. I am fully prepared to hold the agency 
responsible for failing to deal with circumstances where 
somebody has been proven to have been dealing in wrongful acts, 
but when you have an ongoing case where apparently the final 
decision has not been made, it seems to me we have the cart 
before the horse. That does not make much sense to me.
    Mr. Patsalides. Senator Conrad, the issue here is the 
timely referral. In those situations were used as examples for 
failure to get timely referral. However, we cannot document 
that until we complete the investigative matter.
    Senator Conrad. That is what I am saying. If you cannot 
document it, then I do not think it is time to talk about it. 
Let us deal with things that are documented. This committee has 
got to deal with facts, things that have happened, not things 
that in process. We cannot make a judgment on that until the 
process is completed. If we cannot document it, then we ought 
to move on and talk about things that are documented.
    I would like to go to this question of the person that 
was----
    Mr. Patsalides. I think we can provide some documentation 
of closed cases, sir. It is just going to take some research.
    Senator Conrad. Yes. Well, that is what we need to deal 
with. The fellow that dealt with the 20 stolen cars that we now 
find out is not 20, maybe it is 2 or 3, I would like to know 
exactly, he misappropriated cars. What did he do with them, did 
he use them for his own use, did he sell them; what did he do 
with these cars? What do we actually know that he did? What is 
documented?
    Mr. Patsalides. Well, we know that there were approximately 
20 cars that were unaccounted for.
    Senator Moynihan. Approximately 20?
    Mr. Patsalides. We know that there were 20 cars unaccounted 
for. What we do not know, because of the lack of controls that 
the office had, is exactly what happened to those.
    Senator Conrad. Well, what do we know? We know about two or 
three cars.
    Mr. Patsalides. Again, this is an IRS Inspection report 
where we reviewed the file, so we did not conduct this 
investigation ourselves. We just depended on the information in 
the file to find the final adjudication action. If you want us 
to research every----
    Senator Conrad. But what do we know? You indicated earlier 
that two or three cars were misappropriated, that you know that 
occurred; is that correct? Well, how did he misappropriate 
cars? What did he do with them? I am trying to determine if the 
penalty here is appropriate or not.
    Mr. Patsalides. We know that at least two, maybe three cars 
were used for personal use. The other cars may just have been--
--
    Senator Conrad. You mean, on an ongoing basis or just 
temporarily? You mean, he took these cars home.
    Mr. Patsalides. Yes.
    Senator Conrad. And these were cars that were seized in IRS 
operations.
    Mr. Patsalides. Yes, sir. Most of them were.
    Senator Conrad. And he took these cars and used them for 
his personal use.
    Mr. Patsalides. Yes, sir.
    Senator Conrad. That person paid a $20,000 fine.
    Mr. Patsalides. Yes, sir.
    Senator Conrad. Then what happened to him?
    Mr. Patsalides. He entered into this plea agreement where 
he got a deferred prosecution and 2 years' probation.
    Senator Conrad. Was he removed from service? He retired, 
apparently, during this time.
    Mr. Patsalides. Yes, sir.
    Senator Conrad. He retired. And he paid the $20,000?
    Mr. Patsalides. He either retired or resigned, but he left 
the IRS so they could not take any action against him.
    Senator Conrad. All right. Thank you very much.
    Ms. DesJardins, you indicated there were cases where travel 
fraud occurred, yet the employees in question were not 
punished; is that correct?
    Ms. DesJardins. That is correct.
    Senator Conrad. Can you tell us the nature of the travel 
fraud? I am not asking for names here, I am asking, what did 
the person in question do?
    Ms. DesJardins. One of the issues involved travel of a 
number of IRS managers to a meeting and the individuals were 
permitted to stay overnight, which is all right. However, there 
were also managers that were in the local area that were 
allowed to stay overnight in the same hotel at government 
expense. The purpose of them staying overnight was to 
participate in social activities at the government's expense.
    When the issue came forward, the individual stated that 
there was no knowledge or that it did not violate the travel 
regulations to have authorized these other managers to stay 
overnight.
    It was proven that it did violate the travel regulations, 
so this person was required to ask for a waiver of the funds. 
In asking for the waiver of the funds, which was required to be 
approved by the Commissioner, this person did not provide 
accurate information to the Commissioner as to why the 
situation occurred.
    Senator Conrad. Do both the matters of travel fraud involve 
that fact pattern?
    Ms. DesJardins. No, sir.
    Senator Conrad. What was the other travel fraud matter?
    Ms. DesJardins. The other one involved an individual using 
companion tickets for travel. Government tickets, government 
bonus tickets, and using them for companion travel.
    Senator Conrad. The case where an IRS employee abused his 
employees.
    Ms. DesJardins. Yes.
    Senator Conrad. What was the nature of the abuse?
    Ms. DesJardins. The abuses ranged from, this person would 
harass employs, this person would require the employees to do a 
lot of personal business for the individual, just overall 
harassment and demanding things that normally an employee 
should not be required to do.
    Senator Conrad. Personal business for the manager?
    Ms. DesJardins. Correct.
    Senator Conrad. What kind of personal business?
    Ms. DesJardins. If I recall, in one instance, picking up 
some music sheets. I do not recall anything else.
    Senator Conrad. All right. My time has expired. I thank the 
Chairman.
    The Chairman. Senator Lott.
    Senator Lott. Thank you, Mr. Chairman.
    Ms. DesJardins, thank you very much for being willing to 
come forward and give the statement that you have given. I have 
been going back and going over it. It looks to me like you have 
testified here today that IRS managers and high-level employees 
have committed the following: travel fraud, abusing and 
mistreating subordinates, lying to the Commissioner, sexual 
harassment, general fraud, processing illegal performance 
awards, telling a subordinate to lie, time and attendance 
fraud, lying to investigators, and lying to Commissioners.
    Now, that is a long and devastating list. It also appears 
that only the last two resulted in some minor action of 
punishment, although there were a variety of things that 
apparently did occur here.
    Now, each of these cases have been substantiated by the 
Inspector General or the Office of Special Counsel, yet nothing 
or very little has happened. Who is protecting these people? 
Who is not causing actions to occur when these allegations are 
substantiated? Where is the problem? I am not asking for a 
name, necessarily, but give us some idea of why and how these 
matters are not being appropriately pursued.
    Ms. DesJardins. I think when these actions involve high-
level individuals in the organization they are protected up at 
the Deputy Commissioner's Office.
    Senator Lott. Who is the Deputy Commissioner?
    Ms. DesJardins. Mr. Dolan.
    Senator Lott. And this is a pattern, apparently, that has 
been going on for quite some time; is that correct?
    Ms. DesJardins. Yes, sir.
    Senator Lott. How long have you been at IRS?
    Ms. DesJardins. Since 1991.
    Senator Lott. And on several instances you have brought 
these problems to the attention of appropriate officials and 
you feel like inadequate, inappropriate, or no action has 
resulted.
    Ms. DesJardins. Correct.
    Senator Lott. I know this is not easy for any of you, but I 
think it is important that we have this testimony. You are 
substantiating what the American people have been feeling for a 
good, long while and what we have suspected and now we are 
hearing specific examples.
    Now, Mr. Patsalides, in your statement on page 9 you state 
that the IRS has failed to timely refer complaints to your 
office. Senator Mack has been asking about that. They have been 
slow to take administrative action against certain employees, 
and some adjudicative actions taken by the IRS were weak 
decisions.
    When you say slow to take administrative action against 
certain employees, what do you mean? You talked a little bit 
about, slow to take it out of a drawer and get it in the 
appropriate place, but I have the impression it is more than 
that, that it is slow to be acted on, or weak actions have 
occurred once decisions are made.
    Mr. Patsalides. Yes, sir. Even when allegations have been 
substantiated, prompt administrative action has not been taken.
    Senator Lott. What is the solution here? Do we not have a 
proper process to follow through or is this just a matter of 
people, individuals? I mean, if we had different people in 
these positions would it be different, or is this a culture 
that has developed that leads to no, or weak, administrative 
actions?
    Mr. Calahan. Senator, I would like to respond.
    Senator Lott. Mr. Calahan, please.
    Mr. Calahan. I would like to point out that I met 
personally with the Commissioner on this matter of slow 
decisions and he seemed to be genuinely distressed over that 
matter. I really believe that that is something that he is 
going to be very active about.
    Senator Lott. Well, he certainly needs to.
    One last question, Mr. Chairman. On pages 10 and 11 of your 
statement, Mr. Patsalides, you talk about access to taxpayer 
information. Senator Moseley-Braun and I have been concerned 
that the IRS is using taxpayer confidentiality, commonly 
referred to as the 6103 information, as an excuse to hinder 
your investigation and inquiries.
    We have some language, I believe, in the bill that would, 
except for the name, address, and information that could be 
used to identify the individual, make that information 
available to this oversight group that we have. Now, is that a 
hinder to the investigations and inquiries?
    Mr. Patsalides. The lack of 6103 authority is, yes, sir.
    Senator Lott. So you feel that opening it up in the way we 
have proposed could be helpful.
    Mr. Patsalides. Extremely. Yes, sir.
    Senator Lott. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Lott.
    Senator Gramm?
    Senator Gramm. Mr. Chairman, let me say, having sat here 
and listened to this hearing and having sat through the 
hearings that we had prior to our bill, I think it is obvious 
to a blind man that our problem here is the old Greek adage 
that power corrupts.
    Our problem is, we have an agency that has virtually no 
checks and balances and an agency which basically protects its 
own against the public. I am very proud of the bill that we 
have written, Mr. Chairman, but there is one area that we have 
not been able to deal with which greatly concerns me, and that 
is the absence of checks and balances.
    In the criminal justice system, basically the police do the 
investigation and they turn their information over to the 
prosecutor, and, in evaluating the evidence, the prosecutor 
invariably oversees and evaluates what the police did, so you 
get a check on abuse.
    Then the prosecutor has got to go before a grand jury, 
where again you get a check and a balance. Then you go into a 
court, if the dispute continues or a crime was committed, and 
you got independent jurors and you have got generally an 
elected judge, so you have got a division of power and checks 
and balances. It is the genius of our system. Yet, with the IRS 
we literally have the investigator, the prosecutor, the judge, 
the jury, all in the same agency with no checks and no 
balances.
    So maybe we are surprised that all of this is happening, 
but I think anybody who understands how organizations work 
would have predicted exactly this kind of problem. I do not 
think there is an easy or pretty face you can put on the fact 
that the Chief of Employee and Labor Relations Section of the 
Personnel Branch of the General Counsel's Office at the IRS 
raises all of these potential violations of the law and nothing 
happens.
    How are we to conclude anything else other than, nothing is 
happening because the Internal Revenue Service is protecting 
people who are violating the law and who are treating citizens 
in a way that, at least we claim, we will not tolerate. I do 
not understand how somebody threatens to audit somebody and 
they are not fired on the spot. I mean, I just do not get it.
    Let me ask, since we have the Deputy Inspector General and 
we have the Assistant Inspector General, in the last 10 years, 
how many people has the Internal Revenue Service actually 
fired? You have 100,000 employees. So if we were looking at the 
private sector, I would say you would have maybe 1 out of 100, 
maybe 1,000. How many people have been fired by the Internal 
Revenue Service in the last 10 years?
    Mr. Calahan. Senator, I do not think we know that, but we 
would be happy to get that for you for the record.
    Senator Gramm. Well, I would like to know. This committee 
has raised this question now many times. How many people in the 
last 10 years have been fired as a result of wrongdoing and how 
many people in the last 5 years have been fired as a result of 
wrongdoing?
    We would like the actual number of people, not who have 
retired or that have come back to the system after somebody 
raised an objection to what they have done. But to how many 
people have you actually said, you are fired, get out of here? 
We would like to know that number. It seems to me that that 
number is something we ought to be comparing to other 
government agencies and it is a number we ought to be comparing 
to the private sector.
    I think, Mr. Chairman, these are very important hearings. I 
think we have taken a major step toward dealing with abuse, but 
I think there is this final area that is virtually untouched by 
our legislation, and that is our failure to separate out these 
massive powers as prosecutor, judge, jury, investigator all 
wrapped in one that the Internal Revenue Service has. It is 
this power that is the problem. It is not the people, in my 
opinion.
    Having all the sociology professors in the country come in 
and give sensitivity training is not going to solve this 
problem. The problem is, power corrupts. People have got too 
much power. It seems to me that maybe this ought to be phase 
two of what we should be doing, is looking at trying to find a 
system of checks and balances.
    And I know you guys have a terrible job sitting here, 
people yelling at you and trying to answer questions that just, 
honest to God, cannot be answered. But it is clear that these 
abuses are occurring and nobody is doing anything about it. I 
think that is obvious.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Gramm.
    Senator Moynihan. Could I just say to my colleague from 
Texas, we do have a table here that has been provided to us on 
involuntary separations. They seem to range from, in fiscal 
1995 it was 902 out of a total of employees of 126,000. Then it 
went to 1,256 in fiscal 1996 then up to 1,856 in fiscal 1997. 
Perhaps you could help us with that, because the Senator raises 
a perfectly straightforward question.
    Mr. Calahan. We would be happy to do that.
    The Chairman. Next, we will call on Senator Moseley-Braun.

 OPENING STATEMENT OF HON. CAROL MOSELEY-BRAUN, A U.S. SENATOR 
                         FROM ILLINOIS

    Senator Moseley-Braun. Thank you very much, Mr. Chairman.
    To my colleague, I think one of the most important checks 
that we have, because I think we are all in this together and 
looking for some results here, is these women who have come 
forward, the whistleblowers on the system, because when you 
have employees inside of the agency who are willing to step up, 
to put themselves at risk to take on the challenge of being a 
tattletale, we used to call them in school. That takes a lot of 
courage. It takes an awful lot of courage. When I first came in 
I recognized Ms. Long from the last hearings.
    Frankly, in the testimony I thought the response regarding 
her testimony was a little oblique in that it says, ``It cannot 
be concluded that IRS managers do not harass or retaliate 
against employees in the Houston district or other districts,'' 
and that was in response to Ms. Long's testimony about 
harassment and retaliation and people getting back at employees 
who had come forward.
    Ms. DesJardins essentially testified the same way in 
regards to retaliation and harassment inside of the agency, and 
that employees who come forward, the whistleblowers, the people 
who resist the corruption in the culture, get punished by their 
colleagues.
    That is really awful because I think, instead of those 
employees being punished, they ought to be applauded and 
encouraged, or even promoted, for what they are doing because I 
think that whistleblowers, people who are inside the agencies, 
perform an important function in that they provide an important 
internal check on the abuse of power that Senator Gramm was 
talking about on the mistreatment of other taxpayers and on 
conduct unbecoming a public servant.
    So I just have two congratulations. One, I want to 
congratulate the Chairman for this second set of hearings. I 
know, Mr. Chairman, it was controversial to go to the second 
set of hearings, but I think it is important that we perform 
our role in providing oversight and providing a safety valve on 
the agencies. I think I want to congratulate also these women 
and the other employees who have come forward and helped us 
with this whole set of examinations of the agency, because it 
is not a negative thing. It is not a bad thing for the service.
    I was looking at a quote here, and I am going to quote it 
before I go on and ask my question, from the head of the 
Intelligence Unit, Mr. Elmer Irey, who back in 1919 said, 
``When engaged in common endeavor, a group no less an 
individual needs occasionally, for the good of its soul and in 
the interest of its efficiency, to review and appraise its 
origin, its objectives, and its progress and development.
    So I think really that this oversight is that kind of a 
review that can be good for the service if people will not just 
resist it, but rather will kind of go with it and give 
themselves over to it and understand the message that is being 
communicated here.
    I think a major part of the communication here has to do 
with what it is we do to provide the checks and balances that 
Senator Gramm is talking about. While on the one hand this 
conversation that we are having and the sunshine that it gives 
to the operations of the service will help and we have a bill 
in place which will hopefully take us a long way and help, at 
the same time I think I still have a concern regarding what, if 
anything, is being done to protect those employees who want to 
help the agency to do the right thing.
    What steps are being taken right now? There is an ongoing 
internal change directive by Mr. Rossotti in terms of 
reinventing the agency and changing the culture of the agency, 
but what steps are currently being taken, Mr. Patsalides, to 
protect those employees who have come forward, those, to use 
the term, whistleblowers, tattletales, whatever you want to 
call them, the people who have, I think, helped to inject this 
very important element of internal sunshine on the operations 
of the agency?
    What is being done to protect them in the first instance, 
and second, what additional steps or what steps would you 
recommend to protect employees who are, again, trying to get 
the agency to do the right thing, who are prepared to step 
forward, again, in very courageous ways to take on the 
challenge of restoring the respect that the agency has got to 
have if it is going to function appropriately?
    Mr. Calahan. Senator, if I may respond to at least part of 
that. The Inspector General Act allows for employees to make 
disclosures of fraud, waste, and mismanagement to the Inspector 
General either anonymously or with confidentiality requested. 
If they request confidentiality, we do not provide their names 
to anyone and it stays with us.
    We certainly would follow up with any allegations of 
reprisal taken against employees that provide us information. 
However, the Office of Special Counsel has primary jurisdiction 
in that area.
    Senator Moseley-Braun. Mr. Patsalides, your written 
testimony does not say that. Maybe I gave too little of the 
sentence. It says, ``In addition, Long alleged that IRS 
managers harass and retaliate against IRS employees.'' It goes 
on, ``Although the report does not substantiate her specific 
allegations of harassment, it cannot be concluded that IRS 
managers do not harass or retaliate against employees.''
    Mr. Patsalides. That is correct. As a result of Jennifer 
Long's testimony and our investigation, we have gained 
sufficient information to initiate, I think it is, up to six 
additional investigations right now.
    Senator Moseley-Braun. Investigations of managers harassing 
employees?
    Mr. Patsalides. Allegations that have been brought to our 
attention in connection with the Houston district.
    Senator Moseley-Braun. All right. So am I to discern from 
your answer that you think the current procedures that are in 
place to deal with harassment and retaliation are adequate or 
would you recommend that there be additional procedures?
    Mr. Patsalides. I think it would be premature now for us to 
make any recommendations, and that is not normally what we do. 
We investigate the facts and then provide our report of 
investigation with the facts. However, there are ongoing 
investigations and some do include those type of allegations.
    Senator Moseley-Braun. All right. As to the ongoing 
investigations, and again, looking at Mr. Rossotti's internal 
review of the service, has your office or any other office made 
any recommendations to Mr. Rossotti regarding beefing up the 
procedures for protecting whistleblowers? Have you paid any 
attention?
    Mr. Patsalides. Yes, ma'am. One of the things that was 
brought out in this investigation was that there were certain 
potential systemic weaknesses. Our normal process is to submit 
a management implication report to the Commissioner identifying 
those systemic weaknesses, which include the potential for 
disclosing complainants' names.
    Senator Moseley-Braun. Well, just disclosing complainants' 
names--and I do not mean to beat this horse, but it is a line 
that follows. I am not just talking about disclosing the 
complainants' names, whether disclosed officially or not, if an 
employee comes forward and that individual winds up being 
harassed and retaliated against, that is the conduct that I 
think we have to protect against. I guess, again, I do not know 
why we are having such difficulty communicating here.
    Are there procedures in place to protect the whistleblowers 
or, alternatively, have you made any further recommendations to 
protect whistleblowers, given that the two that we have here 
are saying that the result of their action was to be harassed 
and retaliated against?
    Mr. Patsalides. The procedures in place to protect 
whistleblowers fall under the jurisdiction of the Office of 
Special Counsel. That is why I am having difficulty answering 
that question. However, from a personal standpoint, we want to 
do everything we can to protect whistleblowers from 
retaliation. One of the investigations we are conducting now, 
at the request of Senator Nickles, is an employee retaliation 
investigation.
    Senator Moseley-Braun. All right. I see my time is up. But 
Ms. DesJardins, would you take a stab at that. Would you have 
some recommendations in terms of what can or should be done to 
protect whistleblowers?
    Ms. DesJardins. I personally think that the Office of 
Special Counsel needs to become more involved and not view each 
case as a case filed by a disgruntled employee and have an 
attempt to close it as quickly as possible.
    I think that when the allegations are substantiated, the 
Special Counsel should become more involved in ensuring that 
the appropriate actions are taken, which would include the 
protection of the whistleblower.
    Senator Moseley-Braun. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. I would say to the distinguished Senator that 
retaliation is a very, very serious question here and one that 
I think we are all going to have to work hard at finding a 
solution for. Part of the answer, I think, has to be the 
ongoing oversight by this committee because you need somebody 
outside as well as inside reviewing what is happening.
    We will now call on Senator Hatch, which will bring this 
portion of the hearing to an end.
    Senator Hatch?
    Senator Hatch. Thank you, Mr. Chairman. I will not be long. 
I want to compliment you and the Ranking Member for your 
continuation of these hearings, and I want to thank each of you 
as witnesses for appearing here today and being as candid as 
you have been.
    I want to just follow up a little bit on our Leader Senator 
Lott's question because, Ms. DesJardins, you said in your 
testimony that many of the investigations ended up in the 
Deputy Commissioner's Office for a length of time with little 
or no action taken. Senator Lott, I think, brought that out 
well.
    But first tell me what, if any, is the current procedure or 
procedures once an investigation gets to the Deputy 
Commissioner; do we have any procedures?
    Ms. DesJardins. Yes, sir, we do.
    Senator Hatch. And what are they?
    Ms. DesJardins. Once the inquiry or the investigation has 
come back in, normally after it comes back in from the field or 
the region where it has been looked into the Regional 
Commissioner will make recommendations as to what type of 
action should take place.
    When I receive the report I would do an analysis of the 
report and all of the material that was included in the IG's 
report, and I would then in turn summarize that and make a 
recommendation to the Deputy Commissioner. Sometimes the 
recommendation was consistent with what was recommended by the 
Regional Commissioner, other times it was not.
    Senator Hatch. That is it, and then it is up to him to just 
make a determination based upon your recommendation and the 
materials that you submit to him.
    Ms. DesJardins. Yes, sir.
    Senator Hatch. Can you recommend for us ways to prevent 
cases sitting for a prolonged period of time on someone's desk 
without any action? If you had the opportunity to really tell 
us what to do, what would we do?
    Ms. DesJardins. I am not really sure. I think many times 
you have an issue where an individual who is making the 
decision should really recuse himself from handling that 
action. I think that lots of times that is really the problem, 
that the person has an interest, personal friendship, or 
something like that with the individual.
    So for me, I found many times that because that recusal did 
not take place, that was the reason why the cases more or less 
laid around and did not have final action taken on them.
    Senator Hatch. Could I have any response from the other two 
witnesses on these questions that I have asked?
    Mr. Calahan. Senator, one thing that should be pointed out 
is that statistics are kept in terms of the aging of the laps 
of time for adjudicative decisions. Once an investigative case 
is provided to the IRS it goes into a system that keeps track 
of how old the case is. For example, we flag----
    Senator Hatch. Well, is there any printed record of that 
for us to see?
    Mr. Calahan. The statistics?
    Senator Hatch. Yes.
    Mr. Calahan. Sure.
    Senator Hatch. So we could see it.
    Mr. Calahan. In fact, our Office of Oversight, as Mr. 
Patsalides was describing earlier, is in the process of testing 
those numbers to make sure that they are correct, and we would 
be happy to provide that report to this committee when it is 
completed.
    Senator Hatch. I think that would be good. But could we 
have regular reports on how these things are handled and how 
delayed they are? I think this committee is interested, and our 
two leaders on this committee, are interested in the oversight 
functions of this committee. It seems to me, if we are having 
somebody's desk piled up with things that are not being 
handled, we ought to know about it.
    Do you care to say anything, Mr. Patsalides?
    Mr. Patsalides. No. I agree with that statement and I 
believe that more independent oversight of IRS is needed. The 
most important aspect is to increase the accountability of 
managers.
    Senator Hatch. Well, my time is just about up, but let me 
just say this to you. I think almost every agency has some of 
these problems, but none of them, it seems to me, except the 
Justice Department perhaps, creates the concern on the part of 
our committees up here as much as yours and Justice.
    We went so far as to have an independent counsel statute in 
order to try to resolve conflict of interest problems and to 
push things ahead and to make sure that there is no 
preferential treatment given to anybody under the law. Of 
course, as you know, that works and it does not work. Sometimes 
independent counsel are not requested when they should be, 
sometimes they are requested when they should not. We find that 
working and not working.
    I guess one of the things I would like to have you stop and 
consider, since you are as frustrated as we are on some of 
these issues, is how might we work this with the IRS, because 
it is apparent that there is a good old boy system, it is 
apparent that there are people who are afraid to take on their 
colleagues, it is apparent that whistleblowers are being 
abused. I thought Senator Lott's long list of criminal activity 
that he described was pretty significant. Frankly, these 
hearings are pointing it out to the whole of America.
    Let me just close with this. Throughout the debate on IRS 
reform we have heard stories of abuse from IRS officials and 
employees. Because there have been some bad apples in the 
barrel, it would be easy to give the picture that all IRS 
employees are like that and they are somehow mistreating the 
taxpayers they serve. Of course, that is not true. The vast 
majority of IRS employees are doing a good job.
    But we hear enough of these complaints and enough of these 
horror stories that literally we want to do something about it 
and we need your help to help us to know what to do. So I 
personally have appreciated your testimony here today and look 
forward to any suggestions that you would care to make to the 
committee, or to any of us individually.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Hatch.
    That will conclude the questioning of these witnesses.
    Senator Kerrey. Mr. Chairman?
    The Chairman. I would say to the Senator from Nebraska, it 
is our intent to leave the panel open so that written questions 
can be submitted.
    Senator Kerrey. Well, I would respectfully ask, I have 
waited here and I abided by the 3-minute time limit, both in my 
opening statement and in my first round of questioning, and 
that gives me 6 minutes total. I would just respectfully ask 
that I be allowed to ask some additional follow up.
    The Chairman. How long would the Senator need?
    Senator Kerrey. I can be over in three minutes, as you 
originally spoke of.
    The Chairman. All right. Let us go ahead. We will give you 
the three minutes.
    Senator Kerrey. I thank the Chair.
    Mr. Chairman, and I say to the panel, there is a pattern 
that we have heard of personnel actions. There is another 
pattern that concerns me, and that is, it seems like every half 
a dozen years or so Congress gets outraged about what the IRS 
is doing and then issues press releases, and so forth.
    This time around we have got a piece of legislation that 
has advanced out of this committee. I say that because from 
1988 to 1993, the House Government Operations Committee held 4 
or 5 years' worth of hearings leading to a report, leading to 
Commissioner Peterson saying, here is the action we are going 
to take.
    I suspect during those hearings there were lots of members 
who were expressing outrage about what is going on, and we have 
got to do something about it, listening to the stories and 
saying, by gosh, we are going to do something about it. It is a 
very effective thing for us to do, to express our outrage. 
Nobody emotes better than a member of Congress when they are 
dealing with somebody who has been abused by the IRS. I mean, I 
can give you my maximum amount of sympathy.
    The question is, are we going to change the law? I would 
ask you to look at the law. And again, you do not have the 
advantage of holding the law, but one of the things the House 
did, and this committee strengthened, was the authority under 
Title 5 of the Personnel Code to be able to take personnel 
action, additional flexibilities in providing awards, 
additional flexibilities in being able to manage the agency, 
but also very specifically the bill requires the IRS to 
terminate an employee for certain proven violations committed 
by the employee in connection with the performance of official 
duties.
    There are six of them in total, and number six is 
violations of Internal Revenue Code, Treasury regulations, or 
policy of the IRS, including the Internal Revenue Manual for 
the purpose of retaliating or harassing a taxpayer or other IRS 
employee.
    We have got a list of things in this piece of legislation, 
this proposed change in the law, that would on the one hand 
give the Commissioner the authority to manage in an affirmative 
way because if you have 100,000 employees, 95,000 of them are 
going to respond to positive incentives and not threats. So 
give the Commissioner the authority to be able to manage the 
agency, but make it very explicit.
    One of the things you are telling us here is, all you do is 
investigate and present it to the Department of Justice. This 
would change the law, saying that if an IRS employee violates 
the Internal Revenue Service Code and retaliates or harasses a 
taxpayer or another IRS employee, either one, that is grounds 
for immediate termination.
    Now, does that not solve the problem that you all have 
brought to us here this morning? So if we change the law to 
give the Commissioner that kind of authority, that should solve 
this problem.
    At least, whenever this cycle repeats itself a half a dozen 
years from now that will not be one of the things that we will 
be expressing our outrage about and issuing our press releases 
and trying to raise money around, right? I mean, will it not 
solve the problem, is the question I am trying to ask? It had 
better be yes, for God's sakes.
    Mr. Calahan. I am not an expert in personnel law.
    Senator Kerrey. If it is no, tell me. Again, it is painful 
to go through these things, especially when you look at the 
historical record. Congress has done this before.
    There are Associated Press stories that show how these 
hearings are being used by some to raise money. I am outraged. 
I am going to do something about it. Fine. So run your mouth, 
run your press releases, put out your fundraising letters, but 
now it is time to change the law.
    I hope that you will examine this law. All of you have 
expressed a considerable amount of patience and courage to come 
before this committee, but we are talking about changing the 
law.
    Remember, IRS has 535 members of its board of directors, it 
is called the Congress. Every single witness that we heard 
before the Restructuring Commission would say that Congress is 
the biggest part of the problem.
    But I will guarantee you, any hearing where we are going to 
express outrage, we are not going to say we are outraged about 
our own behavior, we are going to be outraged by your behavior.
    I hope that you will help us as we move down the road to 
finally changing the law, examine the changes that we are 
proposing, and ask the question if these changes are made. One 
of the changes in the Inspector General's Office is to ship 900 
of your employees over to Treasury, leaving 300 in your shop.
    You need to look at that language and give us a real, 
honest evaluation of whether or not that is going to make it 
better or if it is going to make it worse, and help us write 
the law so that it improves your operation and decreases the 
number of problems that we hear on a repetitive basis before 
the Congress.
    Mr. Patsalides. Senator Kerrey, I just want to make a 
clarification. We have a total of only 33 criminal 
investigators on our staff right now. We are not the Office of 
the Chief Inspector, who has a staff of approximately 1,200, 
not criminal investigator staff. I think approximately one-half 
of that is the criminal investigators.
    Senator Kerrey. I just use that as exhibit A. You have 
underscored my own ignorance, which is not unusual or atypical. 
I mean, that is the sort of response that we need in order, 
when we all stand down on the floor of the Senate.
    My guess is, it is going to be 100 to nothing when this 
bill finally passes. It is going to be 100 to nothing, we are 
all going to put our press releases out, and we are all going 
to go back to our town hall meetings and say we solved the 
problem. Help us make certain that we do as good a job as 
possible in solving this problem.
    Mr. Patsalides. Yes, sir. Thank you.
    The Chairman. I would just make the observation that the 
section quoted obviously is an attempt to address the problem 
of retaliation. It is not only a question of the law, of 
course, it is a question of it being enforced properly. It has 
to be enforced properly and not by a double standard, which we 
hear so much about today. So, there are those problems.
    Well, I want to thank you for being here today. I know two 
of you feel you come here at great personal risk, and we find 
your testimony was very helpful. We would appreciate any 
further comments you have to make.
    I would point out for the benefit of the committee that we 
have had requests from members who wish to address further 
questions to the witnesses, so the record will be kept open. 
Further questions can be provided on the panels today until 
5:00 today, and we would ask the witnesses to respond by 
Thursday.
     Again, I want to thank you very much for being here, as I 
say, I know at great personal risk and sacrifice. We could not 
hold the hearings if it were not for people like you who are 
willing to testify.
    Thank you very much.
    Mr. Patsalides. Thank you, Mr. Chairman.
    Mr. Calahan. Thank you.
    Ms. DesJardins. Thank you.
    The Chairman. I would now like to welcome the members of 
our second panel. As practitioners of the law, these gentlemen 
appear before us today to tell us of the events they have both 
witnessed and experienced involving the IRS, and offer this 
committee their insights regarding resolution of the many 
problems they will identify.
    The first witness is Mr. Robert E. Davis, who is an 
attorney with 40 years' experience with the firm of Hughes, 
Lewes of Dallas, Texas. During the years 1982 and 1983, Mr. 
Davis served as Deputy Assistant Attorney General in the Tax 
Division of the Department of Justice. His expertise is in 
white collar crime, Federal tax controversies, and civil 
litigation.
    The second witness is Mr. Jay Earl Epstein, who is a lawyer 
with 35 years' experience and member of the firm Epstein, 
Shapiro & Epstein of Philadelphia, Pennsylvania. Mr. Epstein's 
expertise is in tax, corporate real estate, and probate law.
    Third, is Mr. Philip MacNaughton who has been in practice 
since 1976. A portion of his practice is dedicated to 
representing taxpayers before the IRS in tax controversies and 
collection matters.
    Fourth, Mr. Cody Mayo is currently Assistant District 
Attorney of the Caddo Parish in Louisiana. He is also a 
certified public accountant with a law practice in Shreveport. 
Mr. Mayo specializes in tax law and white collar crime.
    Gentlemen, if you would please rise and raise your right 
hand.
    [Whereupon, the four witnesses were duly sworn.]
    The Chairman. Thank you. Please be seated.
    We will start with you, Mr. Davis.

       STATEMENT OF ROBERT E. DAVIS, ATTORNEY, DALLAS, TX

    Mr. Davis. Thank you, Mr. Chairman and honorable members of 
the committee. My name is Bob Davis. I am an attorney. I have 
been practicing law in Dallas, Texas for about 40 years.
    During most of those years, the greatest part of my 
practice has been devoted to representing taxpayers in 
connection with civil and criminal tax litigation and 
controversies with the Internal Revenue Service and with the 
Department of Justice.
    During the years 1982 and 1983, however, I served as Deputy 
Assistant Attorney General in the Tax Division of the 
Department of Justice in Washington, DC. I was then responsible 
for overseeing the functions of the Criminal Section and the 
Review Section of the Tax Division.
    I think it would be fair to say that I have had as much 
experience, probably, as any practitioner who has been 
representing taxpayers over the last 40 years.
    Tax collecting, as we all know, is an unpopular calling. 
Indeed, from biblical times to the present, there have been 
few, or no, warmly regarded tax collectors, perhaps with the 
exception of Senator Conrad. Obviously he is warmly regarded.
    But most of the employees of the Internal Revenue Service, 
as has been noted by the Chair and other members of this 
committee, are honorable, sincere, hardworking people doing 
their best to administer a very complex set of laws which were 
enacted by this Congress.
    Notwithstanding those positive things, I think it is fair 
to say, in my personal experience, that all is not well with 
our tax system. I believe the Internal Revenue Service has, to 
a significant extent, strayed from the proper path; second, 
that there is excessive use and misuse of intrusive 
investigative techniques by the Criminal Investigation Division 
of the Internal Revenue Service; and third, there are sometimes 
serious integrity issues within the agency, but that the IRS 
Inspection Service is simply not up to the task of 
investigating and correcting IRS agent misconduct when it does 
occur.
    I would like to present my views on these subjects to the 
committee over the next several minutes, and then a 
supplemental written statement.
    Fifteen years ago when I was in the Tax Division, criminal 
tax enforcement practices were almost totally different than 
they are today. At that time, undercover investigative 
techniques were almost entirely unknown in criminal tax 
matters.
    At that time, search warrants were used in criminal tax 
cases only a dozen times in the course of an entire calendar 
year, and grand jury investigations were a rare exception and 
administrative investigations were the rule.
    Today, that has dramatically changed and the use of these 
much more intimidating and intrusive techniques is commonly 
encountered. For example, search warrants are executed in 
criminal tax investigations today some 20 times as frequently 
as they were then when I was in the Tax Division.
    It is not surprising that these changes have occurred, as 
the IRS CID has been increasingly used in the suppression of 
drug and organized criminal activity. Its special agents have 
learned the investigative techniques which are employed by the 
DEA, the FBI, and local law enforcement to deal with violent 
and dangerous criminals. These investigative strategies are 
then borrowed and used by IRS CID in routine criminal tax 
investigations of taxpayers who are neither violent nor 
dangerous.
    Many of us believe this is very bad tax enforcement policy. 
Today we see too many ``cowboy agents,'' as they are called, 
who are undisciplined, who are inadequately controlled, and who 
think that the end of putting away the bad guys justifies the 
means, that is, these intrusive, intimidating, and oppressive 
investigations.
    Senator Moynihan. Mr. Davis, you will recall that it was 
the IRS that finally nailed Al Capone.
    Mr. Davis. Absolutely. I do, indeed, Senator Moynihan. That 
has been mentioned repeatedly throughout the recent history of 
the Internal Revenue Service in justification of the use of 
these kinds of techniques. That is an important observation, 
and there is value in that function. The problem is, we all are 
comfortable with the concept of using those kinds of techniques 
in dealing with violent criminals, and Mr. Capone and his ilk 
were in that class.
    What troubles us, is are we equally wise to use those same 
strategies when we are dealing with a citizen who runs a little 
grocery store by the side of the road?
    Senator Moynihan. A fair and explicit question.
    Mr. Davis. Yes, sir. Indeed, it is. Thank you for raising 
that question.
    The example I would like to bring to you, if I may, from my 
own experience is as follows. In June of 1994, approximately 10 
IRS special agents appeared at a private residence at 7:30 in 
the morning. They knocked on the door, which roused the 
resident of the home from her bath. This resident, Sally, 
answered the door in her bathrobe. There were 10 IRS special 
agents in her yard and on her porch, one of whom presented a 
warrant to search her home.
    She was told that she could either leave her home or stay, 
but if she left she would not be permitted to return until the 
search had been concluded. She chose to stay and was confined 
to one bedroom. The remaining agents searched her home for 
about 8 hours and then they left. The only property which was 
seized and taken by them as evidence was 86 old family 
photographs.
    Have you a question, Senator Moynihan, or are you just 
reacting to what I am describing?
    Senator Moynihan. I am listening.
    Mr. Davis. Thank you.
    Those 86 family photographs, many were taken at Christmas 
time and showed the family around the Christmas tree. Later, 
Sally discovered the real reason for that invasive search. It 
was not to seize contraband, or weapons, or drugs, or evidence 
of any crime.
    Instead, the agents had brought with them a furniture 
appraiser who went from room to room, valuing the beds, the 
sofas, the chairs, the tables, and other personal effects which 
had been left in the house by her grandmother, who had passed 
away a few years earlier.
    The IRS believed that Sally's father, the executor, had 
under-valued the furniture on her grandmother's estate tax 
return. Sally was not a suspect or in any way involved in the 
estate tax matters, and her father did not live in the home 
with her. The criminal investigation of Sally's father which 
was then pending was later abandoned by the Internal Revenue 
Service.
    The extravagant use of agent time in preparing for and 
executing this raid on the home of an admittedly innocent party 
was utterly needless. A simple telephone call to Sally would 
have resulted in consent or permission for the appraiser to 
enter the house and inspect the furniture.
    It is obvious in this context that intimidating and 
intrusive searches and seizes are simply not necessary to 
develop a valuation case involving household furniture. In my 
view, that search and seizure operation never should have been 
authorized or executed. Several years later, fairly recently, I 
demanded the return of the 86 family photographs and we finally 
got them back.
    I believe, and I think others may join me in this belief, 
that kicking down doors, wearing body armor, and carrying 
automatic weapons and bursting into people's homes with large 
raiding parties are techniques which should be used, if used at 
all, in investigations of dangerous and violent criminals.
    The IRS CID should do what it was created to do, in my 
view, and that is to enforce the Internal Revenue laws and 
largely leave violent and dangerous criminal suppression to the 
DEA, FBI, and local law enforcement authorities.
    There should be exceptions to the rule in the case of 
violent and dangerous criminals who threaten the public safety 
like Al Capone, but those exceptions should be limited and the 
strategies used in those cases should not be imported into the 
other class of cases which are their chief work.
    I would also like to speak briefly on the subject of 
undercover operations. Some of us also believe that the deceit 
and the misrepresentation inherent in undercover investigations 
and sting operations have no proper place in routine criminal 
tax investigations.
    Successful criminal tax prosecutions have long been made 
without the aid of these undercover techniques. Indeed, they 
are used in fewer than 3 percent of the total cases, according 
to IRS view, which leaves it pretty clear that one can make 97 
percent of these cases--and I suspect a much greater 
percentage--without the use of these techniques.
    I believe the IRS does serious damage to its image, its 
relationship with the public, when it lies to and deceives 
taxpayers in routine criminal tax investigations.
    I would close with this thought, if I may. There is, I 
believe, a pervasive national frustration with our current 
Federal income tax system which is far too complex and far too 
unintelligible to be fairly and uniformly administered by the 
IRS, or, indeed, be complied with by the great majority of our 
taxpayers.
    I would, therefore, respectfully urge--and I heard this 
from other voices today--that the time is here for some kind of 
substantial simplification of the Internal Revenue laws which 
the Internal Revenue Service must struggle to administer and 
the taxpayers must equally struggle to comply with.
    Thank you very much.
    The Chairman. Well, thank you, Mr. Davis. As you have 
heard, we feel very strongly about the need of reform and 
simplification.
    Just let me say, as one citizen, I am outraged that any of 
our citizens would have to undergo and endure the kind of 
anguish that is caused by such intrusive practices. It is a 
serious matter that we are looking at very carefully.
    Mr. Epstein?

            STATEMENT OF EARL J. EPSTEIN, ATTORNEY,

                        PHILADELPHIA, PA

    Mr. Epstein. Thank you, Mr. Chairman.
    My name is Earl Epstein and I am a practicing lawyer, a 
member of a small firm in Philadelphia, and I appreciate the 
opportunity to testify here today.
    For the past 35 years, after completing a clerkship at the 
U.S. Tax Court, I have been practicing tax law in Philadelphia. 
During that time, I have represented many taxpayers before the 
Internal Revenue Service.
    It may sound like I am repeating what a lot of other people 
have said here today, but it is the truth that most of the 
people that I have worked with, from the Commissioner and the 
Chief Counsel at the top, all the way down the line, have been 
terrific people, hardworking, honest people, and they do their 
best and it is a difficult system. I guess I should say, some 
of my best friends work for the Internal Revenue Service.
    But when you get down to the Collection Division, you have 
a whole different situation because it is clear to me that 
harassment and overreaching by the Collection Division is not 
isolated, but is, indeed, a practice.
    It is my experience that collection agents treat taxpayers 
as though they were deadbeats, people intent on cheating the 
government. For some reason which I have never understood, they 
also treat the taxpayers' representatives as though they were 
just accomplices in that effort.
    Of course, that perception is an unfair one. For the most 
part, I found that people who cannot pay their taxes when they 
are due are often caught in circumstances which are not of 
their own making.
    Sometimes they are innocent women caught in a situation 
created by their husbands. Some have been audited and found to 
have made an honest mistake on their tax return, or maybe the 
Tax Court has disagreed with a position.
    Whatever the reason, they find that they do not have the 
cash with which to pay and, in most cases, it is the interest 
and penalties which are added on to the tax which cause their 
downfall. Only rarely have I found taxpayers who have the money 
and just do not want to pay.
    I would like to give you just a few quick examples of some 
of the cases in which I have been involved with over the years. 
Just recently, I came to represent a taxpayer who had directed 
his previous attorney to make a $30,000 payment to a collection 
agent on the promise by the agent that the payment would be 
credited to his personal liability and not to a corporate 
liability for which he was not responsible.
    When the attorney made the payment, in fact, the $30,000 
was credited to the corporate liability. When I got into the 
case and I challenged the agent, he just laughed at me and he 
said, well, did your client get that promise in writing? And 
that was the end of the story. My client had to pay the $30,000 
again, which he borrowed from his father.
    A few months ago, the Collection Division placed a lien 
against the joint account of a husband and wife in Tennessee 
when the liability for the tax was only the husband.
    I brought the agent's attention to a Tennessee Supreme 
Court case which was controlling which made the lien invalid 
against the joint bank account, but the result was that the 
agent would not listen and the funds which the wife had 
borrowed from her father to pay for food for her children was 
taken by the Internal Revenue Service. The amount that was 
involved just did not justify the litigation that would be 
required to recover the funds.
    A number of years ago, a woman came to me with a story. She 
said her beauty shop had been sold by a collection agent at 
auction, even though she had displayed a canceled check for 
$175 showing that the tax had been paid. The agent would not 
look at the check, refused to listen, and went ahead and 
conducted a public auction in front of her friends and her 
family. She came to me afterwards and I started to check into 
it.
    What I discovered was that the Internal Revenue Service had 
made a computer error. They had debited the tax twice and only 
given her one credit for the payment, so that when they added 
up the totals before this auction it actually showed the tax 
was due, and it was not.
    I went to look at what I could do about it. Well, the 
Federal Tort Claims Act prevents you from bringing an action 
against the government for this kind of a situation. The most I 
was able to do for her was to get a private bill introduced 
into the House which would have allowed her to sue for 
compensation, but that, of course, died in committee. It was 
just a little thing, and that was the end of her. The only 
thing she had to show for it was that she could show her 
friends the printed copy of the House bill.
    During my representation of a taxpayer who had been 
harassed by the IRS over a period of years, I attempted to 
settle his case with the Collection Division. We filed the Form 
433, which is a list of his assets and liabilities, and that is 
signed under the penalties of perjury.
    The next thing we knew is that an agent, one that I had 
dealt with before, had fought with before, and had problems 
with before, got into the case and he started a criminal 
investigation. This went on for some time, with my taxpayer 
spending a lot of money on representation.
    Finally, we caused a hearing to be held in the U.S. 
District Court to quash a subpoena that was issued by the IRS. 
At that point when the District Court judge heard the story, 
she turned to the agent and said, what is this all about; what 
are you looking for? Sheepishly, he admitted that there were 
two stocks that were in the name of the taxpayer which were not 
listed on the form.
    The taxpayer leaned over to me and whispered, they are in 
custodian names for my children, they are not mine. I informed 
the court and the court said, fine. Bring the certificates in 
and show them to me tomorrow morning. Then she turned to the 
agent and she said, I do not want you bothering these people. 
Stay away from them until we conclude this matter.
    At 7:00 the next morning I got a phone call from my client. 
That agent had been pounding on his mother's door, an 85-year-
old woman, demanding to be let into the garage to go through 
papers in the garage.
    Of course, I reported this to the court and of course the 
court chastised the agent. But I have to tell you that I had to 
deal with him again and again, and as far as I could tell 
nothing ever happened to him.
    A few years ago, a collection agent came to my office and 
asked to see me on a personal matter. My secretary came in and 
said, it is personal. I thought maybe he had a problem that he 
wanted to consult me with. When he got into my office, he 
demanded to see files of my client.
    I said, first of all, I have an attorney-client privilege 
and you know I am not going to show you the files. Second of 
all, why did you lie? Why did you tell my secretary it was a 
personal matter when you knew it was not? He looked at me and 
he kind of shrugged his shoulders. He said, well, sometimes we 
need to lie.
    I asked him to leave. He would not leave. I insisted that 
he leave. He did not leave. I finally--and this is the truth--
got up, I took him by the neck, and I marched him physically 
out of my office into the hallway to the elevators.
    I was so incensed that I wrote a letter to the Commissioner 
of Internal Revenue, whom I believe at that time was Roscoe 
Edgar. Two days later, I got a phone call from the 
Commissioner's office. They were horrified at the story. They 
promised to investigate.
    A couple of weeks later I got another call from the 
Commissioner's office saying they had investigated, they 
apologized, and that the agent would be disciplined, but please 
do not ask what the discipline is, and I left it at that.
    What that tells me is, when the Commissioner finds out 
about these things, when the hierarchy knows about these 
situations, they will do something and they will take action. I 
think the problem is, most of the time it does not get that 
high and the people down at the lower end in the Collection 
Division do not care and they protect each other. I think what 
you have is an institutional philosophy or personality where 
fear and intimidation is approved.
    My only suggestion to you, sir, and I know you have adopted 
some of the provisions of the Federal Debt Collection Practices 
Act, which I think is wonderful, but I think the key to this 
thing is that a right of an individual who is harmed to bring 
an action, not only against the institution, but against the 
individual.
    Senator Gramm talked about justice. As far as I am 
concerned, the only justice that we will ever get is if the 
individual and the institution is concerned about personal 
liability as a result of improper actions and violations.
    Thank you, sir. I would like to submit more detailed 
written comments, if you would.
    The Chairman. Thank you. Your full statement will be 
included as if read. You are correct, we have incorporated the 
standards established by the Fair Debt Collection Practices 
Act, but will look further at your suggestion.
    Senator Moynihan. But we have not included the personal 
liability.
    The Chairman. No, we have not, so we will take a careful 
look at that.
    Mr. MacNaughton?

     STATEMENT OF PHILIP MACNAUGHTON, ATTORNEY, HOUSTON, TX

    Mr. MacNaughton. Thank you, Mr. Chairman.
    My name is Phil MacNaughton. I am a lawyer with offices in 
Houston and my practice does include representing taxpayers 
before Internal Revenue in tax controversies and some 
collection matters.
    The Internal Revenue Service has claimed that its officers 
are trying to be fair with taxpayers and that the occasional 
horror stories represent aberrant situations. I would like to 
tell you about one IRS revenue officer whose abusive actions 
may have literally hounded a Houston taxpayer to death.
    In 1995, a CPA referred to me a 61-year-old swimming pool 
designer who was being pursued then by tax collectors in 
connection with possible assessment of 941 and payroll taxes. 
Although ill with heart disease and cancer, the man was still 
working each day and he was supporting himself and his family.
    The first thing I did was contact the revenue officer, 
determined what information he wanted. I provided it. I also 
sent to him a letter that detailed the taxpayer's fragile 
medical condition and I asked him to route all communication 
through me.
    In mid-1995, my office filed on behalf of that client a 
written offer to compromise the taxes. The Internal Revenue 
Manual has written procedures governing the offer and 
compromise process. Those procedures include statements that 
the collection activity shall cease during the pendency of a 
good-faith offer and compromise. They get more detailed than 
that, but that is the general rule.
    Despite that, though, the revenue officer continued his 
collection activities in this case despite continued objections 
by me. I advised the revenue officer that these collection 
efforts were in violation of written IRS procedures and that 
they also, more importantly, were a threat to the taxpayer's 
life because he did suffer from heart disease, he had 
experienced, I think, three heart attacks by then, and he had 
reported to me that the IRS collection actions were terrifying 
to him.
    In response, that revenue officer typed up a summons, 
personally, he told me, ordering the taxpayer to appear before 
him for face-to-face interrogation, and then personally drove 
that summons to the taxpayer's house and served it on his son 
when he was not there.
    My client called me, clearly shaken. I called the revenue 
officer and asked him to provide to me any questions to which 
he wanted answers, but he told me that what he really wanted, 
and intended to get, was a personal confrontation between 
himself and my client.
    I asked him why and he was simply silent. This was a phone 
conversation and, for perhaps 15 seconds, there was dead 
silence. I reminded the revenue officer that my client was ill 
with heart disease and cancer and should not be subjected to 
the stress of face-to-face interrogation. He responded then 
with derisive laughter.
    I then contacted his supervisor, explained the situation, 
and asked for her to stop the harassment. But she refused, 
saying only that she, in her words, ``stood behind her revenue 
officers.'' I asked her just to reassign the case to a 
different RO, but she declined to do that. I then contacted the 
Chief of Collections and asked him to stop the harassment, but 
he also declined.
    Next, I contacted the Problem Resolution Office in Houston 
and requested what is called a taxpayer assistance order to 
stop the harassment. In support of that request, with it, I 
faxed a copy of a letter I had obtained from the taxpayer's 
physician.
    The letter stated that the taxpayer was, in the physician's 
words, ``severely impaired and unable to withstand stressful 
situations because of his severe heart failure and cancer.''
    The Problem Resolution Office declined to issue the TAO 
because there was ``no significant hardship,'' although 
privately the personnel there acknowledged that they knew this 
officer was someone they felt was mean.
    The IRS continued its collection actions. In late October 
of 1995, my client received a notice of intent to levy. Ashen-
faced and visibly distressed, he hand-delivered the letter to 
me that same day. Two days later, he died from heart failure. 
He was then 61 years old, and is survived by his wife and four 
children.
    I provided that information to the Treasury Department and 
asked them to investigate. The Regional Inspector General for 
Investigations, Southern Region, concluded that, ``These issues 
are best addressed by the agency involved,'' and sent the file 
back to IRS.
    IRS then sent me a letter which claimed to report the 
results of the investigation. IRS's investigation consisted 
entirely of accepting everything said by the revenue officer 
whose behavior was in question as gospel. Not surprisingly, the 
IRS came to the conclusion that the revenue officer's actions 
were, in their words, ``taken in accordance with agency 
procedures.''
    I do not think anyone can be certain that that RO's actions 
were the proximate cause of that taxpayer's death. But what is 
clear to me is that that officer demonstrated a callous 
disregard for a taxpayer's life, that his behavior was condoned 
specifically by his supervisor, it was permitted by the Chief 
of Collections, it was not stopped by the Problem Resolution 
Office, and it was, in my opinion, not adequately handled by 
Treasury or by the IRS when it was brought to their attention.
    IRS abuse is not a series of isolated events. It is my 
experience that IRS culture increasingly permits, and even 
encourages, taxpayer abuse. Many IRS collection personnel 
regularly ignore written IRS rules and procedures, jumping from 
one excuse to another while they continue to harass taxpayers.
    I know of one IRS employee whose in-service instructor 
asked of the class how the IRS enforces tax compliance. After a 
moment of silence in the classroom, he wrote the word fear in 
letters that reached from the top of the blackboard to the 
bottom, and then left the room.
    I hope these hearings and the reform bills will help 
correct IRS's drift into becoming our National bully. But, if I 
may, while these reforms are welcomed they are only a temporary 
fix, in my opinion. The long-term solution will require 
replacing the income tax system as a method of financing our 
government.
    Even if Congress were able to stop all the abuse and to 
spend all of the money necessary to replace IRS's Model T 
computer system, we would still have a system that requires the 
deep intrusion of the Federal Government into the daily life of 
many, if not most, Americans, one that burdens us every year 
with the need to spend time and money filling out exquisitely 
complex forms.
    I have heard about flat taxes and I do not see how they 
solve this problem. I do some audit work too, and I have never 
had an audit where application of the correct brackets was even 
an issue, much less a problem.
    The problem is, income is just a complicated concept. If 
you tax income, you have to define it. All simplistic 
definitions will fail and you will have to come up with the 
complicated ones you have now, or something like it. Any tax on 
income, flat or graduated, is still going to require a 
complicated Tax Code and, therefore, a huge Federal 
bureaucracy.
    Still, the issue of the moment is taxpayer abuse at the 
hands of the IRS, and I thank you for refusing to accept it. 
Thank you.
    The Chairman. Well, I thank you for being here. You are 
right, your client's experience is not unique. This is a matter 
of great concern to me, as well as the question of simplicity 
of the tax system.
    Senator Moynihan. But Mr. Chairman, we are about to hear 
Mr. MacNaughton's solution and his time was up. If you have an 
answer, you would not mind putting it in writing, would you?
    The Chairman. We would be very happy to receive that.
    Mr. MacNaughton. Sir, if I may, my dad, who is 91 now, was 
a practicing accountant for some 65 years, and had a solution. 
He said, all we need is a simple law that would require all of 
the members of Congress and the President to prepare their own 
tax return without professional assistance. [Laughter.]
    The Chairman. That may well be the answer. Well, thank you, 
Mr. MacNaughton. The hour is growing late and we do have a 
policy luncheon, so I do want to proceed.
    Mr. Mayo?

   STATEMENT OF HON. RAY CODY MAYO, JR., ASSISTANT DISTRICT 
                   ATTORNEY, CADDO PARISH, LA

    Mr. Mayo. Thank you, Mr. Chairman.
    My name is Cody Mayo and I live and work in Shreveport, 
Louisiana. I graduated from Louisiana Tech University in 1976 
with a degree in accounting. I went to law school at Louisiana 
State University Law Center, and graduated in 1979.
    My first job was with the Caddo Parish District Attorney's 
Office as Assistant District Attorney, a position that I still 
hold this day, prosecuting only special white collar crime 
assignments.
    In early 1981, I took and passed the CPA exam and I 
continue to hold a license as a certified public accountant. I 
returned to school in 1981 and earned a Master of Laws and 
Taxation, graduating in 1982 from Southern Methodist University 
School of Law.
    Since that time, I have had an active tax practice, as well 
as holding a part-time position as Assistant District Attorney. 
I am board certified in taxation, I am board certified in 
estate planning and administration. I know almost everyone in 
the Shreveport office of the Internal Revenue Service on a 
first-name basis.
    I have represented taxpayer in disputes with the IRS most 
of my career. These taxpayers come to me in their times of 
crisis for help in dealing with a Tax Code that to them is 
confusing and insurmountably complex, while at the same time 
dealing with an agency that too often is overbearing and, in 
some cases, outright mean.
    I enjoy my work because it pits David against Goliath, the 
little guy in need of help against the most powerful of 
agencies. This, to me, is the ultimate calling of a lawyer, to 
help those people who would otherwise be helpless.
    It is because of this that I come before you now, because 
without lawyers who are willing to aid taxpayers against the 
Goliath of the IRS the individual taxpayer, the small 
businessman, the everyday go-to-work-pay-your-taxes American 
will be defenseless when caught in IRS's cross-hairs.
    Through many years of experience I have seen the mental 
anguish and depression suffered by taxpayers who are under 
audit or investigation. For many, it is the worst experience of 
their lives.
    Several of my clients have divorced because of the pressure 
of IRS audits or investigations. One of my clients, a very 
successful businessman, actually had a nervous breakdown 
because of the audit and was taken from his house in a 
straightjacket by deputy sheriffs.
    One of my clients put a .357 magnum to his head and blew 
his brains out just 4 days before his Tax Court case came to 
trial because he could not take the stress any longer.
    These experiences have shown me why it is important to have 
competent and zealous representation for the American taxpayer. 
Often I, as a tax attorney, am the only thing that stands 
between the defenseless taxpayer and the IRS juggernaut.
    As a lawyer who represents taxpayers I have had the 
opportunity and the pleasure, and in some cases unfortunately 
the misfortune, of working closely with agents and employees of 
the IRS. Over the years I have met and worked with and, in many 
cases, become friends with many fine employees of the IRS.
    While I am here to talk about the abuses that I have 
suffered and observed from certain members of the service, it 
would also be a disservice to paint with a broad brush and 
imply that all agents and employees of the IRS are bad people. 
Most of them are not. They are loyal public servants trying to 
do a most difficult and thankless job.
    While I have had my disagreements with many over taxpayer 
issues, I can say over the years I have come to respect many 
persons within the agency who serve it loyally. Many of these 
same people have become my friends and, in recent years, my 
clients.
    Too many of these loyal public servants have themselves 
become victim of the IRS culture and have been singled out for 
abuse and discrimination by an agency that, in all fairness, is 
out of control.
    There is a clear and present danger not only to taxpayers, 
but the agency's own employees have been and are being 
subjected to arbitrary and outrageous treatment at the hands of 
the IRS.
    My most immediate concern, however, is the agency now has 
gone beyond merely abusing taxpayers and many of its own loyal 
agents and employees. I, as a tax lawyer, am concerned that it 
appears that the agency has in some instances directly targeted 
lawyers who represent taxpayer in an effort to intimidate, 
harass, and I believe with an ultimate goal of making lawyers 
think twice about zealously representing taxpayers.
    I know this because I was, and still may be, a target of 
such agency attack. I have also witnesses firsthand the 
targeting and criminal investigation of another tax attorney 
over a matter that can best be characterized as a witch hunt.
    When the government became aware of the existence of 
evidence of this lawyer's unquestioned innocence, the 
government chose to abandon the investigation or risk exposure 
of its sinister motives.
    I have heard that many prominent tax attorneys are 
unwilling to appear before this committee because they are 
afraid of the retaliation of the kind I have suffered. Frankly, 
I am concerned that my appearance here could further enlarge 
the target on my back.
    In 1992 and 1993, I was representing a small business 
corporation and the two owners of the business in an audit 
proceeding of the corporation with the IRS. During the course 
of the audit, the local group manager for exam at the IRS 
became enraged when I refused to allow my clients to be 
interviewed by the IRS, asserting their constitutional 
privilege against self-incrimination.
    The agent thereupon directly threatened to subject me to 
the full wrath of the agency, stating, ``Maybe we just ought to 
audit you.'' Understandably, I was shocked at this direct 
threat of retaliation. Soon thereafter, I learned that this was 
not an idle threat.
    I was soon subject not only to an audit, but to an intense 
criminal investigation as well. My clients and business 
associates were bombarded with IRS summonses as part of the 
criminal investigation. My business and financial dealings were 
put under intense scrutiny.
    My confidential tax information was illegally disclosed, 
with the primary instigator of this vendetta openly bragging 
among other IRS employees of what he was doing and why, all 
because I stood up for my clients.
    After several grueling months of this torture, the IRS 
finally dropped the criminal investigation and issued a no 
change letter on my audit because, despite their best efforts, 
there was nothing to hang me.
    My paranoia had saved me. Because I had always feared that 
some day I might be a target, I have always overpaid my taxes. 
As the IRS's own records show, my overpayment was very 
substantial and the IRS knew it from the beginning.
    As stated earlier, having the IRS investigate your affairs 
and scrutinize you is, at best, uncomfortable, but when there 
is someone behind the investigation that is trying to carry out 
a personal vendetta, it can be downright scary. I frequently 
had to ask myself if it is worth it. I have my family to think 
about and I wonder, should I find something else to do, some 
other way to make a living?
    I can tell you from first-hand experience, when two IRS 
agents, one of them armed with a gun, corner you as you leave 
the District Attorney's Office where you work after following 
you there, produce their badges, and tell you that you are 
under criminal investigation for having failed to file your tax 
returns when the returns have, in fact, already been filed, it 
is very stressful and it makes you wonder what has happened to 
our country.
    Unfortunately, the abuse did not stop even after the 
termination of the criminal investigation and after the audit 
showed my return was 100 percent correct. I was due a 
substantial refund. A campaign of harassment continued for 
years.
    In June of 1996, I finally heard from other agency 
employees that the years of abuse I have suffered was a result 
of a vendetta by the group manager who was bent on punishing me 
for daring to stand up for my clients.
    I have now initiated a lawsuit in the U.S. District Court 
for the Western District of Louisiana seeking redress for what 
can only be described as outrageous conduct on the part of the 
IRS.
    The group manager violated existing Federal law prohibiting 
willful oppression of a taxpayer. This is a felony. The Justice 
Department has the responsibility to prosecute agency employees 
who wailfully oppress taxpayers or disclose taxpayer 
information, then must also defend the action of the same IRS 
employees in civil suits brought by oppressed taxpayers. 
Despite the lawyer jokes you have heard, this does require 
talking out of both sides of your mouth. What is wrong with 
this picture?
    The IRS has responded to my lawsuit, claiming, in essence, 
that even if these facts are true, it contends I have no 
recourse against the IRS, or even the responsible employee. The 
IRS contends that it and its employees are immune from this 
type of suit.
    Legislation is needed to make it absolutely clear to the 
IRS that this type of conduct is unacceptable and that it will 
be held responsible. I think Mr. Epstein referred to a private 
cause of action. Just about everyone at this panel could tell 
you that that is definitely needed.
    The agency cannot be trusted to police itself. I only filed 
suit after making a complaint to the Internal Security Division 
and nothing was done. I express my concern to the members of 
this committee. This committee has become aware in recent 
months of shocking instances of abuse of taxpayers, and more 
recently abuse of IRS employees, by an agency that is clearly 
out of control.
    The IRS is now targeting even the attorneys who dare to 
represent the everyday taxpayer in what I believe is an attempt 
to intimidate and harass those attorneys who dare to stand up 
for American taxpayers.
    For good reason, this is an area which most attorneys fear 
to tread. In light of the outrageous abuses of taxpayers 
brought before this committee in recent months, the need for 
competent and zealous representation of the American taxpayer 
is of obvious necessity.
    The attempt of the IRS to deprive citizens of their right 
to competent and zealous representation through harassment, 
intimidation, and abuse of the attorneys representing these 
taxpayer must be stopped. Taxpayer representatives need 
protection from the IRS.
    Thank you.
    The Chairman. Thank you. Just let me say that right of 
counsel is an important right. I can tell you it is very 
disturbing to sit here and listen to your testimony. That is 
the reason for these hearings, to try to do something about it, 
and I appreciate each and every one of you being here.
    I have a series of questions that I would like to ask the 
panel. First, all of you have described in your statements 
today some kind of an experience with an over-zealous or 
abusive IRS employee.
    How difficult was it for you to receive a response from the 
IRS when you reported this abuse? Was action ever taken to 
reprimand or remove the employee? I think, Mr. Mayo, you have 
already answered that question, but if you care to elaborate.
    Mr. Mayo. It does not take very long to get a response. 
Response comes fairly quickly, and the answer is, we are not 
going to do anything about it.
    The Chairman. Mr. MacNaughton?
    Mr. MacNaughton. That was exactly my experience. I got 
responses very quickly and the responses were either, I am not 
going to do something about it, or it is somebody else's job 
and that is why I am not going to do anything about it.
    The Chairman. Mr. Epstein?
    Mr. Epstein. I had that one contrary experience where I 
wrote directly to the Commissioner, and I felt that he was 
zealous in doing something. Of course, I do not know exactly 
what it is that he did, but he certainly responded and did 
indicate that he felt that the actions of the agent were wrong. 
But within the Collection Division itself, I would agree with 
my colleagues, that you get no response and no assistance.
    The Chairman. Mr. Davis?
    Mr. Davis. And the fundamental experience I have had is 
that the accounts of the taxpayer's representative and the 
taxpayer are discounted, not given credit, and the assessment 
of what went on and the report by the agent is always accepted. 
There is no objective attempt to find fact, and the complaint 
is almost uniformly rejected. That has been my experience.
    The Chairman. Let me ask you this, Mr. Davis, and I will 
ask each of you. In your experience representing taxpayers, 
have you ever known an IRS employee to open a fraudulent 
criminal case in retaliation against a taxpayer or as part of a 
personal vendetta? If so, what happened to the IRS employee, 
what about the targeted taxpayer?
    Mr. Davis. Of course, this is a subjective assessment of 
why someone did something. My experience tells me that, yes, 
criminal tax investigations and civil examinations of returns 
have been initiated by individual revenue agents and revenue 
officers, in part, in retaliation for positions taken by the 
taxpayers or taxpayers' representatives. I believe that to be 
true. Again, that is my personal assessment. I cannot vouch for 
what is in the mind of the person making the referral.
    The Chairman. We appreciate and understand that.
    Senator Moynihan. Mr. Chairman, could I just remark at this 
point, in response to Mr. Davis' comments and the others', that 
Commissioner Rossotti has appointed Judge William Webster to 
conduct an independent investigation of the Criminal 
Investigation Division.
    Judge Webster was a Federal Judge, he was Director of the 
FBI, and the Central Intelligence Agency. I think we should see 
that he has this testimony directly.
    I am particularly impressed by the thought of the carry 
over of the modes of the Bureau of Alcohol, Tobacco, and 
Firearms into body armor and automatic weapons. That is not 
appropriate to a tax collection agency.
    The Chairman. I have to say, Senator Moynihan, that to me 
it is very disturbing, very much a concern, that these 
intrusive tactics which were not the practice 10, 15 years ago, 
are becoming so commonplace.
    Senator Moynihan. This has the quality of fashion about it.
    The Chairman. As I said in my opening statement, I 
congratulate and applaud what the new Commissioner has done in 
creating this independent study, because I think is a matter of 
the highest importance in reform of the culture of IRS.
    Mr. Epstein, do you want to make further comment on my 
question?
    Mr. Epstein. No, I think I agree with what Mr. Davis said. 
Absolutely.
    The Chairman. Mr. MacNaughton?
    Mr. MacNaughton. I have not had that experience.
    The Chairman. You have not.
    Mr. Mayo?
    Mr. Mayo. I am familiar with one. I am familiar with two, 
my own and another one that I saw less than a month ago.
    The Chairman. Having heard your testimony, Mr. Mayo, I 
would like to ask the rest of our practitioners if they have 
ever personally experienced retaliation from the IRS because of 
their representation of a taxpayer.
    Mr. Davis?
    Mr. Davis. Well, yes, although I would say much of the 
retaliation I have experienced I will put in the category of 
lawful but reprehensible conduct. That is, there will be a 
level of rudeness, abruptness, and unfairness in the exchanges, 
which I regard as lawful.
    They do not have to love me, and they do not love me, when 
I take a role of vigorous advocacy. That occurs. In terms of 
any direct referral of my returns or any direct retaliation, I 
fortunately have not had that experience.
    The Chairman. Mr. Epstein?
    Mr. Epstein. I have had no problem with that, and I 
certainly hope it does not start tomorrow morning. [Laughter.]
    The Chairman. Mr. MacNaughton?
    Mr. MacNaughton. I have had the experience Mr. Davis 
describes, and I also hope that it does not start tomorrow.
    The Chairman. The last question I will ask, and I may 
submit some of these in writing, but do you have any 
suggestions of ways to change the current culture of the IRS to 
prevent the inappropriate use of armed raids and other 
unnecessary law enforcement techniques? Mr. Davis?
    Mr. Davis. Well, I believe, Mr. Chairman, I have suggested 
one. That is, to a considerable extent it may be useful to 
redirect the resources of the Internal Revenue Service back 
into what they refer to as tax gap cases. Those are cases which 
are directly intended to reduce this $100 billion deficiency or 
this amount which goes unreported each year.
    There are roughly 3,500, perhaps, IRS special agents in the 
United States, and 40 percent or more, as much as 50 percent, 
of those resources have been used in specialized investigations 
in areas that are currently of interest to the Congress, for 
example, drugs and organized crime, Medicare fraud, bank and 
savings and loan fraud, and they deflect their resources into 
those areas where they get in touch with these intrusive 
techniques and they become sort of commonplace.
    If they would spend more of their resources trying to 
collect that $100 billion gap which they have themselves 
identified, that might be the proper calling for them and keep 
them away from the temptation to borrow the hard-ball 
techniques from Drug Enforcement and use them against mom and 
pop and their grocery store on the street corner.
    I think if they would use their resources in the way I 
think Congress intended--I hope that I am right in that 
interpretation--then I think there would be less temptation to 
get involved in this hard-ball strategy that is currently being 
used.
    The Chairman. Thank you, Mr. Davis.
    Mr. Epstein?
    Mr. Epstein. Yes, I have one thought. If some of the 
actions that we have heard took place in private industry, 
there would be a right of action where you would be able to sue 
the company, you would be able to sue the employee who harassed 
you or caused you harm. The Federal Tort Claims Act, as I 
understand it, protects the individual and the government from 
actions, civil actions, for damages.
    To me, that gives them a license that nobody else in the 
economy has. If I do something to my employee or harass the 
employee, either I get sued or my firm gets sued. But if 
someone from any government agency does the same thing, they 
are protected and the agency is protected.
    So to me, the first thing is, I would give a right of 
action, private action, against the individual and the agency. 
The second thing I think I would do, which I think is almost as 
important, is that I would require the Commissioner to report 
to the Congress personally each year about actions for 
harassment or violations and compensation paid by courts.
    In other words, put the Commissioner in the position where 
he must know about what happened and he must stand before you 
and report what happened. My reaction is that if the 
Commissioner had to do that, he would do everything in his 
power to stop it because he would not want the embarrassment of 
standing in front of this committee.
    The Chairman. How would you answer the assertion on the 
part of some that if you created such a cause of action, the 
IRS agent would not act, he would not place himself at any 
risk, so your whole enforcement procedure would collapse.
    Mr. Epstein. Well, to me that is a specious argument. If 
you follow the rules, and the Internal Revenue Manual is very 
clear on what the rules are, you are safe, if you do not follow 
the rules, you are at risk.
    The Chairman. Let me ask Mr. Davis, do you have any comment 
on the creation of a tort and the concern that that would 
hamstring efforts?
    Mr. Davis. Yes, Mr. Chairman. I will confess, I am very 
concerned about that. It is true that we in the private world 
are accountable in civil lawsuits, and even otherwise in 
criminal proceedings, if our conduct crosses the lines. But I 
am more cautious about the idea of creating a private cause of 
action involving individual IRS employees.
    I am not suggesting there should be no remedy. One may 
fashion a remedy that would cause the agency to respond, the 
Internal Revenue Service to respond, if it inflicts suffering 
on taxpayers, but the individual action I view as a closer call 
and one about which I would be somewhat more cautious, I think.
    The Chairman. Thank you.
    Mr. MacNaughton?
    Mr. MacNaughton. How to police the police has always been a 
problem. I think it is also true that governments are 
inherently less responsive to lawsuits than are private 
individuals because governments can spend somebody else's money 
to respond to them. It does make for a problem. I think a 
private remedy is appropriate under egregious situations.
    I also think, though, that in my experience where this 
problem will get addressed is when people that work for the IRS 
know that misbehavior--and these are not mistakes, these are 
intentional abuse situations--is not going to be tolerated, and 
they will know that when they have a Commissioner who makes 
that clear and when they have a committee like this one that 
makes that clear, if that is held over time then it will not be 
a problem that goes away and has to be revisited every 5 or 6 
years because the Commissioner is there continuously.
    I have seen this in other governmental agency situations. 
When you get leadership that, in fact, says abuse will not be 
tolerated, then people change and the culture then can change. 
Without it, I think it is very hard to get there through 
legislation and penalties.
    The Chairman. Mr. Mayo?
    Mr. Mayo. My solution would be two-fold. I do not see a 
problem with a private cause of action. We have private causes 
of action against all the police departments in the country. 
When a policeman violates rules and beats up a citizen, he can 
be sued. Now, what is the difference with an IRS agent that 
violates the rules and beats up on a taxpayer? He should be 
sued, too.
    But that is the negative reinforcement. There is a better 
solution, in my mind. That is, I am familiar with all of the 
revenue officers in my local district. I know that they are all 
overworked. Taxpayer harassment that we have talked about today 
is referred to in the business as Grade 9 technique.
    The Chairman. As what?
    Mr. Mayo. Grade 9 technique. Grade 9 is a lower level 
revenue officer who is out there trying to do his job because 
he is overworked and he does not have the experience needed to 
bring all the tools into play. Believe me, they have all the 
tools need.
    So if there were more revenue officers and they were 
trained, as Mr. MacNaughton says, they could increase revenue. 
A good revenue officer ought to be able to collect a couple of 
million dollars a year.
    I happen to represent a man named W.E. Weldon who was 
Revenue Officer of the Year in 1993 or 1994, and I have seen 
him deal with a taxpayer over and over again, that when we got 
up from the meeting to leave, the taxpayer would say thank you. 
Thank you.
    You are fixing to take my house, I have got to sell my car. 
I do not know what I am going to do. But thank you, Mr. Weldon, 
for being so nice about it. He was good. You could talk around 
my town, and all of the people who have dealt with him will 
tell you, he is a prince of a man.
    You can do this job without being mean. If you had more 
people with more resources, they could collect more money. 
Front-line officers, not management types.Front-line officers.
    The Chairman. Maybe the solution is what the New Yorker 
recently had. It had a cartoon with a revenue agent and a 
taxpayer there, and on the side was a jar that said ``tips.'' 
Maybe we could seek that as a goal. [Laughter.]
     Senator Moynihan.
    Senator Moynihan. Very briefly, Mr. Chairman. This has been 
wonderful testimony. I again say Judge Webster should have it 
directly.
    I would address a question of culture and how you can 
change it. I was in the navy 54 years ago. The U.S. Navy in 
those days had just then given up flogging, but just, not 
quite. If you go aboard a Trident submarine today and you could 
be in a Quaker meeting, such is the degree of cooperation and 
reciprocal agreement and understanding. Things do change and 
they can change for the better, and for the worse, as when 
people start breaking into houses with body armor.
    I liked very much Mr. Davis' point about the gap. Senator 
Kerrey raised that. There is $100 billion a year in taxes not 
paid. Senator Kerrey, there is $100 billion a year in taxes not 
paid, as you pointed out. More attention to that would be 
appropriate.
    Well, first of all, just more revenue and less sorrow. I 
think that is an organizational goal. You might just say, how 
much resources do we put into that goal as against other ones?
    But Mr. Chairman, again, this is a wonderful panel. I have 
learned a lot.
    I think that father of yours knew something.
    The Chairman. Thank you.
    Senator Moynihan. Thank you. I have to speak to a forum 
being conducted by our former colleague Senator Durenberger, so 
I will have to leave.
    The Chairman. Thank you very much, Senator Moynihan.
    Senator Grassley?
    Senator Grassley. Yes. Thank you very much for your 
testimony. Before I ask a question, I would like to follow on 
and supplement something the Chairman said to the previous 
panel on a couple of occasions, that we realize the risk that 
they take in being here to testify.
    But I doubt very much if we feel the pain that they feel 
every day they are having to be on the job with having the 
reputation of being a whistleblower, and probably the suffering 
that they go through every day on the job.
    I wish we all had a better understanding of that. If we 
did, we probably would be more outraged than we are with all of 
the testimony that you folks gave, and the testimony of the 
previous panel, and probably the more outrageous testimony that 
we are going to have. I should say more testimony of outrage we 
are going to have in the future meetings here.
    I happen to chair the Committee on Aging here in the U.S. 
Senate, so I spend a lot of my time on the plight of older 
Americans and trying to help them. Mr. MacNaughton, you were 
the one that had the story about the ill client who was pursued 
by agents even after they knew that his illness was really bad, 
and that upsets me. Likewise, we had the story about an 80-
year-old grandmother out of bed at 5:00 a.m. That is also 
inexcusable. All the stories we hear are stories of preying on 
the old, and these are particularly egregious situations.
    To all witnesses, do you believe, from your experience, 
that the IRS has any target on older people?
    Mr. Davis. No, sir.
    Mr. Epstein. No, sir.
    Mr. MacNaughton. No, sir.
    Mr. Mayo. No, sir.
    Senator Grassley. Do you have any other cases or clients 
that would illustrate what you are trying to tell us? In other 
words, examples like you had given to us in your testimony. Or 
does that tend to be the only ones you know about?
    Mr. Mayo. How much time do you have?
    Mr. MacNaughton. I could talk all day, Senator.
    Senator Grassley. Particularly as it relates to older 
people.
    Mr. Mayo. Generally speaking, in my practice what happens 
is, in the collection area, as is referred to earlier, a lot of 
people get into collection problems because of things that they 
really could not control.
    The only time I have had a problem with older people was 
when it was an older tax debt. I had a situation where we could 
not get an offer and compromise done last year for an older 
couple. They had a home. They wanted to live in the home. We 
made an offer and compromise that ultimately was more than the 
IRS collected on the sale of the home.
    Finally, what I arranged was, they would not compromise the 
liability and the account has now been written off, or as they 
say in the business, 53, considered uncollectible. They sold 
the home at a tax sale rather than have the way we arranged the 
transaction, which was for the taxpayer's brother to loan him 
some money to compromise the case and take a second mortgage on 
the home and release the tax lien.
    The IRS would not have it, so in this situation we just 
said, sell it. I mean, fortunately, the taxpayer's brother and 
in-law were there to bid on the property so he did not have to 
move out.
    Senator Grassley. Mr. Mayo, would you elaborate on that 
case you talked about in your testimony where you had a client 
who committed suicide, you had another client who had a nervous 
breakdown.
    Mr. Mayo. The client that committed suicide was an oil 
field worker. He had a sixth-, seventh-, or eighth-grade 
education and he operated a cash business. He had gross income 
probably in the $130,000 to $140,000 range, but only included 
$30,000 on his tax return.
    Now, best we could figure was that that was his net and he 
just was unintelligent enough to know he really did not owe 
that much money. But he did not have any records because he 
operated on a cash business.
    So what happened was, he had $70,000 or $80,000 worth of 
costs associated with this $100,000 of income he did not 
include, but he could not take a deduction for it because he 
had no records. I had worked out a settlement between the IRS 
and the taxpayer, and it was reasonable considering the 
circumstances, that they would allow a portion of that amount 
as a cost of goods sold. He was just in a position, he was 
fixing to have to spend his life's savings on paying taxes that 
he did not owe, and he just could not take it.
    It is my favorite Tax Court story, in a sad kind of way. 
The Tax Court does not give continuances, so I had to call the 
court the morning after he killed himself and say, I need a 
continuance.
    District Counsel said, well, you know, the Tax Court does 
not give continuances. Well, we have got special circumstances. 
Well, what is it? Mr. So and So killed himself. Oh, you are 
kidding. No, I would not kid about that. Let us call the judge.
    So we call the judge. We say, Mr. So and So has killed 
himself. Oh, you are kidding. No, I would not kid about that. 
Then the judge asked the District Counsel, he said, you need to 
check out Mr. Mayo's story. I mean, for crying out loud, that 
would not be anything I could just make up. A taxpayer cannot 
show up alive later on.
    But it was a major deal just to get a continuance of that 
case for trial. I eventually was able to vindicate him. We 
turned up some records and I was eventually able to vindicate 
the surviving spouse. I was just at the point of having her 
being evicted before we just saved that case, and she was 
elderly at the time.
    Senator Grassley. Thank you.
    The Chairman. Senator Kerrey.
    Senator Kerrey. First of all, as to this issue of fear, the 
best witness on that regard was Commissioner Richardson. She 
was a former IRS Commissioner before Mr. Rossotti who appeared 
before the IRS Restructuring Commission and said when she 
received her first paycheck it came in an envelope with a 
return address of the IRS, and it even scared her to open the 
envelope. So this issue of fear is a very important one for us 
to remember.
    I would declare that I share Mr. MacNaughton's view that 
until we collect on some other transaction other than income, 
given that income is being more and more complex, as long as 
income is complex it is going to be very difficult.
    As long as you are going after income, it is going to be 
very difficult for us to design a system that is not extremely 
intrusive. I think that is a fundamental problem that hopefully 
this Congress can address.
    I do think that we can change the law and improve the 
operation, but as long as we are going to go after income it is 
going to be and going to feel very, very intrusive and very, 
very fearsome to the individual that has to document every 
single thing that they have done over whatever period of 
transaction that the IRS is concerned about.
    Let me ask you gentlemen, were you asked by this committee 
to evaluate the bill, the legislation that this committee 
reported out? I am struck in your testimony that none of you 
have commented on the law that we are about to change.
    Mr. Mayo. I have only received a copy of it. I have not yet 
had the opportunity to study its provisions. What I have seen 
seems to move in the right direction, but I have not had 
adequate time.
    Senator Kerrey. Specifically, I would call to your 
attention and urge your comment on Title 3, which is all the 
changes dealing with taxpayer rights. Senator Grassley, who has 
left, was on the Restructuring Commission and took the lead in 
this area, as well as Congressman Portman.
    There are a number of things in there that you have talked 
about here, including some right of action, some capacity to 
recover damages, some capacity to recover damages especially if 
the IRS has been negligent in the conduct of its efforts.
    What we have said essentially is, as with all other areas 
of human endeavor, if there is not some kind of penalty that 
has to be paid it tends to deter that small fraction of people.
    By the way, one of the things the Restructuring Commission 
heard is, just as taxpayers are afraid of the IRS, sometimes 
these revenue agents end up in positions of fear as well. There 
have been death threats against employees. One of the things we 
have to be very careful of is that we do not foment that kind 
of an environment.
    But I would be very grateful, since the Majority Leader 
earlier announced that we are likely to be on the floor 
debating this thing next week, if you would look, especially at 
Title 1, which deals with a number of things that you have 
addressed.
    As to the criminal investigations, unfortunately, the cause 
and effect of our actions was so unclear it is difficult to 
figure out what is right and what is wrong. One thing that has 
happened over the last 15 years, is we have had a huge increase 
in the amount of money laundering.
    A lot of the investigations in the Criminal Investigation 
Division occur as a result of a referral from some other law 
enforcement agency that is asking CID to get involved. They are 
asking to get involved as a result of us again saying we have 
got to do something about drugs. So they are not doing it by 
accident. They are doing it, again, because of something that 
we are doing.
    So the only thing we have got in the bill right now creates 
a unified, new Inspector General for Tax Administration inside 
of Treasury. What this committee and the Restructuring 
Committee heard was there was a tendency to say, it is not our 
fault, it is the other guy's, and they point back and forth and 
then nobody is accountable.
    So if you can look at that, that is in Title 1 of the bill, 
and if you could give us your evaluation of whether or not you 
think that is going to improve. Especially Title 1 and Title 2, 
but anything else in this legislation. As I said, we are going 
to be debating it on the floor.
    And, though I take Mr. McNaughton's point that it is going 
to be very difficult as long as we are taxing income, we have 
got to do the best that we can under the circumstances. And we 
are not going to replace the income tax with a consumption tax 
this year, but we are likely to change the law governing the 
IRS.
    Something I would like you to commend on though that all of 
you have kind of alluded to, and that is the resources that we 
give the IRS. Again, I say for the record, IRS is not Sears and 
Roebuck. They do not generate the revenue by going out and 
selling product to customers, their revenue comes from us. We 
give them their budget.
    Mr. Rossotti, in his report that he has filed recently with 
Congress, lays down the challenge. IRS collects $1.5 trillion 
with a budget of $7.2 billion. Now, for the record, on a 
percentage basis that is smaller than any other industrial 
nation. It is less than a half a percent of total revenue 
collected.
    They got a slight budget increase from last year with 
substantial more revenue, and I suspect you know what the 
phrase Schedule B is. We have increased the amount of work both 
taxpayers and the IRS is going to have to do as a result of the 
Balanced Budget Agreement that we enacted last year.
    I am still sending out press releases praising what I did 
last year, while trying to avoid the responsibility for the 
complexity of the Code and the burden I am placing on the IRS 
to administer that Code.
    So $1.5 trillion of collections, $7.2 billion of budget. 
They process 215 million tax returns, 88 million refunds, 
assisted 110 million taxpayers, distributed a billion forms and 
publications, and on, and on, and on.
    I would appreciate very much in the interim between today 
and whenever we take this up on the floor, and I will provide 
it to you, the year-to-year amount of money the IRS is 
collecting, the changes in the Tax Code that have occurred 
during that time period, and the amount of money that Congress 
has authorized, and just give us your evaluation.
    Are we part of the problem again? Are we shorting the 
agency? You have talked about the need to get high-quality, 
experienced people. Mr. Mayo, you talked about an individual in 
your own district who knows how to get the job done.
    I mean, one of the problems in government is, we have got 
to hire, we have got to train, and we have got to retain. As 
you know, once somebody gets pretty good at being a revenue 
agent, guess what? You guys hire them, or somebody else is 
hiring them. They become very attractive employees.
    So part of our problem is trying to retain people and 
getting the resources, it seems to me, as well as the authority 
to Mr. Rossotti so he can provide the kind of positive 
reinforcement, incentive pay, and all the other sorts of things 
that this law does, it seems to me, is a very important issue.
    Mr. Mayo. There is one thing, Senator. I can tell you that 
in my local office there are fewer Grade 12 agents there and 
fewer revenue agents there than there were 25 years ago.
    Now, not only that, but they have lost five revenue agents 
in the last year, in the last 24 months, as a result of sexual 
discrimination and a program the Internal Revenue Service has 
called ERR 16, which was designed to promote minorities and 
women into upper level positions.
    So the way they did it, was they evaluated managers on how 
well they were promoting minorities and women. When you had an 
old Grade 12 guy that had been there and was good, you needed 
to move him out so you could hire somebody else. They have lost 
their pool of talent in my area. It just happened before our 
face.
    Senator Kerrey. I had the very same experience. We had a 
field hearing both in Nebraska and in Iowa, the Restructuring 
Commission, and we heard that from all of the people who are 
providing services, that it is getting harder, and harder, and 
harder to get services because there are fewer and fewer people 
available to provide those services, and we are asking them to 
do more, essentially, with less.
    So again, I would ask you, in addition to reviewing 
especially the titles that are relevant to the things that you 
have brought to our attention today, and I appreciate very much 
your bringing them to our attention, and the Chairman bringing 
it before this committee, but if you could comment on the 
relevant provisions specifically as to whether or not you think 
it is going to solve the problem or make it worse.
    Second, I will also provide you the year-to-year budgets 
for the IRS, as well as the amount of taxes they are collecting 
and some changes in the Tax Code, and just give me your 
response. Just give me your judgment. Are we providing a 
sufficient amount of public resources, given the amount of work 
we are asking the IRS to do?
    Mr. Davis. May I add one additional response? It will not 
take long. One of the most useful words and important words I 
have heard today, and I heard it several times, is the word 
oversight. The Internal Revenue Service is an exquisitely 
sensitive political machine. If they perceive this body and the 
House Ways and Means Committee are watching their behavior and 
monitoring what they are doing----
    Senator Kerrey. Sir, if I could interrupt you, one of the 
problems--and I apologize for interrupting you.
    Mr. Davis. No, sir.
    Senator Kerrey. One of the problems that we have got, and 
the Restructuring Commission heard it as well, is they do not 
just go to Finance and Ways and Means, they go to Finance, they 
go to Ways and Means, they go to two appropriations committees, 
and two government oversight committees. They have six 
committees that the Commissioner has got to come up to.
    Again, imagine if you had a little company out there and 
you had 535 members of your board of directors, all elected. 
Ask a member just to sort of test them who just expressed their 
outrage, do they know the budget of the IRS? Ask them if they 
know it. Ask them if they know how many returns are processed. 
Ask them if they know what the IRS does.
    One of the problems that we have got, and you are quite 
right, this lack of oversight and accountability, we hope to 
solve with a new public board. We are creating a board. That is 
in Title 1 of the legislation.
    But I hope Congress is also able, in response to the public 
saying you are part of the problem, you are not giving enough 
oversight, that we will include language, as the House did, 
that will require us to have some consolidation of oversight so 
the IRS can come at least once or twice a year to a single 
committee and get agreement on what it is that we want them to 
do. Right now you are apt to get six different sets of 
instructions coming from six different committees.
    Mr. Davis. One thing is clear to me since these hearings 
began, I think, in November. There has already been a change in 
the attitude of some people within the Internal Revenue 
Service.
    They are sensitized to the fact that the Congress is 
looking over their shoulder and they are dealing with us in a 
more responsive and a more positive way. I think that is a 
byproduct of this oversight. I do not want to overstate it, but 
I will simply say it is a wonderful thing that you are doing.
    Senator Kerrey. Thank you.
    The Chairman. I would just give the personal observation 
that, frankly, my concern is not that there is too much 
oversight, there has been too little. This organization has 
been essentially isolated from oversight, either within any 
administration now or past, that the Congress itself has not 
help appropriate oversight. I agree with you, Mr. Davis, as to 
the need of doing a better job.
    I want to echo what Senator Moynihan said. This has been an 
excellent panel. We greatly appreciate your being here today. I 
know it is at some risk and I regret that, but these hearings 
would not be possible without public-spirited citizens like 
yourselves appearing today. Thank you very much.
    The committee is in recess.
    [Whereupon, at 1:05 p.m., the hearing was recessed, to 
reconvene at 9:00 a.m. on Wednesday, April 29, 1998.]


                             IRS OVERSIGHT

                              ----------                              


                       WEDNESDAY, APRIL 29, 1998

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to recess, at 9:00 a.m., 
in room 216, Hart Senate Office Building, Hon. William V. Roth, 
Jr. (chairman of the committee) presiding.
    Also present: Senators Chafee, Grassley, D'Amato, 
Murkowski, Nickles, Gramm, Lott, Mack, Moynihan, Conrad, Bryan, 
and Kerrey.

OPENING STATEMENT OF HON. WILLIAM V. ROTH, JR., A U.S. SENATOR 
         FROM DELAWARE, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will please be in order.
    Let me begin by welcoming everyone back to this second day 
of hearing to examine the policies and procedures of the 
Internal Revenue Service.
    I believe that yesterday's proceedings clearly demonstrated 
how important it is that we continue our oversight of this most 
powerful agency.
    These efforts not only focus our attention on the 
restructuring legislation that the Senate will take up next 
week, but they also continue to define the critical issues that 
must be addressed in our efforts to reform this agency.
    Our work here is also having a very positive influence on 
the administration's commitment to addressing problems within 
the agency. Yesterday's appointment of William Webster to head 
the IRS review of the Criminal Investigation Division is a most 
welcome choice.
    It demonstrates a willingness to address the concerns that 
are being raised by our efforts at oversight and is another 
manifestation of Commissioner Rossotti's dedication to change 
the way the IRS does business.
    One agenda item that I would like to see Mr. Webster add to 
his review concerns placing these CID employees who are trained 
to use intrusive and oppressive law enforcement techniques 
against violent criminals under the direction of our agencies 
that are experienced at combatting such individuals. These 
agencies would include the FBI and DEA.
    Now, as we heard yesterday it is wrong to use these kinds 
of aggressive tactics in routine criminal tax investigations of 
Americans who are neither dangerous nor violent. At every turn 
we must work to promote an agency that puts service and 
efficiency before intimidation and vindictive behavior, and 
that is what these hearings are all about.
    Senator Moynihan?

   OPENING STATEMENT OF HON. DANIEL PATRICK MOYNIHAN, A U.S. 
                     SENATOR FROM NEW YORK

    Senator Moynihan. Mr. Chairman, I could not more agree 
about the testimony we heard yesterday in which we encountered 
members of, how shall I say, the armed forces of the Internal 
Revenue Service dealing with citizens involved in a dispute 
with the government over taxes, which is a normal thing.
    There is a migration of these SWAT team techniques in our 
government and we have to be careful about it. I think Judge 
Webster would be very responsive to your thoughts, he having 
headed the FBI, of course, and being a judge, and the CIA.
    The Bureau of Alcohol, Tobacco & Firearms is in the 
Treasury Department, so there is a possibility of that kind of 
trade, and they should pursue it with energy and listen to this 
committee's concern that the boundary between litigation and 
para-military activities on behalf of fundraising by the 
Federal Government ought to be clearly defined.
    So I thank you again.
    The Chairman. Thank you, Senator Moynihan.
    It is a pleasure to have Senator Chafee here. Senator 
Chafee?

 OPENING STATEMENT OF HON. JOHN H. CHAFEE, A U.S. SENATOR FROM 
                          RHODE ISLAND

    Senator Chafee. Well, thank you very much, Mr. Chairman. I 
just want to commend you for conducting these hearings. As you 
know, I have been involved with the conference on the highway 
legislation, the transportation legislation and I have not been 
able to be here as much as I would like. But I look forward to 
hearing the witnesses today, and commend you for the leadership 
you have given to the committee in connection with these 
hearings.
    The Chairman. Thank you, Senator Chafee.
    It is now a pleasure for me to introduce our first panel of 
the day. These taxpayers have agreed to come before this 
committee to testify and answer questions about their egregious 
encounters with the IRS.
    I would like to take this moment to thank each and every 
one of them for their courage to appear here today, and to let 
them know that the committee is most sympathetic and 
understanding of the frustration and anger they will experience 
in recounting their stories.
    Our taxpayer witnesses are Mr. John Colaprete, Mr. Richard 
Gardner, and Mr. William Moncrief, Jr. I will now ask the 
witnesses to please stand and raise their right hand.
    [Whereupon, the three witnesses were duly sworn.]
    The Chairman. Thank you. Please be seated.
    We will now start with your testimony, Mr. Colaprete.

                  STATEMENT OF JOHN COLAPRETE

    Mr. Colaprete. Good morning, Senators. My name is John 
Colaprete and I am from Virginia Beach, Virginia. I am in the 
restaurant business. I am also a husband, a father, a veteran, 
having served my country proudly as a U.S. Marine Corps captain 
from 1965 to 1969.
    I have never been in any sort of trouble with the law, and 
I believe that every American has an obligation to pay their 
fair share of income taxes. I have never failed to meet that 
obligation.
    I have always considered myself both patriotic and a law-
abiding citizen. I will always be a law-abiding citizen. 
However, I feel I have literally been punished for upholding 
the laws of the Nation I swore an allegiance to honor and 
defend.
    Four years ago, I employed a bookkeeper in my restaurant 
who eventually embezzled approximately $40,000 from the 
business. She went to prison for her crimes, but not before 
turning my life and the lives of countless others upside down.
    With the full cooperation of the Internal Revenue Service, 
this woman, a multiple felon who already had an outstanding 
warrant for her arrest, managed not once, but twice, to 
victimize me, my family, partners, employees, and patrons and 
others of the business community who depended upon me and my 
business.
    This dance with the devil began in March of 1994, when my 
partner and I became aware that we were being swindled by our 
bookkeeper. When we discovered substantial shortages in our 
accounts, we confronted her and she admitted to stealing from 
our business.
    She told us she would make restitution. Unfortunately, 
rather than make restitution she sought shelter with the IRS 
and told them a fantastic tale of money laundering, gun 
running, and drug dealing by my partner and I.
    Little did I know that the IRS would spend less than 48 
hours investigating my bookkeeper's allegations before 
conducting raids on my businesses, my home, and the home of my 
manager. Little did I know that the government that I had so 
proudly served would accept these allegations to be true, 
despite the alarming lack of substantiation, probable cause, or 
proof of any sort whatsoever.
    Little did I know that the IRS, when faced with the 
outrageous claim that I had thousands of pounds of cocaine 
stored like cord wood in my office, would subscribe to a policy 
of guilty until proven innocent.
    This was not a matter of an honest mistake. In fact, a 
recently retired FBI agent divulged in a deposition taken for 
the case that I have pending against the IRS that he had 
advised all involved to be skeptical about the claims of my 
accuser. The FBI specifically declined to become involved and, 
in the words of one of its agents, the whole story sounded like 
a grade B movie.
    On the morning that both my home and businesses were 
raided, raids executed solely on the word of my ex-bookkeeper, 
I was in church for the occasion of my son's first Holy 
Communion.
    Armed agents, accompanied by drug-sniffing dogs, stormed my 
restaurants during breakfast, ordered patrons out of the 
restaurant, and began interrogating my employees.
    The IRS impounded my records, my cash registers, and my 
computers. Since the raids, we have managed to get up and 
running despite what can easily be perceived as our own 
government's best attempts to put us out of business.
    Today, I still wonder how such a thing can happen. But I 
know it does. I would like you to know that for every taxpayer 
like me, those who have survived armed assaults on our 
businesses and our homes, there are perhaps several thousands 
of taxpayers who, in fear, lick their wounds, tally their 
losses, and consider themselves lucky that the IRS has finally 
left them alone, their innocence notwithstanding.
    I have nothing to hide and I will never consider myself 
lucky when I ponder the events of the last four years. As for 
the taxpayers who have suffered similar injustices at the hands 
of the IRS, I hear from these people every week. They seek me 
out and relate horror stories that at one time would evoke from 
me nothing more than simple skepticism. I used to believe that 
such things could only happen in a communistic bloc country or 
police state. I do not believe that any more.
    When the raid occurred at my home, the front door was torn 
from the hinges, my dogs were impounded, along with my safe and 
12 years of my personal income tax returns and supporting 
documents.
    When that safe was finally returned, an heirloom watch that 
I had received as a gift from my late father was missing. In 
the aftermath of the raid, I returned to find my home in 
shambles. It was if I had been burglarized, both in appearance 
and in the sense of having been grossly violated.
    While my restaurant and my home were being raided by armed 
agents of the Internal Revenue Service, a raid was also being 
conducted on the home of my manager. In that raid, my manager 
was pulled at gunpoint from the shower and forcibly restrained 
while he attempted to call an attorney. His teen-aged son was 
knocked to the floor.
    His daughter, 14 years old at the time, had several friends 
over for a slumber party the night before. These young girls 
had to get dressed under the watchful eyes of male agents, 
despite the presence of female agents. The IRS agent stood in 
the doorway to the bedroom, gun drawn, refusing these young 
girls even a semblance of privacy. We were never charged with 
any crimes.
    After scrutinizing our records for 4 months, the IRS 
returned most of them. A rental truck pulled up in front of my 
business 1 day and the items that were returned were basically 
dumped in a pile for us to sort through. I never received an 
apology.
    Following the raids, I could get no answers as to why all 
of this occurred. I was met with, ``No comment, Mr. 
Colaprete,'' at every turn. Freedom of Information requests 
were ignored, ostensibly due to a backlog of such requests and 
despite legally mandated time limits on such requests.
    Two newspapers in Virginia Beach made repeated requests 
under the Freedom of Information Act, only to have the Justice 
Department thumb its nose at those requests. When an 
investigative journalist began to get to the bottom of things, 
he was also subjected to the harassment of the IRS.
    He had an opportunity to interview Special Agent Carol 
Willman from the IRS office in Norfolk, Virginia. During that 
interview, Ms. Willman interrupted the reporter's inquiries 
with a demand for his Social Security number.
    Within the year, he was notified that the IRS wanted to 
audit his return. When a local publication reported this, the 
audit was abruptly canceled. An IRS agent stated at the time 
that the agency does not retaliate against citizens through the 
use of audits, but the facts would seem to indicate otherwise.
    The ex-bookkeeper, meanwhile, was kept in protective 
custody by the IRS in a motel up to the time of the raids. It 
is almost unimaginable that there could be such a level of 
incompetence at the IRS that they would not only take the word 
of this woman and begin any sort of investigation, but they 
would shield her from the authorities who were trying to arrest 
her.
    The woman whom the IRS was protecting and on whom they had 
relied had already been convicted numerous times of embezzling 
and stealing. In fact, the outstanding criminal charge pending 
against her at the time she approached the IRS was for a crime 
involving lying and stealing.
    Ironically, just a week before this woman approached the 
IRS I had specifically gone to the police and filed a complaint 
against her, alleging that she had lied, stolen, and embezzled 
from me. In the face of all that, how could anyone, let alone 
supposedly trained, professional inspectors with the IRS accept 
at face value what the woman was saying?
    Based on her word, she, Carol Willman, not only commenced 
an investigation but completely shut down a business and turned 
the lives of innocent people upside down less than 48 hours 
after first meeting this woman.
    Is there such a competitive atmosphere within the IRS to 
add another feather in their cap that they would ignore not 
only basic investigative techniques, but the obvious flaws in 
this woman's character and simply accept her at face value?
    It is frightening that such a woman could have conned the 
IRS into believing that her employer, despite all appearances 
to the contrary, was a high-level gangster, and then shield her 
from the law in the belief that she would lead them to a bigger 
fish like me.
    To compound this vigilante or lynch mob approach that the 
IRS had adopted, they then allowed her to leave the 
jurisdiction of Virginia to go to North Carolina, where she was 
only later sent to jail for embezzling from three other 
employers in that State.
    On the surface it might appear that she acted alone, but 
this just is not so. The IRS was her partner in crime, first 
acting in concert to destroy my life, then allowing her to flee 
the State and victimize others.
    I looked for answers and was rebuffed at every turn. I 
suffered a deep depression that lasted a year. I was 
immobilized. I could not get out of bed some days. My neighbors 
shunned me. My wife, who is an artist, has not been able to 
pick up a paintbrush in 4 years.
    My children were taunted at school and told that their 
father was a gangster and a drug dealer. I raised my children 
with a zero tolerance for dishonesty, and now they must hear 
allegations that I am a major drug dealer and a tax cheat? I am 
here to tell you, I am none of those things.
    Relatively speaking, the trauma that has befallen me is 
mild compared to what has happened to my manager. He has 
suffered severe depression, sought counseling from his pastor, 
literally been shunned by friends and acquaintances, and has 
yet to get his life back in order. He has been ruined 
financially and emotionally, with little or no hope of ever 
getting his life back to where it was prior to these raids.
    I am also here to tell you that we cannot treat our 
citizens this way, not in America. I have been repeatedly 
victimized over the past 4 years, primarily by a government tax 
agency that is funded with my tax dollars.
    If Americans have a perception of the IRS as a bogeyman, it 
is because the IRS itself has promoted that perception through 
policies that are fundamentally unconstitutional and illegal. 
This is not a partisan issue, this is a people issue. This is a 
freedom issue.
    I have a lawsuit pending against the IRS and I will not 
rest until I have my day in court. The IRS's response to that 
lawsuit has been to cast doubt on my character by insinuating 
that they did find some evidence of wrongdoing, but they chose 
not to prosecute it.
    If I was guilty of anything, why would they choose not to 
prosecute? While any allegations will eventually be shown in 
court to be what they are, a smoke screen, until I get into 
court to prove my case these allegations linger in the 
community where I live and work and continue to compound my 
frustration.
    The system does not work for the American taxpayer. The 
total sense of violation that we have experienced has had a 
devastating effect on us all. In the wake of all this, I find 
that there is no system in place to defend me, or others like 
me. I would like to believe that someone takes responsibility 
for what has happened, for what continues to happen every day 
in this country.
    If the example we ought to set for our citizens is one of 
no accountability and no remorse, then our form of government, 
the oldest surviving democracy on the planet, cannot survive 
much longer.
    A day does not go by that I do not wonder what harassment 
will occur next. I would like to know why this dark entity 
known as the IRS has come into my life and refused to leave. So 
who protects me in this system? Who cares about my 
constitutional rights? Not the courts. Not the IRS. I am hoping 
that the buck stops here with you, Senator Roth, and this 
committee.
    I leave you with three questions, Senators. Why did this 
happen? What will you do to see that it never happens again to 
innocent taxpaying citizens? We cannot employ inexperienced and 
immature people to play God with the lives of taxpayers, IRS 
agents who decide that it is a beautiful day to go out and 
destroy someone's life.
    Finally, once this ordeal has ended and I have obtained a 
verdict in a court of law and a judgment against the IRS, what 
will you do to assure me that the IRS pays the judgment rather 
than continue to beat me into submission through endless 
appeals and an outright refusal to pay the judgment that I 
obtained?
    In this great democracy we have created this entity to 
collect taxes, which we all agree must exist. However, we have 
empowered the agency to be subject to no one, to no laws, to no 
checks and balances, and all of us, including each one of you, 
are afraid of them. Why should we fear the very people we 
employ?
    When these hearings began last September I was told that 
Senator Roth would conduct these hearings because he has no 
fear. After my ordeal, I have no fear any longer. But when 
Americans receive that letter with the logo of the IRS in the 
upper left-hand corner, their pulse rate, their heart beat, and 
their blood pressure rises. There is genuine fear. This fear 
must stop.
    Thank you for giving me this opportunity, Senators.
    The Chairman. Well, thank you, Mr. Colaprete.
    Let me just say that no law-abiding American should have to 
go through this ordeal. That is the reason we are here today. 
We are here today to hear the experiences of people like you so 
that we can reform the process to ensure that the American 
taxpayer is treated in a fair and equitable manner. That is the 
whole purpose of these hearings. I appreciate your courage in 
coming here and telling us your story.
    Mr. Gardner, you are next.

                  STATEMENT OF RICHARD GARDNER

    Mr. Gardner. Good morning, Senators. My name is Richard 
Gardner. I graduated from the University of Tulsa with a BS 
degree in accounting. I am a Vietnam veteran, having served in 
the U.S. Army from 1967 to 1969.
    In December of 1976, I started Gardner's Tax Service, Inc., 
located in Tulsa, Oklahoma. According to the U.S. Federal 
Attorney, my company prepares between 4,500 and 6,000 tax 
returns a year, making my tax service one of the largest in the 
State.
    I appreciate the opportunity of being here today in order 
to tell you about my ordeal with the IRS. While this experience 
has affected me and my family greatly, this is also a story 
about how the IRS will not spare anyone, even individuals 
remotely connected to the taxpayers in question, from unfair 
treatment, intimidation, and threats.
    My personal nightmare began on March 29, 1995. I was in my 
tax office in Tulsa doing a couple's tax return when one of my 
assistants called me to the phone to tell me that an IRS agent 
wanted to see me and was waiting outside my door for me.
    I went out to meet the agent and was greeted by 
approximately 15 IRS agents and between 5 and 8 U.S. Federal 
Marshalls. They were all armed and they were wearing those 
jackets that say in bright letters ``IRS'' or ``U.S. Marshall'' 
on the back.
    One of the IRS special agents directed me into one of my 
other offices, handed me a search warrant, and said, ``we are 
seizing all of your client tax returns, computers, large 
printers, personal papers, and other records.''
    He then said, ``I want you to make a phone call for us. I 
will tell you what to say. We will tape it. If you will do this 
for us, we will ask the judge to be lenient on you 
sentencing.''
    What was this special agent ordering me to do? For me to 
call another accountant who did my electronic filing for my 
clients for a charge that I, in turn, billed my clients for. In 
essence, the agent was using me to set up the accountant to 
deliberately get him into trouble.
    After I refused to comply and the event with the telephone 
ended, the seizure of my office property continued. Please 
understand, at the time of this raid the IRS had no complaints 
against me that I was aware of, or any complaints from any of 
the over 90,000 tax returns my office had prepared in the last 
22 years.
    Following the raid, I went out and bought a new computer, 
new software, and I reopened the next morning at 8:00 a.m. 
preparing tax returns. At about 9:00 a.m., the same agent 
called my assistant, telling her that he thought the office 
would have closed down.
    My attorney at the time told me, ``in 99 percent of the 
Federal cases, when they raid your place of business, they have 
already indicted you, or will in a few days.'' In my case, it 
took nearly 2 years. It took until March 22, 1997 for this 
episode with the IRS to come to a head. It was a terrible 
strain on me, my family, and my employees.
    The entire case of the IRS against me would extract a 
terrible toll. It was the intent of the IRS to break me 
emotionally and financially over what eventually would be a 
total of 33 months so that I would plead guilty to at least one 
count each of bankruptcy and tax fraud.
    I would like to lead you through some of the experiences 
that my family and I was forced to endure over the course of 
these 2 years. Between the time of the raid on March 29, 1995 
and the 23 Federal count indictment delivered on March 22, 
1997, this same special agent and the IRS took the following 
actions against me.
    They tried to force some of my clients to wear hidden 
microphones into my tax office to record me, and when they 
refused, the special agent became angry and hinted, as a result 
of their refusal, that they too might experience some problems 
with the IRS.
    My employees were threatened with the loss of their jobs 
and were informed that they could buy out my tax business 
cheaply, since I would soon be out of business.
    In February 1997, the special agent informed me that I 
would be out of business by that April, since all of my papers 
had been sent to Washington and the IRS approval to shut me 
down had been obtained.
    My wife, Soccoro, was forced to endure an unnecessary 
appearance before a grand jury. The IRS lied to the grand jury 
on the indictment. Many of the 18 tax clients listed on the 
grand jury indictment never knew anything about it.
    One of my clients was surprised to learn from me that his 
name was on the list, especially since he had never appeared 
before the grand jury. Many of these clients were surprised to 
learn of their names being on their list. Also, some of those 
had advised the IRS agents that there had been no problems with 
their returns.
    Lastly, in March of 1997, two of my employees had to visit 
the office of the special agent to retrieve some client files 
confiscated in the raid some 2 years before.
    When they asked the special agent if he had a vendetta 
against me, he replied, ``I've had a personal vendetta against 
Richard Gardner for 15 years.'' Keep in mind, I never knew this 
special agent until he came into my life in my office on March 
29, 1995.
    In the end, the IRS had put between three and five agents 
working on my case and had supposedly put between 6,000 and 
8,000 tax returns on its computers in an attempt to show fraud, 
and failed.
    The IRS examined between 35,000 and 45,000 of my client tax 
returns for fraud, and failed. It had questioned hundreds of my 
clients, threatening them, and spent hundreds of thousands of 
dollars to prove wrongdoing, and failed.
    When it came right down to actually going to court, the IRS 
caved in. The IRS knew it could not win a case based upon 
fabrication, false, and non-existent testimony. Yet, the 
Justice Department indicted me anyway in March of 1997 on 23 
Federal counts.
    Please understand that all 23 of these counts were handled 
and investigated by the same special agent who had visited my 
office in March of 1995. Even then this special agent had so 
many problems with these indictments the IRS had to reconvene 
another grand jury in May of 1997 and have me re-indicted.
    Finally, on December 4, 1997, the Justice Department 
dropped two counts against me. On January 5, 1998, in Federal 
Court, all of the other counts against me were dropped and the 
case was dismissed.
    The IRS admitted in Federal Court what I stated earlier, 
that I prepared between 4,500 and 6,000 tax returns annually 
and that I am one of the largest independent tax services in 
Oklahoma. It appears the IRS wanted a high-profile, guilty-
even-if-you-are-not victim to use to scare other tax preparers 
and taxpayers.
    As you can imagine, to live under the threat of prison for 
33 months has been terrible and has exacted a very high toll. I 
feel that if the Congress did not hold these hearings, the IRS 
would continue as always.
    Thank you for hearing my story.
    The Chairman. Well, thank you, Mr. Gardner, for being here 
today. As I have said on several occasions, these hearings 
would not have been possible if it were not for the courage of 
taxpayers and employees of IRS who appear here at great 
personal risk.
    Senator Gramm. Mr. Chairman?
    The Chairman. Yes. I will call on you next. Mr. Moncrief is 
our next witness, and our Senator from Texas would like to make 
a few comments.
    Senator Gramm. Mr. Chairman, thank you for recognizing me. 
Tex Moncrief is an old and dear friend of mine. When we first 
started these hearings, Tex contacted me saying he wanted to 
testify. I told him that I remembered his case and that it 
obviously was exactly the kind of thing that we were looking 
for, but that he ought to think through doing this because, by 
testifying, obviously his case is in the public domain and 
people have a right, and some will feel an obligation, to try 
to portray it in the most negative light. Tex was determined 
that he wanted to come, and I just wanted people to understand 
that. Thank you, Mr. Chairman.
    The Chairman. Well, I appreciate the fact that you are here 
today, Mr. Moncrief. Please proceed.

                STATEMENT OF W.A. MONCRIEF, JR.

    Mr. Moncrief. Mr. Chairman and distinguished gentlemen of 
this committee, I consider it an honor and a privilege to 
appear before you today.
    In my imagination, Federal raids were always confined to 
Mafia bosses and drug lords. If you had told me that 64 IRS 
agents would storm my office with sidearms holstered and 
bootheels trampling my civil rights and my business reputation, 
I would not have believed you. I am a graduate petroleum 
engineer, a former World War II naval officer, and a second-
generation Texas oilman.
    My father was a World War I army officer and a highly 
respected and successful oil and gas explorer. My family and I 
are patriots and law-abiding Americans. We have given tens of 
millions of dollars away to medicine, the homeless, and the 
needy, and pay many millions of dollars in taxes every year.
    But on the morning of September 1, 1994, the IRS raided the 
Fort Worth office of my family-run oil company. Making sure my 
employees saw their guns, they stormed the offices like an army 
landing on an enemy beachfront.
    My employees heard the agents shout, ``IRS! This business 
is under criminal investigation. Remove your hands from the 
keyboards and back away from the computers, and remember, we 
are armed.''
    They rummaged through every inch of our building, breaking 
into offices, barking orders like, ``Open the doors, or we'll 
knock them down.'' One special agent told my son that he could 
blow the hinges off his safe if he would not open it. Agents 
even removed sheetrock from the walls, as if they were looking 
for illegal drugs. They herded my employees down to a first-
floor dining room, treating them like criminals. No food, no 
phone calls, and for some, no chairs.
    My entire staff at the time consisted of less than 35 
people, mostly women. That is a ratio of nearly two armed 
agents per employee. One employee commented, for the first time 
in my life I feel bad to be an American. I was humiliated and 
branded a criminal before anyone in the IRS bothered to 
consider that I had not done anything wrong.
    Although these investigations are supposed to be 
confidential, someone with inside information alerted the 
media. This ensured maximum coverage and maximum embarrassment. 
News of the raid was broadcast on radio, TV, and in newspapers 
from coast to coast. It sent my business reputation into a 
tailspin, and in my business a good reputation is about the 
most precious thing a man can have.
    They left later in the day with over one million documents 
and an entire computer system. Virtually our whole company 
including records dating back to the 1970's was packed up in 
less than a day and moved to a warehouse in Dallas. For several 
months, when we needed to see a document, file, or have access 
to a checkbook to handle business, IRS agents checked us in and 
out of the warehouse like prisoners.
    Our long nightmare had only begun. My family was 
investigated for more than 16 months. The Justice Department 
finally offered to drop the criminal investigation after I had 
spent millions of dollars in legal and accounting fees, roughly 
$5.5 million, to prove that we had committed no crime.
    But the IRS would not go unless we paid a large, 
arbitrarily determined sum which was, in my opinion, plain 
extortion. IRS also demanded that we sign releases promising 
not to sue its agents and every other government employee who 
had ever touched the case for violating our civil rights under 
the Fourth Amendment of the constitution, and other Federal 
laws. We gave in to these demands, beaten for well over a year 
into submission and threatened with more of the same.
    I am one of the few taxpayers blessed with the resources to 
fight back against IRS abuse and Gestapo-like tactics. The IRS 
must be held accountable to the people it is supposed to serve. 
I am here today in the hopes that this committee will take 
steps to prevent what happened to my family and me from 
happening to any other American.
    Here is my story. The September 1, 1994 IRS raid came about 
as the result of a plot hatched by our former chief in-house 
accountant while he was working for us and supposedly 
overseeing our accounting and the preparation of our tax 
returns.
    About 2 years before the raid, he began stealing 
information from our files and enlisting a group of well-
connected former IRS, Justice Department, and Treasury 
Department officials to help him. In March of 1993, they 
approached the highest level of the IRS, the Acting IRS Chief 
Counsel, the number one lawyer at the IRS, with a plan.
    While this accountant was still working in our offices 
every day, he secretly had his well-connected co-conspirators 
travel here to Washington to meet the Acting Chief Counsel at 
the IRS National Office. They used their connections to entice 
the IRS to throw its full, terrifying weight against us in 
exchange for money, and lots of it.
    In June of 1993, I fired the accountant for incompetence, 
giving him a generous severance and an automobile. I never 
guessed that his scheme to ruin me and make himself rich at my 
expense was already well under way.
    On November 9, 1993, the IRS District Director in Dallas 
signed an agreement to pay our former in-house accountant as 
much as a $25 million bounty, his share of the money he told 
the IRS to expect to take from us.
    Our former accountant, in turn, signed a contract with the 
former Justice Department, IRS, and Treasury lawyers who had 
helped them, promising to pay each of them a share of this huge 
IRS reward.
    At the same time, these conspirators took the stolen 
information to prospective plaintiffs and their lawyers and 
used it to generate spurious private, but ultimately futile, 
lawsuits seeking outrageous damages from us.
    Anyone could have seen that these people had a financial 
stake in destroying me, but the IRS accepted them and their 
story without bothering to investigate their motives or 
honesty.
    All too happy to accept this information, the IRS never 
bothered to inquire how its informer got it or whether it was 
true before launching its massive raid. It could have checked 
our former accountant's claims by employing the usual, but far 
less intimidating or intrusive, practice of sending an agent 
over to our office to audit our financial records.
    I still do not know why it chose not to issue us a summons 
or a subpoena. Had it done either, we would never have had to 
endure this nightmare. There was one enormous problem with all 
of this: we had committed no crime.
    Not long after the raid, the Justice Department began to 
realize that our former accountant lacked credibility and that 
his motives and conduct were highly suspect. However, the IRS 
would not quit. Spurred on by conspirators chasing a $25 
million reward, IRS agents terrorized our employees, knocking 
on their doors after work, and scaring most of them to death. 
The pressure on our loyal, hardworking employees was intense.
    Many of them were working well into the nights and on 
weekends trying to help our lawyers and accountants figure out 
what the IRS was told we had done wrong, while simultaneously 
trying to keep up with our regular business. That was the 
toughest part, there was no new business. An independent oil 
company's most precious asset is its reputation. Ours was shot 
to heck. The damage to our family business and reputation was 
enormous.
    The emotional damage was even greater. One of our 
accountants was hospitalized and placed on medication for high 
blood pressure. Another key employee who had worked for us for 
17 years stated under oath that she was so terrified and 
intimidated by the IRS agents that she agreed to work for them 
in the evenings to help them go through our accounting records.
    Our former accountant offered that same employee a share of 
his IRS informer's fee the night before she was to testify in 
the grand jury in the hope that she would support his baseless 
allegations.
    It may be hard to believe, but IRS agents even subpoenaed 
my college transcript and those of two of my sons. I am 
convinced that they did this to get around the non-disclosure 
laws, embarrass, and intimidate us. Why else would they tell 
our alma maters, the institution we attended years ago and now 
serve as trustees, that we were under grand jury investigation?
    Ultimately, the truth won out because I was fortunate to 
have the means to fight back. Over the U.S. Government's strong 
opposition, we sought to take the sworn depositions in a civil 
lawsuit of the men who had conspired against us.
    An Assistant U.S. Attorney actually made an appearance in 
Texas State Court, but failed to block the depositions. It was 
then that the conspirators and the IRS's scheme came apart. Our 
former in-house accountant claimed the Fifth Amendment 
privilege and refused to be deposed on the ground that truthful 
testimony might incriminate him.
    His lawyer, the former U.S. Attorney for the Northern 
District of Texas and one of the beneficiaries named in the IRS 
reward-sharing agreement, suggested in open court that he might 
have to do the same. At this point when the entire scheme was 
backfiring, the Justice Department offered to settle the 
investigation.
    It got back to us that, even though its extravagantly paid 
informer had disgraced both the IRS and himself, the IRS would 
not stop tearing our lives apart for less than $300 million, 
which, in a matter of weeks, dropped to $100 million, then $24 
million, and finally $23 million.
    Although the IRS never bothered to conduct a civil audit to 
find out whether we owed one additional set of tax, it called 
the $23 million it extracted from us additional taxes and 
interest.
    It was, in fact, nothing more than an amount arbitrarily 
demanded from me, various family business members, our 
business, and our charitable foundation to let the U.S. 
Attorney issue a press release praising the IRS Criminal 
Investigation Division for what it had done to us.
    But money and a press release were not all it wanted. 
Despite the fact that its informer's originally, highly 
compensated allegations were false, the IRS refused to quit. It 
demanded that we sign releases promising not to sue the agency 
itself and every government employee who had violated our 
rights. I did not like this arrangement, but it was clear to me 
that if I did not agree the IRS would investigate our family 
business to its demise and me to my grave.
    When we learned the truth about our former accountant's 
extortionate plan we asked the U.S. Attorney and the IRS 
Inspection Division to investigate. They resisted. First, IRS 
Inspection took a half-hearted look at the case, but closed 
that investigation without taking the time to interview me or 
my sons to find out what had happened. But we kept pressing. We 
acquired more evidence. A new investigation was opened.
    A new IRS inspector recommended that my former accountant 
be prosecuted, but no action has been taken. It is shocking 
that no IRS inspector has bothered to take action against the 
IRS case agents and supervisors who thoughtlessly accepted and 
viciously pursued the false accusations made by our greed-
driven former accountant.
    Our government has consistently stonewalled our efforts to 
obtain internal documents disclosing the truth. A Federal judge 
in Fort Worth recently tired of the government's effort to hide 
the facts. He ordered the government to give us all the 
information we had asked for and to pay attorney's fees to 
compensate us for the burdens it had placed upon our efforts to 
seek out the truth.
    The past 4 years have taken a personal and emotional toll 
that can never be restored. It is my hope that our suffering 
can be used as a mirror reflecting the need to reform an IRS 
that is completely out of control. Put yourself, for a moment, 
in my shoes.
    Your former accountant, a person you trusted for years to 
oversee the accounting and tax preparation for your business 
and fired because he was not doing the job, bargains for an 
incredible IRS reward, falsely tells the IRS you evaded as much 
as $300 million in taxes, and uses stolen information to 
generate private lawsuits against you.
    Armed IRS agents tear apart your offices, terrorize your 
employees, go public with the case, and after a long, 
personally and professionally painful investigation, inevitably 
come up empty-handed.
    There were no apologies, no public corrections of the 
record, and no efforts to right the wrongs. In the end, the IRS 
was concerned about one thing, getting a release from liability 
for itself and its agents.
    What about civil rights? This was a clear-cut case for 
serious self-examination by the IRS. But the IRS did its best 
to cover its tracks, protect itself from ever having to answer 
for its actions, and move on to another investigation on 
another, preferably defenseless, taxpayer.
    I am here today to ask you to call an end to this kind of 
abuse and ensure that what happened to us never again happens 
to another innocent American. Thank you very much, gentlemen.
    Mr. Moncrief, I thank you for being here. Again, I say it 
is outrageous. It is outrageous that any lawful American should 
have to go through this kind of experience, and I just want to 
again express my appreciation to you, and to the three of you, 
for being here today. Our whole purpose is to seek to assure 
fair treatment to the American people.
    Now, Mr. Colaprete, I will start with you, if I may. The 
question must be asked, were you or any of your partners 
trafficking in illegal drugs out of your restaurant?
    Mr. Colaprete. Absolutely not.
    The Chairman. Absolutely not.
    Mr. Colaprete. Emphatically not. I do not know how strong 
of words I can use for something so outrageous.
    The Chairman. Now, Mr. Colaprete, 2 days is not a very long 
time. But, based on just 2 days of investigation, as I 
understand your testimony, the IRS raided your business, going 
so far as to take a fork out of the hands of one of your 
customers, tearing the front door off the hinges of your home, 
ransacking your house.
    Now, after all this mayhem, did anyone from the IRS explain 
to you why they took less than 48 hours to investigate the 
claims brought against you before they descended on you and 
your business?
    Mr. Colaprete. No, sir. The IRS had no contact with me. As 
a matter of fact, by making inroads to find out just those 
questions, I was met with, ``No comment, Mr. Colaprete,'' as 
though you are a criminal, we do not talk to criminals.
    The Chairman. Now, let me ask you this. After the IRS 
investigated your books and records, were you assessed any sort 
of penalty or were you notified that any taxes were due?
    Mr. Colaprete. No, sir.
    The Chairman. How long prior to the raid had you reported 
your bookkeeper's activities to the authorities?
    Mr. Colaprete. Prior to the raids, I contacted the Virginia 
Beach Police 10 days prior to the raids with the evidence of 
this embezzlement.
    The Chairman. Ten days.
    Mr. Colaprete. Ten days.
    The Chairman. Let me turn to you, Mr. Gardner.
    Mr. Gardner. Yes, Senator.
    The Chairman. Had you received any advance notice from the 
IRS of any problem they had experienced with your current or 
previous tax returns prior to the CID raid?
    Mr. Gardner. No, sir, nothing at all.
    The Chairman. None at all.
    Mr. Gardner. No, never.
    The Chairman. Now, is it your testimony that the IRS 
actually listed witnesses in the grand jury indictment against 
you who had never, never been involved with the case; is that 
correct?
    Mr. Gardner. Yes, sir.
    The Chairman. How do you explain that?
    Mr. Gardner. Well, for example, one of my clients listed on 
the indictment sheet contacted me and informed me that the IRS 
had called him a year and a half before and talked to him for 
about 20 minutes. The agent told my client that if he did not 
give them the evidence they wanted, he might also have some 
problems with the IRS.
    He was not the only one. There were about 10 other clients 
that were also threatened this way that were on the grand jury 
indictment. These clients for whom the IRS claimed I filed 
illegal tax returns came back year after year to have their tax 
returns prepared by me, even after the alleged illegal returns 
were filed. Obviously, they did not think I had done anything 
wrong, and these clients were the ones that the IRS was 
building their case on.
    The Chairman. Mr. Gardner, since the time the indictments 
against you were dismissed earlier this year, have you received 
any policy or any explanation from the IRS for the raid?
    Mr. Gardner. No, sir.
    The Chairman. None whatsoever?
    Mr. Gardner. None whatsoever.
    The Chairman. Mr. Moncrief, there must have been some cause 
for the initial effort to investigate you in the first case. 
What do you believe this was?
    Mr. Moncrief. I know of no reason why the IRS investigated 
us. We had no notice, nothing. I have no reason why it should 
have occurred.
    The Chairman. No reason whatsoever.
    Mr. Moncrief. No, sir.
    The Chairman. Why do you believe the IRS served the 
University of Texas with a subpoena for your college 
transcripts? Now, it is true you were a regent at the 
University of Texas, at least up to 1 year prior to the IRS 
raid.
    Mr. Moncrief. Yes, sir.
    The Chairman. Why do you think the IRS notified them?
    Mr. Moncrief. Well, I thought about it at the time. It was 
not because I was a Tau Beta Pi, the honorary engineering 
profession, although I was later named a distinguished engineer 
and graduate, but I think it was undoubtedly due to embarrass 
me, because as soon as they had contacted the registrar, Dr. 
Cunningham, who was the chancellor, called me. Then pretty soon 
most everybody in the university knew it, and then it gets 
around Austin, Texas, and all around the State of Texas. So I 
think it was to embarrass me.
    his kind of a raid was supposed to be confidential, and 
what they did was supposed to be confidential. But by going and 
getting my transcript, it could be used as public information, 
so I think it was to embarrass me.
    The Chairman. Mr. Moncrief, you paid $23 million at the 
conclusion of your case. That is a lot of money. If you were 
not guilty of any charges by the IRS, why did you pay such a 
large amount of money?
    Mr. Moncrief. Well, the IRS wanted to settle the case. They 
wanted to settle the case, but they wanted a substantial amount 
of money. We had it on pretty good authority that if we did not 
settle, they were going to keep after us, just year, after 
year, after year, and harass us, trying to find something 
wrong.
    That would have been hard to put up with and might have, as 
I said in my statement, chased me to the grave. So I finally 
agreed to pay this $23 million, which had come down from $300 
million, for the welfare----
    The Chairman. Their initial demand was $300 million?
    Mr. Moncrief. Originally they said it was a $300 million 
tax case, which I assume they figured they might get because 
they were going to pay the accountant $25 million. But I did 
that for the welfare of my family and so I could get back to 
running the successful oil business that we had. I mean, it was 
ruining our life and I decided to do that and then go ahead and 
pursue things like I am still doing today.
    The Chairman. Let me ask you this. Was there ever an audit 
done on your taxes for the years in question, or an assessment 
notice provided you for any amount of taxes?
    Mr. Moncrief. No, sir.
    The Chairman. None whatsoever?
    Mr. Moncrief. None whatsoever.
    The Chairman. Senator Moynihan.
    Senator Moynihan. Wow! Gentlemen, thank you for your 
testimony. I said at the opening remarks, and I just think we 
have heard confirmation, that we have to be much concerned 
about the para-military performance of the Internal Revenue 
Service.
    I mean, one is aware of it, but thinks of it as marginal 
and having to do with cooperative involvement with drug 
enforcement, which is also in the Treasury Department. Clearly, 
it is not. Clearly, if armed agents can appear in these scenes 
where there is no issue of violence, it is government violence 
directed against citizenry.
    I think we have to ask Judge Webster to look into that with 
the specific concern of, are civil rights being violated in a 
most egregious mode, as would seem to be the case in each of 
what you have described.
    I have one other thought, Mr. Chairman, and that is the 
role of the Justice Department. Are they sensitive to these 
matters, and in particular the U.S. Attorneys? I think we as 
Senators had better pay attention to that because, although it 
is not widely understood, U.S. Senators choose U.S. Attorneys. 
I have been here 22 years, and I so attest. Am I not right, 
sir?
    The Chairman. You are absolutely correct.
    Senator Moynihan. We choose U.S. Attorneys and have 
responsibilities for our choice.
    Mr. Gardner, you mentioned that at one point that the IRS 
convened a second grand jury.
    Mr. Gardner. Yes, sir.
    Senator Moynihan. Well, sir, it would have been the U.S. 
Attorney who convened it, as you know.
    Mr. Gardner. That is correct.
    Senator Moynihan. You referred to a grand jury indictment 
which had persons on it that ought not to have been there. That 
is the U.S. Attorney's choice. It may be something he has 
deputized to a Deputy U.S. Attorney, but he is responsible.
    It is the same case with you, Mr. Moncrief. I think the 
U.S. Attorney was involved in ways that one asks about their 
competence and their motivation. U.S. Attorneys have been known 
to rise to higher levels in public life, and the mode of 
indictment and convictions is well known.
    I think we have to ask the Justice Department down here, 
sir. Are they paying heed to what the U.S. Attorneys are doing? 
What kind of discipline do they have over there? I would invite 
any comments you might have about that. Mr. Moncrief, you 
probably knew that U.S. Attorney. Perhaps you did not, but you 
certainly knew his name.
    Mr. Moncrief. I did not quite catch that.
    Senator Moynihan. Well, the point is, the U.S. Attorneys 
are the ones who take these matters into criminal court, into a 
criminal phase.
    Mr. Moncrief. Yes, sir.
    Senator Moynihan. What are their grounds and what are their 
restraints, and what do they understand they are doing? How 
much do they just accept what the IRS gives them and go 
forward?
    Mr. Moncrief. Well, I think, Senator Moynihan, they 
accepted our bookkeeper's allegations without even 
investigating, just in almost a matter of minutes. We have 
tried for 4 years to get the affidavit. There were supposed to 
have been an affidavit that is sworn out by an informer where 
they can get a search warrant, and we asked for that within 
days after this raid happened.
    We still have not gotten that affidavit, under the Freedom 
of Information Act or anything. We still do not know what this 
informer said that caused this raid. I do not think that is 
right, after 4 years.
    Senator Moynihan. I could not more agree. What I would 
wonder, is why does that U.S. Attorney still have his or her 
job? These are political appointments for which Senators are 
responsible, and the Justice Department, and the President who 
sends their nomination? It is a formality, but it is real.
    In your case, Mr. Gardner, did you have any feeling about 
the U.S. Attorney's office taking anything like being prudent, 
as they ought to have been in your case?
    Mr. Gardner. Senator Moynihan, I believe they just followed 
what the IRS agent said. I do not know if they really checked 
it out.
    Senator Moynihan. Well, that is not why they are appointed 
by the President and confirmed by the U.S. Senate, not just to 
take anything they are handed.
    Mr. Gardner. Absolutely correct.
    Senator Moynihan. And is there no disciplinary process for 
U.S. Attorneys?
    The Chairman. There certainly should be.
    Senator Moynihan. None of these gentlemen would have been 
in court without a U.S. Attorney taking them to a criminal 
indictment.
    Mr. Moncrief. In my case, the bookkeeper had friends who 
were employees of the IRS and the Justice Department that 
cooperated with him to set this up.
    Senator Moynihan. That is called corruption.
    Mr. Moncrief. Yes, sir. It really is.
    Senator Moynihan. I hope the Attorney General is watching. 
I doubt it, but there is a Deputy Attorney General who is 
responsible for the U.S. Attorneys. You cannot get into a 
criminal situation without the Justice Department cooperating 
with the IRS. That cooperation has to be something more than an 
automatic transfer of, anything you say, we will indict and 
send somebody else to jail.
    I will put it this way, sir. These U.S. Attorneys are our 
appointments and our responsibility, and I think we should 
attend to it in a way we have not done previously. I am 
appalled with what I hear and I hope we will not leave it 
there, and I am sure we will not, thanks to you, sir.
    Thank you, gentlemen.
    Mr. Colaprete. Senator Moynihan, in regards to my 
situation, after 5 months of keeping my records and every part 
of my business, holding me in abeyance, we were contacted by 
the U.S. Attorney, who told my attorney, we have no evidence of 
any crime, come get your things. Of course, at that point I 
said, well, you have all my things, you have looked at them, 
why don't you just keep them? But no, the next week they sent 
them to me.
    After that case, or whatever case they assumed they had was 
finished, my question was, as a citizen now, since this is 
over, can I please see the reasons this occurred. That is, the 
affidavit. That was stonewalled for 2 years. The only reason I 
know what is in that affidavit is because we are suing the 
Internal Revenue Service and finally a judge said, let them see 
the affidavit.
    The Justice Department and the IRS claimed that it was 
sensitive and that we could not see it. Freedom of Information 
requests? They do not mean anything. I do not even understand 
what a Freedom of Information request is. It does not work. 
They pick and choose what they want to show you, I guess, or 
give you. But if you require something or request it legally 
and they do not want to give it to you, you are not getting it.
    Senator Moynihan. Well, I think the Department of Justice 
has to look to its standards here. I would appreciate very 
much--we have a practice of asking you to give us something in 
writing after your testimony--if we could have the names of the 
U.S. Attorneys involved.
    Mr. Moncrief. Yes, sir, I believe so.
    Senator Moynihan. Just when you get a chance to send us a 
note tomorrow or the next day.
    Mr. Moncrief. Yes, sir. I certainly would, sir.
    Senator Moynihan. Thank you very much, gentlemen.
    The Chairman. I would also urge, Senator Moynihan, that we 
request William Webster and his investigation of the CID, that 
it would be appropriate for him to look at the role of the U.S. 
Attorney.
    Senator Moynihan. Yes. Exactly. He having been a judge and 
head of the FBI. Exactly.
    The Chairman. Gentlemen, again, we appreciate very much 
your being here today.
    Senator Kerrey. Mr. Chairman, are we going to be given an 
opportunity?
    The Chairman. Oh, I am sorry. You are right. In fact, you 
are next, Senator Kerrey. Sorry about that.
    Senator Kerrey. Thank you very much, Mr. Chairman.
    Gentlemen, I also appreciate and congratulate you on your 
courage in appearing before this committee. May I presume that 
the committee did not ask you to comment on the legislation 
that we passed a couple of weeks ago and sent on to the floor, 
that you have not reviewed the legislation that Congress is 
taking up? May I presume that is correct?
    Mr. Moncrief. I have not reviewed it.
    Senator Kerrey. Well, one of the things I would like to do 
as just sort of a follow on is get you a copy of the bill. 
There are changes in the law that we are proposing that I think 
will address some of the problems that you have identified, 
although the larger problem we are dealing with here is a 
Fourth Amendment right that all citizens have. This Congress, 
in its responsibilities governing Federal law, pass laws all 
the time that grant all kinds of Federal agencies power, and 
you are dealing with one of them.
     All of us in our offices have citizens who have faced the 
IRS, the EPA, the USDA, the Health Care Financing 
Administration, and on, and on, and on, not to mention the Drug 
Enforcement Agency, the FBI, and other agencies to whom we 
grant substantial power, in some cases police power, to be able 
to collect and acquire evidence and bring a case. What we are 
dealing with here, is you all have had your Fourth Amendment 
rights violated.
    One of the things I think we need to be sensitive to all 
the time is that citizens have those Fourth Amendment rights 
and we have to be careful, in granting any agency of government 
power, that we do not give them so much power that they are 
able to do what you just experienced.
    I think in our legislation we heard, in addition to 
individual stories such as yours, lots of other stories; $4 
billion of taxpayer money wasted on computers, difficulty in 
managing, difficulty in recruiting, difficulty in retaining, 
all kinds of other problems; taxpayers not getting their calls 
answered, all kinds of other things.
    In our legislation we have three titles that I would ask 
you to review, and I will get you a copy of the bill. I regret 
that you were not given a copy of the bill prior to coming here 
because I think it would have been useful to get your comments 
in public as to whether or not, in particular, the new Taxpayer 
Rights, a new right of action, for example, under negligence. 
It may not be enough and we may need to look at it.
    I was talking to Senator Bryan, who was a former 
prosecutor. We may need to look at the process of approaching a 
taxpayer. How do you approach the taxpayer? We may need to look 
at an amendment, given your experience and other people's 
experiences, that will change the process of approaching a 
taxpayer to say we think that you have broken the law, we want 
to accumulate evidence, and so forth. I mean, there is a need 
to acquire evidence. Obviously, in all three of your cases they 
have done it in the wrong way.
    The question is, how do we change our law? So I would 
appreciate it very much if you would look at Title 3 of our 
legislation, which extends substantial new powers to taxpayers 
and attempts to address this problem. I would appreciate very 
much your comment as to whether or not it does it.
    Title 1 and Title 4 of the bill also attempts to deal with 
the problem, because one of the things we discovered, and all 
of us who are members of Congress know this, we have a very 
difficult time finding out what the IRS is doing.
    They are not terribly accountable because the law grants 
them not only authority, but the law says we want you to keep 
all this information private. We do not want taxpayer 
information to be made public.
    So inside this wall of privacy, it is difficult for us to 
work a case. It is difficult for us to help a citizen. I have 
got cases that stretch all the way back to the 1980's that I am 
working on on behalf of taxpayers, so it is difficult to 
approach it.
    So we created a new public board that has substantial 
powers over the IRS to manage this agency and to work with 
Congress. We also found in Title 4 attempts to deal with this, 
and I would appreciate very much your honest comments on that, 
but not today because you have not looked at the bill.
    We also found that Congress has not done a very good job in 
its oversight. This is the first committee hearing meeting, 
since the Chairman started last fall, in 17 years where we have 
had full committee oversight of the IRS. There are six 
committees that the IRS reports to in Congress.
    We proposed in our legislation to consolidate that 
oversight at least twice a year so that this new public board 
will have somebody they can come and talk to to make certain 
that they get consistent instructions in the Congress as to 
what they are supposed to be doing.
    Mr. Moncrief and the rest of you, I am sure, would 
appreciate what it would be like to run your business if you 
had 535 people on your board of directors who were elected, and 
that is basically what the IRS deals with.
    So I just want to congratulate you and thank you for 
bringing this to this committee publicly, especially your 
sensitivity now to the dangers of granting any government 
agency powers as to the Fourth Amendment rights of a citizen, 
and I would appreciate very much, and I will get you a copy of 
the legislation, any detailed comments that you would give us 
on Title 1, Title 3, and Title 4, especially in the Title 3 
area and the new rights that we grant to citizens.
    My guess is from listening to your testimony that we may 
need to look at some change in the law that would change the 
process of approaching a taxpayer when there is a suspicion 
that maybe a violation of the law has occurred.
    Mr. Gardner. Senator Kerrey.
    Senator Kerrey. Yes, sir.
    Mr. Gardner. Could I ask you if, on this new tax bill, the 
appeals and the original auditing are going to be separated, or 
are they still being handled the same way that they have always 
been handled?
    Senator Kerrey. Well, first of all, the Taxpayer Advocate 
is made more independent than they were before. The Problem 
Resolution Officer will no longer get their performance graded 
by somebody inside of the IRS, so they will be more 
independent. We do change the due process of appeals. There is 
a detailed section on that. Rather than responding to you 
directly, I think it would be best if I just gave you the 
language.
    Again, all three of you have experienced this thing and 
have knowledge of it first-hand. I think your advice to us as 
to whether or not we have got the changes in the law right 
would be very helpful.
    I mean, you all know that the IRS is not a Sears and 
Roebuck. They are not a private sector agency, they are created 
by law. We write the law. We write the laws that tell the IRS 
we want you to get more involved in drug investigations.
    One of the reasons they are doing what they are doing is 
that we have asked them to be more police-like in going out and 
going after individuals and trying to solve the problem of 
drugs, money laundering, and so forth.
    What has happened, it seems to me, is in the effort to do 
that we have not given them, under the law, clear enough 
instructions of how to do that. So we now need to change that 
law to make certain that they----
    Senator Moynihan. And how not to do it.
    Senator Kerrey. And how not to do it. That is quite right. 
So anyway, I would be very grateful. The Majority Leader has 
indicated, that it is going to come to the floor next week and 
we are likely to be debating this. We will go into conference 
relatively quickly. I hope that you can help us make certain 
that we get this law improved so that we do not have this kind 
of situation in the future. Mr. Moncrief, you are quite right. 
Most American people do not have the resources to fight.
    I said yesterday, and I will tell you, the fear that you, 
Mr. Gardner, mentioned in your testimony is so bad that former 
Commissioner Richardson, in her testimony to the Restructuring 
Commission, said that right after she came on the job she 
received her first paycheck in the mail with an IRS return 
address, and she was too frightened to open it, and it was her 
paycheck. That just is perhaps the most extreme example.
    The IRS, under this new law, we hope, will presume that 
taxpayers are law-abiding citizens and will have an attitude 
towards them that presumes they are law-abiding citizens. What 
we are trying to do is get the penalties high enough that would 
deter this kind of action, as well as establish new due 
processes for citizens when they are approached by the IRS.
    Again, I thank you very much for your testimony.
    The Chairman. Mr. Gardner, I would point out that we have 
made some changes in the appeals approach. The present language 
forbids ex parte conversations between the agent and the 
appeals officer. There is a right to appeal to the Tax Court. 
But it would be very helpful to have each and every one of you 
take a careful look and give us the advantage of your advice.
    It is now my pleasure to call on Senator Nickles.
    Senator Nickles. Mr. Chairman, thank you very much. Some 
people were questioning whether we should have this second 
round of hearings. I think yesterday's hearings, coupled with 
today, are certainly evidence that we need these hearings. I 
think the Criminal Investigative Division is out of control, 
the IRS is out of control.
    Mr. Colaprete, how many agents busted your restaurant, your 
home, and your staff member's home?
    Mr. Colaprete. It was between 20 to 30 men in each 
establishment.
    Senator Nickles. Twenty to 30.
    Mr. Colaprete. Four raids simultaneously, two homes, two 
restaurants.
    Senator Nickles. You have two restaurants in Virginia 
Beach.
    Mr. Colaprete. I did have two restaurants. One, of course, 
was closed six, 8 months later because I just could not keep it 
together. When you have a business that is out there in the 
community like a restaurant, you do not recover from an armed 
intervention such as this. You just do not recover.
    Senator Nickles. I understand.
    Mr. Colaprete. This is 4 years later and we have not 
recovered. We lost one restaurant, but at that time there were 
two restaurants. We had just opened the restaurant 4 months 
prior to the raids.
    Senator Nickles. Mr. Gardner, how many people raided your 
IRS office?
    Mr. Gardner. There were 15 IRS agents and approximately 5 
U.S. Marshals.
    Senator Nickles. Did they go into your home or just into 
your office?
    Mr. Gardner. In my tax service, sir.
    Senator Nickles. Mr. Moncrief, how many did you say hit 
your business?
    Mr. Moncrief. There were 64. Absolutely. Sixty-four. They 
had to get them from Waco, Dallas, and surrounding areas to 
have that big a group.
    Senator Nickles. Mr. Gardner, I do not remember you saying 
that you had a disgruntled employee, but Mr. Colaprete and Mr. 
Moncrief evidently had former employees that had contacted IRS 
and said that there was a problem. In your case, Mr. Moncrief, 
evidently the former accountant even signed a contract where he 
could make millions of dollars if there was significant 
recovery, is that correct?
    Mr. Moncrief. Yes, sir, he did. The bad part was, he used 
employees of the IRS and the Department of Justice to get this 
contract for his reward.
    Senator Nickles. Mr. Moncrief, you mentioned that you 
eventually settled. They were trying to get several hundred 
million dollars, you eventually settled for $23 million. It 
sounds to me like that was not the result of an audit that 
said, here are mistakes, you deducted things you should not 
have deducted or you took a credit when it should have been a 
deduction. It did not look to me like it was mistakes made on 
returns, it sounds more like extortion.
    Mr. Moncrief. This was an arbitrary sum that they came down 
to. They realized that they had done wrong and it was an 
arbitrary sum that they came down to. But at that point, with 
the harassment we had been through, it just made sense to me to 
get my family and myself back enjoying life.
    Senator Nickles. You wanted to get it behind you and you 
were willing to pay some amount to get rid of the harassment.
    Mr. Moncrief. Yes, sir. And I am still after them.
    Senator Nickles. I appreciate that. You also were forced to 
sign a waiver that you would not sue either the IRS or the 
agents that were involved in this case; is that correct?
    Mr. Moncrief. That is correct.
    Senator Nickles. Mr. Chairman, when we talk about 
legislation we talk about taxpayers' rights, and we have this 
bill before the Senate next week. I think we should look at 
repealing this added waiver that IRS gets in trying to complete 
these cases and that they would not be sued.
    When you find this type of abuse and then say, oh, but we 
want to be held totally free from future liability, I am 
bothered by that and I am bothered by it a lot.
    So I am thinking maybe we need to look at an additional 
amendment when we come to the floor next week, and I will work 
with the Chairman on it, as well as Senator Gramm from Texas 
who also mentioned that maybe we need it, because that is 
wrong. That is absolutely wrong.
    I can see from a business perspective where you would say, 
hey, I want to get this behind me and I am willing to pay 
something to get it out, because there is a lot of anxiety. Mr. 
Colaprete, you mentioned it very well, and Mr. Gardner. This is 
an unbelievable strain, mental strain, financial strain. Mr. 
Gardner, they tried to put you out of business.
    Mr. Gardner. Yes, sir, they did.
    Senator Nickles. But they were not successful.
    Mr. Gardner. No. We opened the next morning and are still 
in business today.
    Senator Nickles. Mr. Colaprete, the net result was, you 
lost one of your restaurants.
    Mr. Colaprete. Yes, sir.
    Senator Nickles. A lot of employees lost their job as a 
result.
    Mr. Colaprete. My restaurant generated lots and lots of 
dollars for my country in tax revenues. We lost that 
capability. We turned lives upside down. I had 50, 60 employees 
in that one restaurant who lost their jobs.
    Senator Nickles. Mr. Moncrief, in your case you mentioned, 
what, you only had like 30 some employees in your headquarters.
    Mr. Moncrief. That is all.
    Senator Nickles. But again, I can appreciate the anxiety 
because I used to be on your side of the fence, although I did 
not have an IRS problem like this. But there is an enormous 
amount of angst, anxiety and tension dealing with these 
dealings. I can imagine you might at some point be saying, yes, 
I will pay $23 million to get rid of it. I would be willing to 
get this thing behind me and try to get on with life.
    Well, I hope, Mr. Chairman, that we will look at improving 
our bill even further. I think, as a result of every hearing 
and almost every witness, we have made improvements on this 
bill. It was a good reason, in my opinion, we did not take the 
House bill and pass it.
    We have made significant improvements from the hearings 
that we had in Oklahoma. We added about nine provisions as a 
result of the witnesses there that I think strengthened the 
bill and will hopefully make IRS more accountable in the 
future. I think this panel has contributed to that and I 
compliment them for it. Thank you.
    The Chairman. Next, we have Senator Murkowski.
    Senator Murkowski. Thank you very much. I am not going to 
add much to what has already been said by my colleagues 
relative to the indignantcy that I share as a U.S. Senator in 
accepting the responsibility for representing the people of 
this country and the particular circumstances surrounding the 
IRS actions against the three of you. Such Gestapo-like actions 
are uncalled for.
    To suggest that 64 agents would come into a business of 32 
people, it is really almost beyond belief. But it is factual 
and it does not occur just in the IRS, Mr. Chairman.
    I had an occasion in my State where one of our two pulp 
mills, which is not in existence any more because of being shut 
down by environmental opposition, and the case was parallel. It 
involved the Environmental Protection Agency, who for some time 
had been investigating the mill, taking records out by the 
carload, all engineering designs, and so forth, over an 
extended period of time instead of asking for specifics.
    A short time later, they came in with some 30 U.S. 
Marshals, armed, and seized the offices, made a demand on 
management to explain the effluent that had allegedly been 
going out of the mill.
    When the mill personnel and engineers explained that the 
drawings they had taken were from a small sawmill located on a 
small island in the native community of Metlekatla, they 
recognized in examining this information they clearly had no 
knowledge of the engineering aspects of a pulp mill. There was 
no emissions flowing from the pulp mill into the bay, but it 
was another mill for which the pulp mill managed to have the 
engineering plans.
    They accumulated this Gestapo-like effort because they were 
absolutely unfamiliar with the technical aspects of what they 
were dealing with and had been responding to this case simply 
by a whistle blower who had alleged that they were putting out 
effluent.
    I think it brings it to the point that I want to make, Mr. 
Chairman. I think we should look a little bit beyond just the 
tactics of the IRS, but other Federal agencies that clearly are 
using a presence to threaten and harass citizens of this 
country, whether they be taxpayers or others doing business. 
Obviously we have to maintain enforcement and compliance with 
Federal law, but these tactics are absolutely uncalled for.
    We can send people in to investigate, but you do not have 
to send armed personnel in flak jackets, and that is what 
occurred in my State and I am very much opposed to it, Mr. 
Chairman.
    So I would encourage, as we reflect on this, that other 
Federal agencies that have enforcement responsibility had 
better temper their procedure a little bit and recognize we are 
dealing with U.S. citizens here who, for the most part, are 
honorably engaged in their daily activities.
    And if there is cause for action and investigation, it 
should be done in an appropriate manner befitting of the trust 
that we put in these agencies to enforce actions, and the 
suggestion that Gestapo-tactics men in uniformed flak jackets, 
armed, is simply inappropriate and unnecessary in 99 percent of 
these cases.
    Thank you, Mr. Chairman. I want to commend you witnesses 
for coming forth with your stories.
    The Chairman. Senator Conrad?
    Senator Conrad. Thank you, Mr. Chairman, and I thank the 
witnesses as well.
    First of all, I am a former tax administrator elected by 
the people of my State to serve in that position. I cannot 
conceive of a circumstance that would justify the treatment 
each of you have endured. It is absolutely outrageous.
    Mr. Colaprete, I have read your testimony. I was not able 
to be here when you started, but I have read it. It is 
unspeakable, the way you were treated, and your partner, and 
your employees. Frankly, it tells me that there is a revenue 
service run amok to be treating taxpayers in that way. It is 
absolutely and totally unacceptable.
    I, for one, would apologize to you. That should never have 
happened. Even if they had somebody making these assertions, 
they had an affirmative obligation to establish that there was 
cause, and even then the way they approached you and your 
business was absolutely outrageous. How anybody in a position 
of responsibility would authorize raids of this nature is 
beyond my understanding. The people who did authorize such 
actions should be held to account themselves.
    Mr. Gardner, it is also in your case I find totally 
unacceptable the way you were approached. What conceivable 
justification could there be for approaching you in the way you 
were approached? I mean, this is people who have gotten a 
little bit of authority and have let it go to their heads. What 
is in their minds to treat a taxpayer the way you were treated?
    And I do not care what evidence they had. You do not 
approach anybody in the way you were approached. That is just 
wrong. And anybody that does not have the judgment to 
understand that ought to be fired. That is just the way it is. 
They ought to be removed from service because they have no 
understanding, they have no basic judgment.
    Mr. Moncrief, this raid on your business, 64 agents, 
whatever it was, that is preposterous. What are they thinking 
of? I must say, it sounds like police-state tactics.
    I do not care if they thought you owed $100 million, they 
have no justification for this kind of heavy-handed assault on 
any American. That is wrong and we have got to say it clearly 
and distinctly. That is wrong, it is unacceptable, it cannot be 
repeated. And the people that engage in that kind of conduct 
ought to be held accountable and they ought to be fired and 
they ought to be punished.
    That ought to be the message that goes forth from here. And 
I do not care if you owed $100 million, nobody and their 
employees deserve to be treated that way in America. So that 
needs to be the message that is loud and clear here.
    Mr. Gardner, do you have any idea what led to this raid on 
your business? This IRS agent indicated to somebody that came 
and talked to some of your employees, as I recall your 
testimony, said he had a vendetta against you. For what reason? 
Do you have any idea why he would have had a vendetta against 
you?
    Mr. Gardner. Other than being a tax preparer and helping 
clients reduce their taxes legally, I have no idea. I had never 
met the fellow before he came in my office. They did send an 
undercover agent in wired back in May of 1991 to tape record 
me, for whatever reason, we found out. But that was 4 years 
before they raided. I just really have no idea, sir. That is 
just the IRS today.
    Senator Conrad. To your knowledge, have the tax returns 
that you have prepared understated your client's income?
    Mr. Gardner. No, sir. I do 5,000, 6,000 returns a year and 
I have about maybe 6 to 8 audits a year. It is just normal, 
everyday auditing. It is usually less than the percentage by 
about half, but I really do not know, sir. Just because I was a 
large tax service and they just wanted to make an example out 
of me.
    Senator Conrad. Well, that is totally outrageous. I mean, 
that is not the way one operates. As a tax administrator, it is 
important to enforce the law. There is no question that there 
are people who understate what they owe, but that is totally 
unacceptable to be treating people in that way.
    Mr. Moncrief, you indicated you did pay $23 million. Have 
you paid that amount of money over to the IRS?
    Mr. Moncrief. Yes, sir, I paid that. But that was not for 
taxes, it was just what they called a settlement. I never got 
any tax notice before September 1, 1994, nor have I seen 
something saying I was in arrears or had done something wrong. 
I had not received one before that or since then.
    Senator Conrad. How many years were involved in this 
settlement?
    Mr. Moncrief. This went back to about 10 or 12 years ago.
    Senator Conrad. Ten or 12. Is this for a 10- or 12-year 
period?
    Mr. Moncrief. More than that. It went back to about 1979 or 
1980, right in there. From 1984.
    Senator Conrad. So this would be like a 16-year period in 
which they assert that you owed this additional tax. Do you 
have any idea what your effective tax rate has been during that 
period?
    Mr. Moncrief. Well, it is up in the top. But they did not 
say this was a tax, they just said this was an arbitrary amount 
that they wanted. It came down from $300 million to $200 
million, to $100 million.
    Senator Conrad. You believe that you do not owe any 
additional tax?
    Mr. Moncrief. I never have looked at it or found any that 
appears we owe. They never said that we owed it.
    Senator Conrad. Well, Mr. Chairman, I think one thing we 
should do is ask the Revenue Service to revisit this issue and 
to determine whether or not Mr. Moncrief owes any additional 
money or not. If he does not, he ought to receive a refund. We 
ought to ask the Revenue Service to review this case where this 
man asserts he does not owe the money. He certainly should not 
have had to pay the money.
    I thank the Chairman.
    The Chairman. I would say to the distinguished Senator, we 
have had problems with settlements before where we have tried 
to get the agency to take a second look. We thought there were 
very serious problems with it. But so far, I have had no 
success in that regard.
    We have got three additional Senators to raise questions, 
and we, of course, have two more panels. But the order will be 
Senator Grassley, Senator Mack, and Senator Lott. I will 
recognize the Majority Leader if he has to leave.
    Senator Lott. Thank you, Mr. Chairman. I will wait.
    The Chairman. Senator Grassley.
    Senator Grassley. First of all, I think I need to 
compliment Senator Conrad on his very strong statement about 
the need for this sort of discipline, and in fact, people that 
act like this not even to be in government service.
    But let me follow on where he left off. To each of you, 
were any of the agents that you have discussed who committed 
these horrible acts against you disciplined, that you know of?
    Mr. Gardner. No, sir. Not in my case.
    Mr. Colaprete. Not that I know of.
    Mr. Moncrief. No, sir.
    Senator Grassley. Well, then even emphasizes more than ever 
the point that Senator Conrad was making because this is where 
the problem is then. We have this abuse of power, we have abuse 
of your constitutional rights, and nobody is held accountable. 
We talk about the agents should, but there is a system here 
that ought to be examined.
    The IRS itself has to assume responsibility, it seems, to 
make sure that people's constitutional rights are protected. 
And when somebody abuses those, if the people in management at 
IRS are not going to discipline people like this, we are just 
going to encourage more of it.
    These stories that you have told us, they are awful 
stories, they are appalling stories. To the average citizen 
watching on television, these are earth-shattering things that 
IRS agents could, and would, heartlessly wreak havoc on 
people's lives. It is amazing that anyone would be so 
destructive, feel so strong about something, that they would 
treat you folks the way that you have been treated.
    I am used to discussing things like we are discussing here 
in the Finance Committee as a member of the Judiciary Committee 
where we discuss criminals and prison terms, we discuss what to 
do with heartless criminals who intentionally destroy other 
people's lives. That is what we have right here with IRS agents 
who have done things that are criminal.
    So it is kind of amazing to me that the IRS system, that is 
part of our government, a government that is supposed to be 
under the rule of law, a government where employees are 
supposed to be held responsible. It does not hold people 
responsible for their actions.
    This is the point that I want to emphasize that Senator 
Conrad made very clear about agents being punished for what 
they are doing wrong, but there is something wrong that we have 
got a system that does not want to hold these people 
accountable because these are destructive actions.
    But it is equally awful that no one is held accountable. If 
agents were held accountable, if they were disciplined for 
their wrongdoing, it would serve as a deterrent, it seems to 
me, that would keep other agents from abusing taxpayers, if 
these agents were used as high-profile examples.
    It is still not too late. If some of these people are 
employed, it is still not too late to hold them as high-profile 
examples as they attempt to use prominent taxpayers, and then 
maybe we would not have any more of this and they would know 
how it feels themselves how they treated you. It is a crime 
itself that IRS agents get away with these sort of crimes.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Grassley.
    Senator Mack is next.
    Senator Mack. Thank you, Mr. Chairman. Again, I commend you 
for holding these hearings. There has been some indications in 
the past that we held these hearings last year, we do not need 
to hold any more, we ought to get on with passing the 
legislation.
    But as Senator Kerrey raised in his questions, which is 
exactly the first point that I put down, which was going to be 
to ask you whether you had read the legislation that we had 
proposed and do you think it addresses the problems that you 
have experienced. I understand from your response that you have 
not.
    I will tell you, Mr. Chairman, I am troubled that we have 
frankly not covered all the areas that need to be covered in 
this legislation. I am going to consider whether I should 
appeal to the Majority Leader to delay this until we have an 
opportunity to really have folks who have experienced these 
problems, have had an opportunity, I would assume with their 
attorneys, to take a look at this legislation and see, in fact, 
whether we have gone far enough. I see I have just excited my 
colleague from the other side.
    Senator Kerrey. Well, Mr. Chairman, if we are going to do 
that, let us ask the witnesses to come before the committee to 
comment on the legislation.
    Senator Mack. Good idea.
    Senator Kerrey. Thank you.
    Senator Mack. I will do such right now. One of the areas 
where I have a problem, and which is not a secret to any of 
you, were the amendments that were passed at mark-up to add two 
members to the commission.
    Now, this Oversight Commission is supposedly to help see 
that the experiences that you have gone through do not happen 
again. But we ended up adding to this private sector taxpayer, 
if you will, board to oversee the IRS two individuals, one to 
be a representative of the IRS employees, and the other being 
the Secretary of the Treasury, who did not want this 
legislation in the first place.
    Now, mind you, these individuals who are going to be on 
this board are part-time. If you have these other two entities 
added to this board who have huge staffs to supply them with 
all kinds of information and a point of view, my concern is we 
have destroyed the credibility of this oversight board. I would 
be interested in your sense about that as well. Would any of 
you like to respond?
    Mr. Moncrief. Well, I cannot respond to that now, but I can 
certainly discuss it with my attorneys and get back with you. 
But what you said makes all the sense in the world.
    Mr. Gardner. I would like to discuss it with my attorney, 
too, Thomas Seymour, give you our opinions on it. (See p. 268 
for Mr. Moncrief's response to Senators Mack and Kerrey.)
    Mr. Colaprete. The same with me, sir.
    Senator Mack. All right. Again, we have all used language 
here today that I think comes from our hearts. I was trying to 
think how I was feeling. How do you put into words the feelings 
that go through our hearts and minds here this morning? A 
couple of them were, stunned by what you had to say, chilled 
was another one. Chilled by what you told us this morning. 
Angry about what you had to tell us. Troubled. Troubled.
    Again, my intentions are not to delay this any longer. But, 
as you have said, Senator Kerrey, over and over again, we write 
the laws. I just want to make sure we go far enough in 
addressing these issues. I have great concern with the police 
powers that are used by the IRS that seem to be way beyond 
anything that they should have, given what they have done with 
them.
    I think one of the messages from the hearing this morning 
that all of should take to heart, in our zeal to go after 
criminals, we need to make sure we write in the proper 
safeguards to make sure that honest, taxpaying citizens do not 
have those tools used against them.
    For the first time I saw this morning this informant reward 
agreement. It says, ``Whereas, the Commissioner of the IRS is 
authorized, pursuant to Internal Revenue Code Section 7623 and 
Treasury Department Order Number 150-10, to approve payments 
for information.''
    I suspect that when that was done it was, again, done for 
the purpose of getting to drug traffickers, Mafia. But we see 
three individuals before us this morning where these tools have 
been used against them. I mean, 10 percent of the first $10 
million, 15 percent of the next $10 million, 20 percent of the 
next $10 million. I think we have got a perverse system and I 
am not sure we have gone far enough.
    So, I really do appreciate your being here this morning. I 
think you have really focused the country, once again, even 
though many of us thought that could not be done again after 
the hearings last September. I think you have clearly focused 
us again.
    Mr. Moncrief, in your opening statement you said, ``In my 
imagination, Federal raids were always confined to Mafia bosses 
and drug lords. If you had told me that 64 IRS agents would 
storm my office with sidearms holstered and boot heels 
trampling my civil rights and my business reputation, I would 
not have believed it.''
    You know what? I think for too long many of us have heard 
those stories and there has been a tendency to say, not in 
America. Not in a free country. These kinds of tactics cannot 
be used against honest individuals.
    Well, I think that your testimony this morning has 
indicated that, in fact, they have, and we have got to make 
sure that it does not happen again.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Mack.
    Just let me make a couple of observations. The question of 
oversight is a continuing matter. One oversight hearing, two, 
or a dozen are not going to finish the matter because we are 
going to continue to have problems in the future that need to 
be exposed and corrected.
    Now, some wanted me to move ahead early on the House bill 
and I felt that was not the appropriate time because I thought 
there was much more that needed to be immediately done. But 
there never is an ideal time. I think it is important that we 
do move. We have a number of proposals in the legislation that 
we have worked out with the new Commissioner, in whom I have 
the greatest confidence. I want to ensure that he has the tools 
and opportunity to do what is necessary.
    So I feel very strongly that the time has come that, in the 
immediate future--and I do not say it has to be any particular 
day, or so forth--it is important that we get on with the job.
    At this time I would like to call on our distinguished 
Majority Leader, Senator Lott.
    Senator Lott. Thank you, Mr. Chairman. I am going to be 
brief because I know you have other witnesses. If the rest of 
them have stories to tell anything close to this, we need to 
hear it.
    I have heard over the years the conduct and actions 
sometimes of the IRS described as Gestapo-type actions, but I 
never had heard examples as explicit as this of exactly that 
kind of conduct, and it is totally unacceptable in America.
    I have had people ask me, well, why have you not done more 
about it in Congress? Why have you not had more oversight 
hearings, why have you not had legislation before now? I have 
thought a lot about that and I have talked to some members of 
the House and Senate. I really think there is a certain degree 
of intimidation that is applied to the Congress itself. I know 
of some examples where Congressmen and Senators, as a matter of 
fact, felt this sting repeatedly if they got too aggressive.
    So to these people, on behalf of the American people, I 
apologize for allowing a situation to develop in the law that 
would lead to this kind of conduct.
    Now, having said that, while I think that the legislation 
we have developed is a significant improvement, I still would 
like to make some changes and we are learning as we go along. I 
think what we have had described here today clearly is illegal. 
This kind of conduct should not have been allowed. Somebody 
should have taken action to stop this and it should not have 
needed these hearings or an additional set of laws to 
accomplish that.
    But I will just get to the real question here. Mr. 
Colaprete, in your testimony you name the IRS special agent who 
tried to destroy your business, a Ms. Carol Willman. Now, this 
question is being asked, I guess, in general, but I want to ask 
you specifically. Do you know if Ms. Willman is still employed 
by the IRS, if she was ever punished for what she did to you? 
That is my first question.
    Mr. Colaprete. No, sir. I have no idea.
    Senator Lott. You do not know what her situation is.
    Mr. Colaprete. I have no idea. I do not have the luxury of 
speaking with people like Carol Willman.
    Senator Lott. You do not know whether she was punished or 
allowed to continue working at IRS.
    Mr. Colaprete. No, sir. No, sir.
    Senator Lott. Or, in fact, was fired or not.
    Mr. Colaprete. I have no idea.
    Senator Lott. Mr. Moncrief, the same question to you. You 
described this instance that you had to deal with. Do you know 
if, for instance, the IRS District Director in Dallas was 
investigated, punished, or fired for placing a bounty on you 
and your business?
    Mr. Moncrief. No, sir. No one has been fired that I know 
of.
    Senator Lott. You do not know of any disciplinary action 
that was taken.
    Mr. Moncrief. I know of no disciplinary action. The 
bookkeeper that we had really broke the law in splitting what 
the IRS gave him. That is against the law. I have a lawsuit 
coming up against these six conspirators in June.
    Senator Lott. I wish you well.
    Mr. Chairman, yesterday, in answer to a question from one 
of the witnesses, she identified the Office of the Deputy 
Commissioner, Mr. Dolan, as the place where these cases had 
died, either through slow treatment, neglect, or whatever.
    But I think we need to go a step further. Who is the person 
that is responsible for making sure that people that act like 
this are punished, is it the Deputy Commissioner or is it the 
Commissioner?
    Somebody should have acted on these cases and I think we 
need to find out the answer to that. It is not just a question 
of passing new laws, it is a question of finding out why 
existing laws have not been enforced.
    Thank you, Mr. Chairman.
    The Chairman. There is no question but that is a problem of 
this agency's, not only a question of changing the process, but 
it is a question of assuring that there is strong, capable 
management that will, on a consistent basis, apply the law as 
written by the Congress. I think this is a serious problem of 
management. That is the reason I think it is so important that 
the new Commissioner be an individual experienced in management 
matters.
    Senator Conrad. Mr. Chairman?
    The Chairman. Yes, Senator Conrad.
    Senator Conrad. Might I make just a quick observation?
    The Chairman. Yes, sir.
    Senator Conrad. One of the things that strikes me is the 
culture that has developed here. Senator Kerrey was mentioning 
to me earlier that he thinks that perhaps some of this flows 
from what we have done to try to go after drug kingpins.
    I think, unfortunately, we may have a situation where 
people have kind of gotten mixed up here. We have authorized 
tough legislation to use the IRS to help other law enforcement 
go after criminal figures, whether it is organized crime or 
drug kingpins, and that is as it should be.
    But we have got to make sure there is a bright line out 
there so that kind of police action is not visited against 
taxpayers. I do not care if those taxpayers owe money. 
Obviously we have got to enforce the laws and we have got to 
make sure people pay what they owe. But we should not permit or 
allow these agencies to engage in police-state tactics against 
average taxpayers. I think that has got to be a focus of part 
of our concern here.
    The Chairman. It is my concern with that matter that caused 
me to say in my opening statement that I think it is critically 
important that William Webster, as part of his study, look at 
this question of CID and whether it is appropriate for them to 
be involved in money laundering and drugs, and so forth.
    I think the most impressive thing that we heard yesterday 
by one of the witnesses, or one of the most impressive things, 
was the fact that, today, we see intrusive investigations of 
the type you gentlemen described today. That was not the case, 
according to this witness, of 15 years ago when they were 
successful as they are today in assuring that the taxpayer was 
paying what he or she owed the government.
    Well, gentlemen, time is moving on. I cannot tell you again 
how much I appreciate your courage, the fact that you are here 
today. Your story is an appalling one. This is America and no 
American should have to go through the kind of suffering that 
you and your families have endured. I want to express my 
appreciation for your being here today. Thank you very much.
    Senator Kerrey. Mr. Chairman, I did not hear your opening 
statement, I just heard a statement about it. We have enacted 
laws in this Congress that have granted law enforcement 
agencies substantial authority to erode Fourth Amendment rights 
in the effort to fight a war on drugs and other sorts of 
things.
    Do we intend to ask Mr. Webster whether any of these laws 
that weaken Fourth Amendment rights have had not only an 
unanticipated impact upon these three gentlemen here, but 
perhaps other citizens?
    Senator Moynihan. We do, indeed, and we ought.
    The Chairman. Gentlemen, thank you very much for being here 
today.
    Mr. Colaprete. Thank you.
    Mr. Gardner. Thank you.
    Mr. Moncrief. Thank you.
    The Chairman. I would appreciate it if the area would be 
cleared so we could proceed with the next panel of one 
individual.
    Mr. Warren, if you would please come forward. Mr. Warren, 
it is a great pleasure to have you here today. I appreciate 
that you are here to testify before the committee regarding 
racial discrimination.
    Let me start off by just emphasizing that there is no place 
for racial discrimination, especially in the workplace, and 
especially in the Federal Government. Retaliation against 
employees based on race, whether in the corporate world or the 
departments and agencies of the U.S. Government, is totally 
unacceptable.
    Our witness will address intolerable situations inside the 
IRS, where racial discrimination has been openly reported as a 
very, very serious problem.
    Our witness is Mr. Leroy Warren, who is the chairman of the 
NAACP Criminal Justice Committee. Mr. Warren, I would ask you, 
as we have all witnesses, to please rise and raise your right 
hand.
    [Whereupon, Mr. Warren was duly sworn.]
    The Chairman. Thank you, Mr. Warren. Please proceed.

  STATEMENT OF LEROY W. WARREN, JR., NAACP NATIONAL BOARD OF 
 DIRECTORS, CHAIRMAN OF THE BOARD'S CRIMINAL JUSTICE COMMITTEE

    Mr. Warren. Mr. Chairman, I want to thank the Senate 
Finance Committee for granting NAACP and my request for this 
opportunity to testify before this distinguished body on the 
severe problems of racial discrimination and abuse of power and 
mismanagement of the Internal Revenue Service by its leaders.
    Since August 1997, I have served as chairman of the NAACP 
Task Force on Federal Sector Employment Discrimination. This 
task force convened a Summit on Federal Sector Employment 
Discrimination on January 17, 1998 at the University of 
Maryland, College Park.
    This summit was sponsored by black employees of seven 
Federal agencies and seven NAACP units in Maryland and Northern 
Virginia. The seven Federal agencies were the Department of 
Defense, Commerce, Agriculture, Federal Deposit Insurance 
Corporation, Interior, U.S. Information Agency, Voice of 
America, and the Internal Revenue Service. Approximately 350 
people from 9 States were in attendance.
    Approximately 30 employees from the IRS were in attendance 
and presented testimony at this summit. The summit has received 
a number of verbal complaints and affidavits on IRS employees, 
some of whom are whites, Hispanics, and Asians, including 
blacks also.
    The strongest complaints were received from Milwaukee, 
Wisconsin, Houston, Texas, Oklahoma City, Oklahoma, and 
Washington, DC. Based on the data received, the NAACP believes 
that most of the complaints and allegations are of substantial 
merit and validity.
    IRS abuses and allegations received by the NAACP are 
basically the following summary listing: (1)Allegations of 
racial and sexual discrimination in promotions are a severe and 
increasing problem; (2) Allegations of management's refusal to 
deal positively and fairly with valid complaints are common; 
(3) Retaliation, loss of promotional advancements, and 
mistreatment are by-products faced by most individuals filing 
an EEO complaint, regardless of race and/or sex; (4) In many 
instances, some long-term career black employees are compelled 
to train whites, who become their supervisor within a 
relatively short time frame; and (5) Many blacks, especially 
those at the GS-13 and above level, claim that they are 
frequently the recipients of lower than deserved performance 
ratings which negatively impact their pursuit of upward 
mobility opportunities.
    Racism and sexism across the board is wrong and illegal. 
There are a number of white NAACP members and millions of white 
supporters across America. The NAACP has received a number of 
complaints that some blacks and other racial minorities 
employed by the IRS are guilty of committing discrimination 
against their co-workers and subordinates.
    NAACP believes with the theory of the late Associate U.S. 
Supreme Court Justice Thurgood Marshall that racism practiced 
by any person and/or entity is wrong and has no place in 
America.
    The IRS needs a housecleaning of its top management, 
including some blacks who have basically zero commitment to 
doing the right thing.
    Promoting marginal or unqualified individuals occurs 
frequently. IRS management has frequently promoted marginally 
qualified or possibly unqualified individuals, including a few 
blacks, to high-level positions as a reward for supporting 
racism, racist policies, and/or whatever management does.
    The personal benefits for many IRS managers who frequently 
promote marginally qualified or unqualified individuals are 
employees who display a personal and institutional loyalty as a 
result of their promotions by accepting and backing up the 
actions of their managers.
    In addition, the issue of competitive promotion is 
basically a joke because many, or possibly a majority, of the 
high-level GS/GM-12 and above jobs involve pre-selection prior 
to being posted.
    A case in point involves a black GS-15 male who acted in an 
SES job for a period of time. The selection panel recommended a 
white male for the job. During early September 1997, the Office 
of Personnel Management, under pressure from IRS, refused to 
certify this unqualified white male for a senior SES position. 
The GS-15 black male has not received any justice at IRS.
    Some of the major cost of promoting marginally qualified or 
unqualified employees are as follows: (1) The taxpayers are 
paying for incompetence, while at the same time some IRS 
employees are simultaneously violating Federal EEO laws; (2) 
The quality and skill level that the agency workforce is 
subpar, with low productivity and low morale being the bottom 
line result of such questionable actions; (3) The Balkanization 
of the workplace is one of the very serious results of the 
hiring and promoting of marginally qualified or unqualified 
employees, especially in high-level jobs which require 
substantial skill, formal training, and education; and (4) Many 
blacks with substantial education and skills are hired into the 
IRS at the GS-5 and/or GS-7 levels and retire, in many 
instances, with only one promotion over a 20- to 40-year 
career.
    It is obvious to the task force, and me, that IRS will 
issue a substantial percentage of its highest performance 
ratings to blacks who occupy lower level positions or to blacks 
who, under basically any standards, are not qualified by 
education, experience, training, or personal ability to hold 
middle management positions.
    This tactic and strategy allows IRS management to give many 
of its highly qualified, highly educated, and highly skilled 
and overall best qualified blacks unjustified lower performance 
ratings, with little to no change of being overturned because 
the percentage of blacks with the highest ratings are within an 
acceptable tolerance range. This IRS strategy has negatively 
impacted many highly skilled and highly educated blacks.
    A workplace free of religious, ethnic, and racial bigotry 
is an American dream which we all look forward to, but much of 
IRS's higher management has other ideas, namely to keep 
themselves in power.
    Milwaukee, Wisconsin IRS Office, a Case Study in Abuse. The 
Milwaukee NAACP president has asked the National NAACP and me 
as National NAACP's Criminal Justice Committee chairman to 
assist in its efforts to get IRS to deal with some very 
significant racial and sexual problems at the Milwaukee office 
and smaller offices in Wisconsin.
    The U.S. Senators from Wisconsin and some members of the 
Wisconsin Congressional delegation have shown substantial 
dignity, courage, and decency in their pursuit of justice and 
equality for the IRS employees in Wisconsin.
    The following is a listing and synopsis of some of the 
major concerns and allegations received by the NAACP in 
Milwaukee and forwarded to me for assistance.
    Case one. A white female GS-13 Criminal Investigation 
Division Special Agent has been placed on administrative leave 
since August or September of 1997. She has faced numerous 
actions which are pure and simple retaliation from IRS 
officials in Wisconsin for telling the truth. According to the 
information provided to the NAACP, she had an upward and 
rewarding career until January of 1996.
    In or around January of 1996, she compiled a truthful 
affidavit for use in an EEO case involving another person which 
was the right thing to do, but it has created significant 
personal suffering for her.
    She has been subjected to repeated medical testing and 
diagnosis. As recently as today, she is now in Washington, DC 
being subject to psychological training under the guise of 
fitness for duty.
    She filed an EEO complaint which alleged that, in an 
attempt to scare her, an IRS agent drove recklessly towards her 
in a government vehicle. As far as NAACP could determine, the 
special agent driving the vehicle has not been disciplined. The 
employee has suffered too much for basically no justifiable 
reasons, and she urgently needs your individual and collective 
help.
    Case two. A black female GS-6 secretary has provided the 
NAACP with the following bizarre story which our investigation 
has found to be truthful. She has endured racial and sexual 
discrimination since 1988. She quietly endured until recently 
filing her first EEO complaint in 1994.
    The U.S. Equal Employment Opportunity Commission, EEOC, 
found that the charges were valid. The retaliation, verbal 
abuse, and harassment has escalated since that time as a result 
of filing this and nine complaints later.
    Some of the documented abuses of racism and IRS abuse of 
authority are as follows: One: She won the first case when it 
went before the EEOC, but this winning has negatively impacted 
her career and her physical well-being.
    Two: She has been discriminated against, subject to verbal 
abuse in front of her co-workers, her managers, and fellow 
employees, and harassed almost daily in a very hostile work 
environment with the goal of ostracizing her.
    Three: In one very sordid incident, her manager threw 
pictures and a newspaper at her in front of her co-workers. He 
was allowed to retire without sanctions and with his dignity 
intact.
    Four: In another incident, the same manager referred to her 
as a ``Black Bitch'' in front her co-workers.
    Five: Management has referred to and spread the word among 
employees that she and other IRS employees who believe in 
equality and justice are unstable and a potential deadly threat 
to their co-workers.
    Six: Her performance evaluation was deliberately rated low 
in order to deny her competitive upward mobility opportunities. 
This happens too often to individuals who are not favorites of 
IRS management.
    Seven: As a final act of management to strategize her 
planned removal, a black female was assigned as her acting 
manager for approximately 6 months to replace the previous 
manager who had recently retired. The job was posted, she 
applied for it, but she was not selected and it was given to a 
white male. The acting manager filed an EEO complaint and she 
eventually negotiated a transfer to a western State.
    After filing her complaint, the black female acting manager 
told the secretary she found no reason to give her a low 
performance rating, and the refusal to do so was a factor in 
her failure to get the job on a permanent basis.
    Case three. A black female who was objecting to a black 
male and Hispanic female showing their love in the workplace 
reported the affair to IRS management. She was the recipient--
whether intended or not is unknown to the NAACP--of filthy, 
gross, and vile sexual correspondence between the couple.
    On April 9, 1998, 20 days ago, the black male lost his 
composure, yelled incoherently eyeball to eyeball at the 
terrified black female. A National Treasury Employee Union 
official aided her in her escape from the angry black male.
    The issue is before the Wisconsin courts for relief. The 
victim is requesting a temporary restraining order. IRS, to the 
best of NAACP's knowledge, has done virtually nothing to ensure 
the safety of this employee who does not want to be the 
recipient of filthy sexual material at work.
    Case four. A Hispanic female, GS-12, Internal Revenue Agent 
objected to being unfairly evaluated as a low dollar per hour 
producer, which is supposedly against IRS policy.
    She is under severe pressure from IRS for her belief that 
an outside vendor prepared Climate Assessment Report which 
dealt with the hostile work environment in Milwaukee should be 
released.
    IRS does not want to release the report because of its 
negative findings. The possible loss of her job is a deep 
concern. It is our hope that there will be an investigation 
into these serious and substantiated allegations.
    Mr. Chairman and committee members, all of us are Americans 
and we do not want quotas and/or favored treatment. We are 
seeking a chance to fulfill the dream eloquently voiced by Dr. 
Martin Luther King, Jr. many years ago.
    Congress must take an active role in cleaning up the mess 
at IRS, especially employment discrimination. Correspondence to 
former IRS Commissioner Richardson were met with exception to 
all claims of racism within the IRS.
    The response is typical of the IRS and illustrates that 
this agency often blindly denies serious allegations of 
wrongdoing without a thorough examination into the facts.
    It is highly probable that the failure to institute 
significant senior management changes will be an exercise in 
futility. A new IRS Commissioner, surrounded by senior level 
career employees who caused the problem, will not solve IRS's 
internal problems. IRS senior management, legal staff, and EEO 
staff are major contributors to the internal problems within 
IRS.
    In closing, I want to thank the Chairman and the committee 
for allowing me to speak on this serious national problem.
    The Chairman. Well, thank you very much, Mr. Warren.
    On the first page of your testimony you state that, ``IRS 
management has frequently promoted marginally qualified or 
possibly unqualified individuals, including a few blacks, to 
higher level jobs or positions as a reward for supporting 
racism, racist policies, and/or whatever management does.''
    Now, you are clearly saying that racism is a major problem 
at the IRS. But are you also saying that racism is part of the 
way the agency manages its employees?
    Mr. Warren. Racism and the reward for willing to be part of 
a racist organization is one of the prime requirements for many 
IRS managers to accept a black person. Not on qualifications, 
but they want you to be there to do whatever they want you to 
do, when they are wrong, to do wrong.
    We hear black people talking about blacks who know they are 
not qualified for jobs but are recipients of jobs because that 
way they do not have to promote the best qualified blacks, the 
best educated blacks.
    An example of what you were talking about when you hear 
these things, is a black man in his mid- to late-50's would say 
he never experienced discrimination in his life and he is at a 
high level position. So that tells you something about the 
world we live in, the IRS world.
    The other thing about that is, I think the problem is they 
have had so much--I do not work there, I am at the national 
NAACP. I do not work there, but what has happened, the EEO 
office there has evidently been staffed over the years by 
people who are marginally qualified, who have problems and 
charges against them.
    They are selecting people to run the EEO office that should 
not be selected to run any EEO office, not to mention a 
national EEO office. There is no punishment and no penalties 
for doing wrong, so racism is the reward.
    The Chairman. Let me make sure I understand what you are 
saying, Mr. Warren. You are saying that the agency purposely 
gives high performance ratings to black employees in lower 
positions so that it can give lower performance ratings to 
black employees in higher level positions, but little or no 
chance of these low ratings being overturned; is that correct? 
How does this work?
    Mr. Warren. Well, how it works, it is like the gentlemen 
who were here before. If you do not have millions of dollars 
and you have got the Justice Department attorneys down there, 
you cannot hardly prove an EEO case today unless you have 
$100,000. How many people in this room have $100,000 to fight 
an EEO case?
    So if you get the person down at the bottom and you give 
them this high rating and with the best qualified blacks filing 
a complaint, you are going to take affidavits from the whole 
room.
    What you are going to find in the room, is the blacks with 
the lower grade are going to be satisfied and scared to lose 
what they have got, and the guy who is the best qualified black 
with education and training is angry, he is hostile, or she is 
upset and hurt, pained, because some of them want to be 
accepted so bad that, when they do file a complaint, their 
careers at that point are over with.
    So what has happened there is, the people at the bottom are 
very happy to get those high ratings, knowing they are not 
going to go anyplace higher than the middle or upper levels, 
and the people at the higher levels are given the lower ratings 
because they know the agency is going to sustain their 
complaint.
    When they file a complaint against the agency, the agency 
is going to sustain based on the numerical numbers. It is very 
difficult to sustain an EEO case when you are fighting an 
agency with unlimited resources and when they are buying off 
some of the blacks.
    One of the things you have is a situation today in the IRS, 
and other agencies too, we find, is a lot of the blacks who are 
being promoted are nothing but mercenaries available for the 
highest bidder.
    The Chairman. Let me go to a statement you make at the end 
in respect to senior management changes at the IRS. You go on 
to say that, ``A new IRS Commissioner, surrounded by senior 
level career employees who caused the problem, will not solve 
IRS internal problems. IRS senior management, legal staff, and 
EEO are major contributors to the problems within the IRS.''
    Is it your opinion then that the Commissioner should clean 
house at the highest levels?
    Mr. Warren. He should clean house based on the information 
that the NAACP has received. Let me just say, I have a notebook 
here from Milwaukee, and I have another two-inch notebook at my 
house that I did not bring with me that basically deals with 
Milwaukee. We could go to Houston. We have files on Houston. We 
have got files on other cities.
    Let me just say, the information to the Deputy Commissioner 
of the IRS as a career employee, I think, has been there for a 
while. I think the first thing you should do is think about 
removing them and put new leadership in that office, new 
leadership in the management administration office, and new 
leadership in the EEO office because I do not think the EEO 
office now, and in the future, is going to do the right thing.
    We have people out in the field in these various regional 
offices that our NAACP members, black and white--and some of 
the whites are not members. We deal with anybody. If you want 
to comment, if you have legitimate complaints, we will hear 
you.
    The concern we have there is, if you clean house you might 
get something done. The new Commissioner might be an 
outstanding individual, but if you go into a cage and you are 
surrounded by snakes, cobras, eventually one of those cobras is 
going to bite you and it is going to be fatal to what you are 
trying to do.
    I think that is where he has himself today. He needs to get 
some new people there. He needs to be given some authority to 
select some new people that he can have trust in that is going 
to do the right thing.
    If you get the housecleaning there, take these people out 
of the positions, maybe they would do the right thing and the 
government would not be facing all of these liability suits, 
this discontent in the workplace, and abuse of authority. They 
know what is going on. These are career people. These District 
Managers, like in Milwaukee, that is an office that you would 
think the Gestapo ran, not Americans run that office.
    They are rewarding blacks to do the wrong things, and my 
parents did not teach me that. I am from Texas. I went to 
schools where they taught people to do the right thing. But in 
Milwaukee, you are rewarded for doing the wrong thing, and in 
the national IRS office that is also a problem.
    You are finding people who know they are not qualified. 
They are being promoted, they are happy, they are going to 
defend the system. People who are qualified and not being given 
equitable treatment and fairness and justice, they are going to 
be opposed to the system. So you have got to clean house.
    The Chairman. I would say to the distinguished witness that 
in the legislation to come before the Senate, one of the things 
we are doing is providing the opportunity for the new 
Commissioner to bring in some new faces, so I think that is a 
very, very important initiative.
    Let me conclude my questions at this point. I want to make 
sure I am clear, Mr. Warren. Is it your testimony that you 
found evidence of discrimination against whites, blacks, and 
Hispanics in IRS?
    Mr. Warren. What you have got is a little game that is 
being played. It is a maintenance of power game. You put 
somebody in position and you are at the top. If they are black 
and there are some whites you do not like, you put them up that 
person, like the black female secretary I showed you with the 
acting manager.
    You put somebody in charge who is black and let them come 
down on the whites, and that way you get rid of them. You could 
do it white on white, black on black or whatever, but you are 
using the system to select management and officials whom you 
know are people of virtual moral bankruptcy and they will do 
whatever they have to do just to keep their job without any 
thought of the consequences.
    So what I am saying is, you have people there, blacks who 
are not doing the right thing. They know they are not doing the 
right thing, because you hear the employees talking about them 
all over the place. But the fact becomes, they are favorites of 
management because of the kind of people they are. They are not 
good people.
    The Chairman. Senator Moynihan.
    Senator Moynihan. Thank you, Mr. Chairman. Thank you, Mr. 
Warren.
    You referred to the situation in Milwaukee. I understand 
that the Department of Treasury is leading an EEO study of the 
Milwaukee office, and I am sure you are aware of that.
    Mr. Warren. Let me just say, Senator Moynihan, I have 
talked with the President. This was faxed to me last night from 
the Criminal Investigation Division in Milwaukee.
    Let me just say something about what is going on in 
Milwaukee about that task force. I think it is partially a 
fraud. I am going to be very frank. It is kind of harsh 
language, but there are some fraudulent aspects of this. You 
have people when the panel originally was started that were the 
real culprits of the problem.
    What they should have done in Milwaukee is gone outside and 
gotten independent, non-agency people and a staff person from 
the agency, a contractor or something like we did in our school 
system, to deal with these problems.
    What you are doing here, is the EEO officer at the national 
EEO office, as far as I am concerned and as far as the NAACP in 
Milwaukee is concerned, is trying to control this thing, but 
they are controlling it to make sure the outcome is already 
predetermined.
    Senator Moynihan. Well, can I just understand that the 
final report will be issued to Senators Kohl, Feingold, and 
Congressmen Barrett and Kleska. I am sure they will be vigilant 
in attending to the issues you raised.
    I look forward, Mr. Chairman, if we need to be----
    Mr. Warren. Senator Moynihan, may I say something in 
reference to that issue? They have not been forthcoming with 
Mr. Kohl, Mr. Feingold, Mr. Kleska, and Mr. Barrett, I do not 
think, either. I think the IRS in Milwaukee is just like the 
IRS at the national office. They release only the data they 
want. I asked for employment data, we have not gotten it. We 
have not received anything from them.
    So I think what is happening in Milwaukee, you have got 
some black people up there in Milwaukee, as far as I am 
concerned, and most people at the NAACP is concerned, that 
ought to be in jail for their criminal acts.
    Senator Moynihan. I do hope you will take those matters to 
Senators Kohl and Feingold. They are not going to be 
indifferent in the least, and they will be vigilant. Thank you 
for your testimony.
    The Chairman. Thank you, Senator Moynihan.
    Senator Kerrey?
    Senator Kerrey. Thank you, Mr. Chairman. Thank you as well, 
Mr. Warren, for bringing this to our attention. I would ask you 
to review some of the specific sections of the bill that we 
have that attempt to address this and many other personnel 
issues as well.
    If you want to take notes on it, Section 1101 of the 
legislation, in creating an oversight board, sets out the terms 
of authority, as well as the responsibility that includes 
reviewing plans for training, education, and other personnel 
issues.
    Section 1102 of the bill requires the Commissioner to have 
a demonstrated ability in management; it is fairly 
straightforward. The Chairman of our committee has talked about 
that as well. It is in both the House and the Senate bill.
    Section 1102 requires a semiannual report on the status and 
disposition of employee misconduct and abuse allegation. 
Section 1201, both the House and the Senate bill provides more 
effective management of employee contact, providing flexibility 
provisions, again, as the Chairman has referenced.
    Section 1205 of both the Senate and House bill requires 
submission of an employee training plan to Congress. Section 
3709, some additional procedures for employees to provide 
confidential information to our committees and to report on 
allegations of employee misconduct or taxpayer abuse.
    As I pull them out, those are the sections that reference 
the situations that you are describing. There may be some 
additional things that you would have for us to consider.
    Again, the Majority Leader has indicated that relatively 
soon we are going to bring this up on the floor, so any 
suggestion that you have got to us on ways to change this law 
to help reduce the amount of discrimination that is obviously a 
government-wide problem would be very much appreciated.
    Mr. Warren. Thanks very much.
    The Chairman. Thank you, Senator Kerrey.
    Senator Grassley?
    Senator Grassley. I think, once again, we have an example 
here, as we did in the first panel, of accountability at the 
IRS. In the first panel we had mistreatment of taxpayers, in 
this case we have got mistreatment of employees. In either 
case, people who are meting out mistreatment have to be held 
accountable. The most top management at the IRS is going to 
have to see that people are punished for this sort of 
wrongdoing so that people who are mistreated can do their job.
    The people you are telling about cannot be good tax 
collectors, good government employees, when they have this sort 
of environment of intimidation. We talk about the culture of 
intimidation as it is used against the taxpayer. We have a 
culture of intimidation here that is used against the 
employees, to the detriment of the goals of the IRS to collect 
all the money that is legally owed.
    So I want to take advantage of my few minutes here to get 
you, because you are on television, to be counseling people who 
might be watching who have the problems that you are talking 
about. What would you tell current IRS employees who are having 
problems with racial or sexual discrimination; what would you 
recommend that they do to most effectively deal with their 
problem?
    Mr. Warren. Let me just say, there is no easy solution to 
your question. What we are trying to do at the NAACP is we are 
trying to release our Federal Sector Employment Discrimination 
Report, which will be released on June 17 at the Renaissance 
Hotel in Washington, DC here at a breakfast. We are trying to 
take affidavits and documents.
    We are going to give Mr. Clinton a notebook just like this 
with a couple of hundred affidavits from people all over this 
country, with all religions and all races, talking about 
Federal sector employment discrimination.
    We take in blacks, we take in whites, we take in Asians, we 
take in Hispanics. We are taking anybody that believes in 
decency and justice, regardless of who they are. If they have 
been treated wrongly and we do not agree with everything they 
do, we still are going to take them because it is the right 
thing to do.
    Senator Grassley. How wide is retaliation against those 
employees who complain and who stand up for what might be their 
rights?
    Mr. Warren. I would say it is 90 percent of the time, and 
it is a death sentence for upward mobility and you are going to 
be ostracized, you are going to be punished, and you are going 
to be subject to retaliation. There is a 90 percent chance. I 
would say it is probably close to 90 percent. I know of very 
few people who have filed a complaint and not been subject to 
what I call State-sanctioned terrorism right after they filed 
the complaint.
    Senator Grassley. In other words, they are kind of like a 
skunk at a Sunday afternoon picnic.
    Mr. Warren. That is about right.
    Senator Grassley. There is a great deal of peer pressure to 
go along, to get along, not to complain.
    Mr. Warren. Yes. If you complain, you are virtually a 
communist, a troublemaker, or what they call a trouble 
employee. They have all kinds of names they put to you, but it 
is anything except being a child of God.
    Senator Grassley. Do you know this, or is it always behind 
the scenes that this evidence is brought to you? Is it quite 
obvious to you as an employee that you are labeled as a 
troublemaker?
    Mr. Warren. Let me put it like this. The blacks, the 
Hispanics, the Asians, whoever they are that we have heard 
from, we talked to, have affidavits we have at home, these 
people have career track records of being outstanding.
    Let us take this GS-13 white female whom I was talking 
about right here in Washington, DC today under going mental 
fitness for duty testing as if she has gone crazy. She has got 
awards, she has letters of accommodation, everything else until 
she filed that EEO complaint. The minute you file the EEO 
complaint is like you are going under a death sentence.
    Senator Grassley. That psychiatric requirement of treatment 
that you are talking about is too reminiscent of the Soviet 
system where everybody who tried to buck the system ended up in 
a psychiatric hospital, which was another way of being in 
prison.
    Mr. Warren. Well, the people out in the field refer to the 
Criminal Investigation Division as another State-sanctioned 
terrorist group of the Gestapo from Germany, worse than the 
problems we had in World War II. People are terrified when they 
have to deal with these agencies because they know the agency 
has unlimited resources.
    The Criminal Investigation Division has abused people in 
Houston. We know people first-hand, blacks and whites. These 
people are saying they have done nothing wrong. These are good, 
hardworking individual Americans who gave this country their 
all in all, and now 15 or 20 years later they are being subject 
to just terrorism by the State.
    Senator Grassley. Thank you, Mr. Chairman.
    Thank you for your testimony.
    The Chairman. Thank you, Senator Grassley.
    Senator Lott?
    Senator Lott. Thank you, Mr. Chairman.
    Mr. Warren, thank you for your testimony here today. In 
your testimony, you described several cases of racial 
discrimination against IRS employees and intimidation of those 
employees.
    But what really struck me was, you are describing a subtle, 
sinister, systematic problem in which you are maintaining top 
IRS management has a coordinated strategy to give all these 
excellent ratings to blacks who have low ranking positions and 
give unjustified, you maintain, low performance to those that 
are higher ranking positions.
    Now, this would have to be some sort of coordinated 
strategy by the top IRS management. Is that what you are 
claiming?
    Mr. Warren. Let me rephrase and clarify. What I am saying 
is, it happens so frequently when they file the complaints, 
when you get a chance to talk to people and get their 
performance ratings on the individuals who file the complaints 
and documentation within the office, when you finally get 
around to finding out who got the higher ratings, you see this 
proportion of the secretaries, the GS-5, 6's, 7's, and 8's got 
the real high ratings, and the blacks with the most skills got, 
not lower ratings, but they will not get the top. You need the 
top to move up. In other words, you cannot make the competitive 
announcement roster.
    Senator Lott. So you are basing this on statistics that you 
have been able to get.
    Mr. Warren. Cases we have looked at, right. But they are 
not just at the national office. We are talking about folks in 
Houston, Milwaukee, we are talking about folks in Missouri, and 
we are talking about folks in Chicago, who have talked to other 
people who say they have the same problem out there. One of the 
national civil rights leaders has some of those cases. I have 
not seen the files.
    Senator Lott. Do you have reason to believe that top 
management people in those district offices talk among 
themselves about that or that there is some communication in 
this regard from the national office, or is this an unspoken, 
unwritten, very subtle thing, or is it some sort of a 
coordinated effort? I mean, I find it hard to believe that it 
could happen the way that you describe it without some thinking 
about it beforehand.
    Mr. Warren. Let me just say this.
    Senator Lott. I am not questioning that it is accurate. It 
is like so much of what we have heard about IRS. It is mind 
boggling.
    Mr. Warren. I do not think anything is in writing, but you 
have a culture. Let me just say, I deal with a lot of people, 
police people across the country, on these issues. Sometimes 
you can go into a place and you can see people who are doing 
what they think management wants, and nobody is going to put 
that on a piece of paper. But it is a culture. It is a 
cultural, environmental thing, what you are responding to. You 
know if you do certain things that might be morally bankrupt it 
is going to get you ahead, so you do it. If somebody does not 
pat you on the wrist or put some sanctions or reprimand against 
you, you are going to keep on doing it.
    A lot of times the people who are doing this are rewarded 
by being promoted higher and higher. I do not think it is what 
you call an organized crime family, but I think it is a culture 
acceptance, environmental problem.
    Senator Lott. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Lott.
    Senator Conrad?
    Senator Conrad. Thank you, Mr. Chairman. Mr. Chairman, I 
want to just make a statement based on a conversation I just 
had as I left the hearing room. Earlier we had a panel of three 
witnesses, and I found their testimony certainly compelling and 
of real concern with respect to the way the Revenue Service had 
approached them.
    But as I left this hall, I was stopped by a man who was 
very agitated and he said, Senator, you have got an obligation, 
and this committee has got an obligation, to get both sides of 
the story before you make a judgment. He said, unfortunately, 
you are not getting both sides of the story, you are getting 
one side of the story.
    He said to me, I know of facts that are not being presented 
to you, but I cannot talk about them because the IRS has not 
been given a waiver by the taxpayers in question, so we cannot 
give the other side of the story. He said, I would lose my job 
if I gave what I know to be another side of this story.
    So I say that, Mr. Chairman. I do think we have an 
obligation, before we reach judgment, to get both sides of the 
story. This particular gentleman was very concerned that people 
were named here today who are in the Internal Revenue Service 
who are, he felt, being judged guilty without ever having their 
chance to tell their side.
    He said, you know, I wonder if people are going to be able 
to get a fair hearing if we do not have a chance to get both 
sides of the story given to the public. I would say again, this 
gentleman was very agitated. I could tell he was very sincere.
    Senator Kerrey. Mr. Chairman, let me associate myself with 
what Senator Conrad has said, especially since names have been 
publicly inserted into the record, especially when we are 
dealing with taxpayers who are bringing to us stories that 
said, our reputations were ruined as a consequence of what was 
said publicly. We should not allow the same thing to happen.
    It is very important, especially as we go into 
consideration of changing the law, that we not just change the 
law as a consequence of hearing one side and not the other.
    Senator Conrad. I do think we have that clear obligation. 
Let me say that I also believe, Mr. Chairman, as I expressed 
this morning, that what we heard here today indicates to me 
that there are cases where the Internal Revenue Service is 
acting totally inappropriately in terms of how they are 
approaching taxpayers. I mean, sending in armed agents and this 
kind of heavy-handed treatment.
    Senator Moynihan. SWAT team.
    Senator Conrad. This is not the way to approach taxpayers.
    Senator Kerrey. Has the Chairman thought about offering an 
opportunity for Attorney General Reno to testify, for example, 
to come up and talk to us about the issue of the U.S. Attorneys 
that Senator Moynihan was raising?
    The Chairman. No. But Friday, I would point out to my 
distinguished colleague, we have, of course, extended an 
invitation to the IRS Commissioner to come here to present 
whatever they think is appropriate, so there will be an 
opportunity at that time.
    Senator Conrad. Well, Mr. Chairman, if I might just add 
this point, though. The problem is, if the taxpayers do not 
give waivers, he cannot present the other side of the story. So 
I think we need to be asking the witnesses that come here if 
they will grant waivers so the other side of the story can be 
told.
    Otherwise, Mr. Rossotti can come up here and talk in 
general terms, but he cannot talk about the specifics and we 
may make judgments based on only hearing one side of the story. 
If there is one thing I have experienced in public life, making 
a judgment based on one side of the story can lead you down a 
path that is just wrong. I do not think that is the intention 
of any of us.
    I think we all share a view of wanting to resolve problems 
that we have uncovered with respect to the Revenue Service, but 
they ought to be based on facts. The only way I know, the best 
way to get at facts, is to get both sides of the story. I thank 
the Chairman.
    Senator Moynihan. Well said.
    The Chairman. As I said, the Commissioner has been invited 
to come Friday. He will have the opportunity to present what he 
thinks appropriate.
    Senator Kerrey. Mr. Chairman, can you comment on inviting 
the Attorney General? I mean, a lot of this is a law 
enforcement issue.
    The Chairman. Well, I think the Ranking Member raises a 
very important question. As I said, we think it is something 
that William Webster ought to look at, and we all ought to look 
at. Subsequently, if it seems appropriate, we can, in the 
future, invite the Attorney General.
    Senator Moynihan. Well, all right.
    Senator Kerrey. I appreciate, Mr. Chairman, your response. 
But the dilemma, of course, is that we are about to consider 
changing the law. The Attorney General has the responsibility 
of doing the enforcement effort of the IRS and all this stuff 
gets referred to her people.
    The Chairman. Well, I would point out that yesterday there 
were people on your side wanting to raise it earlier, now today 
they want to delay it. There is no perfect time. I think we 
have----
    Senator Moynihan. But, Mr. Chairman, could we not leave it 
that we will get in touch with Attorney General Reno and see 
what she thinks and we will pass it on to you?
    The Chairman. All right. We will leave it that way.
    Senator Kerrey. Thank you.
    The Chairman. Thank you.
    It is my understanding that there is a vote beginning in 
the next several minutes. So I think what we will do, is recess 
until the end of that vote.
    Senator Moynihan. Thanking Mr. Warren.
    The Chairman. Yes. That is the next thing, is I want to 
thank you for being here today, Mr. Warren. It is very much 
appreciated and very helpful to this committee. Thank you very 
much.
    Mr. Warren. Thank you.
    The Chairman. The committee is in recess.
    [Whereupon, at 11:47 a.m., the hearing was recessed to 
reconvene at 12:26 p.m.]
    The Chairman. The committee will please come to order.
    A question has been raised as to a waiver by the taxpayers 
heard this morning, whether the IRS can comment on their cases. 
Let me remind the panel that the IRS has already made an effort 
to make their case against these taxpayers and could not 
sustain any criminal action. The taxpayers were not found 
guilty of anything.
    Let me say that I am aware of no mitigating circumstances 
that would excuse the type of treatment of taxpayers that we 
heard about this morning. As to the waivers, that is between 
the taxpayer's counsel and themselves. I certainly would not 
recommend giving the IRS a second shot at destroying 
reputations after the compelling testimony that we heard here 
today.
    Let me point out that Commissioner Rossotti and I agreed 
that we would not seek waivers, nor did Commissioner Rossotti 
want to be questioned on specific cases.
    Now it is my pleasure----
    Senator Kerrey. Mr. Chairman, I want to alert you that I 
disagree with the decision on the request for a waiver. I have 
no desire to retry those cases, actually, to the innocence or 
guilt of the witnesses. I do not want to drag them through 
that. I quite agree with you, no taxpayer should be treated in 
this fashion. I do not take the side of the IRS in this matter. 
But we are making a determination about what the law should be.
    It is going to be very difficult for us to make a 
determination about the law unless Commissioner Rossotti, who 
has the authority only the witnesses can grant him, can talk 
either generally or specifically about the cases.
    So I respectfully disagree with the ruling and I will ask 
at some point, if it is not changed, for a roll call vote to 
enable us to at least approach the witnesses and see if they 
will allow a waiver to be granted so Mr. Rossotti, who will 
also, I am quite certain, say that he does not condone this 
kind of behavior. He does not condone behavior that harasses 
taxpayers, that bust down the door, and so forth.
    I would say, further, Mr. Chairman, no drug kingpin or 
money launderer has a big, flashing neon light on their 
foreheads saying, I am a drug kingpin and a money launderer; 
they wear dark suits and red ties and they look normal. They 
hang out. They live in the neighborhoods.
    So Attorney General Reno, we have tasked her with a 
responsibility. We have passed legislation, after legislation, 
after legislation saying, go get those drug kingpins. I do not 
hear an awful lot of concern about Fourth Amendment rights on 
the floor of the Senate when these things are being debated.
    So what we do, is we give her the authority to go after it, 
and we need to hear from her in order to be able to determine 
whether or not a change in the law might actually result in her 
coming back 2 years from now and saying, congratulations, 
Senator Kerrey, you just made it possible for money launderers 
and drug kingpins to survive in this country.
    So I hope, whether it is in written testimony or some sort 
of solicitation, Mr. Chairman--I appreciate very much what you 
are trying to do and I am not trying to be a thorn in your side 
on this issue, but I know we are going to come to the floor of 
the Senate and debate this law relatively soon, thanks to your 
leadership.
    I just hope that we are prepared to consider not that these 
individuals should be drug out again, but to consider that our 
action could make matters worse, not better.
    The Chairman. Well, I would point out that everything that 
was discussed this morning is in the public realm so that there 
is no confidential information. But in any event, what we are 
looking at is the process and we think that there is adequate 
opportunity to discuss that. But, as we said, as far as the 
Attorney General is concerned, we would look at that.
    Senator Moynihan. We would look at that. Mr. Chairman, I 
wonder if the staff could not meet with some of the IRS staff 
and just talk about this matter and bring you their judgment?
    The Chairman. That would be fine.
    Senator Kerrey. Thank you very much, Mr. Chairman. I 
appreciate it.
    The Chairman. It is now my pleasure to welcome the members 
of our third panel, the co-directors of TRAC, or more properly 
called Transactional Records Access Clearinghouse located at 
Syracuse University.
    Our witnesses are Mr. David Burnham, who is a co-director 
of TRAC. He is also an associate professor at the SI Newhouse 
School of Public Communications at Syracuse University.
    In addition, he is a lecturer and author of ``A Law Unto 
Itself: Power, Politics, and the IRS.'' Mr. Burnham has already 
provided valuable testimony to the Senate Finance Committee in 
our hearings last September, and we are pleased to have him 
back with us today. So, welcome to you, Mr. Burnham.
    Mr. Burnham. Thank you, sir.
    The Chairman. And to you, too, Ms. Long. Ms. Susan B. Long, 
who in addition to being co-director of TRAC, is an associate 
professor of Quantitative Methods with the School of Management 
at Syracuse University.
    We are very delighted to have both of you here. I would ask 
you to please rise and raise your right hand.
    [Whereupon, the two witnesses were duly sworn.]
    The Chairman. Thank you. Mr. Burnham, would you please 
proceed.
    Ms. Long. We are going to share this testimony and bring it 
together.
    The Chairman. Very good, Ms. Long. Delighted to have you as 
a co-witness.

STATEMENT OF SUSAN B. LONG, ASSOCIATE PROFESSOR OF QUANTITATIVE 
 METHODS, SCHOOL OF MANAGEMENT, SYRACUSE UNIVERSITY; AND DAVID 
   BURNHAM, ASSOCIATE RESEARCH PROFESSOR, NEWHOUSE SCHOOL OF 
  PUBLIC COMMUNICATIONS, SYRACUSE UNIVERSITY; CO-DIRECTORS OF 
           TRANSACTIONAL RECORDS ACCESS CLEARINGHOUSE

    Ms. Long. Mr. Chairman and members of the committee, we 
welcome this opportunity to inform you about two serious 
problems that have plagued the Criminal Investigation Division 
of the IRS for many years.
    The first problem concerns the CID's systematic inability 
to keep track of the work of its 3,352 criminal investigators, 
men and women who, under the law, are among the most powerful 
of all Federal enforcement agents.
    The second problem concerns the inexplicably erratic way 
the Nation's tax laws are enforced throughout the U.S. While 
these two problems at first seem unrelated, we believe they 
are, in fact, directly linked, that the lack of accountability 
inherent in the CID's faulty bookkeeping system undermines the 
ability of this important investigative force to enforce the 
Nation's tax laws in an effective and fair way.
    Mr. Burnham. Before presenting the evidence that supports 
our conclusions, we would like to make one general observation. 
District to district variation in the enforcement of any 
Federal law is natural and to be expected. The United States is 
a vast country. Sioux Falls, South Dakota, after all, has 
nothing in common with Miami, Florida, and no one would expect 
Federal enforcement in the two cities to be similar. But the 
variations that emerge from a careful examination of data that 
we have obtained from the Justice Department and the courts 
appear to go way beyond such natural occurring outcomes.
    It is fair to ask, for example, why for the last five years 
the per capita number of IRS convictions in Memphis, Tennessee, 
in Ashville, North Carolina, in Charleston, West Virginia, 
Mobile, Alabama, are at least twice that racked up in important 
financial and business centers like Texas, South Houston, like 
in Boston, or in Los Angeles.
    Two questions present themselves about the erratic 
enforcement patterns of the CID. First, mindful of the 
constitutional mandate that government must work to assure the 
American people equal protection under the law, is the IRS 
treating similarly situated citizens in similar ways?
    Second, at a time of scarce government resources is the IRS 
effectively targeting its criminal enforcement activities in 
the areas and against the individuals and organizations where 
they are most needed?
    We believe that one reason the IRS has shown a lack of 
concern about these and other hard-to-explain regional patterns 
of criminal enforcement, it is a surprising fact that the IRS 
is unable to accurately track what its own criminal 
investigators are doing.
    As suggested above, this is not nearly a question of 
expecting the IRS to meet some decidedly minimal bookkeeping 
standards, although there is great irony in its failure to do 
so. When the senior managers of an enforcement force with the 
powers of the IRS's Criminal Investigation Division are unable 
to keep track of the activities of their agents to even provide 
Congress and the public an accurate count of the number of 
people its investigators have convicted or sentenced to prison, 
systematic supervision is impossible.
    Lacking effective internal oversight, genuine abuses by 
individual agents can go easily unnoticed. Outside oversight by 
institutions like the Treasury Department's Inspector General, 
the General Accounting Office, or this committee, is 
problematic. More broadly, we are confronted by an agency that 
is outside the required boundaries of a working representative 
democracy.
    Ms. Long. We understand that these are serious allegations, 
but we believe that the longstanding failure of the IRS to 
provide the American people with an accurate accounting of this 
critical enforcement function is a serious problem. There are 
two related points.
    First, in addition to being unable to track the work of its 
CID investigators, there is strong evidence that the IRS is 
engaged in an active public information campaign intended to 
substantially exaggerate its effectiveness in this area. Put 
directly, the IRS has been hyping the numbers.
    Second, there is no question that for several years the IRS 
has refused to examine the compelling evidence regarding the 
existence of this problem that it, in fact, has worked to avoid 
the accurate balancing of its checkbook.
    Mr. Burnham. What is the basis for our finding that the 
criminal enforcement counts of the IRS, the numbers that have 
long been relied upon by the Office of Management and Budget, 
Congressional committees, the GAO, news organizations, and the 
public are inaccurate and misleading?
    As you know, TRAC is a data gathering, data research, and 
data distribution organization associated with Syracuse 
University. For the last 9 years, under the Freedom of 
Information Act, TRAC has obtained data tapes from the 
executive office of U.S. Attorneys. According to Justice 
Department manuals, these tapes contain a detailed record about 
every occasion when an investigative agency has recommended the 
prosecution of a criminal matter.
    In which of the 90 judicial districts was the matter 
referred? When was the matter referred? Which agency made the 
referral? What was the most important criminal charge? Which 
matters were declined for prosecution; why? Which referrals 
resulted in the prosecutors bringing formal charges, in winning 
convictions, in sending individuals to prison?
    From this matter-by-matter information, TRAC has developed 
counts and batting averages for several investigative agencies, 
including the IRS. According to the Justice Department data, 
the IRS, from 1992 to 1996, referred about 23,000 investigative 
matters to the prosecutors that the IRS had determined should 
be prosecuted.
    During that same period, again, according to the Justice 
Department, Federal prosecutors went forward with about 12,400 
prosecutions and won conviction in 9,350 convictions, and sent 
4,800 individuals to prison. These counts cover all IRS 
criminal enforcement actions, those for tax fraud as well as 
those considerable number of cases aimed at special areas such 
as drugs and money laundering.
    In its annual report covering the same 5-year period, 
however, the IRS presents a very different picture of its 
criminal enforcement activities. While accounts of the number 
of referrals are about the same, when it comes to prosecutions, 
convictions, and prison sentences the Justice Department and 
the Tax Agency seem to be living in very different worlds. The 
IRS, in fact, claims about 50 percent more prosecutions, 70 
percent more convictions, and twice as many individuals sent to 
prison as does the Justice Department.
    The simple fact that the counts of the two institutions are 
so very different is surprising by itself, but the inconsistent 
nature of these numbers concerning a closely-linked 
administrative process is almost impossible to explain. How can 
it be that the IRS claims 50 percent more prosecutions than the 
Justice Department, but then reports twice as many people sent 
to prison?
    In response to a series of inquiries going back more than 2 
years and an extensive discussion with a senior CID official 
last week, the IRS has been unable to explain the astonishing 
inconsistency of its claims. There is additional evidence 
supporting TRAC's findings that the IRS counts are 
substantially incorrect.
    This evidence has emerged in connection with TRAC's belief 
that our mission does not end with the simple collection and 
distribution of data. Equally important, we believe, are our 
efforts to ensure that the information is as accurate and 
comprehensive as possible.
    In this connection, we compare the counts that emerge from 
one agency's records with those developed by another about a 
particular government function. The point here is, when two 
independent bodies come up with the same answers the confidence 
in the accuracy of these answers is greatly enhanced.
    That is why TRAC spent considerable time comparing the 
enforcement counts that emerge from the Justice Department data 
tapes with similar information developed by the administrative 
office of the U.S. courts.
    We decided to focus our examination on the core 
responsibility of the CID, tax fraud. Because of definitional 
differences and other such problems relating to any two large 
data systems, exact matches in such counts are rare.
    Ms. Long. But when we examined the numbers of the Justice 
Department and the courts about the tax fraud activities of the 
CID, we found that the 5-year counts were in substantial 
agreement. According to the Justice Department data tapes, for 
example, Federal prosecutors charged 4,854 individuals with tax 
fraud. According to the courts, there were 4,654 such charges.
    When it came to convictions, the counts of the two 
independent organizations again were quite similar, 4,139 to 
4,187. Considering individual who are sentenced to prison, 
Justice recorded a total of 1,690, the courts 1,662. The 
similarity in these key performance numbers is striking and 
lends credence to their general reliability.
    But when the very similar tax prosecution numbers of the 
Justice Department and the courts are compared with the tax 
prosecution numbers of the IRS, we found surprising disparities 
and inconsistencies. Here are the actual numbers. As just 
noted, from 1992 to 1996, records of the Justice Department and 
the courts indicate that a total of about 4,100 individuals 
were convicted for tax fraud. The IRS, on the other hand, 
claims 6,030 convictions on such charges.
    The gap for individuals sentenced to prison for tax fraud 
is even more glaring. While Justice and the courts count about 
1,600 of these unfortunates during the 5-year period, the IRS 
boasts of sending 3,595 such individuals to prison, more than 
twice the number.
    Thus, the impressive success rates claimed by the IRS in 
its official annual report, the data relied upon by the General 
Accounting Office in its investigative reports to this 
committee and the rest of Congress about the CID is totally 
contradicted by the information compiled by two institutions 
with much less immediate interest in the outcome, the Justice 
Department and the courts.
    Mr. Burnham. There, thus, is strong and disturbing evidence 
that an important arm of the IRS has been unable to accurately 
track its work product, the prosecution of tax violators, and 
that it has routinely hyped its enforcement achievements.
    Almost as distressing, however, is the evidence that the 
Criminal Investigating Division has for the last two years 
refused to balance its checkbook. While individuals citizens 
are free to keep their cash balance in their heads and pay 
penalties when this easygoing accounting system results in a 
bounced check, this option is not appropriate for an arm of the 
IRS.
    This is especially true when, under the mandate of the 
Government Performance and Results Act, all Federal agencies 
are now required to establish specific goals and explain how 
well they are achieving them.
    The evidence regarding the IRS's active disinterest in 
balancing its checkbook has emerged in connection with a unique 
effort by TRAC to provide all American citizens with detailed 
information about the performance of the IRS and three other 
Federal agencies.
    TRAC has pursued this goal by mounting special web sites. 
Complete with colored maps, graphs, tables, explanatory 
material, and the text of relevant laws, these sites gives 
citizens a unique way to obtain authoritative information about 
the district patterns and long-term trends in how the IRS, FBI, 
the DEA, and ATF are enforcing the law.
    The sites are based on data TRAC has obtained from the 
Justice Department, the Office of Personnel Management, the 
agencies themselves, the courts, the GAO, the Census Bureau, 
and other sources.
    Ms. Long. From the very beginning of this effort, we were 
troubled by the obvious problems in the accuracy and 
consistency of the criminal enforcement information available 
in the annual data publications of the IRS.
    In 1997, after determining that the information from the 
Justice Department and courts conflicted with the contradictory 
claims of the IRS, we added a prominent segment to the IRS web 
site stating that our investigation had determined, ``The 
information now being provided the public by the IRS about its 
criminal enforcement activities is substantially misleading and 
inaccurate.''
    Before detailing our criticism on TRAC's web site, we had 
written the IRS a series of letters outlining the serious 
problems we had uncovered and requesting the Agency for Public 
Record Information that might have allowed us to determine why 
the agency was unable to track its own activities.
    One specific request was for a district by district list of 
all IRS defendants, along with relevant docket numbers, 
processing dates, and specific statutory codes, who was 
prosecuted, convicted, or sentenced to prison from 1992 to 
date.
    The IRS has resisted our inquiries, flatly denying that its 
data system was seriously flawed, and not producing the list of 
defendants and other information we had requested.
    On August 2, 1996, for example, Tad Brown, the Assistant 
Commissioner for Criminal Investigation responded to TRAC's 
criticism by writing that the IRS was ``satisfied with the 
tracking of this information through our own data bases,'' and 
that the agency did not ``see the need to reconcile or verify 
the records with those maintained by the executive office of 
the U.S. Attorney.''
    In a letter on March 31, 1997, Brown wrote that, ``We 
continue to stand by our statistics and cannot assist you in 
reconciling our data with that of other agencies.''
    Mr. Burnham. But what makes this mess truly discouraging is 
the fact that it is not new. In fact, more than 15 years ago 
the problems were publicly identified by two expert studies 
supported by the Federal Government. One was completed in 1978 
by a panel of the National Academy of Public Administrators, 
the second, commissioned by the Justice Department in 1980, was 
written by Susan Long.
    However, the IRS's head-in-the-sand attitude about the 
shortcomings we have documented may be coming to an end. We are 
encouraged by Commissioner Charles Rossotti's concern about the 
reliability of the agency's information system and the 
importance of such information to effective management.
    The United States pays a lot of lip service to our system 
of checks and balances to the theory that we are a government 
of public laws and not of whimsical bureaucrats. But unless the 
actions of a powerful government agency like the IRS are 
accurately and carefully monitored, our celebrated checks and 
balances are a sham.
    John Adams said it well in a letter he wrote to Thomas 
Jefferson 180 years ago. ``Power,'' Adams said, ``must never be 
trusted without a check.''
    Thank you very much. We would love to get your questions.
    First of all, let me thank both of you for a very 
insightful report, a very shocking report, I might add. I was 
just looking at some of the statements you made. ``IRS is 
unable to track what its own Criminal Investigation agents are 
doing; lacking effective external oversight, genuine abuses by 
individual agents can easily go unnoticed.''
    Then you go on to say, ``More broadly, we are confronted by 
an agency that is outside the required boundaries of a working 
representative democracy.''
    I wonder if you would explain exactly what you mean by 
that.
    Mr. Burnham. We give police agencies, enforcement agencies, 
a lot of power. That power is needed. We need a New York City 
Police Department, we need an IRS, we need enforcement. It is 
part of our system of assuring that society complies with the 
rules.
    But we also must insist that these agencies live within the 
law. We established a very complicated system for doing that, 
the Congress and the courts. And if the Congress and the courts 
are unable to get good information about how many arrests the 
cop is making in a precinct or what the CID is doing, you get 
the horror stories that you have heard today, and the horror 
stories that I uncovered in my book 10 years ago. We have to 
hold them more accountable.
    The Chairman. Ms. Long, would you have anything to add?
    Ms. Long. Well, without information you do not know what 
they are doing, and the managers within IRS cannot effectively 
manage if you do not have accurate information about what your 
personnel are doing.
    The Chairman. I have here a copy of the IRS so-called fact 
sheet. As you know, the IRS recently released the sheet that 
profiles its Criminal Investigation Division. Your group, TRAC, 
is, of course, an expert on IRS. Both of you are well known for 
the excellence of your work.
    How would you describe the so-called facts contained in 
this report, accurate reporting, inaccurate, wishful fiction?
    Ms. Long. Well, the report covers a lot of ground so I do 
not think you can summarize it in that simple fashion. But as 
to the numbers it presents, as to the number of cases that it 
recommends for prosecution, the number that are prosecuted, the 
number of convictions, the number sentenced to prison, those 
data do not at all correspond with those kept by the Justice 
Department or by the Federal courts.
    The Chairman. Well, let me get a little more specific. The 
IRS says, of roughly 5,000 cases its CID initiated last year, 
the conviction rate of these adjudicated was 93 percent. Is 
that correct?
    Ms. Long. Well, basically, if you look at the Justice 
Department figures for the 5-year period for 1992 to 1996, it 
shows a conviction rate of about 82 percent, not 93 percent. If 
you just focus on tax fraud, the number is around 88 percent.
    But this does not include those cases that IRS recommends 
for prosecution and are never prosecuted. If those are 
included, then the figure falls to something like 44 percent 
for all cases, and about 58 percent for tax fraud cases.
    The Chairman. It falls to 44 percent, and 58 percent.
    Ms. Long. Fifty-eight percent. But that, of course, is 
including those that are never prosecuted.
    Senator Moynihan. The U.S. Attorney just decides not to 
proceed.
    Ms. Long. He does not prosecute. So the conviction rate I 
believe that IRS was referring to at 93 percent was looking at 
those that were prosecuted, how many were convicted. It is 
higher than the Justice Department figures, but depending on 
your base of 82 percent versus 88 percent, something in that 
range.
    The Chairman. Do you have any idea how those percentages 
stack up against other Federal law enforcement agencies?
    Mr. Burnham. Because the Federal agencies like the FBI, 
DEA, and the INS investigate very different kinds of cases, 
comparing the success rates can be misleading. However, when 
the IRS's performance is compared on charges of a similar 
nature, such as money laundering, for example, just taking 
money laundering statutes, the agency's record appears to be 
comparable with that of the FBI. Not better, not worse, but 
about the same. Of course, that contradicts with their claim 
that they are superior to all other agencies.
    The Chairman. Now, the IRS fact sheet maintains that, 
``convictions may result in substantial prison sentences, as 
well as payment of fines, civil taxes, and penalties.'' Can you 
give us a more concrete explanation of the results of these 
efforts?
    Ms. Long. Yes. Obviously, prison can result from those 
kinds of efforts. The IRS's annual report usually claims 
something on the order of 75 to 80 percent of those that are 
convicted end up with prison sentences.
    If you look at the Justice Department and court data, it is 
really quite different. It is more like around half, 51 
percent. If you look just at tax fraud cases, it is more like 
37 percent. So, there is just a huge disparity here.
    The Chairman. You made some passing reference, and both 
Senator Moynihan and I have also, referring to the fact that 
the Commissioner has set up a new organization headed by 
William Webster to review the CID. I think that is an excellent 
move. I wonder what advice each of you would have for Judge 
Webster as he starts to undertake this review.
    Mr. Burnham. Well, Judge Webster should not rely on the 
IRS's internal management data. He must obtain data from the 
courts, the Justice Department and the Sentencing Commission. 
He must put them together, look at them, and then examine the 
performance of the IRS.
    The Chairman. Ms. Long, would you like to add?
    Ms. Long. I just echo those comments. I think they would be 
helpful.
    The Chairman. Senator Moynihan?
    Senator Moynihan. Just to thank two exceptionally gifted 
investigators. Not everybody can do the work that you have done 
with just a couple of computers and a Xerox machine. It is 
really remarkable.
    The GAO has told us that a problem for the IRS in this 
regard is that they do not have the technology. We keep running 
into that problem all over this organization. Would you think 
that is likely?
    Ms. Long. Everything I know suggests that IRS's information 
systems are in a dreadful shambles.
    Senator Moynihan. Yes. Yes.
    Ms. Long. But this goes beyond that. This goes beyond that, 
I would say.
    Mr. Burnham. Senator Moynihan, we asked for a list of 
people that they were indicted as a result of their 
investigations or were convicted. That is not very many people.
    Senator Moynihan. It is not an overwhelming number.
    Mr. Burnham. No.
    Ms. Long. Or very complicated.
    Mr. Burnham. Or very complicated.
    Senator Moynihan. Yes.
    Mr. Burnham. They have not produced that. I cannot believe 
that is a computer problem, that is a will problem.
    Senator Moynihan. That correspondence you had was not 
exactly consumer friendly.
    Mr. Burnham. No.
    Senator Moynihan. Yes. Yes. Well, sir, another matter to be 
raised. We are much in the debt of these two academics and 
citizens. You are kind of both in these regards, are you not? 
We much appreciate it.
    The Chairman. We do, indeed.
    Senator Kerrey?
    Senator Kerrey. Mr. Chairman, I have actually had an 
opportunity to hear Ms. Long and Mr. Burnham's testimony before 
on the issue of examinations, where we have a similar problem. 
I would say that I think one of the things we ought to consider 
doing, is to examine the bill.
    I say to Ms. Long and Mr. Burnham, that in the bill that 
passed out of committee, Section 3709, I believe, helps Section 
1103, which is a new section, the independent IG for Tax 
Administration will help. Then Section 3503 deals with 
examination data and I asked earlier Ms. Long and Mr. Burnham 
to examine that to make sure we have that language right.
    Senator Moynihan. Good.
    Senator Kerrey. We may want, Mr. Chairman, to look at the 
possibility of putting language into Section 1101, which is the 
duties of the new Oversight Board. I mean, all of us understand 
that you get different interpretations of data.
    If I am presenting data to you I may want to skew it in my 
favor. I may want to say I am taller, I do not weigh as much, I 
am younger than I look. I mean, we skew data to our benefit. I 
am a lot faster than I look, and so forth.
    So we understand that data can sometimes get skewed as a 
result of my desire to impress you, but that is not what we are 
talking about here. We are talking about just the availability 
of reliable data that IRS says they agree it is good, we agree 
it is good.
    It may be, Mr. Chairman, and I would say, Senator Moynihan, 
in your longstanding interest in getting good data from 
government, maybe we ought to look at putting some language 
into 1101 that would make certain that this committee is 
getting, and the public is getting, the kind of data that they 
need to make certain that the best oversight of all in 
representative democracy occurs, which is the public's ability 
to get the information, and we then respond to that information 
as it is being analyzed by the public.
    Now, Ms. Long actually has a permanent injunction right 
now. She went through a lengthy Freedom of Information Act 
process in order to get the examination data. It is a 
remarkable story all by itself, and indicates why we need to 
change the law so that the public, and we as their 
representatives, can try to figure out what is right and what 
is wrong.
    The Chairman. Well, I think we all agree that accurate 
information is essential to effective oversight, so we will be 
glad to work with you on that, Senator Kerrey.
    I just want to again express my thanks to both of you for 
being here today. It is very helpful to have available the kind 
of information you accumulate and investigate. It gives us a 
great deal of help. I just want to publicly say how indebted we 
are to both of you for the excellence of your work.
    Thank you very much.
    Mr. Burnham. Thank you very much.
    Ms. Long. Thank you very much.
    Senator Moynihan. Mr. Chairman, if I may just, on an 
atavistic attachment to Syracuse University, note that this 
year in the U.S. News and World Report, I believe, they listed 
the 20 best universities for the study of public administration 
in the Nation, and Syracuse was number one. Also number one for 
snow cover, which keeps you indoors and working. Thank you very 
much. Thank you.
    The Chairman. Thank you. Come again.
    The committee is in recess.
    [Whereupon, at 1:02 p.m., the hearing was recessed, to 
reconvene at 9:00 a.m. on Friday, May 1, 1998.]


                             IRS OVERSIGHT

                              ----------                              


                        THURSDAY, APRIL 30, 1998


                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 9:37 a.m., 
in room 216, Hart Senate Office Building, Hon. William V. Roth, 
Jr. (chairman of the committee) presiding.
    Also present: Senators Chafee, Grassley, Murkowski, 
Nickles, Gramm, Lott, Mack, Moynihan, Baucus, Kerrey, Conrad, 
and Moseley-Braun.

OPENING STATEMENT OF HON. WILLIAM V. ROTH, JR., A U.S. SENATOR 
         FROM DELAWARE, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will please be in order. This 
morning, I would like to welcome our first panel of witnesses 
before the committee today. Our panel of Internal Revenue 
Service auditors, all of whom are currently employed by the 
IRS, will tell us about their personal and professional 
experiences within the IRS.
    They will address cases of fraud and abuse, and then 
provide examples that show the sheer indifference of IRS 
management for internal abuses against their own employees. And 
they will uncover serious compliance problems that cause a 
significant loss of revenue to the government. They will also 
focus on selected IRS practices and procedures that have 
clearly developed into serious problematic issues for both the 
IRS and taxpayers alike.
    Our witnesses are Ms. Maureen O'Dwyer, Ms. Minh Johnson, 
Mr. Michael Ayala, and Ms. Ginger Jarvis. I welcome each and 
every one of you.
    Now, I want to point out that Federal law prohibits public 
disclosure of taxpayer information without the consent of the 
taxpayer. For that reason, I would like to remind the witnesses 
that if questions are posed to them regarding the names of 
specific taxpaying entities, tax years, or amounts of taxes 
paid, you are instructed by the Chair not to respond.
    In the interest of disclosure, we have asked the witnesses 
to understate the revenues involved to prevent any possibility 
of identification no matter how remote.
    I would now ask the witnesses to please rise and raise 
their right hand?
    [Whereupon, the four witnesses were duly sworn.]
    The Chairman. Thank you and please be seated.
    Ms. O'Dwyer, we will start with you.

STATEMENT OF MAUREEN O'DWYER, INTERNATIONAL EXAMINER, MANHATTAN 
               DISTRICT, INTERNAL REVENUE SERVICE

    Ms. O'Dwyer. Thank you. Mr. Chairman and distinguished 
members of the committee, I am a grade 13 International 
Examiner in the Manhattan District of the Internal Revenue 
Service. I joined the service in March 1987 as a grade 7 
Examiner. My college studies were in mathematics, economics, 
and accounting. Prior to that, I was involved in art.
    Within the service, I progressed from the office 
examination of simple Form 1040's to the field examination of 
small business Schedule Cs and Form 1120's through to large 
case, CEP, examination, and ultimately to the audit of 
international corporations. I have been in International for 7 
years.
    In the past, I have received awards, and have also written 
an audit technique for the service.
    When first approached to give testimony before you, I was 
reluctant to do so, as I considered it to be a betrayal of my 
fellow employees. The IRS is an easy smear. And it has been 
reviled, both justly and unjustly, in the press. From the 
inside looking out, it is easy to distinguish between which 
accusations are true and which are not. No one has risen to the 
defense of the service against the unjust accusations. I did 
not wish to add more fuel to the already raging fire or further 
demoralize my fellow employees by disclosing any other 
inequitable practices of the service.
    But our system of taxation is dependent on the taxpayer's 
belief that the tax laws they follow will apply to everyone and 
in the belief that they will be administered impartially. I 
observed that this impartiality does not exist--does not 
happen.
    Therefore, my sense of righteous indignation at the 
betrayal of the fiduciary trust of the American public by the 
service outweighed any personal concern that my testimony would 
display a lack of loyalty toward the service. It is the average 
American citizen who is my employer. And it is this citizen to 
whom I am beholden, not the service nor its administrators nor 
my fellow employees.
    Thus, I am here today to discuss the uneven enforcement of 
the Internal Revenue Service Code and Regulations by order of 
some Internal Revenue Service managers and administrators. I am 
also going to explain the reasons that the service does this 
and the devastating affect that it has on the morale and the 
sense of morality of its employees.
    My discussion begins with the case of my recent past. The 
taxpayer was a sophisticated, international corporation, well-
schooled in international and tax law. My examination of this 
taxpayer led me to believe that it had aggressively pursued tax 
avoidance.
    I had orally proposed adjustments to this taxpayer on 
issues which involved transfer pricing, reorganizations, 
mergers, and consolidations. The dollar amount of my proposals 
were in excess of $42 million and had tax effects in excess of 
$12 million. Penalties and interest could double the tax effect 
to over $24 million.
    The taxpayer had agreed on the issues proposed, but was 
negotiating as to the numbers and was preparing a pricing 
study. My manager after reviewing the case asked me to call the 
taxpayer and get a response date from their on their pricing 
study. The taxpayer requested two more weeks. The two-week 
extension was given.
    The following day a memorandum listing overage cases was 
circulated by the International District Program Manager. My 
case was on that list.
    When my manager received the memorandum on overage cases, 
he called me into his office and ordered me to immediately no-
change the case. He said it was not necessary to write an 
international examiner's report. He ordered me to purge my work 
papers, to simply hand in the tax return stamped no-change. 
Therefore, there will be no record of any audit work on the 
issues considered in this case.
    He informed me that he had the absolute authority to do 
this and that he had the full support of his branch chief in so 
doing and that if I did not do this that I would be held as 
insubordinate. It was only when I threatened to go to 
inspection about being ordered to purge my work papers that I 
was allowed to hand them in and write ``the international 
examiner's report, no-change as ordered''.
    I was not, however, even granted the two weeks promised to 
the taxpayer in an attempt to close the case agreed. Nor was I 
allowed to write the case up as unagreed in an attempt to 
protect the revenue base of the service.
    That this was an egregious and capricious misuse of 
authority by my manager can be seen by the fact that an 
international examiner's report is always written up in the 
same format. It takes no great or lesser amount of time to 
write a case unagreed, agreed, or no-change.
    All the time I spent developing the issues was wasted. The 
manager violated the mission of the service to collect the 
proper amount of the tax revenue at the least cost.
    In that report, I wrote of the issues of the taxpayer's 
counter proposal and of the order by my manager to no-change 
the case.
    Administrators and managers, while they bear the ultimate 
responsibility for the disposition of cases which are worked by 
examiners who are under their supervision, do not have 
unqualified authority. This means that there must be a sound 
and legal basis for the disposition of all taxpayer cases.
    These administrators are not granted such absolute 
authority as they usurp, either through position descriptions 
or under the Internal Revenue Manual. They are sworn in as 
servants of the public to uphold the law.
    The Assistant District Program Manager International keeps 
a file of these reports on closed cases. My file on that case 
is missing. It was removed because the case was closed no-
change without basis in tax law and proper IRS procedure and 
when a taxpayer was agreeing. And that report contained my 
protest.
    If that report was ever accessed under the Freedom of 
Information Act and the information on that action got out, the 
IRS would be badly embarrassed. The only defense of the IRS for 
its action of no-change would be poor audit techniques and lack 
of issue development by the examiner. This the IRS could not 
do. Not only because it was not so, but because of the tax 
sophistication of the taxpayer that was agreeing.
    This decision by my manager to no-change the case was based 
on his desire for advancement in the Manhattan District. The 
Manhattan District was and still is statistics driven. The 
district is very self conscious about having the oldest cases 
in the service. And its administration continually monitors the 
statistics, not the issues on aging cases.
    A manager who has an aging case in his group will not 
receive an evaluation that will merit him a monetary award and 
help him carve out a career path within the service.
    When my manager no-changed that case, he betrayed the trust 
and confidence of the American people and his own sworn duty to 
perform in a matter warranting the highest degree of public 
confidence in his integrity, efficiency, and fairness. My 
manager through ambition, incompetence, and lack of integrity 
gave up a potential tax deficiency which could have brought in 
as much revenue as $24 million in exchange for his vain hope of 
a monetary award in the amount of $2,000.
    There are managers in the Manhattan District who hold their 
integrity in higher esteem than their careers and who will 
argue for the merits of issues on such cases. These are usually 
the more intelligent and technically competent managers.
    Throughout the Manhattan District, the technically weaker 
managers consistently ordered cases closed, no-change as they 
begin to age. In large case, CEP, it is standard practice to 
drop an issue that will delay the closing of the case. Large 
dollar amounts on major taxpayers are routinely zeroed out in 
this manner.
    It matters not that there appears to be an egregious tax 
abuse nor that the complexity of the issue requires time to 
develop. What matters is the manager receive a performance 
award for having met the case-closing deadline timely.
    When questioned as to why the issue was dropped, a 
praiseworthy although obfuscating answer that is often given in 
response is, it was good taxpayer relations.
    I am cognizant that there are cases which should be no-
changed because there are no issues. However, this recognition 
that there is no issue and the decision to no-change a case is 
one that is made early in the audit cycle.
    The cases that begin to age ordinarily have outstanding 
issues which have gone unresolved due to the complexity of the 
issues involved and the difficulty of their development or due 
to the deliberate procrastination and lack of cooperation on 
the part of the taxpayer.
    Therefore, it can be seen that the cases which are closed 
no-change under the statistically-driven cosmetic deadline are 
usually large and wealthy taxpayers who have the means to 
consistently contend and dispute with the IRS.
    The Internal Revenue Service has often expressed the 
concern that an adjustment would bankrupt Wall Street, but it 
has never expressed any concern about bankrupting Main Street.
    I am personally aware of similar cases handled by other 
managers in the same manner can verify the above statements. 
Due to time constraints, I cannot describe them all.
    However, I would like to recount just one case. The 
examiner in this case had proposed a unique and seldom-
considered adjustment in international. The adjustment placed a 
special tax on the foreign shareholders of an American 
corporation. The examiner had researched the foreign tax treaty 
applicable to the foreign shareholders and found no exemption 
to the tax. The adjustment was strictly statutory, highly 
technical, and ordinarily placed only against American 
shareholders.
    Even the taxpayer's highly qualified and highly paid 
representative agreed that it was a viable issue. But because 
there was no case law on point for the application of this 
issue to foreign shareholders, the representative requested 
that the examiner secure a tech advice from Washington counsel 
in order to clarify and resolve the issue.
    To do so would age the case. Therefore, the examiner's 
manager ordered the case closed no-change. The amount of tax 
revenue given up by this malfunctioning manager was about 
$500,000. And if an audit was extended to the later years, as 
is required by the Internal Revenue Manual, the amount of tax 
revenue would probably have been over $1 million.
    But all taxpayers are not treated to a no-change by a 
manager as a case ages. The aging returns of small taxpayers 
are written up unagreed and penalties are assessed. The 
taxpayer will receive a stat notice, that is it must respond 
within 90 days. If the taxpayer does not respond within this 
timeframe, it will automatically lose its appeals right and the 
right to petition Tax Court.
    Understanding these procedures is difficult for the 
unknowledgeable small taxpayer. Without representation, the 
small taxpayer is vulnerable. The results can be costly.
    Stat notices are routinely done to small taxpayers through 
service centers in correspondence audits and through agents in 
field and office exam. The service does this because it has 
over loaded the working inventory of examiners in order to pump 
up closed-case statistics.
    While this may be an example of what drives the IRS, 
perhaps a more defining example of what drives a career 
motivated IRS administrator is an account of how two similar 
tax cases were handled by one manager.
    The examiner under the manager on both tax cases was the 
same. Unreported income and/or false deductions which would 
incur a fraud penalty had been found in succeeding years on 
both tax cases by the examiner.
    Both taxpayers were professionals. The first taxpayer was 
very cooperative. He went through alone represented by neither 
an accountant nor lawyer.
    When it became apparent that there would be unreported 
income, the examiner asked him to bring in his accountant. The 
man declined. He was embarrassed and could not bear to have his 
accountant think that he had these charges leveled against him 
by the IRS.
    His tax deficiency without penalties for 2 years was about 
$45,000. With interest and penalties, especially the civil 
fraud penalty, this amount increased to over $100,000. The man 
had no bank account and no assets other than his cooperative 
apartment which he was arranging to sell in order to pay for 
this IRS assessment.
    The examiner asked the manager to remove the fraud penalty, 
explaining that although this man could not substantiate all of 
the money which passed through his bank account, the audit 
revealed that the man had sold some possessions and that he had 
received the return of some money which he had lent to friends. 
Both of these accounted for some, but not all of the unearned 
income deposited in his account.
    Perhaps, a more comprehensive investigation would find 
adequate explanations for the balance of the unreported income.
    The examiner also explained that if this man had 
representation, refused to agree, and his case went to appeal, 
that the civil fraud penalty would probably not be upheld. 
Deliberate intent would be difficult to prove, especially when 
assessing the character of this man.
    During the audit years, the man had successfully raised two 
children as a single parent, paid for medical expenses of 
friends who could not afford to do so, and had altruistically 
donated money to impersonal charities without thought of any 
personal gain. The manager simply responded, no, he's guilty. 
This taxpayer without an advocate was callously condemned.
    The other taxpayer never appeared for the audit. He was 
represented by a CPA attorney and also by a former IRS Criminal 
Investigation Division employee.
    The previous 3 years of this taxpayer's return had been 
audited by another examiner. The taxpayer had agreed to the 
disallowance of personal items which he had deducted on those 
returns.
    Both of his representatives were uncooperative, cited IRS 
harassment of their client, procrastinated, held back 
information, and consistently attempted to intimidate the 
examiner.
    Despite this, the examiner persisted and found 
substantially large deductions that were false, as well as the 
same personal deductions that had been disallowed in the 
previous 3-year audit.
    The deficiency not including penalties for this taxpayer 
was $450,000. With civil fraud and other penalties as well as 
interest, it would be over $1 million.
    The moment the examiner found these false deductions, the 
representatives changed their approach to the audit. Formerly 
hostile and aggressive, they now whimpered and became 
nauseatingly friendly.
    They cited the prestige of the taxpayer and the 
representative in the community and the meaning of their 
respective positions to the community, but they offered no 
explanation of the falsification and the repeated taking of 
personal deductions which had been previously disallowed.
    The examiner, on the other hand, the education and 
knowledge of the taxpayer, the contempt he displayed for the 
law by taking personal deductions that he knew were wrong.
    In comparison to the first taxpayer, this man considerably 
more wealthy lived off his tax return. He deducted his designer 
cloths, the wages paid to his housekeeper, the furnishings and 
rent of his personal apartment as well as trips abroad for both 
him and his father. His charitable donations were to 
foundations in his own industry, always bearing his own name, 
and designed to enhance his career.
    An examiner has no authority to remove a penalty. A manager 
does under certain conditions. When exhorted by the 
representative simply to be understanding and give a little to 
this taxpayer, the manager without hesitation removed the fraud 
penalty. When asked by the examiner why----
    Senator Moynihan. Mr. Chairman, could I respectfully ask a 
question at this point?
    The Chairman. Yes.
    Senator Moynihan. There are two points, sir. And we know 
the respect and affection you are held by this committee on 
both sides. But our rules specifically require that testimony 
be distributed to members of the committee at noon day.
    Senator Kerrey. At noon of the business day immediately 
before the last business day.
    Senator Moynihan. Noon of the business day immediately 
beforehand. And in all these hearings, we have never seen 
testimony. It is handed out to us at the moment it begins, the 
witnesses appear. And then, it says ``having submitted his 
written testimony, the witness shall be allowed not more than 
10 minutes for oral presentation of his statement''.
    Now, we gathered here at 9:30. It is now 10:00 o'clock. And 
Mrs. O'Dwyer is still going on about people who are 
nauseatingly friendly having been whimpering and such. We do 
have rules, sir. And can we not keep to a 10-minute rule? And 
could we hope that in order to ask so we can join in this? This 
legislation is coming out of this committee unanimously. And we 
want to keep it that way, but the staff is just not being very 
helpful. Could I ask my colleagues?
    Senator Kerrey, would you?
    Senator Kerrey. Yes, sir. I mean, not only do we have rules 
governing this committee and if there is going to be changes in 
the rules, we should vote on it. I mean, I am willing to 
accommodate concerns that the witnesses might have for 
intimidation by the IRS if that is the concern.
    Senator Moynihan. Sure.
    Senator Kerrey. But that concern should be brought to the 
full committee. And we should vote to make an exception to the 
rules. I mean, we set the rules. Furthermore, there are 
standing rules of the Senate that govern the conduct of the 
committee. And that also makes clear that this testimony needs 
to be made available to everybody on the committee.
    The Chairman. Well, first of all, let me point out that in 
most cases, we rarely have in advance the testimony of 
administrative witnesses.
    Senator Moynihan. It has been known to happen, yes, sir.
    The Chairman. And before. So that this is a practice that 
has become the general practice rather than the exception.
    The Chairman let me point out here that one of the reasons 
we withheld this information is because frankly the witnesses 
needed to be protected. I think it would be a serious mistake 
to try to delay these hearings.
    We have a number of distinguished members of the IRS who at 
great personal risk are coming before us to testify what they 
have seen as long-time employees.
    And I think it is critically important that this is not a 
matter of being critical of this administration or any other 
administration. As a matter of fact, many of the examples that 
are used took place under other administrations.
    Senator Moynihan. Oh, clearly, we have never suggested for 
a moment that this administration or any particular 
administration.
    The Chairman. I would hope that we would agree that these 
witnesses who are here today, who have come here at tremendous 
personal risk and are worried about retaliation, to be 
perfectly honest, they have an opportunity to tell their 
experiences as they see them.
    I would remind you these are current witnesses and they are 
under oath. I think it is important that the facts be brought 
out.
    Senator Kerrey. Mr. Chairman, I do as well. I would point 
out merely that prior to the enactment of the Taxpayer Bill of 
Rights 1 and Taxpayer Bill of Rights 2 that Senator Grassley 
and Senator Pryor were so much involved with, there were 
similar sorts of hearings. And I would ask Senator Grassley in 
the previous moments when we had other witnesses. We have had 
other IRS employees before the committee at previous times 
prior to the enactment of those two pieces of legislation.
    I mean, we are basically enacting Taxpayer Bill of Rights 3 
as Title III of this bill. And the only reason I want--I do not 
want to stop the witness from testifying. I want to make 
certain that they are protected against any kind of retaliation 
or intimidation that might occur against them.
    But the question before us is how should we write this new 
Taxpayer Bill of Rights 3? And my presumption would be that 
when Senator Pryor and Senator Grassley had their hearings that 
they distributed testimony and they followed the rules of both 
the Senate and the committee.
    Senator Baucus. Mr. Chairman.
    The Chairman. Senator Baucus.
    Senator Baucus. Mr. Chairman, there are really two issues 
here. One is protection of the taxpayers, that is the witnesses 
in particular which we all do want to do. And the other issue 
is the degree to which these are going to be informative 
hearings where we as a committee get to the bottom of the 
matter and find some ways to minimize the recurrence of the 
allegations.
    Now, the rules, our committee rules are designed to 
accomplish both objectives. In the first place, the notice. 
Regrettably, none of us, except for the chairman and maybe 
other staff or other people, certainly no Democratic Senators 
or Democratic staff had any idea of who you are, who you were 
going to be until we walked in here.
    We did not know what your testimony would be. We did not 
know who you are. We had no idea which makes it a little bit 
difficult to prepare. It makes it difficult for us to kind of 
work to get to the bottom of the matter, that is work on your 
testimony and try to find out what constructively is going on 
here, not engage in the theatrics or demagoguery, but rather 
just constructively find out what is going on here.
    So that is why we have the requirement and the rules that 
the testimony be submitted a day in advance, by noon a day in 
advance presumably so that members of the committee and their 
staffs can look at the testimony and ask intelligent questions.
    It is much more difficult to ask intelligent questions the 
first time we have seen you or know of you or seen your 
testimony as the moment we walked in here. That is just no way 
to conduct business. That is why the rules were written that 
way I think, Mr. Chairman.
    With respect to protection of the witnesses, there are ways 
we can do that. We can have redacted testimony. We can meet in 
executive session, Mr. Chairman. I mean, we can have the 
witnesses tell us their problems and what they faced with the 
IRS in executive session, not in public. That is another way to 
protect the witnesses. Already have another hearing afterwards, 
after we have had the executive session hearing.
    That is what we do in the Intelligence Committee, as the 
Senator from Nebraska knows who is the Vice Chairman of the 
Intelligence Committee. We have many hearings in executive 
session, closed sessions dealing with intelligence. Then, we 
often have another open hearing on the same subject, but not 
going into classified information because I think the public 
has a right to know what generally we are doing and what is 
going on.
    So, Mr. Chairman, I urge you to find some way to minimize 
the politics of this. And I will be honest with you, this is 
getting political because our side has no idea what is going on 
here.
    Senator Moseley-Braun. Mr. Chairman.
    Senator Baucus. No idea whatsoever. And in addition try to 
do it in a way that does protect the witnesses. As I said, 
executive session of one way. Redacting their testimony is 
another way, but at least find some way other than the current 
road we are going down which I think is not doing the public a 
good service.
    The Chairman. Well, just let me make a couple of 
observations. Then, I will call on you. As I mentioned, this 
particular rule has more often not been followed. Frankly, as 
you well know, in the majority of cases, the agencies, from the 
Administration, have not submitted their testimony. And nobody, 
but nobody has made any objections to me on that score in the 
past. This is the first time this has happened.
    Secondly, as I just mentioned, these hearings are not 
partisan. Many of the situations and cases happened under other 
administrations. What we are looking at is to try to make 
changes in an agency that has some practices that are not in 
the best interest of the taxpayer.
    As far as going behind closed doors, as we know, we have 
sunshine legislation. And the general rule is that these 
matters should be discussed in public. The public is entitled 
to know.
    The reason in this particular case the testimony was not 
submitted earlier was frankly to protect the witnesses, who are 
current employees. As they will testify, they are very 
concerned about retaliation.
    We are not in any way trying to indict the administration. 
As a matter of fact, I have said time and again that we applaud 
the appointment of the new Commissioner. We think he is an 
outstanding man. We have been trying to work very closely with 
him, and we will continue to do so. But in the meantime, I 
think it is important to get the facts out.
    Again, I emphasize that each of these witnesses are long-
time employees. They are under oath. And it seems to me that it 
is important that the public hear what they have to say.
    Now, Senator Moseley-Braun.
    Senator Moseley-Braun. Thank you, Mr. Chairman. As you 
know, particularly going through these hearings, there is has 
been no member on this committee that has been more concerned 
about retribution against IRS employees than I. We had the 
conversation yesterday with the majority leader. This is a 
matter of real concern I think on both sides of the aisle for 
all members of this committee to make sure that these people 
who have the courage to come forward are protected.
    Having said that, it just happens, Mr. Chairman, that I am 
sitting here. I have with me a history of the Committee on 
Finance. I do not know. I think this was authorized when Robert 
Dole was the chairman of this committee. But in any event, it 
has been made available. And I have decided that as the first 
woman on the committee, I would read the history of the 
Committee on Finance.
    What this book makes very clear is that this committee has 
a tradition of bipartisanship. This committee has a tradition 
of people working together without regard to partisan lines and 
that Democratic members are treated as well as Republican 
members, that the rules are followed without regard to what 
party you belong to on this committee, and that there is a 
sharing of the leadership between the chairman and the minority 
party spokesman.
    No one wants to not have sunshine on this process. 
Everybody wants to have sunshine. Everybody wants to hear from 
these witnesses.
    But I would just urge the chairman and the members to 
listen closely to what Senator Moynihan had to say because if 
anything, he was raising I think an issue in the tradition of 
this Finance Committee which is that we have rules and that 
those rules are equally applied and that we all, all of us have 
equal access to the information.
    And I probably should have mentioned the majority leader's 
name because now I have inspired him to want to say something, 
but in any event I can tell. Oh, boy, did I punch a button.
    Of all the committees, we should not let this committee 
devolve or get diminished into any kind of partisanship. That 
is not in keeping with the tradition of the Finance Committee.
    The Chairman. Senator Gramm.
    Senator Gramm. Well, Mr. Chairman, let me yield to Senator 
Lott. And then, if you will come back to me.
    Senator Lott. I will be brief. Are we listening to 
ourselves here? We are talking about a rule. I did not see this 
testimony, but I am real interested in what these three ladies 
and this gentleman have to say. For 15 minutes now, we have 
been arguing over two rules. We want to cut this lady off.
    I would like to ask the witnesses to try to limit 
themselves to 10 minutes. But I really think in a bipartisan 
way, we ought to listen to what this panel has to say.
    [Applause.]
    Senator Moynihan. Mr. Chairman, may we have order? What is 
that in the back? And just that I agree with the majority 
leader. And he agrees with us. If we had read this testimony 
overnight, we would know more about it, but let us hear it.
    And may I say to Ms. O'Dwyer that if you feel under any 
threat to your life or position, you have the senior Senator 
from New York State here to say that it will not happen.
    Ms. O'Dwyer. Thank you.
    Senator Grassley. The trouble is the senior Senator from 
New York or the senior Senator from Iowa in the case of Des 
Moines, we cannot be with these people enough to really protect 
them from harassment.
    Senator Moynihan. They have our phone numbers.
    Senator Grassley. Well, I know it. And I know you are 
sincere, Senator Moynihan. And I know you will do what you can.
    But these people are here. I think that we are worried 
about ourselves as political leaders, maybe following a rule or 
not following a rule, the extraordinary circumstances under 
which these people are here. And they are ruining their lives 
as a result of being here. They are no longer going to be able 
to function in the IRS the way we know the IRS. And we do not 
even know it as well as they do.
    And I think we ought to have some sympathy for the people 
that are before us rather than worrying about our own 
prerogatives. I think it is pretty selfish of us when these 
people are sacrificing. We are not sacrificing one doggoned 
thing by sitting here and listening to them. But it is sure 
evident that the Congress has not been doing its job for the 
last 20 years or we would not even have these people here.
    The Chairman. Well, I suggest that we move ahead and hear 
these individuals. I would say, for example, in Mrs. O'Dwyer's 
case, we initially asked her to limit her testimony to 10 
minutes. She felt very strongly that she had an important story 
to tell that would take longer. And so we agreed with that.
    Senator Moynihan. All right. I am fine with that.
    The Chairman. Please proceed, Mrs. O'Dwyer.
    Ms. O'Dwyer. Thank you. When asked by the examiner why he 
removed it, this was when the manager removed a fraud penalty, 
the manager's response was, ``if I didn't, the representative 
would lose him as a client.''
    Why such an astounding and perverted response from an IRS 
manager? Because this was a manager who was always looking for 
a tax appointment outside the service. By this decision, he 
bonded a network with two men he saw as wealthy and powerful 
and in a position to recommend him for some future job opening.
    This manager stands not alone in his behavior. Other even 
more senior level administrations and executives do the same, 
their agenda and introduction into the business world. They 
network and make friends in preparation for careers outside the 
service. Their sense of morality has been eclipsed by their 
personal ambition.
    Many administrators have known IRS projects to be a waste 
of time and of resources immediately after the inception of 
these projects. As those administrators were responsible for 
these projects, the projects were pushed forward anyway because 
they were tax trendy or because they would bring favorable 
publicity to the IRS and thus to the career of the project 
administrator.
    One such project was so highly visible and trendy that it 
propelled the administrator out of the service and into a 
lucrative position.
    Another project had good public relations value. A senior-
level administrator placed a lower level administrator in 
charge of that project and requested a follow-up report on the 
project. The lower administrator told the senior administrator 
that the project was useless and should be abandoned because 
the project could not achieve the goals that were expected of 
it. As the project had good public relations value, the senior 
official told the lower official to expand the project and to 
write it up as worthwhile.
    I especially mention this in order to make the public aware 
that many pronouncements made by the IRS are simply not true. 
The service deliberately disseminates false information.
    An examiner complained to me about the handling of his case 
by an IRS expert. Two issues had existed in the examiner's tax 
case. One issue was entirely technical in nature. The taxpayer 
had conceded this issue. The other issue fell into a gray area 
that came under the umbrella of this man's expertise.
    As is the custom within the service, the expert was asked 
to attend the closing conference on the case with the examiner 
and his manager. The expert took over the case completely, 
treating the examiner and his manager as bystanders.
    The expert relinquished the technical adjustment not within 
his province which had been conceded to by the taxpayer. He 
then reduced his own adjustment to a diminimus amount. He told 
the examiner and the manager that this was necessary in order 
to get an agreed case. Actually, this man needed his issue 
agreed in order to proof the worth of his expertise.
    The taxpayer's prominent lawyer was delighted. The examiner 
and his manager were outraged, vowing to never again invite the 
expert to a closing conference. That evening as the examiner 
stood near a fax machine, he saw a fax come in for the expert. 
It came from the prominent lawyer in the prominent law firm 
praising the IRS expert for his excellent expertise and invited 
the IRS expert to speak at a prominent legal association. Weak 
egos in need of acclaim are sometimes the cause of moral 
deficiency.
    When people, such as these experts, commissioners, district 
directors, executives, and lawyers leave the service, they 
return as representatives of major taxpayers and ignore the 
ethical mandate of the service that former employees disqualify 
themselves for a 2-year period from representing any taxpayer 
whose cases were open and under their authority while they were 
employed by the service.
    They seek to intimidate examiners by asserting their former 
prestige and their still current contacts within the service. 
They endeavor to call in markers to influence the people whom 
they have promoted and those who they used to manage in order 
to make the adjustments just go away.
    A former district director employed by a major accounting 
firm shamelessly solicited work from other accounting firms 
citing his influence within the service. They bypass the 
examiner and attempt to conduct the audit through a manager or 
a more senior-level administrator.
    An audit is conducted by an examiner. Hence, the title 
examiner. Their purpose is to seize control of the examination 
in order to negotiate a settlement before the audit even 
begins. They exert tremendous pressure to drop significant 
items on the return and to convert an adjustment which would 
have substantial tax effect into an adjustment with no tax 
effect.
    These former administrators obstruct the path of the audit 
and never respond to much of the requests for information. They 
whisper those magical words, time on a case, months in process, 
dollar yield, good taxpayer relations which they have heard and 
used so often in their former careers into the ears of the 
service administrators.
    These remarkable subliminal prompters are so effective that 
unwarranted settlements are made. Vowing to the pressure of a 
representative, a manager reassigned a case that had been 
closed and agreed for processing. It was reassigned to a junior 
examiner to be reworked in order to ensure the flow of the 
audit toward the position of the representative, an adjustment 
of only $2 million.
    The case had been closed, unagreed with the stamp of 
approval of Washington counsel. It is the policy of the service 
never to reassign and rework the case except when the case has 
been left incomplete due to the resignation or reassignment of 
the examiner.
    As the lead into my next section, I have been asked to 
express the sentiments of a revenue officer in the Manhattan 
District Collection Division. He was to appear before you 
today. That fear of losing his job caused him not to appear 
gives witness to the magnitude of retaliation that is imposed 
by the service upon the outspoken.
    Again, as time limits his story, I include only his most 
poignant testimony. This collection officer had written off as 
uncollectible two taxpayer accounts. His manager threatened 
disciplinary action against the employee if he refused to levy 
these two taxpayers as ordered.
    On Christmas day, this manager brutally forced the 
collection officer to levy the salary of one taxpayer who was 
earning subsistence wages.
    The second taxpayer was dying of cancer, was living on 
welfare. Even though internal documents informed the IRS that 
this man was a welfare recipient, the collection officer was 
ordered by his manager to have the terminally ill and 
impoverished taxpayer provide the service with a written 
statement and supporting documentation that would verify his 
financial condition and his illness.
    The collection officer was also instructed to make a count 
of in order to seize any and all assets that belonged to this 
sick taxpayer.
    What would the IRS do with $50 from a piggy bank? Was it 
really necessary for big brother to levy on Christmas eve? 
Could it not wait until after Christmas eve?
    What was the ultimate disposition by the service of these 
two taxpayer accounts? They were declared uncollectible and 
written off. A tremendous amount of service resources had been 
utilized, time had been wasted, two taxpayers were preyed upon, 
one employee was demoralized, all on the order of management in 
its attempt to achieve an improperly measured productivity 
statistics. Before ever there is a taxpayer victim, there is 
first an employee victim.
    If either of these taxpayers had had the wherewithal to 
have filed a complaint or had the actions of the collection 
officer somehow become public, management would have declared 
them the actions of a rogue employee. Not so.
    Incidents such as these occur over and over again, both in 
collection and in examination. The employee is intimidated and 
coerced into submission to the misused authority of 
administrators with the resulting inequitable actions that harm 
taxpayers.
    While government agencies, such as the Internal Revenue 
Service should be held to standards of efficiency for 
productivity, the service can never be measured by the same 
standards as for-profit businesses.
    Statistics as they are used by the Internal Revenue Service 
to measure productivity can never be correct. Productivity on 
cases must be measured by the complexity of the issues 
involved, the complexity and cooperation of the taxpayer as 
well as other mitigating circumstances.
    However, the service as a number-oriented organization will 
always regress to the safety and rigidity of statistics. Right 
now within the service, as statistics and dollar yield are 
disappearing, other statistics on months in process, hours per 
case, and filed time versus office time are emerging to replace 
them. These statistics are directly ordered by Washington and 
remanded to local districts as record keeping for enforcement.
    Within the IRS, the power of the chain of command, line 
authority prevails. The pressure on lower-level administrators 
to achieve these administratively imposed statistical goals is 
overwhelming.
    Special emphasis is placed on blind obedience prompted by 
the desire for successful careers, administrators on each 
succeeding lower level will yield. The service acknowledges and 
rewards deference to line authority, not deference to moral 
authority.
    Goals must be reached. Statistics are massaged. A senior 
level administrator will order the justified penalties of a 
major delinquent taxpayer removed in order to get the case 
quickly agreed and closed into the statistics of the current 
quarter.
    The revenue received from the deficiency was needed to 
increase the current dollar yield of the district. Another 
administrator will order in 5,000 cases which are known to have 
poor tax potential in order to plump productivity statistics.
    There are other administrators who will not condone such 
behavior, but they cannot openly condemn it. Instead, they turn 
silently away, seeing nothing, hearing nothing, knowing 
nothing.
    Reluctant to become the target of their powerful brethren, 
these timid administrators close ranks to form a wall of 
protection around the more mighty. This policy of containment 
creates a culture of deceit.
    I once asked a branch chief why he had lied about a trivial 
matter concerning upper management policy. This was only after 
the branch chief had been exposed in the lie. He responded that 
it was his program to form a buffer between baseline employees. 
Problems must never go up. Policy must never come down. In 
other words, correct information is never transmitted upward or 
downward. And truth is never free to flow in any direction.
    Loyal but inept employees will be protected and even 
promoted. Critical but effective employees risk harassment, 
demotion, and dismissal. Character assassination on these 
outspoken employees is normal. Other employees who participate 
in the attack on the outspoken employee will be rewarded a 
coveted assignment, a promotion.
    Management has the tools and the power to get what it 
wishes. The outspoken employee will be ostracized and attacked 
on all fronts. If his integrity cannot be impugned, every 
effort will be made to destroy his work product.
    Recourse to the offices of inspection or EEO for that 
employee are useless. Both agencies seldom act independently 
from but rather as arms of the service administrators.
    If acts of alleged physical menace were charged in two 
separate instances, one incident between two bargaining unit 
employees and the other incident where a bargaining unit 
employee was allegedly the victim of an administrator, 
inspection will not investigate the incident where the charges 
were alleged against the administrator. It will investigate 
alleged charges brought against the bargaining unit employee in 
the other incident.
    If an EEO complaint is brought either against an outspoken 
employee or by an outspoken employee, administration will get 
involved to the detriment of the outspoken employee. Strong 
efforts will be made by management to imply that the outspoken 
employee is the offending party.
    If the EEO complaint was leveled against the outspoken 
employee, management will immediately reassign the outspoken 
employee, sending out an implied signal there is truth to the 
charges leveled against the employee.
    When an EEO complaint is brought by an outspoken employee 
against a supervisor, it is usually because that supervisor has 
been harassing and derogating the employee for being outspoken.
    Management will make every effort to hinder, impede, and 
deep six the charges. The charged employee will receive visible 
sympathy and be given career enhancing assignments, implying 
his innocence. There could be no relief to the employee victim 
of IRS harassment except to step into Federal court.
    If the employee is not strong enough to fight retaliation 
of victimization, the consequences can be dire: dismissal, 
alcoholism, and even death.
    A manager placed a mocking poster of a moronic character on 
his wall which had a crude title. Onto this poster, the manager 
placed the name of an employee whom he disliked because he was 
vocal. The manager went undisciplined. The employee so degraded 
and vilified died of a heart attack.
    Within the Manhattan District, there has even been a 
suicide by a bargaining unit employee as a result of harassment 
by management.
    A dual standard is used in disciplining management 
employees and bargaining unit employees with similar breaches 
of the rules of conduct. A joint IRS-NTEU study concluded that 
bargaining unit minority employees routinely receive harsher 
discipline for minor infractions of the rules of conduct.
    A Manhattan District administrator publicly embarrassed the 
service when arrested for violation of a civil statute. The 
arrest was splashed across the media. The behavior of this 
administrator was an enormous breach of the rules of conduct 
for not satisfying in good faith obligations, including all 
just financial obligations that are imposed by law. That 
administrator was never discharged and is now in a superior 
position.
    A bargaining unit employee would have dismissed if his 
salary was garnished and not sent on a career enhancing detail 
to a superior position, as was another Manhattan District 
executive employee.
    In the milieu that I have described, is it not easier for 
an employee to abandon critical thought, relinquish sound 
reasoning, suspend ethical judgment, and surrender to the lie? 
Within the IRS work force, as splendid talents lie dormant, 
novocained by the outrages of management, Stepford employees 
are arising.
    When the service is caught in unethical acts, public 
apologies will be made and lip service given to new principles 
and concepts, but the service is incapable of understanding and 
absorbing any principle or concept that cannot be reduced to a 
statistic, a number, or a digit.
    Management needs to be rehabilitated. A channel must be put 
in place that will ensure that the old bureaucracy and its old 
ideas are swept aside.
    Risks must be taken for the issue oriented creativity to 
endure. If not, always there will coexist customer taxpayer 
victims and employee victims. And there will continue a run on 
the moral bank by the IRS.
    Is it not a sad irony that all Nations of the world look to 
the United States as a model of democracy for guidance in the 
establishment of freedoms and human rights? Yet the IRS as an 
agency of that government grants its administrators such a 
liberal totalitarian hand.
    Not long ago when Commissioner Rossotti visited the 
Manhattan District, no message of his visit was sent to the 
general population of employees because the district had need 
to control the image it presented to the new Commissioner. The 
image that that district wished to show was one of focus, 
productivity, and harmony.
    As the Commissioner watched and listened, selected 
employees told tales of great accomplishments. Hidden in back 
rooms was the ineptness and the discord.
    It is not that Commissioner Rossotti chose to see the 
district through rose-colored glasses. It is that Commissioner 
Rossotti was deliberately led down an impoverished road where 
decaying houses had only the sides that faced the road painted 
white. The Manhattan District was on a mission to sell their 
piece of real estate as prime. The Commissioner was prevented 
from seeing past the facade.
    If the Commissioner would learn and understand the truth 
about the Manhattan District, let him put on simple raiment, 
enter the district unattended, re-walk down that road, and talk 
to ordinary employees as if a fellow traveler.
    As my testimony draws to an end, I would like to raise some 
reasonable questions. If one were to multiply the approximate 
revenue lost due to the injudicious actions of managers to the 
benefit of large taxpayers in the first two examples that I 
cited, $24 million and $1 million, by similarly acting managers 
in each district in each region of the country, how much lost 
revenue would a practical person determine that to be $1 
billion, $2 billion, more?
    If one were to multiply the economic hardship, emotional 
damage and mental stress placed on each small taxpayer in each 
State throughout the Nation because unfairly forced by the 
service into tax deficiency in order to fulfill policies and 
quotas of administrators, would a humane person even be able to 
value the cost?
    In conclusion, I should like to read an excerpt from a 
recent court case where a small taxpayer had the gumption to 
bring an action against the IRS for violation of its rights. 
The court awarded actual damages for mental stress, emotional 
damages, and humiliation, as well as punitive damages to the 
taxpayer.
    It reads, ``The conduct of our Nation's affairs always 
demands that public servants discharge their duties under the 
constitution and laws of this republic with fairness and a 
proper spirit of subservience to the people whom they are sworn 
to serve. Public servants cannot be arbitrarily selective in 
their treatment of citizens, dispensing equity to those who 
please them and withholding it from those who do not. Respect 
for the law can only be fostered if citizens believe that those 
responsible for implementing and enforcing the law are 
themselves acting in conformity with the law. By this award, 
this Court gives notice to the IRS that reprehensible abuse of 
its authority by any one of its employees cannot and will not 
be tolerated.''
    May my words and the words of others testifying before you 
today stir you to action. May you bring to taxpayers and to 
Internal Revenue Service employees a renewed acquaintance with 
liberty. And may this century not close before democracy is 
renewed by the remodeling of this agency and the rewriting of 
its laws. Thank you.
    The Chairman. Well, thank you, Ms. O'Dwyer. Again, I know 
it takes a great deal of courage and dedication to come before 
this body and testify as you have today.
    Ms. Johnson?

   STATEMENT OF MINH THI JOHNSON, REVENUE AGENT, LOS ANGELES 
               DISTRICT, INTERNAL REVENUE SERVICE

    Ms. Johnson. Mr. Chairman, Senators, good morning. My name 
is Minh Thi Johnson. I have been employed with the Internal 
Revenue Service's Los Angeles District Office as a revenue 
agent since January 28, 1991. I am a certified public 
accountant and have a B.A. degree in business administration 
with emphasis on accounting and finance.
    I am also currently serving as a lieutenant commander in 
the Navy reserves with the Supply Corps. My personal 
achievements include a Joint Service Commendation Medal and a 
Joint Service Achievement Medal. Prior to my employment with 
the IRS, I worked for the Office of the Inspector General at 
the Housing Department--excuse me--for the Department of 
Housing and Urban Development as an auditor/CPA coordinator for 
over five years.
    As an employee of the IRS, let me assure you that if I did 
not care about the IRS or have respect for many of my fellow 
employees, I would not have bothered to travel all the way from 
California to be here today.
    I appear before you today to testify about activities I 
have personally observed as an IRS employee, activities which I 
do--I know are not fair, not equitable, clearly not honest, and 
clearly do not serve the American taxpayer.
    Since the committee's September 1997 hearings on IRS 
practices and procedures, IRS management has openly flaunted 
the fact that it is not concerned with the Finance Committee 
hearings and that it will carry out business as usual when 
things quiet down.
    However, as a result of those hearings, one change did 
occur within the IRS. The direct communication from the chief 
of examinations regarding the circulation of dollars per hour 
to the employees has stopped.
    However, indirectly, under the guise of what the IRS refers 
to as cycle time and adjustment size, IRS management continues 
its long-time practice of basing employee's advancement and 
rewards on the dollars per hour basis.
    In general, IRS field agents are simply not allowed enough 
time by IRS management to thoroughly develop case related 
issues through adequate researching of tax law, court case, 
etcetera. Rather, we are ordered by our managers to propose 
adjustments, in this case increases in taxes owed without any 
justification for it.
    It appears to many of us that aggression coupled with an 
accumulation of high arbitrary tax adjustments is the gateway 
to promotion. Is the standard for promotion based on fairness 
or accuracy? Or are we to accept a standard based on 
aggressiveness to satisfy management's desire to achieve large 
adjustments?
    If there is no quota system, why does the IRS encourage us 
to use such a heavy hand in proposing baseless adjustments, and 
promote the employees who do? I do not believe you can reform 
the IRS without changing its standards for promotion.
    I am aware of one branch chief who encourages his revenue 
agents to ignore the larger tax cases that typically have the 
resources to fight IRS claims and inflated adjustments.
    Instead, that branch chief will have his revenue agents 
focus on cases involving smaller corporations. Why? Because 
more often than not, the smaller corporations tend not to have 
the financial or legal means that larger corporations do to 
defend themselves against these erroneously high adjustments 
proposed by the IRS.
    Also of note is the fact that IRS management has hounded 
employees so much about the time they spend on cases that 
several employees, including me, have had to take leave time to 
work on them at home. By doing so, office time would not be 
charged against these cases and the average adjustment figure 
would remain high against the number of office hours spent on 
them. This is outrageous.
    While these cases result in the collection of questionable 
tax revenues, the amount collected in these case pales compared 
to what I am about to tell you. This case involves IRS 
employees who actually recalculate taxes owed by some of the 
largest corporations in this country in order to reduce the 
legitimate taxes that are truly owed by these corporations.
    I am talking about millions and millions of dollars 
deliberately lost to the Department of the Treasury and under 
the watchful eye of some of the IRS' own managers.
    One particular tax case with which I am familiar involved a 
company enterprise that had been confronted by the IRS with a 
$70 million tax deficiency. During the time this case was being 
handled by the IRS, the original IRS team negotiating the case 
was replaced.
    Now, it is important to note that at the time the case was 
being turned over to the new team, the company had just offered 
to pay the IRS $35 million. In fact, it is my understanding 
that the corporation had actually made out a check for that 
amount, but the IRS rejected it.
    Because the IRS declined the payment, the company and the 
IRS entered into renewed negotiations. This time the company 
had a former IRS district director on their negotiating team. 
And the new IRS team now consisted of the current district 
director and the IRS district counsel.
    With these two teams in place, the new round of 
negotiations ended up with the company paying only $22 million 
in taxes. This was $13 million less than the $35 million the 
IRS had previously rejected.
    When I learned about the final decision, I was furious. I 
raised my concerns and demanded an investigation. However, I 
was quickly informed by colleagues that the case was a 
forbidden subject and we were not allowed to talk about it.
    Even as an employee of the IRS, I find it difficult if not 
impossible to understand how, on the one hand, the IRS will go 
after small taxpayers for arbitrary adjustments, while on the 
other hand, reduce by millions the amount of real taxes owed by 
extremely wealthy and powerful companies. I do not believe this 
is an isolated case.
    While I have not been personally involved with other cases, 
I have become aware through other co-workers that large 
adjustments are often being eliminated when IRS management 
negotiates with former district directors representing large 
companies. This is because certain members of IRS management 
hope to earn the thanks for the tax breaks they arrange for the 
companies in the form of future employment with those 
companies.
    As a result of my objections to the resolution of the 
specific case I previously described, I became the focus of 
harassment by other agents. Harassment has included comments on 
the quality of my work to comments on my Vietnamese heritage.
    When I told my group manager about what co-workers were 
doing to me, the IRS management took no action. However, my own 
manager joined the other agents in the verbal attacks. I was 
encouraged by a co-worker to file an EEO complaint which I did.
    After my group manager retired, the temporary manager 
joined with a union steward and began telephoning me at home 
both at night and on the weekends, demanding I withdraw my EEO 
complaint.
    At this point, my husband came to my defense and spoke with 
my manager about the problems I was experiencing. Shortly after 
my husband became involved with the EEO issue, his tax return 
from the year before we were married was audited.
    Senator Roth, than you for allowing me to express my 
concerns as an IRS employee and American citizen about the 
highly questionable conduct of certain IRS employees.
    However, IRS management has demonstrated it will retaliate 
severely against those employees who question its integrity, 
legality, or the ethics of its actions. Those employees who 
dare question these action in public will certainly pay.
    Therefore, Senator Roth, I am respectfully requesting the 
protection of this committee from retaliation by the IRS 
management in any form due to my appearance and testimony 
before you today. Thank you.
    The Chairman. As I said to Ms. O'Dwyer, we appreciate very 
much your being here today. We understand that it takes 
tremendous courage to do exactly that under these 
circumstances. I assure you that Senator Moynihan and I will do 
everything within our power to protect those who come forward 
to testify here. There will be no retaliation.
    Ms. Johnson. Thank you, sir.
    Senator Moynihan. I would like to associate myself with 
that completely. Mr. Rossotti would not allow it and Secretary 
Rubin would not allow it.
    The Chairman. Exactly.
    Ms. Johnson. Thank you, sir.
    Senator Moynihan. And the laws do not allow it.
    The Chairman. That is absolutely correct. The committee 
will not allow it.
    It is now my pleasure to call on Mr. Ayala.
    Mr. Ayala. Thank you.
    The Chairman. Please proceed.

STATEMENT OF MICHAEL AYALA, ANALYST, GEORGIA DISTRICT, INTERNAL 
                        REVENUE SERVICE

    Mr. Ayala. Mr. Chairman and members of the committee, I 
appreciate the opportunity to provide my testimony here today. 
I have a bachelor's degree from Weber College in Ogden, Utah in 
criminology and military science, and a master's degree from 
the University of Northern Colorado in communications. I am 
also a graduate of the officers advanced course administered 
out of Fort Lee, Virginia.
    I am currently an analyst with the Internal Revenue Service 
in the Georgia District and have worked for IRS for over 30 
years. My previous assignments have included working at the IRS 
Service Center, as a collector in various districts, as an 
employment tax examiner, as a manager, and until recently as a 
compliance analyst on the staff of the regional Commissioner.
    During my 7 years on the Commissioner's staff, I witnessed 
a broad range of misconduct by high-level managers in both tax 
administration and civil service practices.
    This misconduct included mistreatment of taxpayers, 
covering up serious revenue losses, sexual harassment, the 
creation of false records, improper use of enforcement 
statistics, covering up misconduct by executives and their 
high-level subordinates, and violations of prohibited civil 
service personnel practices.
    Such abuses are generally known to a large percentage of 
the IRS work force, but are perpetuated by management's 
intimidation and punishment of anyone inside the agency who 
objects or reports such misconduct.
    Over the course of the last several months, we have read 
and heard about many IRS-related horror stories concerning 
small taxpayers and small businesses. I would like to take this 
opportunity to share with you an example of the type of 
business the IRS audited at the opposite end of the scale.
    In one case with which I am personally familiar, certain 
members of IRS management in a particular district actually 
forgave over $30 million of a $50 million tax liability for a 
large, influential business concern for no apparent reason.
    The remaining $20 million was allowed to be paid over a 
five to six year period. The arrangement which was approved by 
the IRS, also we waivered the requirements for this same 
business to provide documented justification for its not paying 
the total amount of liability due. The IRS is also protecting 
it from levies and full tax liens being filed against it.
    My assignment on this case was literally to stand vigil 
over the 15 State area of the southeast region on behalf of 
this business to ensure that other IRS employees did not 
inadvertently file liens or levies on the company.
    It was my job to make certain that this case never got into 
the hands of unknowing Federal agents who could potentially 
take enforcement action against it.
    Such action was actually initiated on several occasions. 
And I was required to contact the district involved and stop 
the pending action.
    I also believe I have counterparts in the three other 
regions of the country who were assigned similar 
responsibilities relating to preferential treatment of other 
large corporations.
    To me, this was a clear example of unequal treatment of 
taxpayers depending on their financial strength and influence. 
It was also clear to me that those benefitting from such 
significant savings are not going to come running to Congress 
to report that the IRS is illegally saving them millions of 
dollars.
    I am left wondering though about certain members of IRS 
management who have left the agency and were hired at extremely 
handsome salaries by these large prestigious companies or other 
accounting firms.
    In another matter, I reported that the district improperly 
closed 83,621 taxpayer cases. In other words, they simply 
closed the books on over 80,000 cases without completing the 
process of collecting taxes owed on any of them. This was done 
at a cost of many millions of dollars to the public through a 
loss of uncollected revenue.
    In addition, I was able to report that this same office was 
also improperly closing over 4,000 taxpayer cases in a project 
the IRS referred to as the Low Dollar Study.
    This project was approved by my own manager as well as the 
IRS national office in order to create a statistical advantage 
by improving the district's closure rate. Yet, these actions 
created another situation that permitted inconsistent and 
unfair treatment of taxpayers.
    I will add the following to my report that the 
investigation by internal audit found that these cases had 
indeed been closed improperly and should be reassigned for 
corrective action.
    In another case, I learned from a number of female 
employees in the Georgia District that their male manager was 
sexually harassing his female subordinates and rewarding those 
who accepted his advances and punishing those who rejected him.
    One case of rewarding behavior involved a female employee 
with whom he was having a relationship. She allowed a $320,000 
collection statute to expire and her manager helped to cover it 
up. When she allowed the expiration of the collection date to 
occur, the IRS lost the ability to collect the $320,000 due the 
Department of Treasury. The manager, however, was able to and 
did make this almost one third of a million dollar mistake 
completely disappear.
    As the acting manager of these employees, I reported this 
misconduct to both the regional and district executives and the 
district EEO officer. Following my action, the same female 
employees began their own formal complaints with EEO regarding 
their manager and charging him with discrimination and sexual 
harassment. The manager's superiors refused to take any action 
to protect these women from his retaliation or the hostile work 
environment he created.
    In another case, I reported the presence of a striptease 
performance in the Atlanta Regional Office during office hours 
to the regional EEO officer. Instead of responding to my report 
in a reasonable and concerned manner, the EEO officer actually 
reported my contact with herself to my supervisor and attempted 
to discourage me from pursuing the matter.
    When I persisted, the regional Commissioner's response was 
to subject the entire regional staff to sensitivity training. 
However, the person responsible for having a stripper in the 
office and the high-level executive manager who approved it, no 
action was taken.
    The two individuals responsible for this are GS-15 
executive assistants and the EEO officer are still in their 
positions today despite the reported improper conduct.
    Currently, the Southeast Region is tracking the number of 
seizures made from October 1995 through 1998. They are ranking 
the districts and are comparing the number of seizures made in 
the Southeast Region between the respective districts and 
between the revenue officers.
    This is being done in blatant disregard for Policy 
Statement P1-20 and the Taxpayer Bill of Rights. This seizure 
tracking report is titled ``Seizures Southeast Region fiscal 
year 97'' and it was prepared in January of 1998.
    It contains pages showing charts with the number of 
seizures made in each district and graphs illustrating the 
number of seizures made per revenue officer in each district. 
The report clearly evaluates each district as improved when 
more seizures are made and slipped, failed, or disappointing 
when fewer seizures are made.
    This is the second such seizure report issued by the region 
within the last year. As long as enforcement comparisons, such 
as seizures, levies, and summons, etcetera continue to be 
applied and used as performance measures for revenue officers 
as well as districts, abuses in this area will naturally 
follow.
    In light of the recent scrutiny of the IRS by your 
committee, I believe this is not a simply a challenge on the 
part of IRS, but a blatant disregard for recent Congressional 
actions taken to protect taxpayers.
    Mr. Chairman, after I reported the improper closure of 
taxpayer cases and sexual harassment, I personally began to 
feel the pressure of management.
    After 29 years of excellent service to the agency and being 
the recipient of awards and high ratings, I am now the 
recipient of various forms of retaliations, including a 
demotion. I have no doubt that I have been labeled as a 
disgruntled employee for reporting the abuses I have witnessed. 
After my appearance before you today, I firmly believe this 
retaliation will continue.
    Mr. Chairman, no IRS employee should fear coming before 
this committee to testify, although I do. I am here because I, 
like so many of my colleagues, want so strongly to serve the 
taxpaying public with honesty and integrity absent the fear of 
management retaliation for doing the right thing. Thank you.
    The Chairman. Well, thank you very much for being here 
today, Mr. Ayala. We appreciate your taking the time and having 
the courage to testify.
    And now, I will, call on Ms. Jarvis.
    Ms. Jarvis. Thank you.
    The Chairman. Please proceed.

   STATEMENT OF GINGER MARY JARVIS, ACTING TEAM COORDINATOR, 
          MANHATTAN DISTRICT, INTERNAL REVENUE SERVICE

    Ms. Jarvis. Thank you, Mr. Chairman. Good afternoon, 
Senators, Mr. Chairman, and members of the committee. My name 
is Ginger Jarvis. Thank you for the invitation to address you 
today.
    In the interest of time, I am prepared to present a 
summary. However, I respectfully request that the text of the 
speech be admitted into the record in its entirety.
    To briefly summarize my personal qualifications for you, I 
have earned the following degrees: a degree in business, a 
degree in accounting, master of science in taxation. I became 
enrolled to practice before the Internal Revenue Service in 
1978. And I have 23 years combined tax experience in both the 
private and the public sectors.
    Even the IRS has recognized by competence by selecting me 
as one of four agents from the Manhattan District to receive 
specialized training in partnership taxation.
    Currently, I am an acting team coordinator for large case 
examination in the Manhattan District. As such, I am 
responsible for the coordinated examination program which 
examines the income tax returns of multi, multi-billion dollar, 
multi-international companies.
    To effectively execute tax examinations of this magnitude 
requires a major team effort and expertise of economists, 
engineers, computer audit, international audit, domestic tax 
specialists, to name just a few.
    Senators, I appear before you today to inform you of what I 
considered to be outrageous abuses that flourish within the 
Manhattan District. These offenses are committed by IRS own 
management. And I truly believe the policy is more widely 
spread than I have personally witnessed in Manhattan.
    At the sole discretion of individual managers, millions, 
even hundreds of millions of tax revenues owed to the U.S. 
Treasury by some of the largest taxpayers in the country are 
literally forgiven, zeroed out. This is an outrage predicated 
on the need of certain managers to improve statistics, to gain 
personal awards, or who seek solace in careers outside the IRS.
    The Manhattan District is a haven for this type of 
behavior. And I will describe situations that I have personally 
witnessed during my tenure in this office.
    As a member of an audit team, I was recently brought in to 
review the tax returns of an extremely large consolidated group 
of companies. My analysis strongly suggested that several 
hundreds of millions of dollars have been laundered. In 
addition, income from an installment sale in the range of 
several billion, that's B as in boy, billion dollars does not 
appear to have been reported for income tax purposes.
    On numerous occasions over the 14 months that it took to 
develop these extraordinary findings, I attempted to discuss 
the issues with the IRS case manager. Without exception, each 
and every time I addressed the subject, he refused to look at 
my work papers, he refused to discuss the technical merits with 
me, and he just basically dismissed me.
    Out of sheer frustration, I turned to the team coordinator 
and described what appeared to be a multi-billion dollar money 
laundering operation that was unreported for tax purposes.
    The team coordinator then addressed my findings to the case 
manager, the same one who had previously refused to discuss the 
matter with me. The IRS manager's reaction to my raising these 
concerns was to throw me off the case.
    Is it reasonable to assume that this manager's judgment may 
be impaired? He manages a professional prize fighter, teaches 
part-time, and operates what appears to be a tax law practice 
from a private office provided to him by the taxpayer. I ask 
you, at what cost?
    Today, I implore each of you initially to initiate an 
investigation into this matter. I believe that I am imminently 
qualified to raise the specter of money laundering and tax 
evasion to which I now add collusion.
    Another image that will remain indelibly engraved in my 
mind is the time that I witnessed three agents as they emerged 
frantically from a meeting in which that very same large-case 
manager had commented to the taxpayer, and please understand I 
am paraphrasing here, for a stated sum of money he might be 
able to make the specialist adjustment go away. If that remark 
had even remotely been made in jest, the agents would not have 
been quite so upset.
    However, in that instance, the specialist ultimately 
prevailed in assessing a tax adjustment in the range of a few 
hundred million dollars primarily because he had received the 
full backing and support of his own manager and his own branch 
chief. In addition, that specialist proposed a penalty in the 
tens of millions of dollars.
    A few years ago, I discovered an abusive tax scheme where 
nearly $400 million of taxable income was potentially 
unreported. I worked closely with IRS attorneys to develop the 
facts of the case over a two-year period.
    Eventually, the Manhattan District counsel dropped the 
issue. And hundreds of millions of dollars literally went 
untaxed. It is important to understand that the participating 
taxpayers in that study were not limited to the Manhattan 
District. And as circumstances would have it, a related case 
was taken to court in another district where my position, as 
presented by the government, was upheld and is now considered 
to be a landmark case.
    I am aware of many cases that have been ordered closed as 
no-change, a term describing the status assigned to a case 
where the Internal Revenue Service has determined that there 
will be no change to the figures as originally filed on the tax 
return.
    Other cases have had huge adjustments drastically reduced 
as a result of what I believe to be improper influence within 
the district.
    Another highly questionable activity that is taking place 
in the Manhattan District, and I believe is occurring around 
the country, is the return of former IRS senior managers who 
have elected a second career as tax advisors. Many of these 
retirees have elected to remain in or around the Manhattan 
District. And as such, they now represent taxpayers before the 
IRS.
    Since many of these former senior executives and managers 
have only recently separated from the service, many of their 
former colleagues and friends are still actively employed. As a 
result, I believe the newly-established tax advisor can take 
his or her client before the former colleague with the 
expectation of receiving decisions favoring their clients.
    One particular case comes to mind where I was prohibited by 
the case manager from proposing a $6 million adjustment to the 
company under examination. Earlier, that case manager had 
boasted to the team that he had gone to school with the owner.
    The team later discussed the expectations that I would 
experience great resistance from him in enforcing the 
adjustment that I had spent months developing. As was 
predicted, the case manager refused to discuss the tax issues, 
refused to look at the work papers, and refused to permit the 
$6 million adjustment to be proposed.
    Beginning with my current branch chief----
    Senator Mack. Mr. Chairman, I wonder if I might ask a 
clarifying question here. Was that the same case manager that 
you referred to earlier in your testimony?
    Ms. Jarvis. Yes, Senator Mack, it was.
    Senator Mack. All right. Thank you.
    Ms. Jarvis. My current manager--excuse me, not my current 
manager. Please, she is an exception. My current branch chief 
maintains monthly statistics of dollar yield per hour per agent 
by agent name. I believe the statistic is used as a tool to 
assign tax returns to agents they wish to control or demote or 
downgrade or to promote those who do their bidding.
    There are executives without college degrees who have 
attained the levels of at least grades 14 and 15. Last Sunday's 
News Day quoted Senator Moynihan in regard to the line item 
veto. And I quote, this is a formula for executive tyranny. End 
quote.
    I believe the Senator's analysis is applicable to the 
situation I have just described. This is not said with 
malicious intent to disparage anyone. And there are exceptions 
to the rule. But the very nature of the job exceeds the limited 
capabilities of the executives without college degrees.
    In stark contrast, there are agents stuck in the lower 
levels of grade 13 and below who have earned MBAs, CPAs, JDs, 
LLMs, are licensed attorneys. These highly qualified 
individuals appear to be deliberately held down and back 
because of their technical ability.
    By virtue of simply opening their mouths to ask a question 
or express an opinion, they expose the weaknesses of those 
above them.
    In one particular case, a $10 million adjustment was never 
assessed against the taxpayer because the statute of 
limitations ran out while the case was languishing in the 
processing department.
    In its own self defense, the processing department claimed 
it was waiting for district counsel to obtain an extension. 
Counsel's response was that it was waiting for the processing 
department to secure the statute.
    This internal squabbling took place under the nose of 
unfocused and inattentive management, rendered several years' 
worth of investigative work by a team of revenue agents a 
complete waste of time and caused $10 million of tax revenue to 
simply vanish in thin air.
    Senators, at this time, it is worthy of note the Manhattan 
District is the lowest revenue raising district in the country.
    A few years ago, an organization was established by several 
retired IRS senior executives from Washington. The stated 
purpose is to act as liaison between the service and its member 
body of large companies under the guise of the spirit of 
cooperation.
    Remarks passed by IRS agents at meetings are reported in 
the organization's newsletter accompanied by photos of the 
agents. Profiles as to the agents' strengths and weaknesses are 
circulated among the membership. I believe the organization is 
intended for the purpose of spreading among its membership 
techniques to design to frustrate an audit.
    The IRS has placed into practice in the spirit of 
cooperation a policy whereby at the completion of the 
examination of a company, the service is now requesting that 
the taxpayer under audit provide detailed evaluations of the 
agents assigned to the case.
    Those evaluations are then returned to upper management for 
review. It is grossly unrealistic to expect the non-compliant 
taxpayer to return a survey thanking the agents for showing 
them the error of their ways.
    Eventually, the surveys cascade down where they affect the 
agents' performance evaluations. Ultimately, the evaluation 
impacts negatively on work assignments, promotions, salaries, 
etcetera.
    I believe the salaries in the New York IRS area are below 
that of other Federal agencies in the New York area. In 
Manhattan, we are no longer paid to do a job, but to take 
abuse.
    Commissioner Rossotti has announced plans to restructure 
the IRS based on responses compiled from the survey feedback 
action. However, the results are flawed. Many of the agents and 
staff have not responded truthfully because the surveys were 
presented to their managers for review immediately upon 
completion.
    I personally have experience reprisal as a result of the 
SFA. And I am aware of several others who have been castigated 
by management for their responses to the SFA as well.
    On several occasions, I witnessed what I believe is the 
operation of a private tax law practice out of an audit site by 
a case manager. To this day, it is my understanding that he 
still avails himself of the taxpayer's facilities and the 
government staff to provide secretarial services for his own 
personal gain.
    It is an openly discussed topic among agents that this 
manager has previously conducted his private tax law practice 
from the second floor of the IRS office building for several 
years before relocating to the taxpayer's facility in an 
upscale Manhattan area. The unreconcilable question is, at what 
price?
    I really never had an alternative other than to blow the 
whistle regarding my concerns of money laundering, tax evasion, 
and collusion. I was simply doing my job.
    Nevertheless, since reporting my findings, I have been 
subjected to a continuously pervasive, hostile, and often 
intimidating work environment.
    Initially, I reported the facts to the regional inspection 
and provided them with copies of my work papers. I then 
notified the branch chief, the chief of exam, the union, the 
Office of Special Counsel, and several members of the House and 
Senate. I have circulated in excess of 100 memos.
    In the final analysis, inspection division routinely 
reports back to the district they could not become involved in 
the case where the IRS manager refused to assess the 
adjustments because that type of complaint is not within their 
jurisdiction.
    The branch chief looked back two weeks, reclassified leave 
as AWOL, and stopped my salary without notifying me. AWOL is an 
offense subject to termination. At the time, I had a 
physician's letter and I had accumulated a reserve of 250 hours 
of unused annual leave.
    The district director did not answer my memos. And I am 
still waiting for a response to any one of the eight detailed 
reports that I have filed with the Office of Special Counsel.
    The offices of several legislators responded to the effect 
that they regarded the subject matter of my letters to be 
covered under the Hatch Act and therefore were prohibited from 
intervening in the matter.
    At this time, I respectfully request that those offices 
review the intent of the Hatch Act in light of the facts that I 
have just presented. I do not believe the Hatch Act was 
intended to protect management in the commission of a crime.
    Senators, I fail to comprehend how the IRS is able to 
conduct a thorough investigation into any issue, an issue an 
IRS employee raises involving collusion, money laundering, and 
tax evasion without someone in IRS management being compelled 
to interview the employee.
    There are others within the IRS with the same knowledge 
that I possess regarding this case. However, I am the only one 
willing to come forward. It has been nearly two and a half 
years. And IRS management still has not questioned me about it. 
Appearing before you today as I am is my final resort.
    There is an adage at the IRS: if you cannot attack the 
issue, then you attack the agent. I am not alone when I say 
kill the messenger mentality pervades the service on a country-
wide basis.
    Since blowing the whistle, I have been subjected as many 
others have to a continuously pervasive, hostile, and often 
intimidating work environment. I was suspended without pay 
because I blew the whistle. The assistant district director has 
notified me in writing and I present the letter here.
    The assistant district director has notified me in writing 
that he is withholding the decision to rescind the January 1997 
suspension without pay, and I quote, pending the results of the 
ongoing investigation. I ask, what does one have to do with the 
other? Justice delayed is justice denied.
    Mr. Chairman, I could continue to list instances I have 
witnessed and personally experienced that parallel those I have 
already described to you today. I could also describe 
additional actions taken against me personally because of my 
reporting what I believed to be abuses committed by colleagues.
    I have revealed what I believe are some very serious abuses 
occurring behind the one-way mirrors of the IRS. When our hands 
are tied by intimidating management and flawed practices, we 
are prevented from doing the job we were hired to do, that is 
ferret out the non-compliant.
    The IRS must no longer conduct business in the same old way 
that turns a blind eye on the suspect and the blatantly 
dishonest actions of its own management. I ask for your help in 
shattering this one way, self-serving attitude of so many 
within the IRS management.
    Senators, Senator, Mr. Chairman, quite frankly, I believe 
that I will experience further retaliation for appearing before 
you today. Therefore, I respectfully, Mr. Chairman, request 
that the guarantee of protection from reprisal be extended to 
include my small circle of family and friends.
    The Chairman. Are you finished?
    Ms. Jarvis. No, sir. I am asking for a response.
    The Chairman. I say this to each of you on this panel, will 
take steps to ensure that you are not retaliated against.
    Ms. Jarvis. I do not want my family's returns being 
examined or harassed or my friends as well.
    In conclusion, I would like to express my gratitude for the 
opportunity to address this distinguished panel. Thank you, 
gentlemen, and have a good day. And I would be willing to 
entertain any questions that you may have.
    The Chairman. Well, thank you for being here today. As you 
know, the purpose of these hearings is to help ensure that the 
kind of problems raised by you do not happen again.
    [The prepared statement of Ms. Jarvis appears in the 
appendix.]
    The Chairman. And I want to express my appreciation to each 
of you for being here to discuss some of your experiences. I 
will note again that each of you testified under oath. And I 
know it is not easy to do what you did. And you are all 
concerned about retaliation.
    On your charges of money laundering, a very serious charge, 
we will take steps to see that that is investigated further, 
but thank you again for being here today.
    During our hearings this week, several members have raised 
concerns over revenues lost to the government that should have 
been collected. In your testimony, you each described the 
zeroing out or arbitrary reduction by the IRS of monies owed 
the government. I would like to ask you, each of you, in your 
opinion, does this practice result in significant amounts of 
revenue lost to the U.S. Treasury because of uncollected taxes?
    Ms. O'Dwyer.
    Ms. O'Dwyer. It does. Yes, it does.
    The Chairman. Ms. Johnson.
    Ms. Johnson. Yes, it does, sir.
    The Chairman. Mr. Ayala.
    Mr. Ayala. Yes, Senator, it does. There are no special 
rules for managers at any level to deviate from our laws, 
regulations, and standards of treating taxpayers fairly across 
the board. But this does happen. And sadly, the result is a 
lack of public confidence and trust for the service.
    The Chairman. Ms. Jarvis.
    Ms. Jarvis. Yes, Mr. Chairman, I believe that it does, 
particularly in the Manhattan District. It may account for the 
reason that Manhattan is the lowest revenue raising district in 
the country.
    The Chairman. Mr. Ayala, you somewhat touched on my next 
question, but again, I would like to ask each of you. When an 
IRS auditor finds a large tax deficiency and decides to zero 
out or reduce that deficiency, what checks and balances exist 
on the auditor to ensure that their action is appropriate, or 
on managers? Mr. Ayala, do you want to answer?
    Mr. Ayala. Sure. I am not aware of any checks or balances. 
I think there are some government checks and balances that are 
supposed to work that are in place that do not work.
    The upper-level management to do various things, they have 
absolute power. There is nobody that is going to challenge 
their powers to do what they want to do as they want to do it.
    I, too, have been the special counsel and written them a 
number of times for protection. And they have not responded or 
responding that it is just not whistle blower type things that 
they are going to protect employees from.
    I do have, I brought with me a copy of a 1996 report to the 
Congress from the U.S. Office of Special Counsel. And it shows 
that in the thousands of complaints that they got from Federal 
employees in 1996, they ordered three stays of protection. And 
it shows in the past five or 6 years that they have issued 16 
stays of protection for Federal employees. And that is about an 
average of three a year of the thousands that are filed.
    This is adequate to protect employees and to keep some of 
these things that are going on in check or in balance.
    The Chairman. If I could please interrupt. I appreciate 
what you said. But the question I was really trying to get at 
is where there is a deficiency. What checks and balances are 
there, on either the auditor or the supervisor to ensure if 
they are waived, that the action is appropriate? Is there any 
dollar limit, for example?
    Ms. O'Dwyer. No.
    The Chairman. Ms. O'Dwyer.
    Ms. O'Dwyer. There is no dollar limit, no. It is actually 
an examiner does the examining of the case. The manager can 
review the case, discuss the adjustments with the agent. And he 
should generally go along because the examiner is the person 
who has the technical competence.
    In my particular case, the manager just did it to meet a 
deadline. I cannot answer for the other cases. And the other 
case I quoted was also just to meet a deadline. They did not 
want overage cases. And there was no absolute reason other than 
that.
    The Chairman. But you would agree that the supervisor has 
some responsibility for using independent judgment? It is just 
not to endorse whatever comes up?
    Ms. O'Dwyer. You mean, the supervisor is supposed to have 
an awareness of the case. The examiner, a good manager always 
has the knowledge of a case. We get reviewed constantly. They 
look at the cases. They ask questions on a case. They are fully 
aware of what is going on in the case.
    If there appears to be no audit issue or if it will take an 
excessive amount of time to develop, you will get diminimus 
tax. That is when you decide to withdraw the issue. And you do 
not do it.
    The responsibility for the case basically is the agent, but 
ultimately the manager assumes the responsibility for the case. 
It depends if it is a large case or small case also. It is 
different.
    The Chairman. Ms. Johnson, did you want to comment?
    Ms. Johnson. No, sir, because she states it correctly. And 
that is the same in the Los Angeles District, sir.
    The Chairman. Well, the time is growing late. I think I 
will turn to you, Senator Moynihan.
    Senator Moynihan. I have no questions, sir. I have learned 
a great deal. And I want to say to Ms. Jarvis, repeat what 
Senator Roth, the chairman, said that no one is going to 
retaliate against you. Or if you think that is happening, you 
just call us up.
    The Chairman. Senator Grassley.
    Senator Grassley. First of all, I might owe Senator 
Moynihan an apology because it may have sounded like I was not 
supporting what he said about the fact that he would do what he 
just said he would do. And I believe that he will do everything 
he can to do what he said he would do. And I compliment him for 
that. And I would do the same thing for Iowa constituents.
    The point I was trying to make is that this bureaucracy is 
so massive and the subtle ways in which people can be 
retaliated against, it is sometimes just practically impossible 
to keep on top of it all. So I want to apologize to Senator 
Moynihan.
    Senator Moynihan. Let me thank my colleague and friend for 
many years.
    Senator Grassley. I would like to get something straight. 
And it is repetitive. I suppose it is so obvious, I should not 
even repeat it. But you witnesses are telling us that millions 
and at least millions of dollars in taxes due are being 
forgiven by IRS managers each year. This is done, I think I get 
the impression, to boost careers, to make statistics look good?
    Ms. O'Dwyer. Correct. To meet a deadline, to meet 
deadlines.
    Senator Grassley. To meet deadlines.
    Ms. O'Dwyer. At one time when I first went into 
international, basically there was no deadlines. And that is 
what we were informed. And then, the deadlines became 36 
months, then 24 months and then down to 18 months.
    And managers have been called on the carpet if they have 
aging cases within the group. And the manager will take the 
brunt of it. Then, it will come down to the agent. And then, 
they will--if anything will delay a case.
    And all managers do not do this. We are not saying all 
managers do this, but a manager basically who is more insecure 
will then order the case closed and no-change. You can have 
no--there is no protest. There is nothing you can do.
    Senator Grassley. So it is done just to make the IRS look 
good and the individuals at the IRS to look good. And who is 
really paying for this? It seems to me that the American 
taxpayer is paying for this. The constituents pay for it.
    It seems that we hear from and I hear from the little guy. 
I hear from the taxpayer who works hard to make ends meet, ends 
up with a tax liability. And the IRS goes after his house, goes 
after his bank account. And if the tax is due, obviously they 
should. But the extent to which there is a harassment of the 
little guy and at the higher end, taxpayers, you are indicating 
to us, they get away with it.
    My point is that the IRS always seems to be after the 
little person. We even had testimony on this I think back in 
September from one of the agents that said, we were told to go 
after the little guy. They do not have the resources to fight 
it.
    And so we heard yesterday about how the IRS can threaten 
and seize and ruin lives in order to get less money, much, much 
less money than the millions that are owed by the larger 
taxpayers that you are talking about.
    So the IRS seems to be squeezing the little guy to get the 
money while this set of four witnesses are telling us that the 
big tax liability is often forgiven. And the cause of this, of 
course, I think, and it is basic unfairness is the lack of 
accountability.
    There is an environment within the IRS of intimidation of 
the little guy and within the top management, as you tell us, 
for careers to look good, for advancements to be made. It is 
okay to wink at the larger taxpayer basically is what is being 
done.
    So I think it is an appalling situation, but one that I 
think that we can do something about. I think our legislation 
will do something about it. And I think future, ongoing 
oversight that the chairman of the committee has promised will 
do something about it.
    And as I said in my statement that I was partially 
apologetic--or that I was apologizing to Senator Moynihan 
about, I went on to say earlier this morning that it is partly 
we tend to blame the IRS, but there is an awful lot of fault 
that rests with Congress, not only for this bureaucracies that 
we do not do the proper job of oversight that we ought to do.
    So I thank you, Mr. Chairman.
    Senator Moynihan. I thank you. And once again, I thank my 
friend and colleague. No apology was in order. I in fact knew 
what he meant.
    Senator Kerrey, I believe you and Senator Grassley have 
been working together on this subject. And you are next on 
Senator Roth's time sheet.
    Senator Kerrey. Thank you, Mr. Chairman. First of all, let 
me reference Senator Grassley. And he is very much involved 
with the development of changes in the law, the Taxpayer Bill 
of Rights 1, the Taxpayer Bill of Rights 2 that I think has 
changed.
    I think we have gotten a substantial number of improvements 
in the operation. And I just want to stipulate that. I think 
Congress has not been just sitting on its hands. We have 
responded in two very precise occasions. And this is an attempt 
to further take action.
    I want to also inform my colleagues that the restructuring 
commission that was started in 1995 had interviews with over 
300 IRS employees, many of which were conducted in public 
hearings.
    I want to stipulate there is one area that we did not hear 
that I want to comment on. But a lot of things we heard today 
have been incorporated both into the House and the Senate bill.
    And I want to make sure that our witnesses have the 
opportunity. And I will just give you the copies of the 
legislation. And if you will take special note of the Titles 
1101, 1102, and 1103.
    Those are the titles that reference the problems that 
attempt to create a resolution were the problems that you 
brought to us today that other employees have also brought to 
us are being addressed, in addition, in Titles 1204, 3421, 
3701, 3706, and 3709.
    And I urge you do not be intimidated by writing laws 
because some of you may not be lawyers. You say, well, I cannot 
do this. I am not a lawyer either. Senator Gramm is not a 
lawyer. We do just fine in writing laws. I urge you to give 
careful consideration to these things. And I will get it to 
you.
    I will call to my colleagues' attention that I asked in a 
previous hearing, Mr. Epstein who is here, he is a tax 
practitioner, I asked him the same question. And I reiterate, 
one of the problems that I have with these hearings is that we 
are not asking the witness to comment on law that we have 
already reported out of the committee. And Mr. Epstein has 
identified two or three I think very, very good changes that 
would improve the legislation.
    So I hope that you will take my offer in good faith, even 
though the time may be short. We have until next week when it 
is likely we will be taking this up on the floor.
    If you, as a result of your personal experience with this, 
have some suggestions to us that would enable us when we pass 
the law to do something more than just to issue a press release 
saying we have fixed the problem. We hope that the law will 
show the same kind of progress that we have seen with Taxpayer 
Bill of Rights number 1 and number 2.
    I will also point out to colleagues, I mean, we just sort 
of get whipsawed on this deal. And the witnesses yesterday said 
we are doing too much. What you are saying to us is we are not 
doing enough.
    And I want to, Ms. Jarvis, accept your offer. I would 
intend, unless persuaded otherwise, that I should send a letter 
to the Inspector General asking to investigate the situation 
that you have described because the situation that you have 
described borders on fraud where individuals are essentially 
saying that I am going to give a hair cut to a claim as a 
consequence of believing that I might get employment out in the 
private sector. I have a special relationship of some kind.
    And that is the one area in the restructuring commission. 
We hear none of this kind of an allegation. That is a very, 
very serious issue as far as I am concerned. And I accept your 
offer to follow up either with you directly or through the 
Inspector General's office.
    And finally, Mr. Chairman, I would ask that approximately, 
I think it is 13 cases that we heard, there are some complaints 
about the Criminal Investigation Division, actually 14 cases, 
again, I call my colleagues' attention to these as well, 14 
cases the Criminal Investigation Division handled. And I think 
they handled it quite properly and in all cases.
    I mean, one guy runs Big John's Restaurant and Recreational 
Center in Jackson, Mississippi. No doubt, he could come before 
the committee and say he was abused, not according to the U.S. 
Attorney. He was laundering money.
    No doubt, in the Middle District of Florida, the individual 
was running the Inner Circle Lounge would say that his rights 
were abused, not according to the U.S. Attorney. He was 
laundering money and involved with drugs. No doubt as well, all 
these other individuals would say that they have problems.
    And I would urge my colleagues as we move to the floor to 
debate this and we are talking about making changes in the law 
to remember that in addition to some very good examples of 
abuse of power, we have some very good examples where the power 
was applied exactly as we intended it to with laws that we 
enacted in 1986, 1988, and 1994 to make certain that this 
problem of fighting the war on drugs is fully engaged.
    And I would ask consent that all 14 of these be included as 
part of our record.
    The Chairman. Without objection.
    [The information submitted by Senator Kerrey appears in the 
appendix.]
    The Chairman. Senator Moseley-Braun.
    Senator Moseley-Braun. Thank you very much, Mr. Chairman. 
At the outset, I want to thank Senator Gramm for allowing me to 
go ahead. I have a meeting to go to, but I did want to ask a 
couple of specific questions, if not to these witnesses, then 
to the witnesses who will come tomorrow.
    I am very concerned about some of the procedural issues 
that have been raised by these witnesses. It is my 
understanding it is already against the law for agents to have 
dual employment.
    And if indeed they are holding down second jobs and 
moonlighting and the like, I think we need to have some report 
from the department about this. I mean, IRS needs to respond to 
the level of enforcement on that score in terms of dual 
employment. That seems to me to be a terrible, terrible 
problem.
    The second issue that I would like to have some responses 
to has to do with the issue of failure to respond to EEO and 
employment complaints. Mrs. Jarvis testified that she had not 
heard back on eight different cases that have been sent to the 
chief counsel's office. And that I do not understand why 
employees are not getting their specific issues addressed by 
management. And so I would like very much to get some responses 
to that.
    A third area where I am very concerned and I would like 
some kind of analysis, and this seems to come through a number 
of our hearings, has to do with the notion that more time, 
energy, and money is put in chasing little guys, if you will, 
than going after the big tax cheats, the big corporations who 
are not paying their fair share. And I think that will 
obviously just undermine the confidence in the system overall.
    I would like very much to know whether or not anyone in the 
IRS can tell us if there is any kind of cost benefit analysis 
in terms of what it is they do, how much time gets spent on the 
smaller taxpayers vis-a-vis the amount of time that is spent on 
the really big taxpayers.
    Ms. Jarvis, you wanted to say something?
    Ms. Jarvis. Yes, I do, Senator. The upper management 
maintains record on hourly rate of return per agent by agent 
name. So it is in the control, it is in the hands of 
management.
    They can selectively choose tax returns that either will 
have no potential to give to a more qualified agent if they 
want to keep down or they can selectively choose a return 
before examination to give to someone who is technically more 
light just to get someone that might do their bidding so that 
they can promote that individual. That is in the choices, the 
freedom of the management.
    Senator Moseley-Braun. Well, that is a very--that is yet 
another issue. And that is very important follow-up. And I 
would like again tomorrow some response to the frequency in 
which that practice takes place.
    Ms. Jarvis. That is done on a monthly basis. The hourly 
rate of return per agent per name by agent name is d1 monthly.
    Senator Moseley-Braun. But the selective assignment to 
order to hold back one employee versus another, that kind of--
--
    Ms. Jarvis. Oh, that is done with inventory.
    Senator Moseley-Braun. Right. Yes, Ms. O'Dwyer.
    Ms. O'Dwyer. I was just going to agree and say that is done 
consistently. And when she is done, I would like to answer each 
of your three questions.
    Senator Moseley-Braun. All right. Well, I do not know that 
we--I hope that we will have a chance to.
    Ms. O'Dwyer. I want to correct some statements then.
    Senator Moseley-Braun. All right.
    Ms. O'Dwyer. That is what it is.
    Senator Moseley-Braun. All right.
    Ms. O'Dwyer. When you are ready.
    Senator Moseley-Braun. All right. Then, why don't you do 
that right now? I mean, I am ready.
    Ms. O'Dwyer. You said that you thought that employees are 
allowed to hold outside employment.
    Senator Moseley-Braun. No, no, are not. It is already the 
law that they are not allowed to hold. I have been advised it 
is already the law that employees are not allowed to hold 
outside employment.
    Ms. O'Dwyer. No. We have been informed that we are. And we 
cannot do anything that leads to tax, anything that will go, 
appear on a tax return. We will be kept away from doing 
financial accountings. If you wanted to sell shoes part-time on 
Saturday, you could do that.
    Senator Moseley-Braun. Right.
    Ms. O'Dwyer. There are lines of employment that we are 
allowed to do, but there must be permission to do it. That is 
the first thing.
    And then, the other thing you said, was there more time and 
energy spent on going after the little guy? I would say, no. He 
is much easier to do and it goes much faster. You spend a lot 
of time on large cases. And you spend a lot of resources, a lot 
of hours. And then, it is zeroed out. In that period of time, 
you could do 30, 40 or 50 little people.
    And little people can be sometimes--little cases can be 
done quickly. If you are doing a certain project, like I 
mentioned the hobby loss project, that can be just done in 24 
hours, 24 hours spent on it. You just go and just keep doing 
it.
    Senator Moseley-Braun. Right. I appreciate that.
    Ms. O'Dwyer. That is what I wanted to say.
    Senator Moseley-Braun. Well, I thank you for the 
clarification, Ms. O'Dwyer. I guess my question that I would 
like the Service to respond to tomorrow in terms of dual 
employment has to do with Ms. Jarvis spoke to someone who 
actually had a tax practice outside of the agency.
    Ms. Jarvis. I have witnessed that.
    Senator Moseley-Braun. Right.
    Ms. Jarvis. And law practice.
    Senator Moseley-Braun. And that is illegal.
    Ms. Jarvis. Yes, correct.
    Senator Moseley-Braun. All right. So that is what I would 
like to have again tomorrow if the service can respond to that.
    And your point is very well taken about the time spent on 
the little guy.
    Ms. O'Dwyer. Not necessarily. It can go very quickly.
    Senator Moseley-Braun. Right. Right. Right.
    Ms. O'Dwyer. And another thing, I would just like to say on 
the failure to reply to EEO or grievances, that is consistent. 
You can have grievances that are outstanding for 2 years. They 
will deep six them. They will ignore them. I have an EEO 
complaint I filed years ago. I never got an answer. I knew I 
did not have the time to continue. It was deep sixed because it 
was against an administrator.
    Senator Moseley-Braun. Right.
    Ms. O'Dwyer. I never expected to hear from it again. And 
there are grievances right now out for two years, EEO 
complaints. They do not bother to answer them. They just think 
if they ignore it, it will go away.
    Senator Moseley-Braun. Well, I just want in closing to say 
that someone, one of your testimony said it is going to be 
business as usual when these hearings are over. That was you, 
Ms. Johnson.
    I do not think so. I think if anything the fact that the 
committee has taken up its oversight responsibility. And the 
fact that there is public attention on this issue, and with Mr. 
Rossotti coming, I think we are going to see some real changes.
    And certainly, everybody here is determined that you guys 
will not have to suffer any retaliation by virtue of your 
cooperating. This is just, you know, citizenship at its best 
what you are doing. And we are certainly going to see to it 
that you do not suffer as a result of it. Thank you very much. 
Thank you, Mr. Chairman. And thank you, Senator Gramm.
    The Chairman. Thank you, Senator Moseley-Braun.
    Senator Moynihan. Mr. Chairman, can I just quickly ask to 
be excused? As I told you earlier, I am required to be on the 
floor at noon to offer an amendment on NATO expansion. So I 
will not be able to hear Senator Gramm, but I will look forward 
to an account of what he has said. And thank you for this very 
illuminating panel which the morning has only begun.
    The Chairman. Thank you very much, Senator Moynihan.
    Senator Gramm.
    Senator Gramm. Well, Mr. Chairman, I have to go over and 
oppose Senator Moynihan's amendment. [Laughter.]
     But he has plenty of time to give a speech before I get 
there. I do not have any questions. I just want to make three 
comments that I move to make as a result of other points that 
have been made.
    First of all, I think it is very important we do not get 
into this business of little guys and big guys when we are 
talking about tax cheats. I have no sympathy for little guys 
who cheat on their taxes or big guys who cheat on their taxes. 
They are all criminals. They ought to be pursued.
    And quite frankly, if I had my way, I would be willing to 
marginally lose money pursuing tax cheats because that rewards 
people who comply with the law and it encourages people to 
comply with the law.
    So I do not want to get into this business where, you know, 
we decide, we do not go after the little guy because we are not 
going after the big guy. Tax cheats are tax cheats. And we 
ought to be vigorously pursuing them.
    I also want to thank you, Mr. Chairman. You know, you 
listen to these things. And every once in awhile you get ideas 
related to our bill. I think one of the conclusions, for 
example, yesterday I reached is it ought not to be legal for 
the IRS to force somebody to sign a legal document that 
prevents them from suing the IRS as a result of what they have 
done.
    What we are letting them do is to legally intimidate people 
by saying we will stop making your life miserable if you will 
sign an agreement that you will not make our life miserable. I 
would like to see that illegal. I think it ought to be banned 
for the IRS to enter into this agreement and force other people 
to do it. I think people ought to always preserve their right 
to sue the government and the Internal Revenue Service.
    I would like to say finally what continues to bother me and 
it is clear through all of your testimonies is that we have in 
IRS a system which is basically a closed system where people 
are or they act is they are above the law and above the rules 
that apply to everybody else.
    We hear over and over that complaints are made. I do not 
how you judge the quality of these complaints. I do not know 
whether they are valid or they are not valid, but I think it is 
interesting that nothing ever seems to happen.
    We have people who steal 20 cars and they retire with their 
full benefits. We have people who commit or are substantially 
alleged to commit sexual harassment and they get promoted to 
EEOC officers. And then, they are released for sexual 
harassment.
    I mean, it seems to me that one constant pattern here is 
abuse of power. And it all goes back to the point that is so 
easy to raise and I do not know the solution to it. And that is 
this agency has too much power. There are no checks and 
balances within this agency. There is no consistent review of 
what they do.
    We had two of the senior Inspector General officials of the 
Treasury Department here yesterday just holding up their hands. 
Well, you know, we ask these questions. Nothing ever seemed to 
happen. We do not know what happened to these people. It seems 
as if no one has the power to hold this agency accountable.
    And in each of your cases with threats of reprisal, people 
calling you up in the middle of the night, and Ms. Johnson.
    Ms. Jarvis. Yes, sir.
    Senator Gramm. Somebody might get killed calling my wife up 
in the middle of night to harass her, you know. Where I come 
from, we do not put up with that stuff.
    And let me just finally add that I am not sure you are not 
going to have retaliation against you. And I just add my voice 
to people who are concerned about it. And I am not convinced 
that these people are not so arrogant that they think they can 
do it and get away with it. And it is hard to measure it.
    Ms. O'Dwyer. And it is easy for them to do.
    Senator Gramm. And see, we do not know, you know. We do not 
have a way of judging your competence. We do not, you know. It 
is going to be very difficult for us to protect you. And we 
want to try to do it, but it is a very difficult thing. And 
again, I would just like to thank you for coming forward.
    Yes, Ms. Jarvis.
    Ms. Jarvis. Senator, I would just like to say that there is 
a way to measure my competence. The particular situation that I 
spoke of with the hundreds of millions of dollars of money 
laundering and the billions of dollars of unreported income 
from a sale, that statute is still open. Anyone can go in and 
look at those tax returns. They are under examination now under 
the supervision of that same case manager.
    Senator Gramm. Well, I appreciate that. And we should 
either do it or have staff look at it. I mean, these are the 
kind of things that we need to follow up on and try to find out 
exactly what is happening. I thank you, Mr. Chairman.
    The Chairman. Senator Mack
    Senator Mack. Thank you, Mr. Chairman. And to each of you 
who testified to us this morning, it is hard for me to even 
imagine what anxiety each of you has gone through in 
preparation for your testimony this morning. Just preparing the 
testimony under normal circumstances is a difficult thing.
    Being here before the Senate is not an easy thing to do. 
And then, when you layer on top of that the fear of retaliation 
to yourselves and to your family, that is very, very difficult 
thing to do. And I commend you for making the effort and being 
here this morning.
    We will do our best. As both Senator Moynihan and Senator 
have said, we will do our best to protect you from that.
    There are a couple of questions I do want to ask. And let 
me start with Ms. O'Dwyer.
    Ms. O'Dwyer. Yes.
    Senator Mack. In your testimony, you talked about I guess 
former members of the service who come back?
    Ms. O'Dwyer. Yes, I did.
    Senator Mack. Are you personally aware of any instances in 
which former IRS employees improperly represented taxpayers 
before the IRS in matters that they were involved in while at 
the IRS?
    Ms. O'Dwyer. I personally have not had that when I dealt 
with them. I have dealt with representatives who have come 
back, but they have--they were not in that position, but they 
did attempt to intimidate. I was told by one.
    When we conclude a case or we make an agreement, it is 
called a revenue agent's report or a 5701 proposed adjustments. 
They were dictating to me what I should put in it. And I said I 
am not beholden to you. I am doing what I should do. They would 
attempt, they will try to bypass you. They will go to the 
manger.
    But there are other cases, including right now that have 
been in progress. Where former administrators, there is a two-
rule they cannot come back.
    Senator Mack. Right.
    Ms. O'Dwyer. They have come back. And they have attempted 
to do it. I am not involved with anything like that. But, yes, 
I do know it. And then, they attempt to intimidate the examiner 
or to claim that when the examiner will make a protest, they 
will go after the examiner. And they make phone calls to the 
branch chief and his manager and higher. These things do occur.
    Senator Mack. And the intimidation that you experience is I 
guess, what, the understanding of the personal relationship 
that that individual has from his previous experience with the 
manager or the case?
    Ms. O'Dwyer. Oh, they do. They will make phone calls. They 
will go to your manager. They will go to your branch chief. 
This is a very common practice.
    Senator Mack. Let me go next to Mr. Ayala, is it?
    Mr. Ayala. Ayala.
    Senator Mack. In your testimony, you talked about a study 
ranking property seizures.
    Mr. Ayala. Yes, that is correct.
    Senator Mack. And I understand that that study, that should 
not be done. Is that correct?
    Mr. Ayala. Yes, it is a violation of a Policy Statement P1-
20 which states that enforcement statistics, such as levies, 
seizures, summons cannot be used to rate performance of any 
kind.
    Senator Mack. Do you have a copy of that?
    Mr. Ayala. Yes, I do. I have a copy of that here.
    Senator Mack. Senator Roth, do we already have a copy of 
that for the record? Or if not, I would like to have it 
included in the record.
    The Chairman. Without objection.
    [The information appears in the appendix.]
    Senator Mack. All right. And what is the date of that? Is 
that something that has been done since September of last year?
    Mr. Ayala. The graphs showing the number of seizures per 
revenue officer and per district are dated January 12th of 
1998. Some of the statements in there talk about the district's 
range from a low of 1.2 seizures per revenue officer in the 
south of Florida to a high of 2.47 in Georgia, Delaware, and 
Maryland. The district improved from the lowest number of 
seizures per revenue officer in fiscal year 96 to seventh in 
fiscal year 97. In Georgia, they exceeded the regional average 
for all fiscal year 97 and finished the year at 2.47 seizures 
per revenue officer.
    Senator Mack. And that would substantiate in a way Ms. 
Johnson's comments that IRS management has openly flaunted the 
fact that it is not concerned with the Finance Committee 
hearings. Would you agree?
    Mr. Ayala. I would say it is business as usual. They will 
come up with some excuse of why this was done. However, it does 
attach evaluative measures and compare performance-wise. And it 
is a violation of Policy Statement P1-20 and the Taxpayer Bill 
of Rights.
    Senator Mack. I thank you.
    If I may, Mr. Chairman, ask just one?
    The Chairman. Please.
    Senator Mack. Ms. Jarvis, I want to ask you some questions 
related to the case that you referred to on your first page. 
And you say, ``At the sole discretion of the individual 
managers, millions, even hundreds of millions of dollars of tax 
revenues owed to the U.S. Treasury by some of the largest 
taxpayers in this country are literally forgiven, zeroed out.''
    Ms. Jarvis. Yes, sir, that is correct.
    Senator Mack. Is that, do they have sole discretion to do 
that?
    Ms. Jarvis. Yes, sir, they do. As a matter of fact, I 
witnessed a branch chief comment the other day, well, I guess 
it was about two weeks ago to an agent.
    Senator Mack. Help me for a minute, because----
    Ms. Jarvis. Oh, we are agents.
    Senator Mack. I need to get a sense of this organization. 
Where does this individual fit into this thing? How much power 
is that?
    Ms. Jarvis. Two levels up.
    Senator Mack. Okay.
    Ms. Jarvis. I have a direct manager. Then, this other 
person is my current branch chief commented to another agent 
that management has supreme authority.
    Senator Mack. I can respect that somebody has to, you know, 
ultimately make the decision.
    Ms. Jarvis. Above that is an assistant chief of exam, a 
chief of exam, a district director, and assistant district 
director.
    Senator Mack. All right. So where does this person fall?
    Ms. Jarvis. About four levels down.
    Senator Mack. Yes. All right. So that individual four 
levels down has the sole discretion about whether to zero out 
or not?
    Ms. Jarvis. It goes below. It goes to the immediate case 
manager, my manager.
    Senator Mack. All right.
    Ms. Jarvis. On that particular case.
    Senator Mack. Can you appeal that?
    Ms. Jarvis. Yes, sir. I have written letters. And I have 
spoken to the branch chief of the section. I was thrown out of 
that, off the case. I was thrown out of that group. And I was 
thrown out of that branch which is a tremendous disgrace.
    Up until all of that had happened, I had received awards, 
special act awards for the work that I had done, and for my 
contribution to my duty. Another branch chief had commented 
that my manager was in collusion with the taxpayer.
    And no one will discuss it with me, no one. They all say to 
me it is someone else's responsibility. There is no place for 
us to turn. And I feel great compassion for regional inspection 
because they report right back to the people that I am 
complaining about.
    Senator Mack. I thank you very much. Again, I appreciate 
the information that all of you have given us.
    I wonder if it would be appropriate if I just direct a 
thought or a question to my colleague, Senator Kerrey. You have 
done great work in this. You have been a lot more involved in 
it than I have.
    But this concept of zeroing out, I have a sense that when 
that individual makes that decision to zero out, somewhere 
along the line, somebody else has to approve that. I mean, I 
cannot imagine that much authority rests in such a low level I 
guess is what I am saying without some kind of oversight. Are 
you familiar with it at all?
    Senator Kerrey. I am not familiar with it.
    Senator Mack. All right. I think we ought to look at that I 
guess. When I was a lending officer in a bank, each of us has, 
is given authority as to how much, how large a loan we can make 
with anybody else's approval. Eventually, they actually run 
past the board and the board has to approve it, but on a day-
to-day basis, we have certain authority.
    And it would seen to me that there ought to be, if there is 
not, some formal process, some formal identification of the 
authority of the individual to make decisions up to whatever 
level that we want to design.
    Senator Kerrey. I can tell you, Senator, one of the things 
that we did hear from both employees and from management is 
that there is an attempt, not just for the IRS, but in most 
other public and private organizations to push the 
decisionmaking authority further out along the lines so that 
you do not get into a situation where a decision cannot be 
made. It has to be going back up the line. It is very 
frustrating to have somebody say, I cannot make a decision.
    Indeed, one of the earlier restructuring plans that the IRS 
had was pulling more and more of the decisionmaking back up 
into----
    Senator Mack. I am not suggesting that we push the decision 
back, but I am saying that we be very clear in the authority, 
who has the authority to do what, how large a case can they 
zero out.
    So again, if you would be willing to work with me on that, 
I would like to.
    Ms. O'Dwyer. Excuse me.
    Senator Kerrey. Yes, sir.
    Senator Mack. Yes.
    Ms. O'Dwyer. Doesn't there have to be a reason for zeroing 
it out?
    Senator Mack. Well, I would think that would come with the 
authority, yes.
    Ms. O'Dwyer. Yes, but see, it is done to meet a deadline 
and for statistical goals. In my particular case, he said he 
had the authority of the branch chief behind him which he did. 
His branch chief was his very good friend. And upper management 
became aware of it and over him, over the branch chief. And the 
response was, my, even if we--why did this happen? Even if we 
got a portion of the tax, it would have been something. That 
was the only comment.
    Senator Mack. All right. Thank you.
    The Chairman. Well, let me say this discussion does raise a 
very serious question of checks and balances, one that has to 
be addressed. I am so pleased that Commissioner Rossotti is a 
management expert, and he can certainly help address these 
problems.
    This is a problem of not only writing the law, but a 
problem of creating the kinds of checks and balances over 
management that are needed to ensure propriety of actions and 
accountability for said actions.
    Let me say to this group again that I want to thank you for 
being here. It outrages me that each of you have to come here 
fearing retaliation. It is your responsibility as an employee 
and as a citizen to come forward and tell it as it is and as 
you see it.
    And I applaud you for what you do. Again, like Senator 
Moynihan said, if you have any problems, please call us. I 
realize that is not a total answer.
    I think Senator Gramm is right. I recognize that in many 
cases, some IRS officials over there say, well, just wait, you 
know, commissioners come and go. Senators come and go. And so 
that is a problem, but I applaud you for what you are doing. 
And please, if you have problems, let us know. Thank you all 
very much.
    We will now proceed to the next panel.
    Senator Kerrey. Mr. Chairman.
    The Chairman. Yes, sir.
    Senator Kerrey. Yesterday, I raised the issue of waivers of 
witnesses. And since that time, I do not know who sent it to 
you. The Chief Counsel, Stuart Brown sent you, Mr. Chairman, 
and Senator Moynihan a letter detailing why that waiver would 
be difficult to grant. In other words, why Mr. Rossotti would 
have trouble talking about it tomorrow when he comes forward.
    And I just want for the record to say this satisfies my 
concerns. I think it is important for the public to understand 
that there is a law called section 6103 that not only says a 
taxpayer can come and talk about the return, but the IRS cannot 
unless there is a right of waiver granted.
    And in this case there was multiple taxpayers. There is 
also rules of grand jury secrecy that is referenced in this 
letter. And I do accept what the chief counsel of the 
Department of Treasury is saying. And I will not press this 
issue further.
    The Chairman. We will now proceed to the next group of 
witnesses. These witnesses include current and former employees 
of the Criminal Investigation Division of the Internal Revenue 
Service. They will testify before us today about the serious 
abuses they have witnessed taking place both within CID as well 
as publicly involving taxpayers.
    These witnesses will also address the unfair treatment they 
have experienced in the hands of their own colleagues while 
they struggled to deal honestly and fairly with IRS employees 
and the taxpaying public.
    In addition, they will also provide us with testimony 
disclosing an actual case when an entire IRS story was a 
fabrication of lies to entrap an innocent but highly public 
figure in order for an employee to gain improved performance 
ratings on the job.
    It is our practice in these hearings to ask each witness to 
be sworn. Will you please rise and raise your right hand?
    [Whereupon, the three witnesses were duly sworn.]
    The Chairman. Thank you. I appreciate very much your being 
here.
    And I would call upon you first, Mr. Henderson, to testify.

   STATEMENT OF TOMMY A. HENDERSON, SPECIAL AGENT, CRIMINAL 
        INVESTIGATION DIVISION, INTERNAL REVENUE SERVICE

    Mr. Henderson. Thank you, sir. Mr. Chairman, my name is Tom 
Henderson. And I have been a special agent with the Criminal 
Investigation Division, Internal Revenue Service, IRS for over 
25 years.
    I graduated from the University of West Florida in 
Pensacola, Florida in June of 1972 with a degree in economics 
and began my career as a special agent in Orlando, Florida 
immediately after graduation.
    I was also a group manager for the Criminal Investigation 
Division, CID, in Knoxville, Tennessee from 1983 until 1989.
    I would like to share some of my experiences as a group 
manager in the Knoxville office with you today. But, first, I 
want to say that most of the employees and many of the managers 
within the Internal Revenue Service are hardworking Americans 
doing a very difficult job under adverse conditions.
    Their job is complicated by an IRS management which is out 
of control and operating under a separate set of standards from 
the vast majority of the employees. The arrogance, 
vindictiveness, incompetence, and lack of ethics by certain 
managers and management officials and management in general are 
a major detriment to IRS employees as well as American 
taxpayers.
    IRS management does what it wants, to whom it wants, when 
it wants, how it wants with almost complete immunity. Each 
district director and chief appears to operate his own little 
kingdom and in some instances with little regard for the law 
and/or government rules and regulations.
    Management then uses the unlimited resources of the Federal 
Government, that is taxpayer funds to cover up its acts and to 
destroy its opponents whether they be employees or taxpayers.
    The greatest problem within the IRS today is that 
management has no accountability. When an IRS manager makes bad 
decisions, violates government rules and regulations, and/or 
violates the law, that person is usually promoted or the 
situation is covered up.
    Shortly after being selected as the acting group manager in 
Knoxville, Tennessee, I arrived to start my new job. I arrived 
in Knoxville late in the evening at the same time the agents 
and chief of the Criminal Investigation Division were having a 
party at a local hotel.
    Everyone was completely intoxicated. And my initial 
conversation with the chief occurred in his motel room with him 
so intoxicated he could not stand. This should have been a sign 
of things to come. However, I was young, naive, and 
enthusiastic. This would soon change.
    I learned that the chief for the Criminal Investigation 
Division for the Nashville District which included all of 
Tennessee frequently showed up at outlying posts of duty like 
Knoxville with a car load of liquor in the trunk of his 
government car. He would then insist that the agents and 
managers join him in his motel room where significant amounts 
of alcohol were consumed.
    The gathering would then adjourn to a local bar. However, 
that bar had to have facilities to serve food so the agents 
could justify driving their government cars to that location. 
The eating, drinking, dancing, and whatever would continue 
until the late evening. I found that some of my agents on 
several occasions were so drunk they could not find their 
government cars.
    It should be noted that the chief was famous throughout the 
Southeast Region for this behavior. And it was also well known 
by the upper management circles. I was eventually able to put a 
halt to this practice while simultaneously contributing to my 
own demise.
    I quickly learned that the chief ran the district like his 
own private police force. There are numerous instances that I 
can relate which demonstrate corrupt practices within the 
Internal Revenue Service. However, one experience in Knoxville 
stands out about all the rest. This experience ultimately 
resulted in my leaving IRS management and confirmed my distrust 
of management and the entire IRS system.
    As the months passed, I began having some serious problems 
and misgivings concerning one of the senior agents assigned to 
my group. He was a close friend and drinking buddy of the chief 
of the Criminal Investigation Division and had been in the 
district for a number of years.
    For more than 2 years, I had consistently expressed my 
concern to the chief of the Criminal Investigation Division 
that the senior special agent had a problem with alcohol and 
was allegedly disclosing tax and grand jury information in 
local bars in and around Johnson City, Tennessee area.
    I also reported that he had conducted an authorized 
gambling and undercover investigation where he made bets after 
being told not to do so. I learned of this unauthorized 
investigation when he attempted to get reimbursed for his 
gambling losses from the IRS impress fund.
    He was also arrested for driving while intoxicated while 
operating a government vehicle which resulted in the suspension 
of his driver's license. His conduct was covered up at the time 
by the chief of the Criminal Investigation Division.
    In May of 1989, the agent's conduct reached intolerable 
proportions. He was intoxicated on the job for at least a week. 
During this period, the agent called me with information that a 
sitting U.S. Congressman and former U.S. Senator were involved 
in a bribery and money laundering operation.
    I immediately called the chief of the Criminal 
Investigation Division with that information. According to the 
agent, the sitting United States Congressman and former U.S. 
Senator were both receiving $300,000 to $400,000 in currency 
every month for a period of seven years from a well-known 
national company for favorable legislation and/or political 
considerations.
    The agent without authorization transmitted the information 
to the United States Attorney's office in Greenville, Tennessee 
and to the FBI. As a senior IRS special agent, he was 
attempting to establish a grand jury investigation without any 
authorization.
    Before disclosing any information, the authorization to 
number the investigation was needed from the group manager, 
chief of the Criminal Investigation, and the national office in 
Washington since the investigation would involve a sitting 
United States Congressman.
    Had it been true, this obviously would have been an 
enormous case of national importance and a tremendous boost to 
the agent's career. After I had some time to review my notes 
and consider the situation and the performance of the agent, I 
had another senior special agent verify the information with 
the alleged informant. From that I learned that all the 
information was bogus.
    What I had uncovered was an attempt to create an unfounded 
criminal investigation on two national political figures for no 
reason other than to redeem the agent's own career and 
ingratiate himself with his superiors.
    Incredibly, this entire situation was also covered up by 
the chief and assistant chief of the Criminal Investigation 
Division and later by the district director.
    On June 1st, 1989, after I had discovered the agent's 
activities, I informed the assistant chief that the agent was 
out of control, that I believed him to be dangerous to himself, 
to the public, and to the Internal Revenue Service.
    I recommended that we take his gun and credentials and 
place him on leave until he could receive professional help. I 
had seen this happen once before to a prominent political 
figure when I was a new agent and I was not going to let it 
happen again.
    This time, I was the immediate supervisor and it was my 
responsibility to take action. However, I was told by the 
assistant chief to say and do nothing. I was then informed that 
I was the one in trouble and was refused any information from 
the assistant chief.
    This was the second time in my career that I had discovered 
what appeared to be criminal conduct by a special agent. And 
again, for the second time, I was being threatened for doing 
what was right.
    On June 2nd, 1989, I had a conversation with an FBI 
supervisor who was familiar with the situation. The FBI 
supervisor stated that the agent was, and I quote, a 110 
percent alcoholic and a security risk.
    On June 5th, 1989, I was called to the chief's office and 
accused of numerous things. I was told that the entire 
Knoxville group had lost faith in my management, the whole 
group wanted me removed as group manager. I realized that the 
chief and assistant chief were going to again cover up the 
agent's activities.
    I decided to resign my position as group manager because I 
was afraid that anything less could subject me to both criminal 
and civil liability. I had previously discussed in theoretical 
terms my possible liability with an attorney.
    I was angry and hurt by management's lack of ethics and 
support and resigned from the position of group manager with 
the understanding that I would be transferred back to Florida. 
I knew that if I did not get out of the Nashville District, I 
would be fired or forced to resign on some trumped up charge.
    I later learned that the chief and assistant chief had lied 
and that the whole situation was being orchestrated by the 
agent in question, along with the chief and assistant chief. 
The chief of the Criminal Investigation Division then created a 
cover story for my resignation from management in which he 
included praise during the announcement to the Knoxville group.
    Shortly after my resignation, the chief and assistant chief 
with the help of others began a harassment campaign against me 
which I now know to be standard operating procedure within the 
Internal Revenue Service.
    First, I was isolated from my group. I was not even allowed 
within my own group's office space. Secondly, I was ostracized 
by my fellow employees at the direction of the chief and 
assistant chief. Third, and the most devastating of all, my 
case inventory and ability to work as a successful special 
agent were destroyed.
    Management creates a self fulfilling prophecy where an 
employee cannot succeed and is either forced to resign or be 
fired. The only relief for an employee or a taxpayer at odds 
with a corrupt IRS management is the Federal district court. 
Unfortunately, most of us have neither the time nor the money 
to fight the United States Government.
    It seems that almost overnight a senior agent and former 
group manager can no longer do anything right. I had violated 
an unwritten law. I had exposed the illegal actions of another 
agent. What I had indeed done was break up a false criminal 
case against two national political figures that would have 
been disastrous for them as well as the Internal Revenue 
Service.
    After resigning as group manager, I started doing what I 
knew best, finding and working significant criminal cases. I 
developed two significant criminal cases in Gatlinburg, 
Tennessee while I was waiting to be transferred to Florida, 
this pursuant to my agreement with the chief of the Criminal 
Investigation Division.
    I developed both cases to the point that I needed 
assistance in conducting surveillance and executing search 
warrants. As soon as the chief realized that I had developed 
two significant cases, the first case was reassigned to a 
fellow agent in the Knoxville office and the second was 
dropped.
    The first case was completed by the new agent. And the case 
was written up in the Criminal Investigation Digest with other 
significant cases. My participation was never mentioned.
    I considered the second case which required more work the 
more significant of the two. I had obtained information for the 
second case from the FBI espionage files. It related to a store 
being operated by an alleged Iranian intelligence cell in 
Gatlinburg, Tennessee which was allegedly funneling money to 
Iranian terrorists.
    I had determined their method of skimming funds from the 
business they were operating. In addition, one of the subjects 
of the investigation was allegedly one of the Iranians 
responsible for holding the Americans hostage in Iran.
    I could not believe that the IRS management was so 
desperate to destroy my credibility that they would drop this 
investigation. I now know that investigations, specifically 
ones conducted by agents no longer in management's favor 
regardless of their importance or how much money, taxpayer's 
money have been invested or the ethics involved mean absolutely 
nothing.
    I was subsequently detailed out of the district to Tampa, 
Florida. There I spent numerous weeks on what I can only 
describe as a vacation at government expense since I was 
neither required or expected to do much work. Meanwhile, my 
family was being threatened. And the Internal Revenue Service 
refused any assistance.
    It was after my resignation as group manager that I learned 
that the agent who conducted these illegal investigations had 
been involved in numerous other activities which had been 
covered up by the chief and assistant chief.
    These included sexual harassment of a female special agent, 
attempted rape of another female special agent, unauthorized 
disclosure of tax and grand jury information, allegedly being 
drunk and pointed out FBI agents to criminal elements, 
threatening fellow agents, burglarizing a mini storage 
warehouse to obtain drugs, illegal electronic monitoring, 
bragging in bars that hew as going to get a U.S. Congressman 
and a Tennessee State district attorney, and association with 
known criminal elements.
    Both the United States Congressman and the State district 
attorney were well aware of the agent's activities. And I had 
an opportunity to discuss the situation with the Congressman 
after my resignation.
    I do not believe that the retired United States Senator 
until recently was aware of the attempt to investigate him.
    The agent who generated all these problems and more was 
subsequently fired, no, not because of all the previous acts I 
have outlined. He was eventually fired only because he was 
arrested on a cocaine charge by the sheriff's office. And being 
public knowledge, it was impossible to cover up.
    I managed to secure my transfer back to Florida where I 
again became a productive special agent. However, two employees 
left behind were not so fortunate. The first was Barbara 
Latham, my former assistant at the time and a tax fraud 
investigative aide.
    Her only crime was that she refused to ostracize me at the 
direction of the chief and assistant chief and new group 
manager. She subsequently was literally railroaded out of her 
job and both her physical and financial health destroyed. 
However, Barbara can best describe what happened to her.
    The second was special agent Patty Gernt. She made the 
mistake of turning the agent into the Inspection Division as 
required under the code of conduct. I believe she was harassed 
and ultimately railroaded out of her job simply to set an 
example for anyone else who even thought about crossing 
management.
    After my resignation, I learned that special agent Gernt 
was being threatened, assaulted, and abused by this agent. The 
abuse continued at the hands of the chief, the assistant chief, 
and new group manager after my return to Florida. Patty can 
best describe her treatment and what happens to you when you go 
against the IRS power of structure.
    The three of us were dedicated, hard working government 
employees who could not tolerate the terrible abuse of power 
against innocent people. Barbara and Patty have paid a terrible 
price for their honesty and convictions.
    I am testifying here today at personal risk for all my 
fellow employees and taxpayers. It is imperative that 
situations like the one I have described never ever happen 
again. And everyone within the Internal Revenue Service, 
especially its management abide by the same rules, ethical and 
legal standards that govern and guide us all. Thank you, sir.
    The Chairman. Thank you, Mr. Henderson.
    Ms. Gernt.

STATEMENT OF PATRICIA J. GERNT, FORMER SPECIAL AGENT, NASHVILLE 
  DISTRICT, CRIMINAL INVESTIGATION DIVISION, INTERNAL REVENUE 
                            SERVICE

    Ms. Gernt. Thank you. Mr. Chairman, members of this 
committee, my name is Patricia Gernt. I am a former special 
agent out of the Nashville District Criminal Investigation 
Division of the Internal Revenue Service. I graduated from East 
Tennessee State University with concentrations in accounting, 
biology, and chemistry. In 1987, I became an employee of the 
IRS.
    At that time, for me the job was a dream come true, an 
opportunity to work for my country. I believed I would be 
carrying out the duties and mission of the Internal Revenue 
Service in enforcing the tax laws of this country.
    However, as an employee of the IRS, I was also witness to 
incidents of extreme fraud, abuse, and waste of the taxpayer's 
hard earned money. I soon learned that abuse of these revenues 
was considered general operating procedure and certainly a way 
of life within the Criminal Investigation Division.
    Before continuing, I want to be very clear in noting the 
devotion and loyalty of many IRS employees who are hard workers 
fulfilling the public's trust in performing often difficult 
jobs.
    But I as well as other employees found out far too quickly 
the IRS management operates under a separate set of standards 
and is virtually untouchable because it is not simply held 
accountable for its actions either by the national office or by 
Congress. I make this declaration with specific knowledge of 
incidents and further state that it is more the rule than the 
exception.
    Members of management foster an atmosphere of retaliation, 
sexual harassment, fear, and arrogance in its employees to 
assure loyalty to themselves. Regrettably, there is little 
concern at all about the application of the taxpayer's dollars 
in funding the agency or indulging their own behavior.
    Early my career, a former special agent who was my on-the-
job instructor, an OJI, became involved in an extremely serious 
misconduct. He was arrested for driving a government vehicle 
while intoxicated, this according to the local Johnson City, 
Tennessee police department.
    Although I am now personally aware of my former group 
manager Tommy Henderson's efforts to control this agent's 
renegade behavior, no other IRS administrative action was taken 
against him.
    This agent was well known for his repeated outbursts 
disclosing protected tax and grand jury information in local 
bars in and around the Johnson City, Tennessee area. He was 
never once reprimanded by management for this outrageous and 
clearly career ending type of behavior.
    Specifically, it was this same agent who threatened a 
seated Congressman, a former Senator, and a local Tennessee 
district attorney with criminal prosecution, publicly labeling 
them as, quote, crooks.
    While he continued as my mentor, this special agent 
requested me to perform activities clearly outside of the IRS 
code. Among these demands on me were demands for sexual favors. 
He would often apologize later, but that was always followed by 
his telling me, you know, I can make you or break you in this 
job. I feared him because of his constant sexual harassment and 
certainly due to his position as a senior special agent.
    I did not know at that time that I was not alone in this 
fear. I later learned that he had attempted to rape another 
female special agent just a few years prior to my arrival with 
the agency.
    You may be wondering if things were so bad, why didn't I 
say anything to anyone? Why didn't I complain? Well, therein 
lies the heart of the problem.
    To begin with, I was still a new employee with little 
influence or authority. I knew that management had been 
informed of that earlier incident involving a special agent and 
had chosen not to take adversary action against him for the 
assault.
    In fact, the only relief provided this woman was from the 
new group manager, special agent Tommy Henderson. He was able 
to secure an assurance that the agent would never be allowed to 
work along with her on future cases.
    Because the Nashville IRS management clearly ignored the 
widely circulated reports about this special agent, including 
his drinking problems, revoked driver's license, misbehavior 
around female co-workers, and dipping into IRS funds to 
compensate for his personal gambling losses, management had set 
the stage where I then found myself standing dead center and 
alone.
    Certainly, this agent had serious personal problems. And I 
took the brunt for much of it. However, I want to be very clear 
on one point. And it is a major one. This agent needed help.
    He had serious personal problems. Yet his own managers 
preferred to ignore the situation and sweep these breaches of 
professional conduct under what was becoming a very large rug.
    By far the greater breach in professionalism was committed 
by a management that was clearly less interested in dealing 
with poor conduct than with the possibility of this agent's 
actually pulling in the big case.
    By avoiding having to admit to a potential agency mess with 
the agent, management inadvertently chose to let him take a 
road that would ultimately lead to his tragic final fall.
    In 1989, I broke my silence and shared my problems with 
group manager Tommy Henderson. Surprisingly, when he made my 
concerns relative to this renegade agent known to management, 
an investigation was instituted. However, of even greater 
astonishment was that the agent was not to be the target of 
this investigation, Tommy Henderson and I were.
    For nearly 1 year, I was the target of an unrelenting 
internal investigation by the IRS management. My neighbors were 
questioned about me. I was followed by co-workers, incidentally 
who were also special agents acting outside the scope of their 
authority. My college transcripts were even pulled along with 
my tax returns and my divorce transcripts. I was even followed 
to the restroom.
    It was during this investigation of Mr. Henderson and me 
that I became so stressed that for the first time in my life I 
sought professional counseling. All during this ridiculous and 
unproductive investigation, I continually tried to reassure 
management that all I wanted was an equal chance in the work 
place, but absent sexual harassment and threats of retaliation 
or retribution, not too much to ask for I thought.
    What eventually happened to the special agent, my former 
mentor, was indeed pitiful. He was never fired by IRS 
management for sexual harassment nor for verbal threats against 
taxpayers nor for creating false cases against a Congressman, 
former Senator, or a Tennessee district attorney.
    It ultimately took a local police agency catching the agent 
and his cousin outside of the IRS domain with cocaine, scales, 
and other drug paraphernalia to get the IRS management to 
terminate him. The agent's behavior was now in the public eye. 
And the IRS could no longer cover for him. Management's hands 
were finally tied, but only by the scrutiny of the public's 
knowledge.
    For me, the final blow came in 1993. An incident occurred 
within the Knoxville Criminal Investigation Division office 
where a special agent had lost her service weapon. She had 
reported it missing on February 5th, 1993 from a storage safe 
to which only she had the keys. However, days after she 
announced the weapon was missing, it was reported recovered 
from bushes located next to a restaurant that she and 
colleagues had frequented while conducting a search warrant.
    Of paramount interest is that the particular search had 
been conducted on New Year's Eve over 1 month prior to her 
announcement that the weapon was missing. Although it was 
found, all Criminal Investigation Division employees including 
me were questioned about its disappearance.
    However, for 2 days in March, I was interrogated by my 
manager and was then informed I had to, quote, clear myself of 
potential charges of theft or complicity. Although I explained 
that I worked over 120 miles away from the scene of the missing 
weapon, I did not have keys to either the Knoxville building or 
the CID premises, all reasons I felt were strong indicators of 
my innocence. I was now clearly the scapegoat to relieve the 
special agent of blame in losing her weapon.
    As a result of having to clear myself, I obtained a 
criminal defense attorney. Prior to meeting with the IRS in 
Knoxville, Tennessee, my attorney and I agreed we would both 
carry recorders into the meeting.
    When we arrived, both devices were in plain view. As we 
attempted to enter the CID offices, the group manager became 
outraged at my attorney's presence and physically shoved him 
twice.
    When I attempted to leave their office, the same group 
manager came after me and struck me in the stomach. It was 
crystal clear to me at that point that management was going to 
protect its own and I was on my own. I was now branded a self-
serving whistle blower by management and colleagues.
    In 1993 having blown the whistle numerous times on a number 
of matters, I summoned the courage to drive seven hours in my 
own vehicle to Washington, DC hoping against hope I could get 
someone to listen to me at the national office.
    What I ran up against was an IRS Commissioner who refused 
to see me and a head of CID who deflected me to one of his 
assistants. The assistant appeared unmoved about what he was 
hearing from me. I received no help that day.
    To me the national office clearly had no interest in 
knowing about the chaos in Knoxville, Tennessee. But then again 
perhaps, all this was not at all new news to them.
    I soon became seriously ill, both physically and 
emotionally. I assured management that I truly cared and wanted 
to get past all this and continue a career with the agency, but 
I could not endure the untenable conditions they had created in 
the work place.
    With no consideration of the quality years I worked, their 
response to my request was termination with retirement just 4 
years ago this month. Finally, just last year after 4 years of 
legal battling, a suit that I initiated against the Internal 
Revenue Service in 1994 was resolved in an out-of-court 
settlement.
    Before I conclude my testimony, I would like to take this 
opportunity to mention another practice within the IRS that is 
of significant concern to me.
    While not directly related to the main subject of my 
testimony, I would appreciate having a moment to address it.
    The Chairman. Please proceed.
    Ms. Gernt. In many situations when CID numbers or opens a 
case on an individual, they will also number family members, 
such as a spouse, son, daughter, etcetera.
    Often in the end as part of a plea agreement with the 
primary subject, the IRS will negotiate to drop cases on the 
other family members if the primary target will plead to all 
charges at the initiation of the negotiating phase.
    Or in other instances, CID may threaten at the initiation 
of an investigation to number family members. Threats of 
spouses are most common. And then, because these threats 
involve innocent parties, the primary taxpayer will negotiate a 
plea.
    In addition to this, the number of other related cases 
boasts the IRS' statistics and CID. So by numbering the primary 
individual, the spouse, son, daughter, uncle, etcetera, the 
agent shows a hefty inventory of cases. We refer to these as 
related or spin-off cases.
    The agent gets accolades and the manager has a full case 
load inventory which boasts his evaluations. CID looks on a 
national or district level as though it is bursting at the 
seams with cases when in fact most of those cases numbered will 
be dropped or referred to another division of IRS, but never 
worked to the end with a report of prosecution by the Criminal 
Investigation Division.
    We have all read that the new IRS Commissioner is 
attempting to pursue a newly corrected course for this agency. 
There are many dedicated and honest employees who are looking 
to him for his straight and unimpeded guidance.
    They simply want to know they can count on him for support 
when they do their jobs the right way, the honest way, and when 
they defy the abusive behavior of so many in management 
positions. On the other hand, there are employees who do not 
appreciate his efforts to correct the business as usual 
mentality.
    I hope that what I have shared with you today will shed 
some light on what I believe are egregious conditions in which 
honest, public servants of the Internal Revenue Service are 
forced to endure in executing their jobs. I greatly appreciate 
this opportunity to appear before you today. Thank you.
    The Chairman. And we greatly appreciate your being here. 
Thank you.
    And now, I will call upon Ms. Latham.

  STATEMENT OF BARBARA LATHAM, FORMER TAX FRAUD INVESTIGATIVE 
  AIDE, NASHVILLE DISTRICT, CRIMINAL INVESTIGATION DIVISION, 
                    INTERNAL REVENUE SERVICE

    Ms. Latham. Mr. Chairman, members of the committee, my name 
is Barbara Latham. I was an employee of the Nashville, 
Tennessee District of the Internal Revenue Service for almost 
17 years, 12 of them in the Criminal Investigation Division as 
a tax fraud investigative aide. It was a job that required me 
to render assistance to 12 special agents and a group manager 
in the investigation and persecution of cases of tax fraud.
    There is a long history of dishonesty, chaos, and abuse of 
government time and funds in the CID work place among both 
management officials and employees. The waste and abuse is out 
of control.
    During my career with the IRS, I witnessed many incidents 
of extreme fraud and abuse and waste of the taxpayer's money in 
the operation of this division of IRS. They operate under a 
different set of standards than other IRS employees.
    The Criminal Investigation Division applies scant control 
over special agents, many of whom will not work under any 
circumstances. The special agents focus their investigations on 
smaller businessmen with smaller tax liabilities because they 
require less work than investigations involving larger tax 
deficiencies or serious criminal offenses.
    They frequently increase statistics for work load 
inventories by opening five or six related investigations and 
closing them at the same time for lack of resources or 
insufficient personnel to work the cases.
    The Criminal Investigation Division does not need more 
money. They need to use the money they have more wisely. They 
have all the investigative tools they need and unlimited funds 
of the taxpayers' hard earned dollars, but they fail to collect 
millions of dollars in delinquent taxes and manipulate those 
statistics to reflect otherwise.
    When a number is used as an indicator of success, everyone 
will try to inflate that number as much as possible. Tommy 
Henderson from whom you have just heard became group manager of 
the Knoxville, Tennessee IRS Criminal Investigation Division in 
1983.
    He was excellent supervisor, well liked, and respected for 
his fairness to his subordinates. A conspiracy to remove group 
manager Tommy Henderson began in 1989 after he attempted to 
have a special agent under his supervision disciplined for 
misconduct.
    Rather than risking embarrassment to themselves by 
prosecuting his allegations of sexual harassment, alcoholism, 
drugs, and fraud that had been so long repressed, IRS officials 
pressured Tommy Henderson into resigning from management.
    After his resignation, Henderson was subjected to a 
campaign of ostracism, harassment, and retaliation intended to 
force him out of his job. When I refused to obey a direct order 
from the CID chief and Henderson's replacement to shun 
Henderson, I began to suffer different treatment which I 
managed to ignore out of fear for the safety of my job.
    In January 1993, I suddenly found myself a middle-aged 
grandmother with an exemplary work record and impeccable 
reputation caught up in a patronage scheme to protect one 
immoral female when she reported that her service weapon had 
been stolen.
    The truth was she had lost it, but preferred to accuse a 
co-worker, special agent Patricia Gernt who worked at a post of 
duty more than 120 miles away. Just days after the gun was 
reported missing, it was recovered under mysterious 
circumstances.
    It was found by an employee of a fast food restaurant in a 
wet and rusted condition more than 100 miles from the IRS 
office. It also happened to be next door to a business where 
the special agent had assisted in a search warrant a month 
before.
    It was simply not credible that the gun had been stolen. 
All evidence pointed to the gun having been carelessly lost. 
Not even Houdini himself were he alive today could have removed 
the gun from the locked cabinets with no signs of forced entry.
    After the gun had been recovered, IRS officials set out on 
what can only be described as an after-the-fact witch hunt 
under the guise of an investigation. It seemed more important 
to conduct this type of investigation against employees than it 
was to pursue persons who may defraud the government out of 
legitimately owed tax dollars.
    Patricia Gernt and I became the targets in the ensuing sham 
investigation. These pseudo investigations resemble a court 
martial in that they are basically closed proceedings, not 
subject to outside scrutiny. The catalyst for my involvement 
appeared to be my refusal to falsely implicate Patricia Gernt 
in any act of misconduct.
    For my refusal, I was forced to work in a hostile and 
abusive work environment. I felt like I was being punished 
daily. My physical and mental health deteriorated. I endured 3 
years of what can only be described as IRS hell.
    I was even expected to participate in raids along side 
heavily armed agents wearing protective vests. The only 
difference was I given no vest, no weapon, or any other 
protection. This was clearly against IRS policy and was not at 
all what I had envisioned I would be doing in my career at the 
age of 60. I got the message and opted for early retirement in 
September 1996.
    It is the practice of the IRS Inspection Division to use 
Gestapo-type tactics to intimidate and harass the targets of 
their investigations. They coerce them into giving false 
evidence and then offer them immunity in exchange for it. These 
employees are forced to provide false evidence of criminal 
misconduct against innocent colleagues included on the IRS hit 
list.
    As a pretext to an investigation, the IRS Inspection 
Division subjected Patty Gernt and me to polygraphs and 
handwriting analysis. They also conducted interrogations during 
which they tried to get me to implicate her in the theft of the 
gun.
    Monitoring devices were placed on my telephone at my home 
and in my work place. My activities were monitored both in and 
away from the work place. And anonymous phone calls were made 
to the Office of the Inspector General accusing me of tax 
fraud.
    Both of us were denied access to documents. And files were 
shredded so that no paper trail existed of this harassment and 
retaliation.
    The fiasco of the missing gun grew out of proportion and 
became a nightmare. Special agents were diverted from their 
cases and other employees kept from performing their jobs.
    The controversy surrounding the investigation continued for 
more than 3 years and cost the taxpayers close to $1 million, 
including more than $100,000 in legal fees paid to two private 
attorneys hired to defend the supervisor, 3 years of lost 
manpower for more than a dozen employees and hundreds of 
thousands of dollars to settle employee complaints.
    In the end, the total cost of this case to the taxpayers, 
including the resulting personnel disputes and all of the 
coverups of unethical conduct in the work place was in the 
millions of dollars.
    There is no one in our society more powerful than the IRS. 
They assume they are above the law and do not have to obey the 
laws applied to private individuals. They have the power over 
the lives of citizens that is theirs by virtue of their 
intimate knowledge of every single one of us.
    Not even employees are immune from attack. Workers are 
afraid to voice concerns for fear of reprisal. Employees should 
be allowed to voice their opinions and to make those in power 
aware of what is happening to them and how their constitutional 
rights are being violated. It is time that the IRS is held 
accountable for their actions and performance.
    Senator Roth, thank you for this opportunity to appear 
before your committee today.
    The Chairman. Well, first of all, let me thank each of you 
for being here. I apologize for the kind of treatment you 
received as dedicated public servants. It should not have been.
    And I would now like to introduce the three targets of the 
IRS investigation: former Senator Majority Leader Howard Baker, 
former Congressman James Quillen, and the District Attorney 
General for the First District of Tennessee, Mr. David 
Crockett.
    I welcome you gentlemen. Please be seated. I would like to 
start out by publicly apologizing as to what happened to you. 
It should happen to no American. It should happen to no public 
figure. And I am outraged that it did.
    I do want to point out that this did not happen during this 
administration.
    It was back in the 1980's. We are concerned about an agency 
that is too often out of control. And I just want each of you 
to know we do feel outraged by your treatment. And we 
appreciate the fact that you are here today.
    With that, I would like to call on you, Senator Baker, for 
any comments you may care to make.

  STATEMENT OF HON. HOWARD H. BAKER, JR., FORMER U.S. SENATOR 
                         FROM TENNESSEE

    Senator Baker. Mr. Chairman and members of the committee, I 
thank you very much for the opportunity to be here. I commend 
you for having these hearings. My name is Howard H. Baker, Jr. 
I have had the honor of serving in the United States for 18 
years beginning of January 1967 until January of 1985. And 
during that time, I had the privilege of serving as minority 
leader for two terms. And then, the last 4 years, my final 
term, I served as majority leader.
    On leaving the Senate in 1985, I returned to my profession 
as a lawyer and have practiced law since then, except for a 16-
month period in 1987 and 1988 when President Reagan asked me to 
serve as his chief of staff.
    Mr. Chairman, a few weeks ago, I was visited in my law 
office here in Washington by a member of this committee's staff 
and was told that as a result of the committee's inquiry into 
IRS activity, it had learned that I was at one time the target 
of an investigation by an agent of the IRS criminal division, 
an investigation that based on totally fabricated facts.
    I knew nothing of that investigation either before, during, 
or after the time it was terminated. I knew nothing of it until 
I was informed by this committee's staff. I must repeat, Mr. 
Chairman, that the allegations were absolutely and totally 
without foundation and did not occur.
    The Chairman. Inexcusable.
    Senator Baker. Mr. Chairman, I find it very disturbing 
indeed that the criminal division agent attempted to frame me 
and reported his bogus allegations to the FBI and to the 
Justice Department.
    I may say that I am grateful in the extreme that others in 
the service, particularly including these three IRS employees 
who are here today were able to terminate this malicious plan.
    And I regret, however, that apparently the three IRS 
employees who challenged another employee's fabricated criminal 
investigation themselves suffered retaliation. They should not 
have been retaliated against. They should have been commended.
    I would like to express my profound appreciation to Special 
Agent Henderson, Ms. Gernt, Ms. Latham for standing up for 
justice and for my rights as a taxpayer and citizen really at 
the expense of their own career and for them to know that I am 
grateful.
    Had this matter proceeded, I am confident that I would have 
been in a position to employ the best lawyers and accountants 
and to demonstrate the fallacy of these allegations. But Mr. 
Chairman, I am deeply troubled that others who are perhaps less 
fortunate but who might find themselves in a similar situation 
with such charges leveled against them might not have the 
resources. They might not be in a position to defend 
themselves.
    And it is for that reason more than any that I commend this 
committee for inquiring into these matters, for ventilating 
these facts and to protect those American citizens who might in 
the future be subjected to such indignity and humiliation.
    Mr. Chairman, may I add that I am not nor have I ever been 
one who sets out to savage government. I have enormous respect 
for public servants, members of the House and Senate, the 
bureaucracy, the executive department. It is the very essence 
of our Nationhood.
    And I commend you, but I also commend in advance Secretary 
Rubin because I am confident that he will do what needs to be 
done or the new director of Internal Revenue. I have high 
confidence that he will undertake the measures that are 
necessary to rectify such a situation.
    And I also express my admiration for other members of the 
IRS. They are by and large like other Federal employees and 
servants, dedicated, loyal, and honest people.
    But I must tell you, Mr. Chairman, I have never been so 
infuriated about an event such as this.
    The Chairman. With good reason.
    Senator Baker. Some may say, well, nothing happened. You 
did not know about it. So why are you concerned about it? This 
matter was referred to the Justice Department. There is an FBI 
file. That is a record in this government, notwithstanding that 
it is totally false. I have seen too many raw files of the FBI 
to think that those allegations are now totally obliterated, 
notwithstanding that I sit here and tell you there is not a 
scintilla of truth. There are still in somebody's file some 
place.
    So that is the real danger, not that I could not defend 
myself, I think I could have. Not that I was not damaged 
finally because nothing happened. Regrettably because of the 
system in a pernicious, evil way victimized me in a way that 
cannot be totally eliminated.
    I commend you, Mr. Chairman, for having these hearings. I 
commend the members of the committee on both sides of the aisle 
for their patience in going into this matter at this time.
    The Chairman. Well, let me say again, Senator Baker, you 
have brought great honor by your service to the term ``public 
servant''. And to me, it is unbelievable that a man of your 
distinguished background could be the victim of this kind of 
false investigation. And if they would dare do it to you, what 
about the average American citizen who might be targeted? What 
chance do they have to protect themselves? This is not 
something that should ever happen in the United States of 
America. And I apologize.
    The Chairman. Congressman Quillen, we welcome you as one of 
those most distinguished members of Congress. It is good to see 
you here, but I apologize for the circumstances.
    Senator Chafee. Mr. Chairman, unfortunately due to a 
longtime commitment, I cannot stay throughout all of this. But 
I just wanted to join in your commendation of Senator Baker and 
to say when you have a person of the towering integrity of 
Senator Baker being attacked in one of these schemes, it just 
shows you the peril that an ordinary citizen would be subjected 
to because they do not have the known reputation of Senator 
Baker. And thus, that citizen could suffer terribly.
    And I share in the indignation that Senator Baker voiced in 
what took place. I am sure Congressman Quillen will reiterate 
that indignation. But this has been very powerful testimony. 
And I want to thank everybody.
    Senator Conrad. Mr. Chairman,
    The Chairman. I would like to give the three witnesses a 
chance to finish.
    Senator Conrad. Could I just make a mention? I, too, have 
an obligation.
    The Chairman. Sure.
    Senator Conrad. On behalf of our side of the aisle, 
Democrats not only on this committee, Senator Baker, but 
Democrats in the United States Senate have extraordinarily high 
regard for the honesty and integrity of Howard Baker.
    I do not know of anybody that is more respected on both 
sides of the aisle. I did not have the honor of serving with 
you in the U.S. Senate, but I can tell you your reputation is 
well known. And it is truly an outrage that anybody set out to 
frame you and to diminish your reputation based on totally 
false accusations. That is absolutely outrageous.
    We have heard during these hearings a number of outrages. 
And I think the most important thing we can say to you and 
others who are similarly victimized we are going to bend our 
best efforts to stop it so that it is not permitted to ever 
happen again to anyone.
    Senator Roth said so well, if it could happen to a Howard 
Baker, it could happen even more easily to an average American 
citizen, and as you said in your statement, Senator Baker.
    But I do want to say on behalf of Senate Democrats if I 
could be permitted to speak on their behalf, Senator Roth, I 
think it is appropriate that your honesty and your integrity 
are without question. And we appreciate deeply that you have 
come here today to express your outrage.
    I think it will help that we move the legislation necessary 
to correct this agency, but it is going to take more than 
legislation. It is going to take a change of attitude. And we 
hope that that helps in that regard as well.
    Senator Baker. Senator, I thank you very much.
    The Chairman. Thank you very much, Senator Conrad. I 
appreciate those words. And as I noted, this is something that 
occurred back in the 1980's.
    I would now return to you, Congressman Quillen. I would 
appreciate any comments you may care to make.

STATEMENT OF HON. JAMES H. QUILLEN, FORMER U.S. REPRESENTATIVE 
                         FROM TENNESSEE

    Congressman Quillen. Thank you, Mr. Chairman. I appreciate 
the opportunity of being here with such a distinguished group. 
You do a great job as do the members of your committee.
    I am James H. Quillen of Kingsfort, Tennessee. And I 
retired from the U.S. Congress as a member of the House of 
Representatives after 34 years of continuous service. I am one 
of the three targets referred to in this testimony you have 
just heard.
    Earlier on in my Congressional career, a prominent 
businessman had been sued by the IRS. And he won the case. 
However, he had to pay the legal fees even though he won.
    When this was brought to my attention, I introduced a bill 
which stated specifically in the event the IRS lost a case 
against a taxpayer, the government had to pay the legal fees of 
that taxpayer. Following this, the IRS sent a team in to audit 
my personal tax returns.
    Later on in my Congressional career for reasons unbeknownst 
to me, I was targeted by a special agent of the Criminal 
Investigation Division of the IRS. He would often visit several 
local bars and after a few drinks would loudly state my name 
saying, ``We're going to get that crook Congressman Quillen.'' 
This happened not just one time, but many times.
    As a result of those verbal assaults, the IRS group 
manager, special agent Tom Henderson felt it was necessary to 
put the special agent's alleged charges to rest. As a result 
special agent Henderson conducted a preliminary investigation 
to determine there was absolutely no basis of the fact in the 
special agent's claim.
    That, however, did not stop him. Not only did he not lose 
his job, but continued to boast that he was still going to 
bring me down.
    I so greatly appreciate the efforts of special agent Tom 
Henderson on my behalf as well as those of former IRS employees 
Patty Gernt and Barbara Latham for having the courage to stand 
up against what they knew was wrong despite the considerable 
cost to their own careers and future livelihood.
    Special agent Henderson, Ms. Gernt, and Ms. Latham, I would 
like to express my utmost respect for you and for the values 
you uphold.
    Mr. Chairman, I know there are other agents who have the 
character and integrity of those three fine people. I hope and 
trust that with the Senate Finance Committee's continuing 
oversight of the IRS that these employees will prevail.
    Mr. Chairman, experiencing that dramatic charge against me 
as a former businessman before I came to the Congress and 
before I served 8 years in the State legislature was very, very 
shocking indeed.
    I cannot believe that a branch of this government which we 
all respect would stoop so low to have an employee like the one 
in Johnson City who criticized me and tried to bring me down.
    It was a feeling inside. And it has not gone away. It 
probably never will. But the courage of those IRS individuals 
who stood by me is a shining example of what could happen.
    I often hear from former constituents and friends, why not 
abolish the IRS and go to a flat tax? I think the IRS needs 
something done, if not abolish it altogether, abolish what has 
been happening in the past to individuals like Senator Baker 
and those of whom you have heard today. Thank you for the 
opportunity of being here.
    The Chairman. Well, again, let me thank you for being here 
and apologizing for the ordeal you were forced to endure. I had 
the honor and pleasure of serving with you. And you, too, bring 
great honor to the term ``public servant''.
    I would just like to echo what you said to these three 
individuals. They characterize the best in public service. And 
I am a believer that the vast majority of employees in the IRS 
are dedicated, well meaning, hard working citizens. And we are 
all here because we want to make sure that these kinds of 
practices do not happen in the future.
    So thank you for taking the time to join us.
    Congressman Quillen. Thank you, Mr. Chairman
    The Chairman. And now, it is my privilege to call upon 
David Crockett who is, I believe, District Attorney General for 
the First Judicial District.

 STATEMENT OF DAVID CROCKETT, DISTRICT ATTORNEY GENERAL, FIRST 
                     DISTRICT OF TENNESSEE

    Mr. Crockett. Thank you, Mr. Chairman. It is good to be 
here. We appreciate your interest in our problems. I am David 
Crockett, named incidentally after a distant relative of mine 
who once served in Congress from Tennessee.
    The Chairman. We are impressed. [Laughter.]
    Mr. Crockett. Well, the voters at home seem to like it. 
[Laughter.]
     I have served as District Attorney General of the First 
Judicial District in the State of Tennessee for the past 16 
years. I am presently engaged in a campaign seeking my third 
consecutive term in that office. Prior to that time, I served 
for 10 years as an assistant district attorney. I am a graduate 
of East Tennessee State University, the University of Tennessee 
College of Law. I served 4 years during the Vietnam conflict as 
a captain in the Judge Advocate General's Corps of the United 
States Army, concluding my service as the Chief of Military 
Justice at Ft. Jackson, South Carolina.
    I, like Congressman Quillen and Senator Baker, was a target 
of an IRS agent who was assigned in East Tennessee in the mid-
1980's. I first became aware of this particular agent when his 
automobile hit another car as he came out of a bar onto North 
Roan Street in Johnson City. The agent was charged with DUI.
    He refused a breathalyzer test and with the testimony of 
other Federal employees and some other agents who swore that he 
was not under the influence when this hit this lady head on was 
successful in defending his DUI case. But a member of my staff 
at my direction had prosecuted him in this case.
    And this agent apparently at that time included me in a 
plan that he had formulated apparently for revenge directed at 
me and perhaps career advancement as to Congressman Quillen and 
Senator Baker.
    Shortly after his acquittal, he became proclaiming publicly 
in local bars and restaurants that we were tax cheats. That is 
Congressman Quillen, Senator Baker, and I were all tax cheats 
and were somehow defrauding the Federal Government and that he 
would see that he got us.
    Frankly, being the least in that crowd certainly 
politically and powerwise, I was somewhat flattered to be 
included with those allies. [Laughter.]
     I thought that if worse came to worse, I had some pretty 
stout support. See, after this agent made these repeated 
allegations and this was done frequently when he was drinking, 
it eventually led to an investigation of me that dragged on for 
several years, first by the IRS and then later by some of his 
friends with other Federal agencies.
    No charges were ever placed against me. No action was ever 
taken for any alleged wrongdoing. In fact, the investigation 
just simply died without anyone ever formally advising me that 
it did in fact occur.
    I knew it had occurred because this agent would frequently 
go to local sheriff's offices or other places and proclaim that 
I was about to be indicted as the district attorney in the 
First District by Federal grand juries and I was under 
investigation and it was only a matter of time before I was 
removed from office.
    And even though nothing was done, the damage even today 
remains. It still lingers, particularly around election time. I 
would make the observation, Senator, that reputations are 
delicate things and once lost or tarnished are very difficult 
to ever totally regain.
    I know now that these courageous agents who have been here 
today and testified did in fact intervene or attempt to 
intervene. And some sacrificed their careers to stop this 
particular rogue agent.
    To them, I want to today formally say thank you and express 
my deepest appreciation to them for what they did for us.
    As for this IRS agent, this particular agent, his drinking 
seemed to get worse. Yet, he continued on his job until one 
night in Knoxville, Tennessee early in the 1990's, he and a 
relative were caught with a quantity of cocaine in their 
vehicle.
    The agent tried to bluff his way out of trouble by telling 
the local deputy who had stopped him that his relative who was 
a nephew, as I recall, were engaged in some kind of an 
undercover operation for the IRS. And that was the reason they 
possessed the cocaine. The local deputy persisted and contacted 
the agent's superior who knew nothing of such an operation that 
he was maintaining.
    And so after that episode, the agent's friends in the IRS 
and his supporters there could no longer protect him. And he 
was subsequently fired from his position. Somehow, he did avoid 
prosecution for the cocaine possession charge in Knoxville 
which incidentally is not within my judicial district or I 
think the result would have been different. [Laughter.]
     In any event, I can say this, this agent's ambition to get 
some big people to advance his own career was wrong and the 
failure of those in management to keep him in check was 
disgraceful, particularly when that management turned their 
animosity upon the few agents of integrity who tried to bring 
that particular agent to their attention. These agents of honor 
are in my opinion the true heroes of this story.
    If anything can be learned from this episode it is that we 
average Americans who work every and pay our taxes still fear 
the IRS agents who can by virtue of their positions destroy 
lives and ruin careers. If our story can help prevent others 
from being targeted unjustly and help ensure better supervision 
of IRS field agents, then our time here today will be well 
spent.
    I sincerely hope this committee will set aside partisan 
differences and partisan politics in an effort to craft 
legislation to bring in check the abuses of power that so many 
of us have endured. Thank you for having me here.
    The Chairman. Thank you very much for being here today, Mr. 
Crockett.
    Let me make just one additional comment that, as shocking 
and unbelievable as this whole incident is, I also find it 
unbelievable that the agent involved and responsible for this 
was in no way punished by the IRS for his misdeeds. Rather than 
he suffer, those who tried to do what was right were the 
victims. And that was wrong.
    Now, we will go to the questions we have of the three 
witnesses. Let me be very clear about the three IRS employees 
who have testified here today. Is it your testimony that a 
special agent of the IRS framed these three gentlemen seated 
next to you in a completely false criminal case?
    Mr. Henderson. Yes, sir.
    The Chairman. Mr. Henderson.
    Mr. Henderson. He attempted to do it.
    Ms. Gernt. Yes, sir, that is correct.
    Ms. Latham. Yes.
    The Chairman. And is it also true that the three of you 
experienced severe retaliation for your efforts in breaking up 
that false criminal case?
    Mr. Henderson. Yes, sir.
    The Chairman. Ms. Gernt.
    Ms. Gernt. Yes, sir.
    Ms. Latham. Yes.
    The Chairman. Do any of you have any fear of retaliation 
for your testimony today before this committee?
    Mr. Henderson.
    Mr. Henderson. Absolutely.
    The Chairman. Ms. Gernt.
    Ms. Gernt. Certainly.
    The Chairman. Ms. Latham.
    Ms. Latham. Yes.
    The Chairman. Ms. Gernt, you stated that you came here to 
Washington to inform the IRS leadership about this case and 
others. Do you feel you received retaliation for that effort?
    Ms. Gernt. Yes, sir, I did.
    The Chairman. Mr. Henderson, I have to assume that the case 
you described was a work of a single agent who was out of 
control. However, you said in your statement that you had seen 
something like this case earlier in your career. Please 
explain.
    Mr. Henderson. Yes, sir. When I was a brand new special 
agent, I ran across what appeared to be a bribe from a 
defendant to another special agent who was working a prominent 
political figure at that time.
    I turned that information over as we were required to do 
it. And again, I was placed under investigation and lived under 
an investigation for almost a year until they finally decided 
they had better cover the whole thing up. And I was allowed to 
transfer out and to another POD. And the whole affair was 
quietly swept under the rug.
    The Chairman. Have you ever been aware of CID agents who 
have created other false cases against either taxpayers or 
employees? Would you say this has happened with some frequency?
    Mr. Henderson. Yes, sir, it has happened with frequency.
    Ms. Gernt. Yes, sir.
    Ms. Latham. Yes, sir.
    The Chairman. Have you ever been made aware of agents 
conducting illegal wiretaps or surveillances against either 
taxpayers or employees, Mr. Henderson?
    Mr. Henderson. Yes, sir, in Knoxville, Tennessee, the chief 
of CID used the agents in our group to pull surveillance on 
each other. They pulled surveillance on Patty. They pulled 
surveillance on Barbara. They pulled surveillance on me. They 
used their badges and credentials and government cars all 
illegally. And it is well documented.
    The Chairman. Have you ever been aware of the destruction 
of evidence that may have benefitted a defendant, Mr. 
Henderson?
    Mr. Henderson. Yes, sir, in the same case, the handwriting 
exemplars that inspection took from Barbara and Patty were 
destroyed. This was evidence that they destroyed. That is what 
they are talking about, about not leaving a paper trail so that 
they could not prove using the same evidence what happened. 
Yes, so they did destroy evidence. That is unprecedented. You 
do not destroy evidence in a criminal case of any kind like 
that.
    The Chairman. Ms. Gernt.
    Ms. Gernt. That is correct, sir. They did destroy the 
questionnaires. And contrary to the Internal Revenue Code, when 
I left my position in 1994, I was allowed to take personal 
items from my office. And in a very short time, special agents 
were sent to Johnson City from the Knoxville, Tennessee office.
    And my cases, including tax cases which should normally be 
kept for a period of 7 years were shredded by two special 
agents over a matter of days with continually running the 
shredder to shred any information that I had collected, any 
notations, and therefore potentially destroying evidence 
possibly of an exculpatory nature.
    The Chairman. Ms. Latham.
    Ms. Latham. Yes, sir, this evidence was destroyed by the 
IRS Inspection Division. And they did this to cover up any 
evidence of harassment and retaliation against us.
    The Chairman. This will be my last question on this round. 
Are you aware of any instances where the IRS has lied in court, 
Mr. Henderson?
    Mr. Henderson. No, sir.
    The Chairman. Ms. Gernt.
    Ms. Gernt. Yes, sir, I am.
    The Chairman. Ms. Latham.
    Ms. Latham. Yes, sir, I am.
    The Chairman. Senator Grassley.
    Senator Grassley. I do not think I am going to make any 
statements. I think that I need to applaud these three very 
brave IRS employees who are willing to do what is right. And 
obviously, I cannot say it better than Senator Conrad or 
Senator Roth did, the very strong statements of apologies to 
our colleagues and to Mr. Crockett for what has happened to 
them.
    And I would follow up on what Senator Baker said to the 
three of you, his commendation to you for being brave and for 
helping him personally, but also for standing up for what is 
right which is even more important, and the problems that you 
face as a result of this, the problems you have faced as a 
result of this.
    And Senator Baker's commendation reminds me to repeat 
things that I have said in the past about whistle blowers that 
nobody has ever followed my advice. And maybe, it is not as 
good advice as I think it is.
    But I work hard in the false claims bill, for instance, to 
protect whistle blowers. There was a whistle blower protection 
act. It was the first bill that President Bush signed in his 
new presidency to protect whistle blower. And I know you do not 
have a lot of confidence in this legislation, but it still is a 
better climate than it was before there was some protection for 
whistle blowers.
    But I do not think any amount of respect we show in our 
statement for whistle blowers or any laws we pass to protect 
you is going to do the good when a President of the United 
States be he a Republican or Democrat, and I have said this in 
presidencies of both parties, until we have a rose garden 
ceremony honoring whistle blowers from time to time.
    As Senator Baker said, you are truly patriotic. And that 
does not apply just to you. That applies to other people who 
have done more and less than you have done because you are 
considered within the bureaucracy as an outlaw, as a skunk, at 
a picnic would be respected.
    And when are we going to admit that whistle blowers are 
going to help us do our job of oversight, to make sure that the 
taxpayer's money is used wisely, to see that the rule of law is 
respected?
    We in Congress and prosecutors around the country cannot do 
the job without the help of people like you who know where the 
skeletons are buried and what closets they are in and to help 
us find them. And I hope some day, some president will honor 
people like you. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Grassley.
    Senator Nickles.
    Senator Nickles. Mr. Chairman, thank you very much. I want 
to thank all of our panelists, especially the IRS agents.
    And Mr. Henderson, you are still employed by the IRS?
    Mr. Henderson. That is correct.
    Senator Nickles. Ms. Gernt, are you still employed?
    Ms. Gernt. Retired.
    Senator Nickles. Retired. And Ms. Latham.
    Ms. Latham. Retired.
    Senator Nickles. Retired, both of you are retired. I have 
been reading your statements. And I apologize. I was not here 
when you presented them. I had to step out. I very much 
appreciate our friend and colleague, Senator Baker and 
Congressman Quillen for their statements and also for the 
Assistant Attorney General.
    I am bothered by this kind of abuse. And I am bothered I 
guess in reading the statement. We had one really bad agent, 
but you all complained. And so I am bothered that justice was 
not brought about to this person until I guess he was found 
with cocaine in the car.
    Mr. Henderson. That is right.
    Senator Nickles. But what really bothers me is why didn't 
his supervisor do something? What has happened to the 
supervisor when those complaints were made, and this was in one 
or two of your statements that you had alluded to.
    So when these allegations were made against this one person 
that obviously had a gambling, a drinking problem, maybe a 
sexual harassment problem and so on, when complaints were made, 
why didn't they do sometimes? What has happened to the 
supervisor in this process?
    Mr. Henderson. I was his immediate supervisor. And I tried 
to stop him when I found out what was going on. And I went to 
my chief and assistant chief and wanted to take his 
credentials, his gun, and actually get him professional help. 
But at that time, I did not know the extent of what he was 
doing. And I was told to sit down and shut up, that I was under 
investigation.
    And I subsequently was put in a position where I had to 
resign as group manager or face possible criminal and legal 
problems of my own because it was obvious that the people above 
me, no matter what I said would lie, just flat out lie. And I 
would sitting betwixt and between a rogue agent and a 
management that would not cough up the truth.
    And you have to understand that when I got to east 
Tennessee as group manager, this agent had been there a long 
time. Everybody knew what he was doing. I was just the only 
manager that tried to stop it. And that is what got me into 
trouble.
    Senator Nickles. Well, let me ask you a question. So you 
took this to your supervisor?
    Mr. Henderson. That is correct.
    Senator Nickles. And they, he or she refused to do anything 
about it?
    Mr. Henderson. I took it to my supervisor. The agent went 
around me. And they got together. And I assume and I can only 
assume this because of all the things that I had heard that had 
happened in that district prior to me becoming a manager, there 
were a lot of skeletons in the closet that they just could not 
allow to come out.
    And of course, when I tried to stop this agent, I assumed 
he threatened them with those skeletons.
    Senator Nickles. Well, let me ask you. I am interested. 
Your immediate supervisors, are they still employed by the IRS?
    Mr. Henderson. One of them is. I might add, he has a 
management position with no real position in the Nashville 
District today.
    Senator Nickles. And what is his name? You can write it out 
to me. You can give it to me in a minute. I am meeting with the 
Commissioner shortly. And I am concerned about a bad apple, but 
I am concerned about the fact that once it was brought to the 
attention of the higher ups that they were not willing to take 
action.
    Mr. Henderson. Let me add something here. During this 
process, after I had left Tennessee--and I got out of Tennessee 
because I knew what was coming. I had a little more experience 
and I guess a little more savvy as to what will happen. And 
Barbara and Patty did not. And they did not make it out.
    But Patty called me and was just horrified that the group 
manager who was in the process of railroading her and Barbara 
out of their jobs at the time was using a government vehicle on 
government time going to the Holiday Inn with his secretary on 
a regular basis. And inspection would not investigate it.
    So she was just horrified, what can I do? Here is this guy 
running me out of my job and my career. And every day, he is 
picking up his secretary in a government car, every other day 
or so, and they are going to the Holiday Inn for two or three 
hours.
    So I told her hire a private investigator. I think it took 
a second day. They have--we have a videotape of it.
    Senator Nickles. He is still an employee?
    Mr. Henderson. Oh, yes. They created a grade 14 position 
for him in Atlanta. That is where he is at today.
    Senator Nickles. If you would give me that name and 
information, I would appreciate it.
    Mr. Henderson. Glad to.
    Senator Nickles. Let me ask on kind of a related subject, 
Ms. Gernt, you are no longer employed. Did you have to retire 
or you retired as a result of this?
    Ms. Gernt. I retired as a result of it.
    Senator Nickles. When did you retire?
    Ms. Gernt. 1994.
    Senator Nickles. And Ms. Latham, when did you retire?
    Ms. Latham. I retired in 1996 after reaching an out-of-
court settlement of a lawsuit that I filed in 1994 and opted 
for early retirement.
    Senator Nickles. Related to these events?
    Ms. Latham. Oh, yes, because of those events, I spent 3 
years there that destroyed my mental and physical health.
    Senator Nickles. And Ms. Gernt, when you retired, you 
mentioned it was a result of the conflicts I guess you were 
having with superiors?
    Ms. Gernt. That is correct.
    Senator Nickles. In reading your statement, including 
sexual harassment as well.
    Ms. Gernt. It runs rampant. This was--these were a series 
of events that occurred frequently. They are not or were not 
isolated incidents. In 1993, as I said, when I--and I believe 
the constitution says I have a right to an attorney in a 
criminal situation. But when I attempted to bring my attorney 
to the CID office to lay things out, let us find out what is 
going on and why, we were not allowed to enter the Criminal 
Investigation Division.
    And this manager at the time physically struck my attorney. 
And I become so upset and ill that I attempted to leave the 
Criminal Investigation Division. And the group manager struck 
me in an attempt to hold me back, thus separating me from my 
attorney. That is the incident that Ms. Latham referred to.
    The government attorney's were not good enough for this 
manager. And in an attempt to cover up numerous lies, numerous 
lies that we now have in my possession and the possession of my 
attorney through the discovery process in my litigation 
regarding these matters, the government hired two, not one, but 
two private attorneys for its own manager.
    The events that followed were that we were able to work out 
a settlement agreement in which I was instructed not to 
disclose the terms of the settlement and to never relate to 
anyone the reasons for the lawsuit, but according to what I 
know Mr. Rossotti has waived that, the nondisclosure clause. 
And I am able because of him and his help to discuss this 
today. Otherwise, I would not be permitted to discuss anything.
    Senator Nickles. The settlement, did you agree not to sue 
the IRS or those agents in the future, either of you as part of 
your settlement?
    Ms. Latham. We both had to agree to that.
    Senator Nickles. We learned of that yesterday. Let me just 
touch on one other thing, Ms. Gernt, that you mentioned in your 
statement. You mentioned that in several cases, the Criminal 
Investigation Division would open a case not only on an 
individual, but maybe several family members?
    Ms. Gernt. Yes.
    The Chairman. And then, use that as leverage? Let me ask 
you, when you were trying to draw these cases to a close, if 
the person that CID had the complaint against would settle, 
then CID might be willing to drop the cases on other family 
members? Did that occur frequently?
    Ms. Gernt. That occurs frequently.
    Senator Nickles. You think that is an abuse or intimidation 
in the process?
    Ms. Gernt. It is all of those.
    Senator Nickles. I concur. But it is a frequent occurring 
event?
    Ms. Gernt. Yes, we have had one agent who had numbered so 
many cases, related cases, aunts, uncles, brother, sister, 
friends, neighbor that the computer would not take the number 
of cases this special agent numbered because they were 
literally pages. The entire Southeast Region in the Criminal 
Investigation Division could never have worked those.
    Senator Nickles. Wow! Well, Mr. Chairman, I compliment you 
for these hearings. And I am amazed. This is the third day of 
this second round of hearings that we have had. And each day, 
some of these stories about IRS abuse of power and again by a 
few people, not all agents, but a few people and particularly 
in the Criminal Investigation Division are shocking, absolutely 
shocking. When you have to hire investigators and/or 
prosecutors to be investigating the criminal investigators, we 
have a real problem. And I think we do have a problem.
    And I compliment these three agents for their courage. And 
an apology is necessary. It is a shame that these things happen 
to government servants. And to think that they also have 
targets who happen to be popular, political figures just makes 
it worse. That should not happen to anybody period.
    And I am shocked to think that one or two of the people 
that might have been in the chain of the command that was aware 
of this did not take action, but he is still on the government 
payroll. That is not acceptable. Hopefully, it will be remedied 
very, very shortly.
    So I appreciate the statements that our panelists have 
made. I think these hearings have been very enlightening on 
cases where some people clearly have abused their power.
    And they should be prosecuted. Some people, termination is 
not satisfactory punishment for this type of abuse of power 
that can destroy lives, destroy careers, spent untold millions 
of dollars, not only that, but the anxiety level for the 
duration of some of these cases and so on is just an 
unbelievable hardship.
    So I thank all of our panelists. And Mr. Chairman, thank 
you for having these hearings. It has been very enlightening.
    The Chairman. Thank you, Senator Nickles.
    I want to thank Commissioner Rossotti for lifting the gag 
rule so that people like Ms. Gernt could testify today.
    Again, I want to thank each and everyone of you for being 
here today. You have given another example by your testimony of 
public service. And I applaud you for what you have done. Thank 
you very much.
    The committee is in recess.
    [Whereupon, at 1:35 p.m., the hearing was recessed to 
reconvene at 9:30 a.m. on Friday, May 1, 1998.]


                             IRS OVERSIGHT

                              ----------                              


                          FRIDAY, MAY 1, 1998


                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to recess, at 9:41 a.m., 
in room SD-216, Dirksen Senate Office Building, Hon. William V. 
Roth, Jr. (chairman of the committee) presiding.
    Also present: Senators Chafee, Gramm, Mack, Moynihan, 
Conrad, and Bryan.

OPENING STATEMENT OF HON. WILLIAM V. ROTH, JR., A U.S. SENATOR 
         FROM DELAWARE, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will please be in order. First, 
let me begin by welcoming IRS Commissioner, Charles Rossotti. 
We very much appreciate your appearance today, as well as the 
leadership and tremendous effort of reform that you have 
already initiated within the Internal Revenue Service.
     I want you to know that I am pleased with the seven-step 
plan announced this week for the agency, including your support 
for the creation of a new Inspector General for Tax 
Administration. As I have commented before, I wholeheartedly 
approve of the appointment of William Webster, whose task it is 
to report back on the proper role of the criminal investigative 
division.
     The purpose of the hearings in September and this week is 
to uncover problems in the IRS that require either legislative 
or management changes.
     And consequently, last Friday, when Commissioner Rossotti 
and I met, we agreed that because IRS reform would best be 
served by focusing on solutions and not adjudication of 
specific problems we have heard during the course of our 
oversight, I suggested that these matters be referred to the 
General Accounting Office, in the short-term, and thereafter be 
assigned for further investigation by the new Inspector General 
for Tax Administration, which is contained in the legislation 
the Senate is expected to act on next week.
     Today, we will focus on solutions, solutions to the 
serious concerns our oversight has raised, rather than address 
specific cases. I believe this is the best use of our time and 
will be most productive to the accomplishment of our 
objectives.
     There is a second purpose to these oversight hearings, and 
that is to strengthen the hand of the Commissioner in dealing 
with the IRS bureaucracy, a bureaucracy that in my judgment has 
been too long outside the control of any commissioner.
     Oversight is a painful process. It means focusing on 
things that go wrong. It means seeing things you would not wish 
to see and hearing things you would prefer not to hear. But 
once that process is underway, real change becomes possible.
     I think that all of us have a better understanding of the 
problems with the IRS than we did only nine months ago.
     Commissioner Rossotti, you have one of the toughest jobs 
in Washington. This committee wants you to be successful, and 
we welcome you here today.
    Senator Moynihan.

 OPENING STATEMENT OF DANIEL PATRICK MOYNIHAN, A U.S. SENATOR 
                         FROM NEW YORK

    Senator Moynihan. Yes. Well, to paraphrase another member 
of the administration, Commissioner, how was your week?
     We have had a traumatic time here and do not really know 
how general a problem we are dealing with or how much there are 
isolated events that are horrors, but are, in some sense, 
isolated and not systemic. It is the kind of thing you are good 
at, and we like to hear you about.
     I would like to make one request, sir, which is that we 
have had these specific named public civil servants come before 
us and speak of troubles they have had and their concern for 
retaliation.
     I think it would be helpful, Mr. Chairman, if we could 
get--in due time--a case by case report from the IRS about this 
person and those charges. Could we do that, sir?
     Commissioner Rossotti. Yes, sir.
    Senator Moynihan. And one thing that--I am sorry, Mr. 
Chairman. I am going to have to raise it again. A month ago, 
March 31--today is May Day, my golly, and all over Europe there 
are no parades.
     You wrote us--you personally wrote, as we understand--a 
long six-page letter. A seven-page letter on the problems of 
implementing the legislation that we have reported out in a 
time frame that diverts you from the year 2000 problem with the 
agency's work generally, and you gave us specific dates that 
you could get this provision in and get that provision in.
     In the interval, we have created a select committee here 
in the Senate on this issue. Two years late perhaps, but even 
so, with our very distinguished colleague, Senator Bennett, as 
chairman, and he has been going around. He had breakfast 
yesterday with the Secretary of Defense, who thinks things are 
better than the GAO had reported last year.
     I do not think the Chairman would mind, Senator Bennett, 
by my saying that the GAO had reported last year things were a 
disaster. So, if they are better than a disaster, well, so much 
for weapons systems.
     If you could speak to that subject, because we have to 
have a government-wide program. We have not had yet. We have, 
in you, someone who understands the subject and will get on top 
of things.
     So, we welcome you, sir, and look forward to your 
comments.
     Commissioner Rossotti. Thank you.
     The Chairman. Again, Commissioner Rossotti, it is a 
pleasure to welcome you, and please proceed with your 
statement.

 STATEMENT OF HON. CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL 
                        REVENUE SERVICE

     Commissioner Rossotti. Thank you, Mr. Chairman, and thank 
you for your kind comments about me, and also, for the 
opportunity to appear here. I also want to thank you and 
Senator Moynihan and the whole committee for your leadership in 
insuring that our taxpayers are treated fairly.
    Mr. Chairman, at my confirmation hearing last fall, I 
pledged to bring about fundamental change at the IRS and to 
improve, in the broadest sense, the way the agency serves the 
public, and I just want to reaffirm that commitment today.
     I think the hearings of this past week further demonstrate 
that fundamental change at the IRS is needed. I also think that 
every American who heard the testimony would be disturbed, as I 
was, at that testimony, and we simply must change the 
conditions that lead to the situations described by your 
witnesses.
     We have to help provide better service to taxpayers who 
willingly comply with our obligations, and we have to have 
absolute respect for the rights of all taxpayers. We must 
insist on fairness and accountability throughout the agency, 
and to do this, we have to have a quality work place which 
provides every employee a positive environment that is needed 
for them to be able to be productive and to provide quality 
service to taxpayers.
    Mr. Chairman, as you and others on the committee have 
noted, the overwhelming majority of IRS employees are honest 
and hardworking and dedicated people, and I believe that they 
are just as upset about allegations of misconduct and 
mistreatment of taxpayers as we are.
     Now, as you noted, Mr. Chairman, I am prevented from 
speaking about the individual cases discussed this week, and we 
agreed that would not be the most productive way for me to 
spend my time. But I do want to tell the committee today that 
the abuse of even one taxpayer or one employee is one too many 
for me.
    Senator Moynihan. Commissioner, could you just, in the 
interest of the many people watching, tell why you are 
prevented?
     Commissioner Rossotti. Yes.
     Discussing any information matter of a taxpayer, even so 
much as acknowledging that a taxpayer has filed a return or 
that we had any interaction with a taxpayer is completely 
prohibited by law, and all of us are bound by those laws, 
unless we were to get a waiver. Not only from the individual 
taxpayer, but in most cases there is more than one person 
involved.
    Senator Moynihan. And this is meant to protect the 
individual taxpayer.
     Commissioner Rossotti. Yes. And equally, there are other 
laws. For example, there are grand jury rules that, on the 
criminal matters, also prevent any disclosure. And also, even 
with respect to employees. There are privacy laws.
     So, without a great deal of prior consultation and legal 
activity, it really is not possible to comment on an individual 
case. I should also mention that for good reasons, we did not 
even know what these cases were going to be until we heard them 
at the same time.
     So we have not had an opportunity to research each 
individual case. Quite apart from the legal restrictions.
     But I do want to stress, even though I am not commenting 
on the individual cases--and I have said this in a couple of 
statements this week--from my point of view, any kind of 
mistreatment, of one taxpayer or one employee, is one too many.
     And I very much welcome your suggestion, Mr. Chairman, 
that the GAO be given the responsibility to investigate and get 
the facts on each and every one of these investigations. And I 
promise you that when we get the results of those 
investigations, we will act accordingly and take disciplinary 
actions where the allegations are substantiated.
     Now, looking to the future, the modernization that I have 
proposed will require a dramatic break from past practice in 
almost every facet of the agency. From the internal structure, 
the technology, management roles and responsibilities and 
recruiting of senior executives.
     However, a change of this magnitude will take time, and 
there is not a magic formula or easy solution that will quickly 
solve the IRS' problems and transform it into a quality service 
organization. Fundamental change requires a comprehensive, 
systematic and sustained approach.
     We will make progress, Mr. Chairman, but it will be step 
by step, over a period of years. And we must set priorities as 
to which problems we first turn our attention to.
     As Senator Moynihan noted, much as we wish we did not have 
to spend our time on it, we must do whatever is needed to solve 
the century date change problem, and this massive problem does 
consume a great deal of management time.
     And even while we are addressing this problem and 
addressing the changes to the IRS, we must also operate the 
IRS, which even in normal times is a demanding and risky task.
     Effecting meaningful change at the IRS will also require 
help from Congress, and especially the restructuring 
legislation that the Senate will soon debate. The bill that was 
reported out of your committee, Mr. Chairman, contains 
initiatives that are the key to our modernization effort, from 
changing the organizational structure, to establishing an 
oversight board and expanding and enhancing taxpayers' rights 
and providing essential personnel flexibilities.
    Mr. Chairman, as part of my ongoing review and systematic 
study of all parts of the IRS, one of the techniques that I am 
relying on is to engage the services of some highly respected 
individuals to assist in my efforts.
     In February of this year, former Controller General, 
Charles Bowsher, accepted my offer to head up an independent 
review of the inspection service to advise me how it can best 
perform its essential mission. Mr. Bowsher and his team of 
investigators, drawn from outside the Treasury Department, are 
currently investigating any and all aspects of the inspection 
service.
     This includes a review of the organization and methodology 
used to plan and deliver audits and investigations, the 
relationship between the inspection service and IRS management 
and the relationship between the inspection service and the 
Treasury IG.
     Now, although the Finance Committee bill will move most of 
the inspection service to the Treasury Department to form the 
New Treasury IG for Tax Administration, which is a plan that 
both Secretary Rubin and I do support, nevertheless, I believe 
that Mr. Bowsher's recommendations will be useful in the 
future.
     And although his review is not complete, his interim 
reports have already indicated to me that there is a need to 
improve the process for investigation and action on allegations 
of misconduct by managers, when those allegations fall short of 
the threshold for treatment as a criminal offense.
     Therefore, I have taken certain near term steps. As an 
interim step, I have set up a special panel of officials from 
outside the IRS to act on possible misconduct cases, arising 
from the misuse of statistics cases that have been under 
investigation since last fall.
     In addition, I am now about to set up a special task 
force, overseen by another outside expert, to insure that the 
IRS has sufficient procedures in place to identify, evaluate 
and take consistent action on the results of investigations of 
allegations and of complaints by IRS employees.
     Now, the second major law enforcement unit of the IRS is 
the Criminal Investigation Division (CID). It plays a vital 
role by investigating tax evasion, enforcing our tax laws in 
cases of willful non-compliance and insuring the overall 
fairness of our tax system.
     The best estimates available indicate that non-compliance 
with the tax laws, of all kinds, costs about $1,600 per year 
for every taxpayer return filed. So, given the enormous 
importance of the CID, I proposed, as the Chairman indicated 
earlier this week, a seven-point action plan to improve CID.
     First, and probably most basic, I launched an independent 
review of this division that will be headed by former FBI and 
CIA director, William Webster. And his review will examine all 
aspects of CID, including operations, procedures, case 
outcomes, case review practices, discipline and performance 
measures.
     I have also asked Judge Webster and his team to examine 
the cases involving CID that were brought before this committee 
this week in order to learn what we can from those cases.
     Second, as mentioned with regard to the inspection 
service, I support the creation of the new Inspector General 
for Tax Administration, which is in your legislation. And like 
all Inspectors General, the new IG for Tax Administration will 
report directly to Congress and will have the independent 
authority to investigate all allegations of employee 
misconduct, including those at CID.
     Third, we will move quickly to centralize the disciplinary 
process for CID managers and employees within the IRS. This 
will insure appropriate and consistent discipline in CID 
misconduct cases. A specified group of labor relations experts 
will review all such cases and recommend action.
     Fourth, we are creating a new complaint system for 
taxpayers who have complaints about CID investigations. It will 
be managed by the new Treasury IG for Tax Administration.
     Fifth, we will institutionalize the oversight of CID 
within the Treasury's Office of Enforcement. To the extent 
permissible by law, the Under Secretary for Enforcement will 
insure that CID's policies and procedures are fully consistent 
with those of Treasury's other law enforcement bureaus.
     Sixth, I am requesting that the Joint Committee on 
Taxation join with the Treasury and the IRS in conducting a 
study of willful non-compliance. This review will examine the 
sources and extent of taxpayer non-compliance and measures that 
might address this problem.
     Finally, more generally, we must promote a culture of 
openness, quality and integrity within CID, consistent with my 
vision for the entire agency. I have recently issued a 
directive to all IRS employees about their obligation to report 
misconduct, fraud, waste and abuse and to guarantee employees 
freedom from reprisal when they report any misdeeds.
    Mr. Chairman, I have made clear, every way I can, that 
there will be no reprisals for any witness that appeared before 
you. Or actually, any employee who comes forward to report 
problems or misconduct.
    Mr. Chairman, after 28 years of management, I have to say I 
am also very troubled by the reports of discrimination and 
harassment in the IRS work place, and I have heard some of 
these complaints from employees in my travels, not only from 
your hearings.
     I cannot emphasize enough the importance that I place on 
creating a positive working environment that is free of 
discrimination, reprisal and harassment, and a work place that 
insists on accountability and open and honest communication 
among employees and management.
     I am committed to addressing each and every complaint, and 
I also believe that the Inspector General, as proposed by your 
legislation, will prove to be a valuable resource in addressing 
these concerns. In addition, the disciplinary task force that I 
mentioned will also prove helpful in our efforts to combat 
discrimination and harassment.
     I have also taken some other steps. I recently issued a 
memorandum to all IRS employees, stating that they have an 
obligation to report misconduct, fraud, waste and abuse. In 
that memo I have made it clear that the IRS has a stringent 
policy that guarantees employees freedom from reprisal when 
they report such action.
     IRS employees were also provided with a description of a 
variety of avenues for reporting misconduct.
     I also recently issued new performance standards for 
executives and managers on equal employment matters. This 
standard comes after consultation with the Departments of 
Justice and Treasury, and reaffirms our commitment to progress 
in eliminating discrimination, promoting employees based on 
merit and qualifications and encouraging a diverse work force 
to better serve taxpayers.
     On a broader scale, the modernization process which I have 
proposed calls for a management structure and a working 
environment that, over time, will create a far more positive 
working environment. These fundamental changes include stronger 
and more direct internal communications, open employee 
communications with management and the ability of employees to 
grow to their full potential; a flatter management structure 
that will foster better communication and a team approach and a 
high quality and more tailored training.
     Finally, Mr. Chairman, I would like to briefly address the 
topic of audit selection and execution, and first I want to 
stress that this is a new area for me. I think that is actually 
a distinct advantage for me and that my perspective is that I 
will personally not believe that we are doing the right thing 
with respect to audits until I feel I can explain the process 
to the average American taxpayer.
     I must say that the audit process and our published 
statistics are confusing. I mean, they were confusing to me. 
So, I imagine they are also confusing to other people, and I 
think, in some cases, the process is unnecessarily frightening 
for taxpayers.
     Over time, we must de-mystify the audit process and make 
it clear that an audit is not a signal that a taxpayer has done 
anything wrong. An audit should be used only to determine 
whether a taxpayer has paid the correct tax liability.
     Audit selection should never be punitive and audits should 
never be aimed at generating any specific amount of revenue.
     Concerns have also been raised--and have bothered me a 
great deal when they were raised--that IRS audits, in some way, 
unfairly target poorer taxpayers. I believe, based on what I 
have been able to research, that this concern reflects poor 
communication about IRS compliance activities.
     In my written testimony, I have included a table of audit 
statistics, which I hope will begin to shed some light on this. 
One of the confusing points in the past is that there are two 
special categories of activities, which comprise 45 percent of 
what the IRS reported last year as audits.
     One category is audits of taxpayers who filed no return at 
all. The second is taxpayers who claimed the earned income tax 
credit, which is an area that the Congress has asked the IRS to 
pay special attention to because of the historically high rates 
of over-claims in that area.
     So, for the remaining 55 percent of what were classified 
as audits, which actually comprise all audits of the individual 
taxpayers who filed returns and did not claim an earned income 
tax credit, the statistics and the tables show two important 
points.
     One, the chance of a low income taxpayer being audited is 
only about one-half of 1 percent. And second, the chance of a 
taxpayer with income over $100,000 being audited is about four 
and a half times as high as for a low-income taxpayer.
     Audit coverage also varies widely from district to 
district, as you heard in some earlier testimony, and this is 
partly because incomes and compliance vary widely. The 
population is not homogeneous from district to district. This 
is a matter that we need to do a better job of explaining as 
well.
     And with respect to the conduct of individual audits, 
ultimately proper management and supervision, in which quality 
standards are the paramount concern, is of utmost importance. 
As with all areas of the IRS, the role of the new independent 
Inspector General investigating any instance of improper 
influence of an audit will also be essential.
     And once again, I am convinced, Mr. Chairman, that the 
long-term solution to some of the audit concerns lies in the 
modernization concept that I have advanced. I believe it will 
allow better management of compliance resources on a nationwide 
basis, and our focus on helping customers comply will stress 
preventing problems before they occur and intervening as early 
as possible, through such things as problem prevention days and 
other forms of assistance.
     I pledge to the committee that in designing the new 
organization we will place great emphasis on control over audit 
selection.
    Mr. Chairman, last October I commented that the renewed 
interest of Congress in IRS management issues is an essential 
force for positive change. Six months later, I still firmly 
believe that.
     I realize that so far we have only taken some first steps 
towards addressing some very large problems. Much more needs to 
be done and will be done. Fundamentally changing the way the 
IRS does business is a long-term process requiring a long-term 
commitment from both the Congress and the management.
     I am here today, again, to pledge myself to that goal and 
to our partnership. Thank you, Mr. Chairman.
     [The prepared statement of Commissioner Rossotti appears 
in the appendix.]
    The Chairman. Thank you, Commissioner Rossotti.
     Let me again stress the importance of all of us working 
together to bring about the kind of change we want to see in 
this organization, and I congratulate you for the steps that 
you have already taken. As you know, they are only a beginning.
     You are absolutely correct. We are talking about changing 
the culture of a major organization consisting of roughly 
100,000 employees. So, it is going to take cooperation and 
working together between the executive and Congressional group 
to get the job done.
     I have a couple of questions that you did cover in your 
opening statements, and we will include your full statement as 
if read. But I think these two areas are of sufficient interest 
and importance. It is worthwhile going over them again.
     As you know, one of the major concerns that came out, 
particularly from the employees as well as the taxpayers and 
taxpayer representatives, was concern about retaliation. Many 
of the employees really were extraordinarily fearful of coming 
before us; that they would face, when they went back to their 
jobs, retaliation, abuse, and possible loss of jobs. That 
should not be the case.
     Any employee should have the right to appear before the 
appropriate committees of Congress without fear, and I know you 
feel as strongly about that as I do.
     Commissioner Rossotti. Yes, Mr. Chairman. I do. I have 
made that clear in every way that I can. I do plan, next week, 
to reinforce that in a specific way, which is to send a memo 
around to the right offices, specifically reinforcing that with 
respect to the employees that appeared here.
     I will do that, and we will send you a copy of that. But I 
think, more generally than that, I have been trying, through my 
own activities, to reinforce the notion that all employees 
should be free to speak. Not only to your committee, but to me 
and to other people inside the agency that they want to speak 
to to raise problems, because as I said in my confirmation 
hearing, it is the only way we are going to ever solve 
problems, is to acknowledge them and bring them out into the 
open.
    The Chairman. I know that you feel as strongly as I do 
about this. I just think it is important that we make it clear 
that all of us, to the best of our ability, will take steps to 
insure that those who come before us, whistleblowers, whomever, 
do so without fear of retaliation.
     Nobody, frankly, can guarantee 100 percent that that will 
happen, but we will do our level best to protect them.
     Commissioner Rossotti. Yes, sir. Yes, sir, Mr. Chairman. I 
pledge that to you, and I have said that internally, and I will 
reinforce it again next week.
    The Chairman. A second matter of concern is that there were 
a number of problems raised, and initially, you talked about 
having them investigated by the Inspection Office. Frankly, 
that is the only alternative you have.
     But again, I think it is important for everybody to 
understand that we all agree that the questions that have been 
raised in some of these cases ought to be investigated by the 
Comptroller General.
     Commissioner Rossotti. Mr. Chairman, I welcome that. I 
think that is a very appropriate way to go, and I will pledge 
to work with them any way that I can to make sure they get the 
information they need and get access to anything that they 
need.
     And, of course, after they finish their investigations, 
they will have to provide a report, and we will have to take 
actions, if there are substantiations of misconduct.
     And I also pledge that we will insure that that is done 
very rigorously.
    The Chairman. We think that assurance is critically 
important, and I appreciate that.
     Let me turn to what I consider a primary message of the 
hearings this week.
    Senator Moynihan. Mr. Chairman, could I just, for a moment, 
add to your problems by saying it is all very good to have the 
Conptroller General look into these matters, but we do not have 
a Conptroller General.
    The Chairman. You are correct. But we do have a General 
Accounting Office.
    Senator Moynihan. That is your next set of hearings, sir.
    The Chairman. Right. It is critically important that we 
have a new Conptroller General, but we do have a General 
Accounting Office, and we will refer these matters, as you say.
     That has to be done by us. It cannot be done by you. But I 
think it is important that the record be clear that we agree 
that this is the way to proceed.
     Commissioner Rossotti. Yes, sir.
    The Chairman. Now, I would like to go back to the question 
of management, of which you are an expert. But, as I said, I 
think the primary message that has come out from the hearings 
we have had these last several days is that there has been a 
very serious failure for the managers of this agency.
     And we are not talking about your administration. You have 
just been here a brief time. We are talking about the past.
     As I have already indicated, there is an internal climate 
of fear, retaliation that, frankly, demoralizes the employees. 
The statistical indicators of agency performance have been 
shown to be unreliable.
     Paramilitary techniques are being used against non-violent 
citizens, racial discrimination, sexual harassment appear to be 
commonplace, and we have even heard evidence of what appears to 
be, in a sense, extortion, framing and zeroing out of high 
dollar liabilities.
     So this tells me that management, the managers responsible 
for the day-to-day operations of IRS, are not doing their jobs. 
I do not know how else to account for the state of affairs.
     As you know, I feel you will not be successful in your 
efforts to turn this agency around until you have new people in 
top management positions that you trust and in whom you have 
confidence, and I have, of course, expressed this concern on 
several different occasions. The committee has placed, in the 
new reform bill, additional tools for you to accomplish this 
goal, which we will take up next week.
     But the point I want to make very strongly is that it is 
time for a change. You have been in your job a few months now. 
I would appreciate hearing from you what progress you are 
making in this regard and what are your plans for the future.
     Commissioner Rossotti. Mr. Chairman, first of all, I want 
to commend the work that you have done in putting additional 
provisions in the legislation, because I think that is going to 
be very helpful.
     Of course, the most important thing that we need to do to 
improve the agency is to get the right people in the right 
jobs, and this is the thing that I probably spend more time on 
than anything else.
     Of course, this is not a matter that is so easy to do, 
because even getting people from the inside, finding the right 
people from the inside to move to right jobs is difficult, but 
it is even more difficult getting people from outside to come 
into the IRS. It is something that takes some time and is a 
challenge.
     So, it is going to take me some time to make these kinds 
of moves; however, I will tell you--I think as I said in my 
confirmation hearing--that I agree that getting the right kind 
of people, the right people that I select personally into the 
right jobs ultimately is paramount; of paramount importance, 
and I have been working on that in a number of different 
directions.
     In terms of specific positions, I have, at this point, 
only filled a few. I did appoint, just within the last couple 
of weeks from inside the IRS, a person I have considerable 
confidence in as representative of what I consider the new IRS 
of the future. He has been appointed to the position of Chief 
of Operations, which is a key position.
     I am working on three other positions right now that I am 
personally recruiting on, one of which I hope will be filed 
fairly soon. But this is also going to require a sustained 
level of effort really over a couple of years.
     It is not something, to find people and to put people in 
the right place, that is going to be done overnight. So, I 
certainly would concur with your observation that getting the 
right people in the right jobs is paramount.
     And as I pledged at the beginning here, that is the thing 
that I will spend probably as much time on as anything else.
     And finally, let me just say, once again, the legislation 
will really be very helpful in doing this because I have found 
already it is quite challenging, especially when you have to 
bring in people from outside. Not everybody wants to work for 
the IRS right now, and you have to find ways to attract them.
    The Chairman. Not everybody wants to work for government 
right now I believe.
     Commissioner Rossotti. That is right. But there are people 
who are attracted to the challenge. I mean, truthfully, it is 
remarkable that there are people who really have no reason to 
want to come, other than because of the public service 
opportunity that they see. We just have to find a way to grease 
the skids a little bit to make it as easy for them as possible.
    Senator Moynihan. Mr. Chairman, I think we have one such 
person before us.
    The Chairman. Absolutely. As both of us have said before, 
Senator Moynihan, we are fortunate to have this individual in 
what I think is, without question, as difficult a job as there 
is in government this time. That is also part of the fun and 
the challenge I would say.
     Commissioner Rossotti. This is my selling point when I am 
trying to attract these people.
    The Chairman. You are right. We are trying to give you the 
tools that will help you with that. I understand it is 
difficult. I know that it is difficult to get people in the 
private sector, many times, to come into government.
     Unfortunately, at the same time, there is nothing more 
important, as I said, than having a new team in place to bring 
about the kind of changes that you and I want. I recognize your 
problems, but I want to keep pushing you as fast as I can.
     Commissioner Rossotti. Mr. Chairman, I think I welcome not 
only you pushing me, but also, you helping me with some of 
these other provisions. All I can say is that I am working as 
hard as I possibly can to do that, and I think we are making 
some progress.
     I really hope that within the next few months we will have 
some additional results. I think we have made some progress, 
but there is more in the pipeline than there is to show out of 
the pipeline so far, I have to say.
    The Chairman. Let me turn to another thing, if I may, 
Commissioner Rossotti, which you did make some reference to in 
your opening comments, and that is my concern about the 
intrusive type of investigation that has been made with non-
violent taxpayers.
     As you said, and I agree strongly, one case is one case 
too many. We had one witness who pointed out that 15 years ago 
we processed and succeeded in indicting and convicting those 
that were evading paying their taxes without these extreme 
measures.
     The charge has been made, for example, that part of the 
problem is that CID, in some of its activities of money 
laundering, organized crime and so forth, have to use some 
pretty extreme measures, but that somehow that practice has 
been carried over to the non-violent, and that is outrageous if 
it is even one.
     Now, Congress may be partly responsible for that, because 
if you go back, as I understand it, we expanded the 
jurisdiction, the requirements of IRS, into some of these other 
fields where you are involved with drug dealers, violent 
organized crime and things of that sort.
     But as I said, 15 years ago we did not do this. What are 
we going to do about that? What do you see as the solution?
     Commissioner Rossotti. Well, first of all, Mr. Chairman, I 
think that this is another area that is new to me, and so I am 
learning about it. But one of the things that I have learned is 
that even in the Internal Revenue Manual, as it exists today, 
it does say and it does state that the policy, which I think is 
certainly appropriate, is that any investigation, even of a 
person who is suspected of criminal activity, should be done 
with the least intrusive techniques that are available, that 
are possible.
     And I think the questions that were raised in your 
hearings certainly throw in the question of whether that policy 
was being followed. Now, why that came about is something that 
I do not know, but this is precisely why I decided, some time 
ago, that for this complicated area we needed to do a thorough 
review, a really thorough review of what techniques, among 
other things, the CID was using.
     Judge Webster will be leading that review, together with, 
by the way, a very able colleague, a former colleague of his 
that will assist him, Mr. Shaheen, who is the head of the 
Office of Professional Responsibility, together with people 
from other agencies, not from the Treasury Department, to help 
them.
     They are going to look precisely at those kinds of 
questions. How are the decisions made to decide whether search 
warrants or undercover activities, or those kinds of things, 
should be----
    Senator Moynihan. Or body armor and automatic weapons.
     Commissioner Rossotti. Yes.
    Senator Moynihan. That is what surprised, I think, Mr. 
Chairman.
     Commissioner Rossotti. I think all of the questions that 
were raised in your hearing, whether the techniques were 
appropriate, as you put it, whether the arming of agents was 
appropriate, what should be done in tax cases, which are about 
60 percent of the cases, the other 40 percent being the illegal 
income cases--I really believe that with this review we will 
get a very thorough review of that and recommendations as to 
how we can insure that the policy of using the least intrusive 
techniques would be applied in every investigation.
     And, of course, that will be a recommendation, but I have 
promised Judge Webster--he did not want to take on this job 
unless he was really convinced that it was a serious review 
that was really going to be acted upon based on what he found.
     Both Secretary Rubin and I have met with him, and based on 
that, he did agree to accept, because he, I think, concluded 
that we are serious about looking into this and taking action 
on the results of what he finds.
    The Chairman. I also talked with Bill Webster. It is a good 
selection. The number two man is excellent. So that is an 
extraordinarily important initiative.
     Let me turn to another matter, which I find unbelievable. 
I think it is intrusive.
     We heard from witnesses this week; that in order to 
pressure a taxpayer to plead guilty, CID would open cases 
against uninvolved family members in order to extract a plea 
agreement from the primary suspect. In other words, they would 
include innocent members of the families as means of bringing 
pressure on the taxpayer from whom they seek to take corrective 
action.
     All of us consider our family our most precious asset. 
That bothers me very much. I wonder what you think of that 
approach.
     Commissioner Rossotti. Again, I think, as with all of the 
IRS' activities, they should only be taken with the specific 
purpose that they are designed to be. If there is an 
investigation of an individual, it should be designed because 
there is reason to believe that that individual has potentially 
committed some crime, not as some kind of corollary tactic.
     And I think that this is another matter that will be 
included within the scope of Judge Webster's review.
    The Chairman. I would urge that, because I, frankly, think 
it is outrageous that such intrusive pressures can involve an 
innocent child, spouse, or other family member.
     Let me ask one more question, and then I will turn to 
Senator Moynihan.
     We have received information, again, that I find 
disturbing. Are you aware of any undercover operations where 
CID agents have posed as certified public accountants to the 
general public? Do you feel that is appropriate?
     Commissioner Rossotti. I do not know about that matter, 
Mr. Chairman. I simply do not have information on that. I don't 
know.
    The Chairman. I wish you would investigate, because it 
bothers me, Pat; that you go to a CPA that person may not be 
what they're representing.
    Senator Moynihan. Entrapment.
    The Chairman. It is entrapment. Yes. Under our legislation 
next week, we are providing that CPAs maintain confidential 
information in the same manner that attorney/client 
relationships do. And to have them use this, what I call a very 
intrusive practice, I think is, frankly, outrageous, un-
American, and I would hope that you look into it.
     I have taken considerable time, and I will turn to my good 
friend and colleague, Senator Moynihan.
    Senator Moynihan. Thank you, Mr. Chairman. I have two 
questions, neither of which I have answer. That is why I put 
them to you.
     On the Year 2000 matter, in March 31st, I mentioned 
earlier, you sent us a long letter with very specific dates 
about specific provisions. Do I take that as still your view 
and that we ought to discuss the matter on the floor?
     Commissioner Rossotti. I do not know where you should 
discuss the matter.
    Senator Moynihan. Yes. Yes.
     Commissioner Rossotti. I know that the Chairman has 
committed to working with us on this. I do believe that very 
much, Senator Moynihan. I do believe that we have to work out a 
realistic schedule. It is very regrettable.
     It is very regrettable that we have to devote our 
resources to something that, in essence, just keeps us even. It 
does not get us ahead.
    Senator Moynihan. And you are hardly alone.
     Commissioner Rossotti. No. I know we are not alone, but 
the consequences are visible in this letter because we are 
seeing that there are desirable provisions that all of us would 
like to see implemented earlier.
     But when I look at the situation we are in at the IRS, and 
I am only focusing on the IRS, we have almost a $1 billion 
program over a multi-year period of time, which is----
    Senator Moynihan. This is to get your computers in 
compliance so that they can move from the 20th century to the 
21st century without going all array, because we only have two 
letters designating the year in the current programs.
     Commissioner Rossotti. Right. But doing that at the IRS, 
especially with the old systems we have, is going to cost, over 
the whole period, close to $1 billion. Now, it is not just the 
money.
     The public companies are now required to report how much 
they are spending. So, I happened to see, in the press the 
other day, that General Motors reported to the SEC they are 
spending between $360 million and $500 million.
     Our program is twice the size of General Motors, and I 
know that we do not have twice the management resources of 
General Motors. Not close to it.
     That being the case, we have to add to that, by the way, 
for this calendar year, the next 8 months, about 800 changes 
that are stemming form last year's tax bill, the 1997 tax bill.
    Senator Moynihan. You don't say.
     Commissioner Rossotti. We have to put those in this 
summer.
    Senator Moynihan. There were 820 pages. So that is about 
right.
     Commissioner Rossotti. Well, it translates to about 750, 
800 computer changes. I mean, individual changes to different 
parts of the system. Those are the same people that are doing 
the century day change.
     So, for this calendar year, we have no choice but to be 
absolutely focused on this problem. I have to tell you this 
consumes time, too. Even during this week, when we were doing 
these hearings, I had to have meetings with people to sort out 
what could be done and what could not be done.
     The letter that I wrote was simply an attempt to be 
realistic, from a practical standpoint of when it is likely 
that we would be able to address additional changes.
    Senator Moynihan. The letter said, we are happy to comply, 
we want to comply, but the time pressures are such that there 
are certain dates we cannot get to.
     Commissioner Rossotti. Yes.
    Senator Moynihan. One other question, sir. And here, you 
are talking to someone who has no legal qualifications. 
Whatever.
     If I am troubled by any one thing that we are doing, if I 
am told I am ought to be, it is this question of the burden of 
proof in civil procedures, and it is so easily misunderstood 
when we are told the burden of proof is on you and not the 
government.
     But we had four of your predecessors, respected persons 
all; tax lawyers, saying that if we shift the burden of proof 
to the government, where, of course, it does exist in a 
criminal proceeding, the auditing process would become much 
more intrusive, and the taxpayer will find life is more 
difficult, not less, because of the record keeping required.
     Do you have any thoughts?
     Commissioner Rossotti. Again, I am not a tax lawyer 
either. So, this is a new topic to me.
    Senator Moynihan. There are some lawyers behind you.
     Commissioner Rossotti. Yes. I know. Well, I have been 
trying to learn about it, from a practical standpoint, and I do 
not claim to be an expert in this.
     But I think the way I understand it is that the risk that 
you cite, Senator Moynihan, of it potentially backfiring, does 
exist, and it depends on the details of how it is done.
     If what is meant by the burden of proof is that when a 
matter arrives for adjudication in court say, the issue is if 
both parties, the IRS and the taxpayer, have roughly an 
equivalent case, then the taxpayer should win. That does not 
seem to present any problem. I mean, that is fine.
     I think there are some other interpretations here though, 
which I think the Chairman and the staff are trying to work 
with the IRS to deal with, which could give rise to a broader 
interpretation of what is meant by this burden of proof, which 
could imply, for example, that taxpayers might believe that 
simply by not retaining their records or not retaining as many 
records, that therefore, they would have an advantage.
     That, I think, is where the risk comes in, because then 
you would have nothing to do except have the IRS go in and try 
to find this information, which then leads down a path which I 
do not think any of us want.
     So, it is a matter which requires careful and pretty 
technical work, I think, to make sure that you get it right. I 
think there certainly is a legitimate concern that there should 
not be a case where the taxpayer has equal proof, so to speak, 
and loses the case. That should not be.
    But this matter of making sure it does not become more 
intrusive, that is very important also. So that is going to 
have to be worked very carefully. I think at the staff level.
    Senator Moynihan. Good. I can indicate, sir, that there are 
some wise heads nodding in the first row behind you.
    Commissioner Rossotti. Well, if I got through that one, 
then I am in pretty good shape.
    Senator Moynihan. Mr. Chairman, I have a statement by 
Senator Bob Kerrey about the hearings, which includes a number 
of proposals, of which the one you will, no doubt, be 
appreciative of; that we should require that the committee meet 
every year on a set date, say the second Tuesday of May, to do 
the kind of oversight that we have been doing this year.
     I would like to place this in the record at this point.
    The Chairman. Without objection.
     [The letter of Senator Kerrey appears in the appendix.]
    Senator Moynihan. And I thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Moynihan.
    Senator Gramm.

OPENING STATEMENT OF HON. PHIL GRAMM, A U.S. SENATOR FROM TEXAS

    Senator Gramm. Mr. Chairman, let me first note that our 
provision, transferring the burden of proof, has been well 
reasoned, and, in fact, a condition for getting the transfer of 
the burden of proof is turning over full data to the IRS and 
keeping data that a prudent person could be expected to keep.
     When I look at our bill, that is one of the provisions I 
feel strongest about. In fact, after the hearings this week, I 
am convinced that our bill is inadequate to meet the task.
    Mr. Chairman, I hope we are going to get at least two 
rounds, because I am going to use this first round as an 
opening statement.
     I want to begin by congratulating you. If these reforms 
are successful, I think that it will be one of the things in 
your career that you are going to be remembered for, and you 
did it. There were a lot of people who were very skeptical 
about these hearings, and I would have to say that I was among 
them.
     I expected to hear a group of malcontents complain. In an 
organization of 100,000 people, you have always got people who 
are unhappy. I expected some isolated abuses, but I would have 
to say that these hearings have totally changed my viewpoint.
     I have no confidence in the Internal Revenue Service of 
this country. It is not that I am so unhappy to find that 
people do bad things. People do bad things. Smart people do 
stupid things.
     But what has totally undermined my confidence is that 
nothing seems to be done about it. There seems to be a system, 
which more than anything else, was designed to protect 
wrongdoers; to see that people are not held accountable, and I 
think this is critically important.
     If you get a new team, that may produce short-run changes 
in the system. But you have got to have a change in the system. 
Let me tell you what I think is wrong at IRS.
     I think the system is a bad system. I think you are 
dealing with human beings, and you have got some people who do 
bad things; some people who do dumb things. We experience that 
here where we work.
     But the difference between a good system and a bad system 
is a good system rewards good behavior and punishes bad 
behavior, and a bad system does the reverse. I believe you have 
a bad system.
     I do not think you are going to change the system 
permanently by simply having new management, though I believe 
you need it in the short-term. And I believe that you need to 
take a long, hard look, and we need to take a long, hard look, 
at how the Internal Revenue service is structured.
     I am still totally convinced that the problem is this 
agency has too much unchecked power. An agency in a free 
society should never have the ability to investigate, evaluate 
and basically prosecute, all wrapped up into one. There clearly 
is an absence of checks and balances within this agency, and I 
think it needs to be changed.
     I also believe that we need to take a long, hard look at 
the things that I have happened, and I am concerned, quite 
frankly, that you do not have, even under our new bill, the 
ability to do some of the things that need to be done.
     So, I think we have got to have fundamental changes. And 
one of the things that I am doing, as we get ready to go to the 
floor with our bill, is to look back and see how we might 
address this problem with a lack of check and balance.
     I am not sure how you do it, but all I know is that 
compared to the criminal justice system, where you have got 
checks at each level, where the police do the investigation and 
then their investigation is evaluated by a grand jury and by a 
prosector, that by the very nature of the two being from 
different departments of government, they valuate each other.
     They represent checks and balances on the behavior of each 
other. And then, if you are in the criminal justice system, you 
get to go into a court where you have got an elected judge; you 
have got 12 jurors who hopefully are independent of the whole 
process.
     So, you have got checks and balances at each phase of the 
process. With the Internal Revenue Service, you have no 
external checks, and I think, basically, that is the problem. 
But it very difficult to fix it.
     I guess I have used up my first round, but that basically 
is the sad, but firm conclusion that I have reached as a result 
of sitting through the vast majority of these hearings.
     This is going to be very difficult to fix, but I am 
convinced that we have got to undertake the process. And again, 
I want to thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Gramm.
    Senator Mack.

  OPENING STATEMENT OF HON. CONNIE MACK, A U.S. SENATOR FROM 
                            FLORIDA

    Senator Mack. Thank you, Mr. Chairman. I, too, as I have 
indicated several times this week, want to commend you and 
Senator Moynihan for these hearings. And I also want to commend 
the staff for the work they have done on these hearings.
     I think that they have been extremely enlightening. I find 
myself agreeing with Senator Gramm in the comments that he has 
made. I think one of the things that kind of shook me was the 
realization--or at least my understanding of it, and I must 
admit that that is a limited understanding.
     My understanding of what we heard this week is, again, 
that there are limited checks and balances that are in place. 
And I think one of the things I would suspect that you are 
taking a look at, being someone known for his management 
capabilities, is what kind of a system do you put in place; 
what kind of levels of authority do individuals have; what kind 
of limits are placed on their authority; what kind of controls 
are in place to evaluate those limits are being lived up to.
     So again, I commend you and the staff for the work that 
you have done. These have been outstanding hearings. I think 
that the suggestion that Senator Kerrey apparently made and 
Senator Moynihan mentioned a few minutes ago; that the only way 
there is going to be a guarantee in place that we are going to 
continue this oversight effort is to, in essence, kind of 
require that it be done in a systematic way, and I think that 
is a very important suggestion.
    Mr. Rossotti, there is really only kind of one area for me 
to pursue. The Chairman has kind of asked us, really, not to go 
into individual cases that were raised, and I had really come 
here intending to look at those and raise questions in those 
individual areas.
     You have an incredibly difficult job. You know that better 
than we do, and it is probably a lot more difficult than you 
thought when you accepted the position.
     But one of the messages that we heard this week is that it 
is business as usual though with the IRS. In fact, one of the 
people who testified this week said--in fact, a couple of them 
did. In essence, they said everything is continuing to happen 
as it has been happening all along. The oversight hearings 
aren't bothering us.
     We heard that the southeast region may still be evaluating 
districts according to their number of property seizures, and 
as I understand, this is not supposed to happen. But this was a 
report dated January of this year, after the September 
hearings.
     So this leads me to this point and question: How many of 
the top executives are still in place? And I am going to be 
fairly specific. I am going to name one name, Michael Dolan.
     We heard in the testimony that the Inspector General 
investigated and substantiated allegations of travel fraud, 
abuse of subordinates, sexual harassment, fraudulent 
performance appraisals and orders to cover up illegal actions, 
all against IRS executives.
     Yet, in each and every case, the report from the IG was 
sent to the deputy commissioner's desk--I believe Michael 
Dolan--and no disciplinary action was taken. And here is my 
point. My intention is not to go after individuals.
     But how are you going to get a message to the people 
throughout the organization that things are going to be 
different if nothing is changing?
     Commissioner Rossotti. First of all, Senator, I think even 
before I got in office, when I was here before this committee 
for confirmation, I pointed out that getting across a message 
and actually effecting change in a place as large as the IRS, 
while you have to continue to operate every day, isn't like 
building it from scratch and just moving into it. You have to 
keep running.
     We just finished a filing season, for example, that 
processed quite a few tax returns. For these reasons, it does 
take some time and change has to be done step by step.
     From the point of view of the message though, I think that 
at least for most of the people at the IRS there is a message 
that it is a new day at the IRS. Now, there are always going to 
be some people who do not get the word, and there may have been 
somebody down in the southeast region who did not. We are going 
to track that down and find out what it is.
     But to really change it, it is not just a matter of what 
you stop or what you tell people you are going to do. It is 
actually putting in place new things; positive things that 
actually are different than what the other ones were.
     Part of this, as the Chairman mentioned, is putting people 
in place. I have been doing that incrementally. I have got one 
new regional commissioner that I have selected. I have got a 
new person I have just put in for chief of operations. I have 
got several people that I am getting in from the outside, if I 
can recruit them in from the outside.
     This is not something that we can do instantly while 
continuing to operate an organization, but I am working on it 
every day.
     On the matter of statistics, if there is anybody at the 
IRS who does not understand that we are not going to use 
enforcement statistics as a measure of individual employee 
performance, then that is a person who has not heard a pretty 
loud message.
     We do, however, on that matter have a problem, and it is a 
very significant problem, which I think is worth my mentioning 
to the committee, and that is that you cannot run an 
organization like the IRS without having some kind of measures 
in place that measure how things are going.
     So we have said we are going to take away a lot of 
measures. We have not yet been able to come forward with very 
good guidance, very precise guidance, as to how we should be 
measuring performance, which leaves it, in a sense--it leaves a 
vacuum to some degree.
     We are working very hard to devise a new set of measures 
that will be appropriate. We have a task force working. We have 
an outside consultant. I am hoping that we can get some very 
short-term interim guidance out fairly quickly. But in reality, 
we won't really have even an interim set of reasonable measures 
out until fiscal 1999.
     And this is just one of many different areas of change 
that we are working on that take time to do. So, your basic 
observation is how do we effect change in this kind of a large 
organization. It is, of course, the big question that I am 
trying to address, and I think the answer to that question is 
that it will be done step by step, over a period of time, by 
systematically working through each of these areas.
     Getting the right people in the right jobs. If necessary, 
where there is misconduct or if there are substantiations of 
allegations, most certainly getting people out of jobs or taken 
action against them is substantiated. But even that takes time.
     Since I have gotten here, I have initiated investigations 
that so far have produced 14,000 pages of reports of 
investigation of potential misconduct. They have just started 
to be delivered to me, and we have just submitted those to this 
independent panel. I could go on.
     The question of performance measures and getting rid of 
performance measures that are inappropriate, such as saying we 
won't use measure of enforcement action to evaluate any 
employee or manager, we have done that.
     There may be some people who didn't get the word. We will 
take care of that. But we have to put something in its place. 
We have to have something to measure how performance goes in a 
100,000 person organization. Step by step.
    Senator Mack. My question though, I think, is more has 
anyone lost their job as a result of both the hearings from 
last September and your initial review?
     I mean, Senator Gramm talked about the need to change the 
system. In many of the things that you have said today, you 
talked about policies being violated. A violation of policy 
generally is the result of an individual choice, a decision 
made by a manager.
     My point for pressing this is the sense around the country 
is that it always business as usual in Washington. And so, if 
the team that created the mess that we are pursuing is still in 
place, the message has got to be, both to the people in the 
country, and I would think to those in the IRS who have been 
violating these polices, it is business as usual.
     Commissioner Rossotti. The issue of individual 
responsibility for misconduct is, in the IRS, in Federal 
Government, as well as even in private sector, something that 
has to be substantiated.
     I mean, to put something on an individual person you have 
to go through a process of investigation to determine, in a 
very factual way, exactly what those allegations--whether those 
allegation were substantiated and then you have to take action 
based on that.
     In order to eliminate the possibility that people could 
assume that it was business as usual, that it was a white-wash, 
I set up an entire process to try to deal with that. Now, it 
takes time. It takes more time than I would like in some cases.
     I have no other way to do it. I have to set up 
investigations, I have to get them done, I have to go through 
the process and then we have to take action. And all I can say 
is that I can assure you, and I can assure the rest of the 
committee, that we are committed to doing that.
     I cannot assure you that I can do it any faster than the 
process allows.
    Senator Mack. Well, I am going to let it go at that, Mr. 
Chairman. I think I have made my point.
    The Chairman. Thank you, Senator Mack.
    Senator Chafee. Thank you, Mr. Chairman. I want to join 
Senator Gramm in saying you have had a good year, Mr. Chairman, 
in these hearings, plus the previous action. Now your name is a 
noun. We see advertisements: ``Do you have your Roth yet?''
     You have had a significantly successful 6 months or so.
    Mr. Rossotti, I think it is important that we stress that 
while you are trying to make these changes, the organization 
has to go on. We have just completed now the collection of--
what is it? Your organization has collected $1.5 trillion. Is 
that right?
     Commissioner Rossotti. I think it might be 1.6 or 1.7.
    Senator Chafee. That is not billions. That is trillions.
     Commissioner Rossotti. Yes, sir.
    Senator Chafee. And you processed something like 120 
million tax returns in the past couple of months. So, you have 
got a heavy duty. And one, I want to commend you and the people 
you have selected to help you from outside, Judge Webster and 
Charles Bowsher, whom both of us had very fine experiences, as 
you recall and I recall.
     Let me say this: I can only believe that in your efforts 
to deal with personnel you are having to struggle with civil 
service regulations. Is that true?
     Commissioner Rossotti. Yes, sir.
    Senator Chafee. I had a very fine staffer who went up to my 
home state to become head of the largest department, and she 
reported to me later that she could not hire and she could not 
fire anyone. So, it is a lot hard to bring reforms about. That 
is under the state civil service system.
     But what about you? Do you have struggles? It is one thing 
to say we are going to replace a head of this division or that 
area, but I suspect it is a lot harder than you had it with 
AMS.
     Commissioner Rossotti. Yes. It is harder, but I think a 
part of it is a matter of--what it boils down to is a matter of 
time. Senator Mack indicated some impatience. I have to share 
it, having come from the outside; that we ought to be able to 
move faster on some of these points.
     I suppose that that is just part of the character of being 
in public service, but I do not think it makes it impossible. I 
think it just changes the time frame. If you are willing and 
you are committed to make changes, you can do them, but it does 
take longer.
     The other point that I think is important is that the new 
legislation that this committee has recently approved, and 
which I hope will go on the floor soon, will give us some great 
help on these areas. Particularly with respect to bringing in 
people from the outside in the senior ranks and also making 
some other changes in how performance is measured. So it will 
be very helpful.
     I do want to thank you for your comment about the 
operational aspect of the agency. I mean, the other limiting 
factor, in terms of change, is that we have to continue to run. 
I mean, this is an enormous, enormous organization, in terms of 
the money it processes, and it does work from an operational 
standpoint.
     So, while there are very serious problems and major 
changes that need to be done, we have to do them in such a way 
that is carefully calculated to not upset something that has to 
be done. You just don't run a tax season with 120 million tax 
returns without anybody managing it.
     I certainly can't do that by myself, and I can't instantly 
change around all the people that are doing this. So it does 
require some attention to operations while you are continuing 
to make these changes.
    Senator Chafee. I was shocked, as was the other members of 
this committee, by the testimony we have had and the incidents 
that were accounted. It just dumfounded me.
     One of the things that deeply bothered me that has been 
touched on here before is the fact that the members of the 
Criminal Investigative Division carry firearms. That has been 
touched on before. It just seems totally unnecessary. I do not 
think they are going to engage in a gun fight, are they, as 
they come in to get somebody's records.
     I didn't understand it at all. What is the rationale for 
them having guns?
     Commissioner Rossotti. Rather than my giving a rationale, 
since I haven't been here long enough to know what the history 
of it is, I think it is better for me to say what I think we 
need to investigate that question.
    Senator Chafee. All right.
     Commissioner Rossotti. Which is exactly why I have got 
somebody with the experience of Judge Webster, who even though 
he is from law enforcement, was a judge and who I think has 
very broad experience in determining what----
    Senator Chafee. And he is going to report back on that? He 
is going to look into that?
     Commissioner Rossotti. He is going to look into all the 
questions that are really fundamental to how the CID, Criminal 
Investigative Division, should operate. Certainly what kind of 
weapons they should carry and in what circumstances would be an 
appropriate part of that.
    Senator Chafee. You come from a management background. 
Indeed, the very name of your was American Management Systems. 
I am curious, and you touched on this a little bit in your 
testimony.
     All right. So we do not want to judge the productivity of 
the unit by the number of enforcement results that they have 
had, but how else? You have got to have some criteria by which 
you can judge the productivity of a unit. What else are you 
going to do?
     Commissioner Rossotti. Senator, this is exactly what I was 
trying to get to in my previous answer. This is a very, very 
difficult question. How do we manage an agency, which basically 
has the job of collecting money, without getting down to what I 
think has caused significant problems? What people broadly 
refer to as quotas.
     I think there are some ways to do that. The most important 
way, at the individual employee level--let's take an 
examination or a collection employee--is to develop measures of 
case quality and inventory management, which is getting 
somebody to rate how well you are doing on a sample of cases 
and focus on the quality, which takes into account not only how 
well you have collected, but how well you have treated the 
customer and so forth.
     These are all new things for the IRS. I mean, this is why 
it isn't so fast. I mean, it has taken years and years. I think 
I have got something that says at least 25 years things have 
been done a certain way. Now we have said we are not going to 
use these kind of quotas, but we are still going to, of course, 
track information about how much money we collect.
     So what we have is some confusion. Frankly, we have 
confusion in the near term over exactly what we can manage by 
and what we cannot manage by. We tried to give out some interim 
guidance. What we are working on, which we hope we will have at 
least preliminary results for next fiscal year, is some 
guidance that will give managers more explicit guidance over 
what it is that they are allowed to measure and how they would 
measure it, and more explicitly, what they are not allowed to 
measure.
     As long as we are in this vacuum where we said you can't 
do this, but we haven't been explicit about what you are 
supposed to do, we have a problem. I am being very honest about 
it. It is not a simple problem to solve. If it was that simple, 
I would have already done it. But I do not think it is 
impossible.
     It is like a lot of things. I do not think it is 
impossible to do this. I think we need to use some creativity. 
There are some techniques.
     I think generally we know which direction we want to go 
in, but getting them in place for the huge range of activities 
that exist at the IRS is not something that one can do 
overnight.
     So, I think what I would like to do at certain points in 
time, when the Chairman thinks it is appropriate, is to not 
only come and talk about what we have stopped doing, but be 
able to come in and say, look, here is how we are going to try 
to solve the problem that you have identified and get the 
reactions of the committee and other people because this will 
be an evolving solution over several years.
    Senator Chafee. Well, it seems to me that you have got to 
some indicia, some criteria by which you go by.
     Commissioner Rossotti. We do.
    Senator Chafee. And like so many things, you are dependent 
upon the quality of the supervising people to differentiate 
between what just is mass statistics and what is a capable 
employee who is solving the problem and getting on with things.
     Thank you very much. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Chafee.
     And, Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman. Thank you, 
Commissioner Rossotti, for being here, and thank you for taking 
the job, because this is, as everybody has indicated, a very 
tough challenge. But, in a way, that can be exhilarating as 
well.
     But I know for somebody of your background who has been so 
successful in the private sector, building a company as 
dramatically as you did, there must be days when you wake up 
and say, why did I do this? Or your wife says it for you.
     Commissioner Rossotti. That is a more accurate commentary. 
Yes, sir. I guess I didn't take an oath, but I still can't deny 
what you said.
    Senator Conrad. I am sure. I just know that you must be 
going through that, and this week must have been that kind of a 
week.
     Nonetheless, this is critically important to our country, 
and the challenge that you have taken on is a very important 
one. I think we could all agree that the vast majority of IRS 
employees are honest and hardworking. That was certainly my 
experience.
     As you know, I was tax commissioner of my state. I elected 
and served in that position for 6 years before coming to the 
United States Senate. So I had a long history of involvement 
with the Internal Revenue Service. And I must say, in the 
district that I worked and the state that I worked, my 
experience with the Internal Revenue Service was very positive.
     I found lots of very dedicated career employees who 
genuinely wanted to do a good job and treat people 
appropriately. But it is also true that, from time to time, we 
found IRS operations that we found baffling, in terms of 
treatment of people.
     I think we can also acknowledge that there is some problem 
from the type of hearing format we have here, because we have 
heard, in essence, one side of the story. We have heard the 
complaints of people, but we have not been able to hear the 
other side of the story because of the secrecy provisions of 
Federal law.
     So that makes it difficult to render a full judgment on 
what is really going on, but we have got to press ahead and do 
our best because that is our responsibility.
     I think we can also acknowledge that there are a certain 
number of taxpayers out there who really don't have any 
intention of paying their fair share. In fact, they don't have 
any intention of paying what they legally owe, and they go, 
sometimes, to great lengths to avoid paying. I have always been 
impressed by the creativity of some people in avoiding their 
tax obligations.
     With all that said, there were things that we heard here 
this week that were outrageous. I know you were outraged, from 
a conversation that you and I had just the other day. I can 
tell you I was angered.
     I must say, the day before yesterday, after hearing some 
of the testimony, I do not show it very much because I am 
Scandinavian, but I tell you I was very angered by treatment of 
taxpayers. This kind of cowboy attitude that we are going to go 
in and intimidate people. That is just unacceptable and that 
has got to stop.
     I was especially struck yesterday, when we heard Senator 
Baker, who is as fine a man, I think everyone here would 
acknowledge, that ever served in the United States Senate. 
Somebody who is beyond question in terms of personal integrity 
and honesty.
     I mean, that somebody would go to great lengths to frame 
him, that is outrageous. And it goes to individual tax 
preparers. We heard this Mr. Gardner, and he has got people, 
armed people, coming to him. This is a tax preparer. This is 
not a violent threat. And they have got armed people coming, 
with their law enforcement jackets emblazoned with the seal, 
and calling him out and threatening him. That is just totally 
inappropriate.
     So, this is the abusive tactics in some of these cases, 
the arrogance, and the lack of accountability I found 
especially troubling.
    Senator Gramm and I talked, before the hearing began, about 
this lack of accountability, in many ways, being the most 
troubling. I do not know if Senator Gramm pursued that during 
his questioning period, but I share that view.
     There is a sense, among some anyway, within the IRS--and I 
stress some, because again, I do not want to besmirch this 
entire agency. I know full well how many really excellent 
people are there who do care deeply about doing a good job.
     But among some, one gets the sense that they feel free to 
engage in inappropriate behavior, and there is no sense that 
anybody is watching the store. There is no sense that they are 
going to be held accountable.
     So my question is how much of this do you see as systemic? 
How much of this do you see as cases that represent exceptions?
     Commissioner Rossotti. Well, I think some of the more 
egregious cases--I hope we do not have very many situations 
like we found with Senator Baker. I mean, I cannot imagine that 
we do.
     But I think really, in some ways, my feeling is that even 
one case is too many. We really cannot be in a situation where 
we say, well, it is okay to have--you know, like we are running 
an airline and every once in a while we have plane crashes and 
people get killed, and we say, well, statistically we are 
pretty good. We run a safe airline. At least that is not the 
way I view it.
     Each and every time, if there is anything that happens, we 
have to try to figure out what went wrong, if there is 
something that went wrong, and do something about it.
     However, I will say what I think I have said in my early 
testimony and again today, that apart from dealing with 
individual misdoers or misconduct, which we will certainly 
follow up on--with the aid of GAO we will follow up on those--
if it were simply a matter of getting rid of some wrongdoers, 
or getting rid of a few people and replacing them, my job would 
be a whole lot easier.
     It really is more fundamental than that, and I think that, 
in some respects, I do agree with Senator Gramm. We really have 
to deal with the whole structure of the way the agency runs.
     The technology, believe it or not, actually has something 
to do with this because the better technology you have, the 
better you can track what really goes on, the better you can 
manage individual transactions, as you know from your previous 
experience. As it is now, it is almost impossible.
     I went through some of the cases, for example, that were 
here at the Senate Finance Committee, and I won't mention a 
particular case because we are not allowed to do that. I was 
looking at what can we do to follow up where there were clearly 
some indications that taxpayers were mistreated. Badly treated, 
as indicated here.
     Well, here is one that went on for 17 years. There were 
nine different organizational units that had major transactions 
that went wrong in this unit over a period of time, and that is 
organizational units. We really don't know how many employees 
it was.
     Many of these, in this particular case, involved some 
error prone systems that did not necessarily cause the problem, 
but contributed to the cause of the problem. If I look at that 
kind of situation and say, what do I do about it, yes, I want 
to try to go back and find out which employee made a mistake.
     But really, if I have a system like this that has this set 
of transactions on it, no matter what I do to find the 
individual employees, it is not going to solve the problem. 
Therefore, what do we do?
     We clearly have to follow up on these individual cases, 
and we will, and we have to provide appropriate disciplinary 
action where individuals can be found to be responsible.
     But I believe that is why I proposed a very, very 
fundamental set of changes that deals with completely revamping 
the organizational structure to get much more accountability 
and a much flatter organizational structure that redefines the 
management role so we can actually have accountability, so that 
we don't have to go back and look over 17 different 
organizational units to figure out who was responsible.
     To revamp these performance measures, update the 
technology and combine all of these things as well, I must say, 
these are the only things we are doing internally. There are 
also the legislative changes, which are very important.
     There is a whole series of provisions that Senator Roth 
added to the House bill, which deal with things like 
collections and examinations, the kinds of activities that have 
the most effect on taxpayers in that regard.
     It is really the combination of all these things, which is 
going to take time, which I think can dramatically improve the 
way that the IRS treats individual taxpayers. I am afraid that 
was a little bit of a long winded answer to your question, 
Senator, but that is the way I see.
    Senator Conrad. Well, if I could just conclude, because my 
time has ran out.
     I believe a flatter management structure is important to 
delivering services. One of the things that we learned in our 
operation is flatter management structure does a better job 
both ways. Second, the technology does need a dramatic upgrade.
     One of the things that always struck me when I was dealing 
with the IRS is our information systems, at the state level, 
were far superior to the Revenue Service's. Far superior. We 
tried to be on the cutting edge of technology because it did 
help us manage the case load in a way that allowed us to be 
more responsive and more effective.
     But the final point that I want to make to you is I also 
think, from what I have heard, that there has got to be 
improved feedback systems and monitoring systems to hold people 
accountable.
     There is something wrong right at the heart of the Revenue 
Service with respect to feedback systems, and you can't be a 
manager, and you can't hold people accountable unless you have 
feedback systems. I know that you will direct your attention to 
those as well.
    The Chairman. Let me get back, if we might for just a few 
minutes to some specifics. Yesterday, or a couple of days ago, 
we heard from the Transactional Records Access Clearinghouse, 
TRAC, about the inaccuracy of the figures.
     In a way, it goes to a question that you have raised, 
Senator Conrad. Really no one knows how widespread some of 
these practices are. So it is very difficult to evaluate each 
of these problems, how widespread they are.
     I was shocked by TRAC, which, of course, is associated 
with Syracuse University, saying that the CID statistical 
figures--or rather, the IRS reporting of statistical figures, 
such as indictments, prosecutions, convictions, were not 
accurate. They accused the IRS of hyping those numbers.
     This is a very serious charge because it makes it very 
difficult, as you well know, for us to have effective 
oversight, if we cannot trust the figures coming from there. Do 
you have any suggestions?
     I would certainly hope that this would be a matter that 
Judge Webster would look into, because I think it is critically 
important.
     Commissioner Rossotti. Well, actually, I think that we can 
even move faster than that. I happen to h ave met with Mr. 
Burnham and Ms. Long, who are the people who are the sponsors 
of TRAC, a couple of weeks ago and found out that they have 
been studying the IRS for a long period of time.
     We didn't try to sort out precisely what the difference 
was in these numbers, but I think I understood why there was 
this issue. I view this as something that is totally 
unnecessary for us to have, this difference in numbers between 
the Justice Department and between the TRAC figures.
     And one of the things that I committed to do is to work 
with them to try to come up with a more transparent set of 
numbers, which may not be totally reconciled with the Justice 
Department, because there are some differences in the 
definitions of what is accounted, but I think that the idea--it 
is similar to what I said on the audits, although we do publish 
statistics.
     They are just not clear. They are just not transparent, 
and there really has not been, in my view, a sufficient effort 
to work with groups like TRAC to make them more transparent.
     So, I think we can do that. That is a relatively easy one, 
as a matter of fact. It may take a little bit of time to do it, 
but we will do it.
    The Chairman. Now, some of our witnesses, as well as 
members of Congress, have advocated legislation which would 
provide a private right of action against IRS employees for 
misconduct. I would appreciate your point of view.
     Should IRS employees be held personally liable for damages 
caused by their conduct?
     Commissioner Rossotti. As I understand it, there are some 
limited circumstances. And again, this is an area I am just 
learning about. But, as I understand it, there are some limited 
circumstances in which individual employees can be sued, and 
then it is up to the Justice Department to determine whether 
they would be defended by the government or not.
     But I really think that that, on the whole, is not the way 
to go to answer these problems. I think that the answer is that 
the agency should take responsibility, should be accountable 
and should have better processes in place to hold employees and 
managers accountable.
     We have to be concerned also about how we actually attract 
and retain employees. I mean, if we make it too onerous, then 
we have, again, one of these unintended consequences where the 
best people will not come.
     So, I think that the more general answer to that, in my 
view, is to simply make the agency better managed to hold 
people accountable and certainly taxpayers have recourse, and 
more so in your bill, against the agency. But if there are 
problems with individual employees, we should, for the most 
part, be dealing with them ourselves in the agency.
    The Chairman. Well, some have raised the specter that if 
you have personal liability on the part of the employees, they 
will not actively support enforcement. An easy way to protect 
their own interest is to do nothing.
     Commissioner Rossotti. Well, that risk does exist with a 
lot of the things that happened here. Senator Chafee really 
made some excellent points there.
     We have to come up with a new way of managing it, new ways 
of measuring it and new ways of doing it. It is not simply a 
matter of saying we have to get rid of all these things, 
otherwise, we will not have an agency at all.
     We have a really creative building job here, not just a 
tearing down job, and that is why it takes a while.
    The Chairman. Let me turn to anther practice that came out 
of these hearings that deeply disturbed me. Some of our 
witnesses indicated that the IRS forced taxpayers to sign 
waivers that they would not sue the IRS or an IRS employee.
     Are you aware of this practice? Are there any written IRS 
policies or procedures which relate to the process of seeking 
waivers?
     Commissioner Rossotti. I honestly do not know the answer 
to that. I have to get back to you on that one, Mr. Chairman.
    The Chairman. Do you have any judgment on the practice 
itself? Should such waivers be permitted?
     Commissioner Rossotti. I think that is a very good 
question to look into. That certainly sounds like that is a 
practice that ought to be reviewed if it does exist, but I do 
not have that information to really answer that question.
    The Chairman. A number of witnesses did raise that.
     Commissioner Rossotti. We will get back to you with some 
views on that, Mr. Chairman.
    The Chairman. Let me make one comment. Earlier I talked 
about the problems of CID investigating and using intrusive 
measures, and I said that was partly because Congress broadened 
the jurisdiction of the IRS to money laundering and drug 
running and so forth.
     In saying that, I would hope you would investigate and 
give us your recommendation, or have your task forces do that, 
as to whether there should be some legislative correction in 
this area.
     Commissioner Rossotti. I will.
    The Chairman. I do not want you just to say, well, it is 
required of us.
     Commissioner Rossotti. That is an excellent suggestion, 
Mr. Chairman. We had not thought of that, but we will put that 
down and do it.
     The Chairman. Senator Moynihan.
    Senator Moynihan. Yes. Two things. One must have a little 
cheer here. This legislation that we will be bringing up Monday 
does do something that we have heard about, which is the 
disparity between what you can earn in civil service and what 
the lawyers and accountants we are up against are earning, and 
we create 40 individuals who you can pay up to the level of the 
Vice President's salary, which is $175,400. You can't pay 
yourself that.
     Commissioner Rossotti. That is all right.
    Senator Moynihan. I think, frankly, sir, the Commissioner 
ought to be at grade two in the civil service industry.
     Commissioner Rossotti. That is not important.
    Senator Moynihan. I know, but the next person might care. 
You are going to have the opportunity to bring some people in 
at a pay scale that is the highest in the government.
     Commissioner Rossotti. Senator, I sure hope that 
legislation passes because I am already recruiting people based 
on what is in that bill.
    Senator Moynihan. One question which you do not have to 
answer, but you might want to think about and give us a note 
about some time, is it is very clear that the practice of the 
confidentiality of tax returns, which is meant to be a 
protection for the individual becomes a complication in which 
nobody can find out what is going on or those who know cannot 
say.
     And when you cannot say, you frequently find out you do 
not bother to know; to learn. Is there some adjustment of 
confidentiality that would make for a greater transparency in 
what happens in the agency while it is protecting the 
individual?
    The Chairman. Could I make a comment on that?
    Senator Moynihan. Would you make a comment. Yes. You are 
Chairman.
    The Chairman. Senator Moynihan raises, I think, a very, 
very significant factor. The secrecy provisions were developed, 
of course, to protect the taxpayer. None of us have any 
disagreement with that. It is important.
     But the fact is that the right of privacy has been used as 
shield to protect the agency from real meaningful oversight.
     I can tell you we have been criticized because we only 
have a few cases, but, Senator Moynihan, to try to investigate 
those few cases is such a tedious, detailed, impossible task 
because of privacy, that it has been very difficult to have 
effective oversight. So you have hit right on the head one of 
the key problems.
     Commissioner Rossotti. Far be it for me to say I have a 
solution to this problem. I certainly acknowledge it. From my 
personal point of view, since I personally believe that one of 
the most basic principles to improve any organization is 
getting information out, I am interested in making as much 
information public as I can.
     Take this matter of the TRAC. I mean, t here isn't any 
reason why we should have these differences. When I got into 
it, and I met with Ms. Long and Mr. Burnham, one of the 
problems is that in order to reconcile their data and the 
Justice Department data and our data, you have to get down and 
identify, at least to some degree--you do not have to have all 
the data, but you have to have some degree on the individual 
cases.
     Well, right there, we are blocked from being able to do 
this. So we are going to try to figure out a way around it. It 
is an impediment to having open communication. Unfortunately, I 
am not sure how to reconcile that. I really have, frankly, not 
even had time to study that problem, and I certainly do not 
have any suggestions today.
    Senator Moynihan. But, sir, may we hope that you will, and 
when you have some thoughts, you will share them with us?
     Commissioner Rossotti. Sure.
    Senator Moynihan. Thank you very much, Mr. Chairman.
    The Chairman. Let me just make an observation. Someone 
commented earlier, rightfully, that the legislation that we are 
going to take up this coming week is not the total answer. I 
could not agree more.
     But we have got to start somewhere. The thing I want to 
emphasize and have the public understand, because I think it is 
important, Senator Moynihan, is that we are going to work 
together. The executive branch, the commissioner, this 
committee are going to be a team in trying to get the job done, 
because that is the only way we will get permanent changes.
     Let me tell you that we have evidence and information 
about what's being said in some parts of the IRS organization 
such as--well, we will just outlast the Commissioner. Or, we is 
only going to be here a couple of years and, you know, the 
Finance Committee, they will turn to something else tomorrow.
     That is not going to happen. We are going to work 
together, and we are going to work together over the long term 
because that is the only way you are going to correct the 
situation. One piece of legislation is not going to be the 
ultimate answer. We are going to have to continue to look at 
these problems.
     It is not a partisan matter. These problems go back to 
other administrations.
     What we are trying to correct is to make sure that this 
agency, when you and I leave, is the kind of organization that 
the public trusts and the employees are proud of.
    Senator Moynihan. Well said, sir.
    The Chairman. Senator Gramm.
    Senator Gramm. Mr. Chairman, let me say that I want to 
identify myself with both the things that you said and Pat 
said. I do think we are going to pass the bill, and so anything 
we know now that should be done, I think we ought to try to get 
it in this bill.
     I think it is clear that the confidentiality provisions 
are used to protect the agency, and I am not sure that some of 
it wasn't designed for that purpose. And I think, if we can 
find a way to fix it, we should.
     Let me also say, Pat, I strongly agree with you. We do not 
ever want to make it where public service is something that 
only rich people can do. I would be interested in working with 
you in looking at this salary structure. I think there are some 
people who are willing to do these jobs virtually for nothing, 
but they ought not have to.
     I have three questions. First of all, Mr. Rossotti, over 
and over again in listening to people in these cases where they 
were arguing that the IRS had been abusive--and, boy, the 
evidence seemed overwhelming to me--they made the point that in 
order to get the IRS to stop ruining their lives, they had to, 
among other things, sign an agreement that they would not sue 
the IRS.
     I am looking, very strongly, at offering an amendment to 
our bill banning those agreements. Can you tell me why I should 
not?
     Commissioner Rossotti. Well, I think we would have to look 
at the details of that. I think that is probably an area where 
some improvement can be made. I honestly cannot provide, 
precisely, the answer to that question.
    Senator Gramm. Well, if you would, and I am not trying to 
pressure you today.
     Commissioner Rossotti. Yes.
    Senator Gramm. But look at it over the weekend, because it 
is my plan now to offer this amendment.
     Commissioner Rossotti. We will.
    Senator Gramm. If the IRS comes into your place of business 
and is shutting you down and you are going to go broke, and 
they figure out, somewhere along the way, they made a mistake, 
and one of the ways you can get them to stop is to give up your 
rights to sue them, who would have a choice except to sign 
that? I think we ought to ban it.
     Commissioner Rossotti. From a personal standpoint, not 
having completely staffed this out everywhere throughout the 
government, I agree that there is something that should be 
looked at there, and I will get back to you.
    Senator Gramm. All right. We will try to be sure we are 
easy to reach. We will contact you.
     Commissioner Rossotti. Yes, sir.
    Senator Gramm. One of the things that worries me--I do not 
doubt your sincerity at all, and I am not saying this is an 
easy thing to solve. But it has to do with the difficulty of 
firing people.
     I guessed, from what you had said or did not say in 
response to Connie Mack, that there is no evidence of anybody 
that has been fired as a result of any hearing we have had. Is 
that right?
     Commissioner Rossotti. Let me just give you a statistic 
that I found out in preparing for these hearings. In terms of 
actually firing people, in the entire history of the senior 
executive services, about 7,000 senior executives in the entire 
Federal Government--and it was created in its current form in 
1979. So that is 19 years.
     My statistics, I think are right. I have got it in here. 
There have been 16 people fired, actually fired for misconduct.
     Now, does that mean there were only 16 people that were 
removed or in other ways gotten out? I do not think so, because 
I think, as in most organizations, in reality, in practical 
terms, most of the time, when there is somebody--unless they 
have really serious criminal misconduct, what happens is that 
they retire or they are moved out, and you just get them out of 
the way one way or another.
     So, when you really get down to the point of how many 
people are fired, if there were only 16 in the entire Federal 
Government in 19 years, it is pretty obvious that firing, in 
the narrow sense of the term, is not the main thing that 
happens.
     I think that the most important thing is can we move aside 
people that are not performing or not performing correctly, and 
can we bring in people that we need, which is actually the 
second part. It is the harder part.
     My conclusion is that it is very slow, but it can be done. 
And if you are determined to do it and you really make a 
distinct effort, you can do it. Some of the provisions in your 
bill will actually make it a whole lot easier.
    Senator Gramm. Well, any suggestions you have as to what we 
could do to make it easier for you to fire people who are 
abusive and who violate the procedures, would be very 
important.
     I would like your staff to get for me, if they could, what 
kind of penalty would be imposed, as a normal course of 
functioning, for an IRS agent who threatened a police officer 
who stopped him for a speeding ticket; that he would be audited 
if he wrote you the ticket?
     Commissioner Rossotti. We can get you that. I do not have 
it with me, but there actually is a guide.
    Senator Gramm. My view is that ought to be a firing 
offense. If that is proven, that is exactly the kind of thing--
I mean, it seems like a little thing, but it is a statement of 
a mentality that is bread by this closed system.
     And I think that at IRS, from the point of view of 
retribution, he who threatens to use an audit, that that single 
offense ought to get somebody fired.
     Commissioner Rossotti. Well, I can get you information.
    Senator Gramm. If you will get me what the penalty is so I 
can look at it.
     Commissioner Rossotti. Yes. We will get it for you.
    Senator Gramm. It probably ought to be a firing offense, 
and I know that sounds pretty strong and maybe there are 
extenuating circumstances----
    The Chairman. No. It does not sound strong. It sounds 
perfectly right.
    Senator Gramm. Well, I appreciate that. I think it is a 
real problem.
     Let me just say, in conclusion--and I want to thank you, 
Mr. Chairman for giving me the second round--I know that you 
have got to be torn between trying to run an agency that has 
got to collect money.
     And the one thing that I tried to say throughout these 
whole hearings is that I want to tough on tax cheats. It always 
make me nervous when we get in this business of rich people and 
poor people.
     I have got no sympathy for people that cheat on their 
taxes, whether they are rich or poor and whether they cheat 10 
cents or $10 million. They are both criminals, and they ought 
to be vigorously prosecuted, and we ought to go after them, 
unmercifully, within the law and within a system of checks and 
balances.
     But I know you have got to be torn between trying to 
collect this money, which we are spending pretty fast here, and 
wanting to do something about the problem.
     I would just like to say, in conclusion, as an outsider 
and in terms of morale of the IRS, I think firing about 50 of 
these people who are clearly abusing the system would be a good 
thing, if I worked for the IRS. Fifty 50 people who were 
clearly bad actors and who had brought disgrace on a profession 
that I cared enough to dedicate my life to. I would feel good 
about it.
     In trying to measure the terribly difficult job that you 
have of maintaining the morale of an agency that is being beat 
up on television every day, and you have got to go and tell 
your children, well, yeah, I work there, but I am not like 
those guys and that is not the way real people are there, I 
think that going through these cases and identifying these bad 
people and firing a whole bunch of them would be well received 
by your employees.
     I think they would appreciate it, and I think the American 
people would. So, I am not saying let's have a hanging just for 
display purposes, but I think----
    The Chairman. You are from Texas, aren't you?
    Senator Gramm. I think where hangings are due, after a fair 
trial, that they are justified. And I would think, if I were 
working at the IRS and all these accusations had been made, and 
if some of them checked out to be true, I would feel better if 
those people were fired.
     Commissioner Rossotti. All I can say is what I said in the 
testimony, is that although it is a laborious process, we are 
going to investigate every one of these allegations, as well as 
others, by the way, that I have initiated. And the Chairman's 
suggestion of having GAO help us with this is an outstanding 
suggestion.
     And when we get the results of this, through some process 
that we have, we will take action, and we will take the 
strongest that we can, recognizing there are all these 
guidelines and there are rules as to what we can do.
    The Chairman. Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman.
     You have got 110,000 employees. It is one of the largest 
enterprises in the world. Do you have any sense of--now, we 
have had a number of cases presented over this week in our 
previous hearings.
     In any large enterprise, private sector, public sector, we 
would anticipate a certain number of cases like this. Certainly 
you would find people within the agency or within the 
enterprise that feel aggrieved, feel they have been mistreated, 
feel they have been harassed, feel they have not been promoted 
when they should have been. That is true in any large 
enterprise.
     Do you have any sense, based on your private sector 
experience, if given the scale of this enterprise, if the 
Revenue Service is different in terms of employees operating 
inappropriately?
     Commissioner Rossotti. That is really a hard question to 
answer in any kind of statistical sense. I mean, for one thing, 
I do not have a way of answering, honestly, that question.
     I think that what we do about it though is probably not 
totally influenced too much by that. What my view is, using my 
airplane analogy, even if we have a few crashes, that is too 
many. We may recognize that statistically we will--using the 
airplane analogy again--some day have another air crash. But 
that doesn't mean we ever want to forecast it or anticipate it 
or accept it.
     We want to try to do everything we can to prevent it. So, 
I think that that is the answer.
     With respect though to the employees, I really want to 
make a comment about that, because I have had the time. I have 
probably talked to at least 1,000 of the IRS employees, either 
in large groups or small groups.
     They are, as the Chairman and others have said, for the 
vast majority of them, very dedicated employees, and they are 
very, very worried about where the IRS is. And that is one of 
my tasks, to reassure them.
     I think that in addition to the specific problems that we 
have heard here, you do have some normal stresses like other 
organizations have had. I mean, the IRS has been downsized. We 
have 10,000 fewer employees than we had 3 years ago.
     That creates stresses. There are not as many promotions, 
there are not as many replacements. There has been a 
consolidation of overhead in districts.
     As you know, in some of the districts it was very 
unpleasant and people had to lose their jobs or be reassigned 
to other places. We have had the public pressure, and the 
employees do really care about this.
     In addition to that, we are also going through, as in any 
large organization in America, the stresses that are part of 
the changes in society. We have different kinds of 
relationships than perhaps were traditional 10, 15 years ago 
between women and women; between people of different races.
     These create certain kinds of stresses in the IRS, as they 
do in other places. You add to that the more specific things, 
the more specific kinds of problems that have been identified 
here, and you do have an organization that I would say is 
highly stressed. And those come out in a number of different 
ways.
     Our challenge, and what I am hoping to do is, is to set 
this forth in a positive way to say, look, we can turn this 
around. We can build a new IRS.
     And if you look at my testimony, one of the three goals, 
which I absolutely believe is critical to making this work, is 
creating a work environment, a quality work environment, that 
provides the right kind of environment for the employees to be 
successful, because we won't provide good service to taxpayers 
unless we have a working environment that provides satisfaction 
for the employees.
     This is part of the challenge of moving this whole 
organization ahead, and it is a very difficult time, but I 
believe, with the help of the Congress, it can be done.
    Senator Conrad. Can I just go into one other matter, Mr. 
Chairman, that I think is important? Briefly.
    The Chairman. Briefly. Yes.
    Senator Conrad. This is a delicate area, but I think it is 
very important, and that is the use of statistical measures to 
determine what individuals and working entities within the 
Revenue Service due in terms of performance.
     It is totally inappropriate, in my judgment, to have 
quotas. When I ran a tax agency, we never had quotas. Ever. I 
never thought they were appropriate. But I must say there have 
been some developments in some things I have heard that strike 
me as throwing the baby out with the bath water.
     I mean, there is no way that I know to run any enterprise 
without the statistical measures on what people are doing in 
terms of performance. And if you are in collections, one 
measure of performance is how much you collect.
     Now, another measure ought to be that you do not abuse 
people and you do not cross the line in terms of the treatment 
of taxpayers. If you are in audit, there are statistical 
measures that are simply critical to evaluating whether a unit 
is performing or failing to perform; is using their resources 
effectively.
     Can you tell me how you approach this question of the use 
of statistical measures in evaluating performance? What is your 
intention on that?
     Commissioner Rossotti. Well, you are quite right, this is 
one of the most difficult areas that we are addressing and is 
one in which it is very unsettled right now.
     We are stopping doing things that were inappropriate, such 
as giving people, if not quotas, at least things that could be 
very closely interpreted as quotas, in the sense that you would 
have a very concrete goal of so much money per person down at 
the individual level or even the first line manager level, 
which is what was prohibited by the taxpayer bill of rights.
     So, we have stopped that. As I say, maybe there are a few 
people who didn't get the word, but that has stopped. The 
problem is we have somewhat of a vacuum right now because we 
have not developed the more appropriate kinds of measures, 
which are more balanced between the kind of thing that you were 
talking about--case quality; treatment of taxpayers; how the 
employee sees it.
     We know that we have to do that, but when you look at it 
in terms of the complexity of the IRS for all the different 
functions, examinations of all the different kinds of 
taxpayers, the geographical regions, this is not something that 
we do overnight.
     So where we are today is that for this fiscal year we have 
a very unclear situation--I am being very honest about this--by 
people around the agency as to what they are supposed to do and 
what they are not supposed to do, and we are going to try, even 
in the next few months, to at least do some clarification of 
that because it leaves a vacuum.
     More basically, we have a task force working with, again, 
another outside set of experts that are working on developing 
on interim set of measures for fiscal 1999 that will attempt to 
do those kinds of balancing, and even that will be far from 
perfect.
     I believe it is going to take two to 3 years to actually 
develop the right kind of measures for all the different 
functions, and even then it will not be perfect because we have 
got to do some even more basic things that relate to how the 
organization is structured and how we measure compliance and 
other things before we really get to where we want to go.
     So, I sound like a broken record, but we have got some 
short term things that we are doing. We do have a problem in 
this area. I really have to be honest with the committee.
     There is a certain amount of confusion. While we have 
gotten rid of things that have been ingrained for 25 years, we 
haven't put the new things in place. That is where we are right 
now.
    Senator Conrad. If I could just say, I think this is one of 
the most important things to do. You cannot manage an 
enterprise of this scale without statistical measures, and I 
would just urge you, as one idea, to go to some of the states 
to see what they are doing.
     Commissioner Rossotti. We will.
    Senator Conrad. Whether it is California or Massachusetts; 
that are well run, large enterprises and see how they are doing 
it.
     I thank the Chairman.
    The Chairman. Well, I think we all agree that it is 
important that you develop new performance standards. I do have 
to say it does concern me when you have individuals, under 
oath, coming forward and saying, for example, even now in the 
southeast area I believe it was, there were statistics being 
developed and people were being graded by how many seizures 
they made. If they didn't have enough, it was negative.
     Commissioner Rossotti. That shouldn't be. I was going to 
track that one down. I heard that testimony, and I am going to 
track it down. I mean, I think that we are getting close to 
stamping those kinds of things out, but it may be that there 
are some people who just didn't get it. But we will get rid of 
those.
    The Chairman. I have a couple of quick questions I would 
like to ask.
     Yesterday, we heard from IRS employees who testified that 
in certain cases potential tax liability has been zeroed out 
for reasons unrelated to their merits. Have you previously 
heard of this problem? Do you have a plan to address this 
problem?
     Commissioner Rossotti. In terms of that specific 
allegation, I think that is the one that should be checked out, 
if it was improper. I have not heard of that specific problem. 
I think that that gets to the question of, again, basic 
management.
     I mean, the purpose of a manager in managing an audit 
activity is to know what is going on and be accountable and 
there is, of course, data that tracks what those settlements 
are that is available to people up the line.
     I have not heard of that as a widespread problem or a 
particular problem, but we will look into that particular 
allegation. Not only follow up on that particular one, but see 
if there is something we can learn from it.
    The Chairman. Let me ask you this: As you know, we have 
heard a lot of serious allegations. You are familiar with the 
legislation that we are taking up next.
     Do you have any further recommendations or suggestions at 
this time as to how that legislation can be improved?
     Commissioner Rossotti. Well, the only specific one I have 
at this time is just the one that we have already sent you in 
the letter, which is just a practical issue of the effective 
dates on some of the provisions so we can get the computer 
systems in.
     There are a few minor tune ups, I would call them, on some 
of the personnel flexibilities that I would like to work with 
your staff on, basically so we can get the new people in.
     And then, of course, there are some issues that the staff 
is working on and some of the taxpayer rights issues that the 
Treasury is taking the lead on that I know we are working with 
you on. But my main statement on the legislation is that I 
think it is going to help a lot in terms of improving the IRS, 
and I really hope we can get it passed.
    The Chairman. I wish to announce that the record will 
remain open until 5:00 today for members who wish to pose 
written questions to the Commissioner. Members should send 
their questions to the chief clerk.
     We thank you for being here----
    Senator Moynihan. Mr. Chairman?
    The Chairman. Yes, sir.
    Senator Moynihan. Before we close, not to spoil things, but 
could I offer a positive note?
    The Chairman. Absolutely.
    Senator Moynihan. You put together a wonderful week of 
hearings, the second round. We have heard some horror stories, 
we have heard some great many charges, but no one has ever come 
to us to say that the Internal Revenue Service was used for 
political purposes by the administrations of any president in 
the past 20 years.
     The charges, the efforts to frame Senator Baker, Mr. 
Quillen, were just wholly specific to that particular office 
and this deranged agent.
     But whatever else it is, this could not be more important. 
It is clear that the Internal Revenue Service has kept itself 
out of American politics completely, and that is a badge of 
honor that we should not hesitate to display.
    The Chairman. There is actually a study going on concerning 
that matter. As far as I know, what you say is absolutely 
correct. And, of course, that is one of the reasons, I think, 
we are in the situation where an administration can only 
appoint one or, at most, two employees. The Commissioner and 
the counsel is the other one. And frankly, I think that is a 
problem.
    Senator Moynihan. Not enough political input.
    The Chairman. There is not enough oversight.
    Senator Moynihan. Yes.
     The Chairman. It is impossible for one commissioner and 
one chief counsel to adequately overview, and that is the 
reason I think it is important that he be given the opportunity 
to have his team there; that he can appoint people. Frankly, 
much of the problem is restructuring, legislation, the code. 
The code is too broad. It leaves too much discretionary power 
in the agency.
     But it is also the question of culture and management, and 
that is the reason we are lucky in having an individual with 
this background.
     Commissioner Rossotti, I want to thank you for being here. 
Thank you for taking on this heavy responsibility. I cannot say 
how important I think it is that everybody work together in 
trying to bring the solution. We can and will do the job with 
your assistance.
     Commissioner Rossotti. Yes, sir.
    The Chairman. I thank you again.
     Commissioner Rossotti. Thank you, Mr. Chairman.
    Senator Moynihan. Thank you, sir.
    The Chairman. The committee is in recess.
     [Whereupon, at 11:49 a.m., the hearing was concluded.]
                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


                 Prepared Statement of Hon. Max Baucus

    Mr. Chairman: One of the earliest controversies facing the newly 
independent United States of America involved the taxing powers of the 
federal government. After all, unjust taxes were among the chief causes 
of the War for Independence.
    But our founding fathers had fresh memories of raising an army and 
running an embattled government mostly on borrowed funds. They knew 
they would need revenue to provide for the common good. So, in an act 
passed by the very first Congress, we gave the central government the 
power to collect tariffs and taxes, so long as they were fair and 
uniform.
    During the last couple of months, in every household across the 
country, Americans went through an annual rite. They sat down at the 
kitchen table, pulled all their financial records together, and figured 
out what they owed the government.
    Nobody likes doing their taxes. And they probably dislike paying 
them even more. Yet the vast majority do it. And they do it honestly. 
Americans realize they have a bargain with their country, which it is 
their duty to uphold.
    They pay their taxes so that their money, when pooled together with 
the money contributed by all their friends, neighbors and fellow 
citizens, is used wisely ``for the common good.''
    Americans expect their money to defend their families from hostile 
nations. To educate their children. To provide for a clean and 
healthful environment. To improve their highways. To help keep them 
healthy. To help provide for them in their old age. And to give a 
helping hand to those going through hard times.
    In short, Americans expect their money to be used to pay for all of 
the things that help make this nation great. In return, though, the 
American people want their government to do two things.
    First, the American people want their government to treat them with 
respect and dignity as the revenue is collected. They expect to have 
their privacy respected, and to be treated fairly.
    Second, Americans expect that everyone else who enjoys the benefits 
taxes pay for will shoulder their share of the burden. That their 
neighbor down the street isn't hiding part of his income, and thus 
avoiding paying his fair share of the tax. That everyone is filing 
returns, and that the amounts claimed on those returns are accurate and 
true.
    Mr. Chairman, I truly believe the American people have the right to 
have both of these expectations met. And I believe we here in the 
Senate shoulder a great deal of the responsibility for making sure of 
it.
    We were placed on this Committee because, presumably. we understand 
the need for revenue to keep this country running. We also understand 
the grave responsibility that goes along with the power to tax.
    John Marshall said: ``The power to tax involves the power to 
destroy.'' It is our duty as members of this committee to make sure 
this country does not use its power in that fashion.
    How do we do that? We must stay above partisan politics and petty 
squabbles. We must make sure our laws reflect good public policy--that 
the tax code is used for the benefit of the American people.
    That is why I have watched the process we have gone through in 
anticipation of these hearings with a measure of personal regret and 
disappointment. I do not believe these hearings are balanced. I believe 
they fail to rise above partisan politics. And I do not believe they 
will ultimately benefit the American people.
    Mr. Chairman, if you look in Webster's New World Dictionary, under 
the word ``oversight,'' you will find it described as ``vigilant 
supervision.'' As Members of the Senate Finance Committee, we must be 
vigilant that individual taxpayers are being treated right by the 
Internal Revenue Service. However, it is every bit as important that we 
are vigilant to make sure taxpayers are treated fairly.
    Let me make it clear: I do not object to investigating the IRS to 
make sure it is operating correctly and treating taxpayers right. That 
is part of our responsibility. But I also believe we have a 
responsibility to look at the whole picture, not just place a spotlight 
on the issues that give political advantage to one party or another.
    How can we spend four days talking about a handful of cases that 
the IRS might or might not have mishandled, yet not spend a single 
minute talking about how some Americans are flouting the tax laws? Our 
entire system of collecting revenue would unravel if taxpayers stopped 
paying their fair share because they believed everyone else is 
cheating.
    Estimates of tax avoidance are soaring, with many believing the 
numbers could reach $100 BILLION per year. How can we ignore this 
issue, or ignore the dangers that IRS employees face every day as they 
try to do the job we have hired them to do?
    Mr. Chairman, we have a new Commissioner of the IRS, Charles 
Rossotti. He is an honorable man, and a good public servant. We have 
given him a mighty challenge--to reform an agency that has resisted 
reform in the past.
    He has asked us for a few simple tools to make the IRS work better. 
Changes in personnel rules, so he can put a good working team in place. 
The ability to reorganize the agency, so he can eliminate layers of 
duplication. Most of these provisions are included in the IRS 
restructuring bill that the House passed six months ago by a vote of 
426-4. That bill still awaits action by the full Senate.
    Mr. Chairman, if we are going to spend our time on these hearings, 
I wish they could be balanced. But since that apparently is not 
possible, I urge you to move quickly to pass a good IRS restructuring 
bill through the Senate.
    Passing a solid restructuring bill will do more to get the IRS on 
track than a hundred of these hearings where we sit, posture, 
pontificate and play politics.
    It is our responsibility as Members of this Committee. And, more 
importantly, it is our responsibility to the American people.
    Thank you, Mr. Chairman.

                               __________

                 Prepared Statement of Hon. Kent Conrad

     Thank you, Mr. Chairman. The series of hearings we begin today 
will be useful if they help us find ways to help the IRS become more 
responsive to the needs of taxpayers--a task the committee has been 
pursuing for many months.
     We know the IRS has had management problems. Commissioner Rossotti 
is bringing a professional manager's approach to the agency, and we 
look forward to hearing from him later this week to find out what he 
has been able to do in solving the problems that this committee's 
hearings have uncovered.
     If we are going to be serious about helping taxpayers, the best 
thing the Senate could do would be to pass the IRS reform bill that 
this committee approved unanimously almost a month ago. Personally, I 
am disappointed that we have delayed getting this bill to the floor.
     Finance Committee bill would provide more protection for innocent 
spouses pursued by the IRS for tax liabilities they never knew about. 
It would provide significant relief in the tax penalty area. It would 
also give the Commissioner the tools he needs to deal quickly with IRS 
employees who engage in abusive and coercive behavior.
     When IRS employees cross the line, the Commissioner needs to put a 
stop to it. Abusive behavior should not and cannot be tolerated. When 
IRS personnel violate the agency's rules and standards of conduct, 
swift punishment and correction must follow.
     We have an important national interest in an IRS that is 
efficient, well managed and fair to citizens who must deal with it. 
When it fails to respect the taxpayers--who, after all, are paying for 
the agency--it breeds disrespect for the system.
     I expect to see this committee insisting on more accountability 
when it comes to overseeing the IRS. Government agents who deal with 
citizens as directly as IRS agents do must be held to the highest 
possible standards.
     It is a shame that taxpayers have gone through yet another filing 
season without the benefit of those additional protections our bill 
would provide. We worked with Commissioner Rossotti in shaping that 
bill to respond to what he--as well as taxpayers themselves--have been 
telling us face-to-face about how the agency could be improved. 
Enacting that bill ought to be our top priority.

                               __________

                  Prepared Statement of David Crockett

    I am David Crockett, named after a distant relative of mine who 
once served in Congress. I have served as District Attorney General for 
the First District of Tennessee for the past 16 years. I am presently 
engaged in a campaign seeking election to my third eight year term in 
that office. I previously served 10 years as an Assistant District 
Attorney. I am a graduate of East Tennessee State University and the 
University of Tennessee College of Law. I served 4 years as a Captain 
in the Judge Advocate General's Corps of the United States Army during 
the Vietnam Conflict, concluding my service as Chief of the Military 
Justice Division at Ft. Jackson, South Carolina.
    I, like Senator Baker and Congressman Quillen, was a target of an 
IRS agent who was assigned to East Tennessee in the mid 1980's. I first 
became aware of this agent when his car hit another automobile on N. 
Roan Street in Johnson City, Tennessee, after he left a local bar. The 
agent was charged with DUI. He refused a breathalyzer test and 
successfully defended the charge aided by the testimony of several 
other federal agents and employees who swore that he was not under the 
influence of an intoxicant.
    Since a member of my staff prosecuted him, thin agent apparently 
included me in a plan he formulated for revenge and career advancement. 
He, shortly after his acquittal, began proclaiming publicly in bars and 
restaurants that he was going to get Senator Baker, Congressman Quillen 
and me. He said that we were ``crooks and tax cheats.'' Frankly, I was 
a bit flattered to be included in such distinguished company as Senator 
Baker and Congressman Quillen. However, the repeated accusations by 
this agent, frequently when he was drinking in bars, eventually led to 
an investigation of me that continued for several years, first by the 
IRS and later by some of his friends with other federal agencies. No 
charges were ever placed nor was any action ever taken, in fact, the 
investigation simply died without me ever being formally advised that 
it had ever existed. Yet even today, the damage done by this agent 
still lingers, particularly around election time. Reputations are 
delicate things which once lost are difficult to regain.
    I know now that these courageous agents and employees of the IRS 
who are here today and who previously testified did intervene and some 
sacrificed their careers to stop this rogue agent. To them today, I 
want to publicly and formally express my deepest appreciation and 
gratitude for what they did.
    As for this IRS agent, well his drinking seemed to get worse, yet 
he continued in his job until one night in Knoxville when he and a 
relative were caught with a quantity of cocaine in their vehicle. The 
agent tried to bluff his way out of trouble by telling the local deputy 
that he and his relative, (a nephew I believe), were engaged in an 
undercover operation for the IRS The local deputy persisted and 
contacted the agent's superior, who, of course, knew nothing of such an 
``operation.'' After this episode, the agent's friends could no longer 
protect him and he was subsequently fired from his position. Somehow, 
he avoided prosecution for cocaine possession in Knoxville, which is 
not within my district. This agent's ambition to get some ``big 
people'' to advance his own career was wrong and the failure of those 
in management who protected him was disgraceful, particularly when 
management turned their animosity upon the few agents of integrity who 
tried to bring this agent to their attention. These agents of honor are 
the true heroes of this story.
    If anything can be learned from this episode it is that we average 
Americans, who work every day and pay our taxes, still fear the IRS 
whose agents can, by virtue of their positions, destroy lives and ruin 
careers. If our story can help prevent others from being targeted 
unjustly, and insure better supervision of IRS field agents, then our 
time here today will have been well spent.

                               __________

               Prepared Statement of Hon. Alfonse D'Amato

    Mr. Chairman, I commend you for your leadership in holding 
additional oversight hearings on the practices and procedures of the 
IRS. Our past hearings exposed major problems within the agency, 
including abuses of power and egregious mistreatment of taxpayers. And, 
although the IRS reform legislation, passed unanimously by this 
Committee, goes a long way to bring about the change needed to restore 
taxpayer confidence in our system, in the final analysis, what is truly 
needed is continued Congressional oversight of the IRS.
    Besides continued oversight, we must ensure that IRS officials who 
encourage or mandate taxpayer mistreatment are held accountable and 
removed from their positions of authority. The stories relayed in 
yesterday's hearing were as shocking as those heard in past hearings. 
Targeting a taxpayer's representative for audit or other investigation 
because he vigorously defends his client, and blatantly ignoring policy 
that requires contact with a taxpayer's representative is conduct 
beyond comprehension. But, to intentionally put a very ill taxpayer in 
harms way, is totally reprehensible. Until the agency and its 
responsible employees are held accountable for these egregious acts, 
this Committee's oversight role must not end.
    I applaud Commissioner Rossotti's efforts to improve the IRS. His 
recent announcement to appoint Judge William Webster (the former FBI 
Director) to review the Criminal Investigation Division (CID) is 
further evidence of his commitment to effect fundamental change at the 
IRS. I trust that these efforts will also include a careful look at top 
management officials to ensure that fundamental change to the IRS 
culture is of paramount consideration.
    Thank you, Mr. Chairman.

                               __________

                Prepared Statement of Robert Edwin Davis

    Mr. Chairman and members of the committee:
Identification and Personal Background
    My name is Robert Edwin Davis. I am an attorney, and I have 
practiced law in Dallas, Texas for almost 40 years. During most of 
those years, the greatest part of my practice has been devoted to 
representing taxpayers in civil and criminal tax litigation and 
controversies with the Internal Revenue Service (IRS) and the 
Department of Justice. During the years 1982 and 1983, however, I 
served as Deputy Assistant Attorney General in the Tax Division of the 
Department of Justice in Washington, D.C. I was then responsible for 
overseeing the functions of the Criminal Section and Review Section 
(large civil case settlements) of the Tax Division. I think it would be 
fair to say that there are few attorneys in the United States who have 
handled more civil and criminal tax cases on behalf of taxpayers than I 
have since 1960.
Description of Issues to be Discussed
    Tax collecting has always been an unpopular calling. From biblical 
times to the present, there have been few--or no--warmly regarded tax 
collectors. Most of the employees in the IRS are sincere and honorable 
people, going about their thankless work of administering the rules and 
policies adopted by Congress, the Treasury Department and senior IRS 
officials.. However, my personal experience is that all is not well 
with our tax system, and I believe that (1) the IRS has, to a 
significant extent, strayed from its proper path; (2) there is 
excessive use and misuse of intrusive and even oppressive investigative 
techniques within the Criminal Investigation Division (IRS CID); and 
(3) there are sometimes serious integrity issues within the agency, but 
that the IRS Inspection Service (IRS-Inspection) is simply not up to 
the task of investigating and correcting IRS agent misconduct when it 
does occur. I would like to present my views on these subjects to the 
Committee over the next several minutes, and in a supplemental written 
statement.
Excessive Use and Misuse of Intrusive Investigative Techniques by the 
        IRS CID
    Fifteen years ago, when I was the Criminal Deputy in the Tax 
Division, criminal tax enforcement practices were almost totally 
different from those which are encountered today.
   ``Undercover'' investigative techniques were almost entirely 
        unknown in criminal tax matters;
   Search warrants were used in criminal tax cases only a dozen 
        times in an entire calendar year;
   Grand jury investigations were a rare exception, and 
        administrative investigations were the rule.
    Today that is dramatically changed, and the use of these much more 
intimidating and intrusive techniques is commonly encountered. For 
example, search warrants are executed in criminal tax investigations 
today some twenty times as frequently as they were then.
    It is not surprising that these changes have occurred. As the IRS 
CID has been increasingly used in the suppression of drug and organized 
criminal activity, its special agents have learned the investigative 
techniques which are employed by the DEA, the FBI and local law 
enforcement to deal with violent and dangerous criminals. These 
investigative strategies are then ``borrowed'' and used by IRS CID in 
routine criminal tax investigations of taxpayers who are neither 
dangerous nor violent. Many of us believe that this is a very bad tax 
enforcement policy. Today, we see too many ``cowboy'' agents, as they 
are called, who are undisciplined and inadequately controlled, and who 
think that the end (putting away the ``bad guys'') justifies the means 
(intrusive, intimidating and oppressive investigations). Let me give 
you an example of the kind of abuses which concern me.
An Example: Executing A Search Warrant to Obtain An Appraisal of 
        Residential Furnishings
    One summer morning in June of 1994, approximately ten IRS special 
agents appeared at a private residence at 7:30 a.m. They knocked on the 
door, which roused the only resident of the home from her bath. This 
resident, ``Sally,'' was a 45-year old woman who was living in a home 
which had formerly been owned by her grandmother. She put on a bath 
robe and responded to the knock at the door. There were approximately 
ten IRS special agents in her yard and on her porch, one of whom 
presented a warrant to search her house. The agents then entered her 
house. She was told she could either leave or stay, but if she left she 
would not be permitted to return so long as they were at the house. She 
elected to remain, and she was confined to one bedroom, where she 
remained in the presence of a female IRS agent. The remaining agents 
searched her home for about eight hours, and then left. The only 
property which they ``seized'' and took with them when they left were 
some 86 old family photographs, many of them taken at Christmas 
gatherings. Sally was very upset by this forceful intrusion into her 
home. She missed an entire day of work, and had no idea why the ten 
agents had entered her house and taken the family photographs.
    Later, Sally discovered the real reason for the invasive search. It 
was not to seize contraband, weapons, drugs or evidence of any crime. 
Instead, the agents had brought with them a furniture appraiser who 
went from room to room valuing the beds, sofas, chairs, tables and 
other personal effects which had been left in the house by her 
grandmother at the time of her death two and one-half years earlier. 
The Internal Revenue Service agents believed that Sally's father, the 
executor, had undervalued the furniture on her grandmother's estate tax 
return. Sally was not a suspect or in any way involved in the estate 
tax issues, and her father did not live in the house with her. The 
criminal investigation of Sally's father was later abandoned by IRS 
CID.
    The extravagant loss of agent time in preparing for and executing 
this ``raid'' on the home of an admittedly innocent party who was not a 
suspect at all was utterly needless. A simple telephone call to Sally 
would have resulted in consent for the IRS appraiser to inspect and 
appraise the furniture. Intimidating and intrusive ``searches and 
seizures'' are wholly unnecessary to develop valuation cases involving 
household furnishings. That was, in my opinion, one ``search and 
seizure operation'' which should never have been authorized or 
executed.
    Several years later, after I demanded their return, the IRS 
belatedly gave back the 86 family photographs.
Intrusive Investigative Techniques Should Not Be Used in Routine 
        Criminal Tax Investigations.
    I believe, as do many others, that kicking down doors, wearing body 
armor, carrying automatic weapons and bursting into people's homes with 
large raiding parties are techniques which should--if used at all--be 
reserved for investigations of dangerous and violent criminals. IRS CID 
should do what it was created to do: pursue the enforcement of the 
internal revenue laws, and it should leave violent and dangerous 
criminals to the DEA, FBI and local law enforcement authorities. The 
exceptions to this rule should be very limited.
    I would also like to speak briefly on the subject of undercover 
operations. Some of us also believe that the deceit and 
misrepresentation which are inherent in undercover investigations and 
``sting'' operations have no proper place in routine criminal tax 
investigations. Successful criminal tax prosecutions have long been 
made in this country without them. The IRS does serious and needless 
damage to its image and relationship with the public--and government as 
a whole--when it lies to and deceives taxpayers in routine criminal tax 
investigations.
One Final Appeal: Simplify Our Tax Laws
    There is a pervasive national frustration with our federal income 
tax system, which is far too complex and unintelligible to be fairly 
and uniformly administered by the IRS. Further, our tax laws cannot be 
understood or complied with by the great majority of our taxpayers. 
Indeed, it is my observation that even well-trained tax professionals 
frequently cannot comprehend and work competently with the Internal 
Revenue Code. I would respectfully urge that it is time for a major 
simplification, or some other fundamental change in our income tax 
laws.

              Supplemental Statement of Robert Edwin Davis

    Mr. Chairman and members of the committee: I would like to submit 
for the consideration of the Committee and its staff some additional 
information which it is hoped may be useful in your deliberations 
regarding IRS integrity and conduct issues. In this supplement to my 
oral statement, I will briefly describe some actual matters which have 
been presented in my practice. They are described in a way which 
deletes any reference to the names of either individual taxpayers or 
IRS personnel.
The IRS Inspection Service (IRS-Inspection) and the Office of Inspector 
        General of the Treasury (OIG-Treasury) Should Not Have 
        Exclusive Authority Over IRS Agent Misconduct Issues
    My professional experience has taught me to be seriously skeptical 
about the capacity and resolve of the IRS-Inspection to identify, 
investigate and fairly evaluate claims made by taxpayers and their 
representatives regarding IRS agent misconduct and abuse. I will 
acknowledge at the outset that many taxpayer complaints about IRS agent 
misconduct are unfounded, or at best, are only partly justified. I am 
personally satisfied, however, that serious agent misconduct has 
occurred and does occur today. I am also fully satisfied that IRS-
Inspection is not the place to repose the exclusive power and 
responsibility to investigate and resolve these issues.
    It is my opinion that IRS-Inspection investigators are often too 
close to the very personnel and offices which they are assigned to 
investigate. Further, some IRS-Inspection investigators seem to feel 
that their own agency suffers a ``black eye'' when agent misconduct is 
identified or confirmed. As a result, they often cannot and do not view 
taxpayer reports of agent misconduct with objectivity, and do not 
pursue them with appropriate zeal. I believe that is especially true 
regarding allegations of misconduct by IRS CID personnel.
    Our national experience with police departments across the nation 
confirms one conclusion: the public does not have confidence that 
police investigators will objectively investigate allegations of 
misconduct by their own fellow officers. That public skepticism is 
justified. Similarly, ``letting the IRS investigate its own'' has not 
worked satisfactorily in the past, and it should not be relied upon in 
the future. I would like to provide the Committee with an example.
IRS-Inspection Punishes Taxpayer Complainant
    Several years ago, I represented a taxpayer in a criminal tax case 
whom I shall call ``Joe Smith.'' Mr. Smith and two of his employees 
provided me with affidavits asserting serious misconduct on the part of 
two IRS special agents, including perjury. Because I was skeptical 
about these claims, I asked these three witnesses whether they would 
agree to submit to a polygraph examination. Thereafter, Mr. Smith and 
the two employees individually passed separate polygraph examinations 
administered by a highly-skilled polygraph operator. I was assured by 
the polygraph operator that, in his professional opinion, my client and 
his two employees were telling the truth. The client and I believed 
that this serious agent misconduct should be presented to the IRS-
Inspection. Because a criminal indictment of Mr. Smith was then 
pending, we negotiated a direct and explicit agreement with the IRS-
Inspection: that it would consider the taxpayer's complaint, including 
photographs, affidavits of Mr. Smith and his staff, as well as the 
results of three polygraph examinations, but that none of these 
materials would be disclosed either to the special agents or the Office 
of the United States Attorney prosecuting the case until after the 
criminal case was concluded. Not only did the IRS-Inspection accept 
that information, they also interviewed Mr. Smith and asked for other 
information as well. All information the IRS-Inspection requested was 
provided.
    Notwithstanding the direct and explicit agreement that the 
materials provided by Mr. Smith would remain confidential until after 
the trial, investigators for the IRS-Inspection very promptly violated 
that agreement, and delivered over all of these materials they had 
obtained from Mr. Smith to the prosecutors and the special agents in 
order to aid them in prosecuting Mr. Smith. Thus, the IRS-Inspection 
served as a conduit of information harmful to the complainant in 
violation of its clear promise that it would not do so.
    That same special agent misconduct was a major issue in the 
criminal trial of Mr. Smith. Fortunately, the jury correctly assessed 
the evidence, and found the testimony of Mr. Smith and his two 
employees was truthful. As a result, Mr. Smith and his codefendant were 
found to be innocent of the tax crimes charged after less than one hour 
of jury deliberation.
    Both the jury and the polygraph operator believed Mr. Smith and his 
two employees when they accused the two agents of perjury and other 
wrongful conduct, yet it is evident that no thorough investigative 
effort was ever pursued by IRS-Inspection, and apparently no corrective 
action was ever taken with respect to the two agents. Furthermore, no 
disciplinary action was taken to punish the IRS-Inspection 
investigators who promised that the information given to IRS-Inspection 
would not be given to the special agents and prosecutors until after 
the trial, and then consciously and deliberately violated that promise. 
OIG-Treasury also later reviewed the case and met with Mr. Smith. No 
corrective action was ever taken by OIG-Treasury.

                               __________

                 Prepared Statement of J. Earl Epstein

    Mr. Chairman, my name is Earl Epstein. I am a practicing lawyer and 
a member of a small law firm in Philadelphia, Pennsylvania. I 
appreciate the invitation to testify before this Committee.
    For the past 35 years I have been engaged in the private practice 
of tax law and during that period of time have represented numerous 
taxpayers before the Internal Revenue Service. Of particular importance 
today is my experience in representing taxpayers who have been subject 
to collection proceedings by the Collection Division of the Internal 
Revenue Service.
    As I am sure you are aware, the stated ``Mission'' of the Internal 
Revenue Service is ``. . . to collect the proper amount of tax revenue 
at the least cost; serve the public by continually improving the 
quality of our products and services; and perform in a manner 
warranting the highest degree of public confidence in our integrity, 
efficiency, and fairness.'' The Services' ``Statement of Principles'' 
goes on to say that administration should be conducted ``with great 
courtesy and considerateness . . . should never try to overreach, and 
should be reasonable within the bounds of law and sound 
administration.'' These statements of principle are well publicized and 
can be found posted in Internal Revenue Service waiting rooms around 
the country. Unfortunately, taxpayers and their advocates have not 
always found these principles to be followed with any degree of 
consistency by the Collection Division.
    By these remarks I do not mean to suggest that all Internal Revenue 
Service Agents harass taxpayers, nor do I mean to suggest that all lie 
or overreach. Indeed, most IRS personnel that I have dealt with over 
the years are hardworking, honest people who give their best efforts to 
administer a confusing and difficult system in a fair and honorable 
manner. However, it is also clear to me that harassment and 
overreaching by the Collection Division of the Internal Revenue Service 
is far from isolated and that. indeed, it could not continue at the 
rate that I have seen over the years without institutional approval of 
these practices, whether that be an active approach or by passive 
approval.
    Following your hearings on abuses of the Internal Revenue Service 
last year I was somewhat chagrined at the contention of the Service 
that reports of their misbehavior were ``exaggerated examples of rare 
instances of inappropriate actions.'' This has not been my experience 
with the Collection Division. In that context I would like to relate to 
you just a few examples of the kind of unfortunate experiences which I 
have faced in my years of practice before the Collection Division of 
the Internal Revenue Service:
   Just a few months ago the Internal Revenue Service filed a 
        lien against a joint bank account held by a husband and wife as 
        tenants by the entireties. The debt for taxes, however, was 
        only that of the husband. Under Tennessee state law, which 
        applies in this instance, the lien is improper and may only be 
        filed against the survivorship interest of the husband, not the 
        present interest of the wife in the joint account. The 
        controlling case issued by the Tennessee Supreme Court was 
        cited to the Collection Division in Memphis. Nevertheless they 
        refused to release the lien, thereby placing a hold on the 
        funds of the wife, my client, which she sorely needed to feed 
        her children. Short of litigation, which was not economically 
        feasible in this instance, nothing could be done to persuade 
        the collection people in Memphis to release the lien.
   About two years ago a Collection Agent, attempting to 
        collect unpaid withholding tax, told my client that he could 
        pay the tax by a check from the attorney representing him at 
        that time and that, if he would do so, he would receive credit 
        against his personal withholding tax liability. After the 
        payment was made as directed, the Collection Agent instead 
        credited the payment to the corporate debt, rather than the 
        personal liability of the taxpayer. When I later brought this 
        matter to the attention of the agent, he denied his promise to 
        credit the personal liability and then, when I confronted him 
        with his oral agreement, he laughed and told me that ``it 
        wasn't in writing.'' This forced my client to pay an additional 
        $30,000 in tax with no recourse under the law.
   A few years ago a Collection Agent appeared in my office and 
        told my secretary that he wanted to consult with me on a 
        personal matter. When I invited him into my office he proceeded 
        to identify himself as an agent of the Collection Division of 
        the Internal Revenue Service and demanded access to my files on 
        one of my clients, a clear violation of the attorney client 
        privilege and clearly not a consultation on a ``personal 
        matter.'' When I asked him why he had lied to my secretary he 
        merely laughed and told me that ``sometimes we have to do 
        that.'' Of course, I threw him out of my office and wrote to 
        the Commissioner of Internal Revenue to report his action. I 
        was later advised by the office of the Commissioner of Internal 
        Revenue that the Agent received an unspecified disciplinary 
        action.
   Some years ago I represented a woman who owned and operated 
        a small beauty shop. The Collection Division had placed a lien 
        on her shop for unpaid taxes of approximately $175 and 
        proceeded to sell her shop equipment at auction, thereby 
        putting her out of business and embarrassing her in front of 
        her customers and friends. At the auction she had displayed to 
        the Collection Agent her canceled check with which she had paid 
        the claimed tax. The agent refused to listen to her and 
        proceeded with the sale. Subsequently I was retained as her 
        counsel. I obtained copies of the computer records of her 
        account from the Internal Revenue Service and was able to show 
        how they had made an erroneous double entry of the tax due on 
        their computer system, thereby making it seem that the taxpayer 
        owed tax when, in fact, this was not the case. Although the 
        Service acknowledged the error to me, they refused to make any 
        effort to make my client whole, even refusing to repay the 
        excess tax which they had collected by the sale of her property 
        on the grounds that the Statute of Limitations had expired on 
        the refund. Since the amount did not justify the expense of a 
        refund action in the United States District Court, and since 
        the law at that time did not permit an award of damages, there 
        was little I could do for her other than to write to her 
        Congressman to describe to him what had occurred. As a result 
        of that letter a private bill was introduced in the House of 
        Representatives which would have permitted her to bring an 
        action against the United States for damages in order to 
        compensate her for her loss. Unfortunately, the bill died in 
        committee. She was never compensated and never received an 
        apology. Her only solace was her ability to display the draft 
        of House Bill to her friends.
   For years a particular Collection Agent in Philadelphia lied 
        to me repeatedly on a number of cases. In order to protect the 
        guilty I will refer to him as Agent ``M.'' I reported his 
        actions to his supervisor on each occasion. On at least one 
        case he was thereafter removed from the case and another agent 
        assigned. Nevertheless Agent ``M'' appeared again and again on 
        cases I was handling and was obviously never sufficiently 
        reprimanded or dismissed for his conduct.
   Some years ago I represented a taxpayer who had been 
        severely harassed by the Government over a period of some ten 
        years, first by bringing two criminal actions against him, both 
        of which were dismissed by the Court, and then bringing a civil 
        action against him alleging income tax fraud, to collect tax on 
        the very allegations which were the subject of the dismissed 
        criminal suits. The matter was brought to the United States Tax 
        Court.
   In an effort to settle the Tax Court case we submitted an 
        Offer in Compromise along with the required statement of assets 
        and liabilities, executed under penalties of perjury. Our 
        friend, Agent ``M'' then instituted a criminal investigation 
        against my client but refused to tell me why he had done so, or 
        on what grounds he felt a crime had been committed. In a 
        hearing to quash a subpoena issued against my client a Judge of 
        the United States District Court in Philadelphia forced Agent 
        ``M'' to disclose the grounds of the criminal investigation. It 
        turned out that Agent ``M'' had decided on his own that my 
        client had failed to list a number of stocks on the Offer in 
        Compromise submission and therefore proceeded to push the 
        criminal investigation for lying under oath on the Offer form. 
        When informed of the grounds of his investigation I was able to 
        easily produce the stock certificates in the name of my client 
        as custodian for his children under the Uniform Gifts to Minors 
        Act, thereby showing that my client had no legal right to the 
        stocks and did not own them. As a result, my client had not 
        lied under oath on the Offer in Compromise submission. Agent 
        ``M'' had no compunction about harassing my client on false 
        grounds which could have been easily explained had he been 
        forthright and open in his dealings with me. My client, of 
        course, had to bear the cost of these proceedings.
      During the course of the previously described hearing in the 
        District Court, Judge Norma Shapiro Court ordered Agent ``M'' 
        to cease all efforts at collection and investigation and 
        specifically forbade the agent from any contact with the 
        taxpayer or his family pending a ruling by the Court on the 
        validity of the claim which, of course, she later determined to 
        be invalid. Blatantly ignoring the order of the Court, Agent 
        ``M'' visited the home of the taxpayer's 80 year old mother at 
        five AM the next morning, threatened her, and demanded entrance 
        to search her garage. When the Court was advised of his actions 
        Judge Shapiro severely reprimanded Agent ``M'' in open court.
      When the civil fraud case was eventually tried in the United 
        States Tax Court, the Court found for the taxpayer and 
        criticized the Internal Revenue Service, stating that the 
        actions of the Government could well have been viewed as a 
        personal vendetta against him. But, of course, that criticism, 
        although welcomed by the taxpayer, did nothing to repair the 
        damage that years of harassment caused him, nor did it 
        compensate him for the cost of two criminal trials, one 
        suppression hearing, and a Tax Court trial.[1]
    In 1977 the Congress amended the Consumer Credit Protection Act to 
include a new section known as the ``Fair Debt Collection Practices 
Act.''[2] That Act provides for a standard of conduct for debt 
collectors of ``consumer debt,'' is designed to prevent ``abusive, 
deceptive, and unfair debt collection practices . . .''[3] and provides 
for prevent civil penalties and damages for violation of the Act.[4]
    Among other things it regulates the kind and place of 
communications with the debtor[5], defines and prohibits false or 
misleading representations,[6] and defines and prohibits unfair 
practices.[7] Unfortunately, the Act does not cover actions by an 
officer or employee of the United States to the extent that collecting 
any debt is in the performance of his official duties.[8] This 
exclusion is unfortunate in that, by implication, it permits an 
employee of the Internal Revenue Service to engage in ``abusive, 
deceptive and unfair debt collection practices'' that is prohibited in 
the private sector.
    I would urge this Committee to give careful consideration to 
legislation making the Internal Revenue Service subject to the same 
rules of conduct which the Congress has imposed on the private sector, 
an interesting sidelight of which is a requirement of annual reports to 
the Congress assessing the extent to which compliance is being 
achieved.[9]
                                endnotes
  [1] You may read the report of that affair, and the opinion of the 
        Court in Apothaker v. Commissioner, T.C. Memo 1985-445.
  [2] Public Law 95-109, 95th Congress; 15 USC  Sec. 1692 et seq.
  [3] 15 USC Sec. 1692(a).
  [4] 15 USC Sec. 1692k.
  [5] 15 USC  Sec. 1692c.
  [6] 15 USC Sec. 1692e.
  [7] 15 USC Sec. 1692f.
  [8] 15 USC Sec. 1692a(6)(C).
  [9] 15 USC Sec. 1692m.

                               __________

                    Exhibit Submitted by Mr. Jarvis

[EXHIBIT A]

    This agreement is made this [9th] day of [November] 1993, by [Billy 
W. Jarvis] hereinafter known as the informant) and the Internal Revenue 
Service (hereinafter known as the IRS) by and through the Commissioner 
of the Internal Revenue Service.

WHEREAS the Informant has possession of, or access to, certain 
knowledge and information relating to an alleged violation of the 
Internal Revenue laws; and

WHREREAS the Informant shall provide information in a written form 
which may lead to the collection of a substantial amount in unpaid 
taxes from the persons and entities identified on Exhibit ``A'' hereto 
(hereinafter ``Taxpayers'' when not identified by name) for the tax 
years set forth on said Exhibit ``A''; and

WHEREAS the Commissioner of the IRS is authorized, pursuant to Internal 
Revenue Code (hereinafter IRS) Section 7623 and Treasury Department 
Order 150-10, to approve payments for information assisting in the 
detection of violations of federal statues administered and enforced by 
the IRS:

NOW, THEREFORE, in consideration of the mutual promises and covenants 
contained herein, the Informant and the Commissioner agree as follows:

          1. The Informant agrees to be debriefed by representatives of 
        the Internal Revenue Service within thirty (30) calendar days 
        of the execution of this agreement regarding the violations of 
        the Internal Revenue laws referenced above. The Informant shall 
        at that time, and thereafter provide information and evidence 
        in a written form consisting of memoranda, letters, books, 
        records, accounting work papers, summaries, tax returns, and 
        any other items that are considered common evidence in matters 
        of tax fraud and other financial crimes.
          2. The Informant shall assist the IRS in any criminal 
        investigation or civil examination relating to a violation of 
        the Internal Revenue laws by the taxpayers.
          3. The Informant shall, upon reasonable request by the IRS, 
        wear a surveillance device for the purposes of monitoring 
        conversations between the Informant and other persons 
        concerning or related to violations of the Internal Revenue 
        laws and related to the taxpayers.
          4. The Informant shall be identified only as ``Informant'' in 
        any affidavits for search warrants relating to information 
        provided by the Informant.
          5. The Informant shall testify before the Tax Court, District 
        Court, Grand Jury, or any other forum investigating such 
        allegations and shall testify at any hearing, trial, 
        administrative proceeding or other judicial proceeding which 
        may arise therefrom.
          6. The Informant understands that at some point in the 
        judicial or administrative process the Informant's true 
        identity may become public knowledge. No IRS official will 
        disclose the Informant's identity unless required by law or 
        ordered by a federal judge or magistrate to do so.
          7. The IRS will pay to the Informant amounts per the below-
        outlined schedule of the net taxes, fines and penalties (but 
        not interest) collected from the Taxpayers as a direct result 
        of information provided by the Informant that caused the 
        investigation and resulted in the recovery:
                10% of first $10,000,000.00
                15% of first $10,000,000.00
                20% of first $10,000,000.00
                25% of amount over $30,000,000.00
                With a maximum reward not to exceed $25 million
    No payment shall be made if any of the conditions set forth in this 
agreement are not met.
          (a) Payment to Informant under this paragraph shall not be 
        made until after the taxes, fines, and penalties are finally 
        determined to be owed to the IRS, and have been collected from 
        the Taxpayers by the IRS. For purposes of this Agreement, a 
        final determination of tax liability is defined by Code 
        Sec. 7481, and includes the expiration of the statutory period 
        for a taxpayer to file a claim for refund and to initiate legal 
        proceedings against the United States for said refund; 
        provided, however, if the Taxpayers, or any one or more of 
        them, and IRS enter into a Closing Agreement(s) determining 
        liability, then, with respect to each such Taxpayer, payment to 
        Informant shall be made within a reasonable time following 
        collection of said sums pursuant to the Closing Agreement(s).
          (b) In calculating the amount of the reward to be paid to the 
        Informant under the formula described above, the sum of the net 
        taxes, fines and penalties collected from the Taxpayers:
                  (i) will be reduced by the amount of any 
                corresponding reduction of each taxpayer's taxes for 
                any tax year covered by this Agreement; and
                  (ii) will be reduced by the amount of any 
                corresponding reduction of any related Taxpayers' taxes 
                for any tax year.

                               __________

               Prepared Statement of Hon. Orrin G. Hatch

                            [april 28, 1998]
    Thank you Mr. Chairman. Today we start an important series of 
hearings in our ongoing oversight of the Internal Revenue Service. For 
too long, Congress has been lax in their oversight function. The 
hearings this week illustrate that the Chairman and the Committee are 
not just paying lip service to the important role we have regarding IRS 
oversight.
    There has been a lot of talk lately about the IRS becoming a 
service-oriented agency--and I agree with that completely for the bulk 
of the taxpayer assistance, compliance, and collection activities. 
However, we must remember that the IRS is also a law enforcement 
agency. The Criminal Investigation Division is a very important part of 
the IRS. Let's not forget that it was through enforcement of the tax 
code that we were able to put Al Capone in prison--not all tax cheats 
are benign.
    Throughout the debate on IRS reform, we have heard stories of 
abuses from IRS employees. Because there have been some bad apples in 
the barrel, it would be easy to get the picture that all IRS employees 
are somehow mistreating the taxpayers they serve. This is not true. The 
vast majority of the IRS employees are honest, hard-working individuals 
doing their best in an unpopular job. In my own state of Utah, we have 
the top service center in the nation. The criminal investigations and 
collections divisions are the same.
    Are there mistakes being made or abusive situations allowed to 
occur? The testimony we will hear this week shows us that there are. 
These abuses are serious and must be stopped. But, what we need to get 
a clearer picture of is whether the stories we hear today are the 
exceptions or the rule.
    As a law enforcement agency, the IRS must be subject to 
restrictions on their authority and action to ensure adequate 
protection of individuals rights. A strong system of checks and 
balances must be built into any agency responsible for law enforcement 
activities. This has also been my position relative to law enforcement 
agencies under the jurisdiction of the Judiciary Committee. But, at the 
same time, we must be very careful to ensure that any limits placed on 
the law enforcement--in this case, the IRS--will still allow the agency 
to conduct thorough, professional, and fair criminal investigations and 
bring those who are willfully disobeying the law to justice. The 
millions of honest taxpayers in America should not be rewarded for 
their honesty by government's allowing those who cheat to get away with 
it.
    I look forward to the testimony we will hear this week. These 
hearings will help us to ensure that the IRS is enforcing the laws 
fairly and justly. This is what the American people want. They do not 
want tax cheats to go free. Several recent polls have shown that as 
much as the public dislikes the IRS, they hate the tax cheats more. We 
must make sure that in our quest for a kinder, gentler IRS we do not 
unduly hamper the important law enforcement role that it plays in our 
society.

                               __________

                 Prepared Statement of Hon. Bob Kerrey

                            [april 28, 1998]
    Mr. Chairman, good news came to American taxpayers on November 5, 
1997, when historic IRS reform legislation, based on the work of the 
bipartisan, bicameral National Commission on Restructuring the IRS, 
passed the House of Representatives 426-4. However, the bad news has 
come every day since to the American taxpayers, because, five months 
later--and eight months since this committee had its first hearings on 
this matter--IRS reform legislation has not yet passed in the Senate.
    While I was encouraged by the general thrust of the proposal that 
passed out of this committee unanimously last month, I am disappointed 
in the time it has taken for the Senate to act. We have taken months to 
pass legislation that is not unlike what the National Commission on 
Restructuring the IRS's final report recommended, or what was passed by 
the House of Representatives.
    The one major difference is the cost: the Senate bill costs nearly 
$20 billion over ten years, and nearly half of that is not paid for.
    While these additional hearings serve the public good--the American 
people already know what the IRS is capable of and want and deserve 
action. These hearings will mean nothing if we do not change the law.
    I am not an IRS apologist. It is an agency that has been left to 
its own devices for far too long--50 some years--and has functioned 
under a culture that presumes taxpayers are guilty until proven 
innocent, even though 85% of Americans voluntarily file their taxes 
willingly and without incident. That is why Congressman Portman and I, 
and Senator Richard Shelby and I before that, embarked on reform 
efforts to begin with--we knew there was a dire need to overhaul the 
IRS.
    According to statistics compiled by the National Commission on 
Restructuring the IRS, the IRS receives roughly 238,000 calls per day--
but half of those callers do not get through to an IRS representative. 
Of the callers that do get through, nearly 19,000 are given wrong 
information. In addition, the IRS sends out roughly 114,000 notices per 
day, but does not have an internal management mechanism in place to 
ensure that what is in those notices is completely accurate.
    It would be easy to blame the new IRS Commissioner, Charles 
Rossotti for these short comings. But the reality of the situation is 
that he lacks--as did commissioners before him--the statutory authority 
to make the significant technological, personnel and management changes 
to correct most of what is wrong with the IRS. And the fault for that 
lies with Congress.
    Congress created the IRS, Mr. Chairman, not the other way around. 
The IRS is not Sears & Roebuck. We wrote the laws, we changed the tax 
code, we were responsible for oversight--535 members of Congress serve 
as the board of directors. It is no wonder we are so eager to point the 
finger elsewhere. But the American taxpayers are not fooled. When the 
National Commission on Restructuring the IRS held our field hearings 
the people who we talked to--taxpayers, accountants, lawyers, IRS 
employees--all knew that Congress had a big hand in this mess. In fact 
a majority of them thought Congress was more of a problem than the IRS.
    From those hearings and from that experience, language was created 
for IRS reform legislation that not only benefits American taxpayers by 
improving IRS service and procedures--but also changes the way our tax 
laws are written.
    In both the House Bill and the Senate Finance Committee legislation 
there are key Congressional accountability provisions that are vital to 
reforming the IRS and the way Congress adopts changes to the tax code. 
Both plans require a Tax Complexity Analysis of all new tax legislation 
so that every new tax proposal will be evaluated on its complexity and 
cost for taxpayers and to the IRS before it is voted on in Congress. A 
Tax Complexity Analysis will discourage tax complexity and stop the 
tendency of Congress to constantly alter and complicate the tax code 
without considering the ramifications to taxpayers and the IRS.
    The just passed Coverdell Education IRA bill, which would be the 
64th tax law added to the books since 1986, is an example of how 
Congress passes tax law without considering the cost of administering 
this new tax law and its real impact on the American taxpayers it is 
supposed to help. The prospects are dizzying.
    This legislation allows for tax-free withdrawals from education 
accounts for room and board, uniforms, transportation expenses or 
supplementary items or services--but only if these things are required 
or provided by the school. So this new law will not only require 
families to have a pretty sophisticated understanding of the law before 
they take their money out, it also appears that to be on the right side 
of the law, parents would need to be able to justify their expenditures 
with detailed records.
    The questions then are: Who is going to be checking those records? 
Will the IRS be asking taxpayers to submit bus fare receipts and 
clothing bills with their tax returns? Will these receipts be required 
in an audit situation?
    Also, the bill would sunset in 2002. If the President signs this 
legislation, we will have established three separate rules governing 
education savings accounts. This year, we have education savings 
accounts that can be used for higher education but not K-12. Next year 
and through the year 2002, we have different rules which allow tax-free 
withdrawals from these accounts. After 2003, K-12 withdrawals could be 
made, but only from the contributions and earnings from 1999 to 2002.
    How will taxpayers know how much of what they take out is tax-free? 
How will the IRS know? How will the IRS attempt to explain these new 
rules to taxpayers and who will understand them? Will anyone 
understand?
    Passing legislation like this, while complaining about how the IRS 
administers the tax code and services the taxpayer is the wrong 
direction to head. And while Commissioner Rossotti and American 
taxpayers wait for IRS reform legislation to be passed by this body, 
they are left to suffer the consequences of an agency in critical need 
of reform and a Congress that can pass tax law without considering the 
law's ramifications on taxpayers or the agency.
    I am also troubled that there are no taxpayer compliance issues on 
the agenda for these hearings. We will hear more stories about IRS 
abuses--which we already know exist--but we will not hear any testimony 
on how a small percentage of American taxpayers continue to abuse our 
voluntary system at a great price to the large percentage of Americans 
who do not.
    Willful noncompliance with our nation's tax laws cost taxpayers an 
estimated $100 billion annually. According to a special Harris Poll 
conducted on April 15th, ``[t]ax evasion is believed by most people to 
be more widespread than harassment by the IRS.'' The poll found that by 
a margin of 50% to 33%, Americans believe more people ``get away with 
not paying all the taxes they should'' than pay ``all their taxes and 
are unfairly harassed by the IRS.''
    Yet we will not hear testimony about tax cheats such as the one 
reported in the Washington Post on April 23 in which a husband and wife 
team, who owned a tax business in Maryland, filed 333 fraudulent tax 
returns and wound up pocketing nearly $700,000--until the IRS caught up 
with them.
    If we are going to shine a spotlight on the problems of our tax 
system let's shine the light everywhere, not just on the areas that 
make the most convenient headlines.
    The simple fact is, more Americans pay taxes than vote. How the IRS 
operates and treats taxpayers is a direct reflection of how Americans 
feel their government treats them--and by most accounts the treatment 
they receive is not good. Action on legislation will not only put the 
IRS on the right track and provide American taxpayers with an agency 
that more resembles a financial institution than a law enforcement 
entity, it will also go a long way toward repairing the public's 
perception that we truly are a government of, by and for the people.

                 Prepared Statement of Hon. Bob Kerrey

                             [may 1, 1998]
    Mr. Chairman, I first want to thank you for holding these hearings, 
and although I will state again for the record my disappointment that 
these hearings were too one sided in their content and that the 
witnesses through no fault of their own were woefully unprepared to 
discuss the legislation we will be debating next week, these hearings 
will have yielded some positive results.
    I want to thank Commissioner Rossotti for not only coming forward 
and talking to the Committee today after a tough week, but I also want 
to thank him for agreeing to take on the monumental task of overhauling 
this agency. I have been at this reform effort since 1995 and can 
appreciate his task. I think his willingness to serve his country in 
this manner deserves our full recognition and appreciation.
    Mr. Chairman, a consistent theme of your hearings and of our report 
out of the National Commission on Restructuring the IRS is how can we 
change the culture of the IRS to make it more taxpayer service 
oriented? In order for this change of culture to be real and lasting, 
it will take time. My concern has always been that we hold these 
hearings, receive a lot of press, the IRS hunkers down for a time, and 
then they go back to business as usual.
    The question, really, before us is how do we make lasting change?
    The legislation we reported out a few weeks ago should go a long 
way towards making sure that the IRS really undergoes a fundamental and 
permanent change of culture. We want the oversight to be real and 
lasting.
    One of the provisions in the legislation attempts, and maybe it 
does not go far enough, to consolidate and institutionalize annual 
Congressional oversight. Nothing changes a bureaucracy more than 
knowing that Congress will be asking them to come before them annually 
to discuss problems and prod them in the right direction. But, Congress 
should not be exempt from reforms.
    Mr. Chairman, I would like to suggest to you that the Committee 
consider changes to its own internal bylaws to institutionalize our 
oversight.
   First, we should require that the Committee meet every year 
        on a set date, say, the second Tuesday of May. The Committee 
        would meet with the Commissioner of the IRS and the Chairman of 
        the Oversight Board to review a select number of the cases that 
        have been referred by the IG, under our IRS restructuring 
        legislation, to the Oversight Board.
   Second, we should give the particular IRS employees a chance 
        to respond to the accusations raised by the IG report. It 
        should be voluntary, but they should have the chance to explain 
        their actions.
   And third, we need to institutionalize Committee follow up 
        to these IG reports. We need to know what actions did the 
        agency take on a specific case? What policies were changed?
    Indeed, perhaps we should change the legislation to require a 
follow up report from the IRS Oversight Board to this Committee.
    Mr. Chairman, my hope is that after both of us are long gone from 
this institution that some future Finance Committee doesn't suddenly 
wake up to the importance of IRS oversight. One of your greatest 
legacies for this Committee could be the regular, institutionalized 
oversight of this important agency. I will do everything in my power to 
see that this legacy comes to pass.
    Thank you.

Attachments.
                        Department of the Treasury,
                                  Internal Revenue Service,
                                                     April 30, 1998
Hon. Daniel Patrick Moynihan,
Ranking Minority Member,
Committee on Finance,
U.S. Senate,
Washington, DC.

    Dear Senator Moynihan: A number of witnesses at this week's Senate 
Finance Committee hearing presented testimony alleging improper actions 
by the Internal Revenue Service in specific cases. Following this 
testimony, several members of the Committee noted that the IRS was 
prohibited by law from responding to these allegations. This letter 
summarizes the limitations the IRS may face when asked to respond in 
public to allegations made in specific cases by witnesses who appear 
before the Committee.
    Disclosure Restrictions Under IRC Section 6103. As you are aware, 
section 6103 of the Internal Revenue Code requires the IRS to protect 
the confidentiality of tax returns and return information. A witness 
may discuss his or her own tax information before the Committee in a 
public hearing; the IRS, however, may not discuss that same case in a 
public hearing unless the taxpayer specifically authorizes the IRS to 
do so. Moreover, any given case may involve taxpayer information not 
only of the witness who appears before the Committee, but also 
information about other taxpayers; and some cases may involve a 
multitude of taxpayers. In order to present a case fully, a separate 
authorization would have to be obtained from each taxpayer whose 
information is to be discussed.
    Rules of Grand Jury Secrecy. Under Rule 6(e) of the Federal Rules 
of Criminal Procedure, grand jury information may not be disclosed by 
government personnel except under very limited conditions. In general, 
the limitations imposed by Rule 6(e) are even more restrictive than 
section 6103; for example, government personnel who are authorized to 
receive grand jury information are prohibited even from disclosing the 
information to their supervisors (unless the supervisor is separately 
included on the list of authorized personnel). Violations of grand jury 
secrecy are punishable by imprisonment for criminal contempt of court. 
The prohibition against disclosure of grand jury information continues 
even after the investigation is closed, and cannot be waived by the 
target of the investigation.
    Cases Pending in Litigation. Public comment about cases pending in 
litigation can prejudice the proper resolution of the matter and 
adversely affect the rights of the parties. If a case is pending in 
court, it should be resolved through judicial process, according to the 
rules of evidence and procedure. For this reason, the IRS has 
maintained a longstanding practice not to discuss publicly cases that 
are pending in litigation, even if the taxpayer chooses to make public 
statements about the matter. This policy against public comment about 
cases pending in litigation effectively precludes the IRS from 
addressing a number of the matters raised by witnesses before the 
Committee this week.
    In addition to these legal and policy considerations, there are 
also practical limitations on the IRS' ability to respond in public 
sessions to allegations regarding the handling of specific cases. The 
IRS must have time to retrieve and review case files in order to 
prepare its testimony; this process is complex and time consuming. We 
believe the IRS generally best serves the needs of congressional 
oversight by providing a wider systemic perspective on issues that 
other witnesses may raise in the context of individual cases.

        Sincerely,
                                   Stuart L. Brown.

                                * * * *

            Internal Revenue Service Criminal Investigation

                             Asset Sharing

    The asset forfeiture program has become an effective tool in the 
Federal Government's anti-crime strategy against drug trafficking, 
money laundering and organized crime. The IRS and other government 
agencies use the forfeiture laws to dismantle criminal enterprises by 
seizing and obtaining title to their assets. The Comprehensive Crime 
Control Act of 1984 created the legal tools to mount an aggressive 
national forfeiture program. Passage of the Anti-Drug Abuse Acts of 
1986 and 1988 enhanced the use of these tools.
    The Anti-Drug Abuse Laws of 1986 and 1988 provided IRS with civil 
and criminal statutes to seize and forfeit assets used in unlawful 
activities. These assets include the proceeds from drug trafficking and 
money laundering and any assets used to commit these crimes. For 
example, persons selling drugs from their home would not only forfeit 
the drugs and the money they received from their home drug sales; but 
they would also forfeit their home.
                          jackson, mississippi
    IRS special agents utilized their financial expertise of following 
money and identifying assets while working a major narcotics 
investigation in Jackson, Mississippi. As a result a building, located 
at 901 N. Parish Street, was seized in the Edward Charles Johnson case. 
This building, known as Big John's Recreational Center, was seized in 
late 1994 a part of a federal prosecution of drug charges. IRS-CI found 
that Johnson intentionally omitted over $390,000 in gross income from 
his federal income tax return during the years 1988-1991 and attempted 
to conceal his income by laundering the money through nominee names and 
businesses.
    In a dedication ceremony on August 16, 1995, the former Big John's 
Recreational Center was presented to the YMCA to be converted into a 
YMCA Teen Crisis Center as part of the federal government ``Weed and 
Seed'' program. The Crisis Center welcomes pregnant teens, teenage 
dropouts, runaways, teens on drugs or teens facing any other crisis. 
The former Center was a place neighbors remember because of its noise, 
fighting shooting and drug dealing. All agencies participating in the 
investigation were praised for taking a thorn in the side of the 
neighborhood and turning it into something positive.
                  middle judicial district of florida
    As a result of an OCDETF investigation in the Middle Judicial 
District of Florida in the early 1990's, numerous individuals were 
prosecuted. The investigation also resulted in the seizure and 
forfeiture of a night club and liquor store known as the Inner Circle 
Lounge. This bar had been utilized by several major narcotics 
traffickers over the years. A special agent with the IRS--Criminal 
Investigation in the South Florida District testified at length during 
the forfeiture trial of the night club. As a result of this testimony, 
a guilty verdict on the property was received. The verdict was appealed 
all the way to the Supreme Court. The Supreme Court chose not to hear 
the appeal and the forfeiture verdict was upheld. The IRS--Criminal 
Investigation was instrumental in the final disposition of the 
property. The forfeiture became part of the federally funded ``Weed & 
Seed'' program. The government identified ``The Quality Life Center of 
Southwest Florida'', which operated out of rented space for over six 
years and was in desperate need of expanding its operation. The non-
profit center offers programs for youths such as martial arts, 
swimming, tutoring and educational programs all designed to teach self-
reliance. In September of 1997, United States Attorney Charles Wilson 
presented the deed for the property to the director of the Quality Life 
Center in a ceremony held at the 7500 square foot facility. The 
director described the new facility as a ``an oasis of opportunity, 
learning and growth.''

                                * * * *

              west virginia state police academy to expand
                         u.s. attorney's office
                   southern district of west virginia
    ``The Internal Revenue Service, CID's office in West Virginia and 
the West Virginia State Police have forged one of the most collective 
working relationships in law enforcement today, ``stated United States 
Attorney Rebecca Betts. ``The financial expertise of the Internal 
Revenue Service, coupled with the experience and manpower of the State 
Police in drug trafficking cases, has produced some of the Office's 
finest best drug trafficking cases.''

    United States Attorney Rebecca A. Betts, Chief, Criminal 
Investigation Division Barbara A. Hurley, and Roger Burgess, District 
Director of the Internal Revenue Service for the Virginia/West Virginia 
District, presented to the West Virginia State Police the title to a 
147-acre farm in Mason County, West Virginia. The 147-acre farm was 
previously owned by Jerry Wandling, a long-time cultivator and 
trafficker in marijuana in Kanawha, Mason and Patnam Counties. Wandling 
forfeited the farm to the United States in connection with his 
conviction in Federal court on charges of money laundering, and the 
filing of a false Federal tax return.
    The State Police were presented the farm based on their active 
participation in the IRS-led investigation of Jerry Candling, which 
included assistance in the execution of a financial search warrant on 
Jerry Wandling's property. Pursuant to a plea agreement to forfeit 
property worth approximately $500,000 consisting of a Cadillac Allante, 
a Mercedes Benz 300 E, a houseboat, $6,000 in cash, a 16-acre farm in 
Mason County, and the 147-acre farm in question.
    United States Attorney Betts noted that, with the release of the 
Wandling farm to the State Police, the Department of Treasury Asset 
Forfeiture Fund has now distributed an estimated $940,000 in monies and 
assets to law enforcement agencies throughout West Virginia over the 
past three years.
    In addition to the Wandling case, notable examples of money 
laundering investigations resulting in significant forfeitures 
distributed this year include Charles ``Tucker'' Morgan, also involved 
in marijuana distribution, Jerry Jenkins, owner of M&J Electric, a coal 
company supplier, and Edward Laughley, an employee of Eastern 
Associated Coal, who was convicted for filing false tax returns and 
conspiracy to defraud the IRS.
    ``Tracing the proceeds of criminal activities is painstaking work, 
but well worth the effort,'' stated Betts.
           $32 million from bogus diaper sales--north florida
    According to United States Attorney Charles Wilson, Middle Judicial 
District of Florida, these funds ``represented one of the largest 
health care fraud recoveries in the United States to date.''

    On November 17, 1997, more than $32 million seized from a 
Kissimmee, Florida businessman in a Medicare fraud scheme was returned 
to the taxpayers in Orlando, Florida. U.S. Attorney Wilson, accompanied 
by U.S. Attorney Wilson, accompanied by U.S. Senator Bob Graham, D-Fla. 
and Ross Lawson, Chief IRS-CID, North Florida District. presented the 
check to Rose Crum-Johnson. the Regional Administrator for the Health 
Care Financing Administration in Atlanta, Georgia. Crum-Johnson. whose 
agency makes policy and helps finance the federal share of Medicare and 
Medicaid, called it a ``wonderful day'' for taxpayers and said the 
recovered funds would be used to finance other medical claims in 
Florida.
    The return of the $32 million was the culmination of a three year 
investigation into the alleged false billing practices of Ben O. 
Carroll through his Kissimmee, Florida based companies, Bulldog Medical 
of Kissimmee, Inc. (BMK) and MLC-Geriatric Health Services, Inc. (MLC). 
Carroll set up these businesses as medical providers through which he 
marketed incontinent care medical supplies to nursing home patients 
throughout the limited States. The fraud in the case was based on false 
claims for reimbursement submitted by Carroll's business, BMK and MLC, 
to a Medicare insurance carrier. None of the items claimed were legally 
reimbursable by Medicare.
    Medical supplies were sold as a disposable ``pouch'' for which he 
charged at least $5 that was nothing more than a .50 cent adult diaper. 
The items marketed by Carroll's companies cost approximately $4 to $9 
and were fraudulently billed to Medicare as prosthetic devices and 
catheter maintenance supplies for amounts up to $40.
    Carroll's businesses had billed Medicare for over $70 million in 
claims during the period under investigation for which at least $56 
million was reimbursed to Carroll's businesses. IRS Special Agents 
traced money through 69 bank and brokerage accounts used by Carroll. 
Almost two tons of records were seized from Carroll's businesses and 
over $32 million was seized from the 12 bank and brokerage accounts.
    In 1996, Carroll was charged in Florida and Kansas with mail fraud, 
interstate transportation, money laundering, witness tampering, 
conspiracy, aiding and abetting, and criminal forfeiture. Pursuant to a 
plea agreement, Carroll pled guilty to conspiracy to defraud Medicare 
of $70,846,973.85 and mail fraud, and agreed to forfeit the $32 million 
previously seized. He also agreed to pay over an additional $5 million 
in additional assets. On March 10, 1997, Carroll was sentenced to 10 
years in prison without the possibility of parole. He was also ordered 
to pay $4.1 million in restitution which is over and above the $32 
million forfeited.

Gehl case
Northern District of NY

    U.S. Attorney Thomas J. Maroney of the Northern District of NY 
stated that, ``This check underscores the importance of the excellent 
working relationship between state and local law enforcement and 
federal agencies.''

    On March 10, 1998, the IRS-Criminal Investigation (IRS-CI) 
presented the New York State Department of Environmental Conservation 
(DEC) with a federal asset forfeiture check totaling $381,021.80. This 
check represented proceeds of laundered money in connection with a 
joint investigation conducted by the DEC and IRS-CI into the sale of 
contaminated salmon eggs taken out of Lake Ontario and sold as caviar.
    Since 1978 New York State Law has banned the sale of certain Lake 
Ontario fish because of chemical contaminants, including P.C.B.'s 
(polychlorinated biphenols), and Mirex, a chlorinated pesticide.
    Robert J. Gehl, and his corporation Tempotech Inc., were found 
guilty of federal violations relating to the illegal sale and 
transportation of the illegal caviar. On February 10, 1995, Gehl was 
sentenced to 87 months in prison and fined $250,000.00. As a result of 
structuring the money received from the sale of illegal caviar, which 
was traced through numerous bank accounts by IRS special agents, Gehl 
and Tempotec Inc. were ordered to forfeit $482,400.00.

United States Attorney
U.S. District Court, District of Nevada
    securities fraud takes nearly $50 million of us investors money
    ``Because of the labyrinth of interlocking corporate shells and the 
intricate flow of funds, this has to ranked as among the most complex 
of telemarketing scams I've seen''--Leand Prosecutor Christopher Bruno.

    Jeffrey Jolcover pleaded guilty to securities fraud and money 
laundering and he agreed to cooperate with the government in a criminal 
investigation. Mr. Jolcover and others used a number of complex 
telemarketing schemes designed to defraud the investing public of 
millions of dollars between October 1990 and mid-1995. They targeted 
investors throughout the United States, enticing them to invest between 
$35 million and $50 million by making, false statements and omitting 
facts.
    Most of the funds raised from defrauded investors were obtained 
through the sale of interests in wireless cable TV systems in Texas, 
Nebraska, Alabama and Wisconsin. In one of the schemes, operated from 
April 1994 through early 1995, 1,579 individuals invested approximately 
$16.7 million.
    None of the victims have received any return on their investments. 
The attorney for the victims also said he doubts if the victims will 
recoup their losses.
    The money laundering charge stems from an October 1994 incident in 
which Mr. Jolcover caused $275,000 illegally raised from investors to 
be deposited into a brokerage account in Reno. A substantial portion of 
these funds were then transferred to and deposited into an offshore 
bank account--the transaction was designed to conceal the ownership of 
the transferred funds.
    Mr. Jolcover faces an estimated prison term of 57-71 months. His 
sentencing is scheduled for June 15 before U.S. District Judge Howard 
McKibben.

February 19, 1998
Buffalo Assistant U.S. Attorney
        telemarketing fraud cheats 1,700 senior citizens--twice
    ``I hope you will rise this time in prison to think about all the 
damage you caused by cheating senior citizens, some of them 75 or 80 
years old''--U.S. District Judge Richard J. Arcara.

    Thomas Pantano and Maurice Jordan operated Capital Punishers 
Recovery Agency and Western New York Industries, Inc., companies that 
claimed they could get money back or people who were cheated by 
sweepstakes telemarketing companies.
    Capital Punishers and Western New York would obtain lists of 
individuals who had sent money to other telemarketing companies. They 
would promise that, for a fee, they would recover their money. They 
stated that they knew where the lost money was and had investigators 
and attorneys on staff to recover the lost money. In fact, they would 
make no attempt to recover the money, other than sending letters asking 
for the money back. Over 1,700 victims lost $500 to $3,000 and did not 
get back the money that was previously lost. Jordan and Pantano scammed 
victims out of $1.9 million over a two year period.
    Mr. Pantano pleaded guilty to mail fraud, conspiracy and halo tax 
charges (tax evasion and false statements); he owes the Internal 
Revenue Service $75.000 in taxes on his unreported income from this 
telemarketing scheme; was sentenced to 16 months in prison and ordered 
to make restitution of $108,000 to his victims. Mr. Pantano told 
authorities that he is broke.
    Mr. Jordan, who was ordered to make restitution of $474,646 to his 
victims, pleaded guilty to money laundering, engaging in a monetary 
transaction in excess of $10,000 which were proceeds of the fraudulent 
telemarketing activity, conspiracy to commit mail and wire fraud and 
was sentenced to 52 months in prison.
    Fourteen employees of the enterprise have entered guilty pleas. 
These employees were named in the indictment with Jordan and Pantano or 
were charged in felony informations.

April 9, 1998
United States Attorney, Central District of California
  united states taxpayers are the victims of tax scam run from prison
    Eight people involved in a fraudulent tax scheme run out of the 
California Men's Colony state prison in San Luis Obispo have pleaded 
guilty to charges of filing numerous fraudulent federal tax returns.
    Inmates and others at the Men's Colony filed false tax returns with 
the Internal Revenue Service in order to obtain income tax refunds to 
which they were not entitled. In most cases, the defendants would use 
the names of other inmates on the tax returns and would create false 
documents to reflect wages earned and taxes withheld from those wages 
to support their claim for an income tax refund. Refunds were issued on 
several of the returns.
    Carl Goosman and Shawn Meyers pleaded guilty to a scheme in which 
they filed approximately nine tax returns with the IRS and sought 
refunds totaling more than $40.000. In addition, Goosman filed 
approximately 27 additional returns, claiming refunds of more than 
$111,500.
    In a second part of the scheme, two prisoners and an outside 
accomplice filed approximately 11 tax returns claiming refunds of 
nearly $40,000. They received approximately $12,313 in refunds. One of 
the two prisoners filed an additional 42 returns in which he claimed 
refunds totaling $136,441.93.
    In another scheme, Shannyn Turner and Victor Matchem filed four tax 
returns claiming refunds of $6,218 and Turner filed an additional 19 
returns claiming refunds of $40,000.
    In the final case, Norman Hunt filed five false tax returns. All 
defendants pleaded guilty to making false claims to the United States.

 December 1997
United States Attorney, Southern District of Ohio
  operator of mentally retarded groups homes convicted for theft and 
                            money laundering
    ``This was not a matter of bookkeeping errors, this was a 
systematic effort by Mr. Peterson to steal money. The money Peterson 
stole could have been used to serve other mentally retarded people''--
Assistant U.S. Attorney David J. Bosley

    U.S. Attorney Edmund A. Sargus Jr. said, ``This case demonstrates 
the need for federal and state cooperation in safeguarding the taxpayer 
dlollars.''
    Carl Peterson submitted false cost reports to the Ohio Department 
of Human Services, Medicaid Program for costs relating to the operation 
of four group homes for mentally retarded residents in Cincinnati Ohio. 
Mr. Peterson submitted cost reports that included claims for non-
existent expenses and for personal expenses that were not actual costs 
of running the group homes. The fraudulent cost reports caused the Ohio 
Medicaid Program to pay Mr. Peterson over $400,000 to which he was not 
entitled. Mr. Peterson also created a false company which enabled him 
to divert a portion of these stolen funds for his personal use.
    IRS agents were able to show that instead of using the subsidies to 
serve the 40 retarded people in the homes, Mr. Peterson spent the money 
on himself and friends. He spent $5,282 of the stolen money on beer and 
wine. He also hired a go-go dancer as a group home consultant and 
bought a car for another exotic dancer. Mr. Peterson spent $5,807 in 
Medicaid money to buy and install a stereo sound system for a go-go 
nightclub. The conclusive evidence convinced a jury to find him guilty 
of 44 counts of money laundering theft and mail fraud.

October 14, 1997
United States Attorney, District of New Jersey
           numerous citizens are victim of unlicensed lawyer
    ``Even imprisonment couldn't stifle Alevras' criminal conduct; 
seven weeks after he was sentenced, he began submitting forged claims 
for New York state income tax refunds on behalf of fellow inmates''--
Assistant U.S. Attorney Andrew Schiff

    Chris G. Alevras, a law school graduate but not licensed to 
practice law, held himself out as an attorney associated with a firm. 
In 1991, the firms' lawyer suffered a stroke and in 1995 he died. In 
the name of the law firm, Mr. Alevras carried out a number of fraudulen 
schemes, representing a total attempted loss of more than $800,000.
    Mr. Alevras kept funds that he should have disbursed to or on 
behalf of clients. In count one, Mr. Alevras was representing the 
plaintiff in a civil rights lawsuit. He settled the lawsuit without the 
plaintiff's knowledge and kept the proceeds of $36,000 for himself. It 
count four of the indictment Mr Alevras represented two persons who 
were refinancing their home mortgages. The mortgage company transferred 
funds into an account Mr. Alevras controlled in the name of the 
deceased attorney but instead of using the monies to pay off the 
existing mortgages on the homes, Mr. Alevras kept the monies for 
himself. As a result, the mortgage company's title insurer suffered a 
loss of approximately $140,000. Other counts in the indictment included 
separate bank frauds involving Mr. Alevras's negotiation of worthless 
checks totaling $365,000 causing financial institutions to suffer the 
loss in $240,000 of that amount and individuals to suffer the loss of 
the remainder.
    Mr. Alevras also filed 31 separate false claims with the IRS 
seeking income tax refunds totaling approximately $290,000. These 
counts were dropped in exchange for his plea but were used in 
considering his sentence. However, in his plea, Mr. Alevras admitted 
filing a false tax return and receiving $41,478 refund that was issued 
as a result of the filing of this return.
    Mr. Alevras plead guilty and was given an 87 month federal prison 
sentence.

September 23, 1997
United States Attorney, Eastern District of Pennsylvania
   prominent fundraiser takes money from 500 nonprofit organizations
    ``This is a very sad day for someone who rose to such influence and 
promise''--U.S. District Judge Edmund V. Ludwig

    John G. Bennett. Jr., president of the Foundation for New Era 
Philanthropy, was able to get 500 nonprofit organizations to entrust a 
total of $354 million of their money to him promising to double it in 
six months with matching contributions from other rich people who 
wanted to remain anonymous. There were no such anonymous benefactors. 
The foundation was a pyramid scheme that shuffled money from newer 
participants to the earlier ones. Mr. Bennett also used $7 million for 
his private businesses and personal accounts, using some of the cash to 
buy an expensive home, a luxury car and first-class travel for his 
family.
    Organizations named as victims in the indictment include the 
American Red Cross, the Salvation Army, the United Way, World Harvest 
Mission, the Juvenile Diabetes Foundation, Mission to the Americas, the 
Franklin Institute, the Free Library of Philadelphia, the Detroit 
Institute of the Arts, the Philadelphia Orchestra and Drexel 
University.
    Mr. Bennett plead no contest to 82 counts of money-laundering, 
fraud and tax violations. He was sentenced to 12 years in prison and 
returned $1.5 million to make partial restitution to the charities he 
defrauded.

February 26, 1998
United States Attorney, Eastern District of Wisconsin
             former guard holds up bank in gorilla costume
    ``Raszkiewicz's gorilla-gram get-up was so convincing that one 
guard chased down a runaway balloon for Raszkiewicz in the bank's lobby 
while he was in the vault stealing cash''--Assistant U.S. Attorney 
Christian Larsen

    The FBI could not develop sufficient proof against bank security 
officer Timothy Raszkiewicz to charge him with a $141,000 bank robbery 
that occurred in December 1991.
    In 1995, IRS criminal investigation division conducted an 
investigation and found that Timothy Raszkiewicz conducted a financial 
transaction which involved the proceeds of the robbery of the First 
Financial Bank of Milwaukee, Wisconsin. This was done in violation of 
the money laundering statutes in Title 18 United States Code 1956. 
According to the Fact of Finding filed with the court, IRS special 
agent William Gardiner followed the proceeds of a bank robbery which 
lead to the defendant Timothy Raszkiewicz.
    When Mr. Raszkiewicz was arrested in March 1997, he could not be 
charged with the bank robbery because of a five year statute of 
limitations on bank robbers, for which the FBI has statutory authority. 
But he pleaded guilty to money laundering after IRS agents were able to 
show how he used the money from the robbery to buy rental property and 
pay for other real estate enterprises.
    Mr. Raszkiewicz was sentenced to 6\1/2\ years in prison and ordered 
to pay $35,717 to the First Financial Bank. The government is seeking 
the forfeiture of about $141,000 from Mr. Raszkiewicz.

January 29, 1997
New Orleans, Louisiana
         united states attorney, eastern district of louisiana

                6,000 LaSalle University Students Misled

    ``In my opinion, Mr. Kirk, yours has been the most callous of 
frauds''--Judge Martin Feldman

    From 1989 to 1996, the World Christian Church (LaSalle University) 
grossed $36,000,000 in receipts from students wanting degrees from this 
mail order university. La Salle was organized under the protection of 
an alleged church, and its President Thomas Kirk II took a vow of 
poverty.
    LaSalle told students that it was accredited by an organization 
called the Council on PostSecondary Christian Education. In reality, 
however, the council was merely a shell organization with a post office 
box and answering machine. Mr. Kirk admitted that he set up LaSalle 
under the World Christian Church to avoid regulatory oversight and 
review. The school made $36 million which Kirk and other officers 
funneled through the church to avoid personal income tax. Mr. Kirk also 
claimed a vow of poverty while he had access to a chauffeur-driven 
limousine, a $1.5 million home, expensive cars and other luxuries.
    In order to recruit students Mr. Kirk advertised LaSalle University 
throughout the USA in publications including USA Today and various 
other magazines and newspapers. The advertisements stated that La Salle 
offered degrees at the bachelors, masters and doctorate level in 
numerous areas including Engineering Computer Science Law Education. It 
was further part of the scheme to defraud that Kirk hired very few 
faculty members to grade papers and at times five faculty members 
graded the work of more than 6,000 students. Often, faculty graders 
were asked to evaluate work in which they had no qualification. Certain 
graders admitted that they simply provided a grade based on the volume 
and weight of the submission.
    Mr. Kirk was sentenced to five years in prison and ordered to pay a 
$125,000 fine. The sentence was the maximum that could have been 
imposed. He pleaded guilty to tax evasion, conspiring to commit wire 
fraud, and credit card fraud.
    As part of the plea bargain, Mr. Kirk had to forfeit the mansion, 
and the school had to forfeit more than $10.75 million in cash. That 
money and any future restitution collected from Mr. Kirk, is to be 
given to LaSalle students who want refunds. The U.S. Attorney's office 
is attempting to identify victims of the LaSalle fraud and to aid the 
court's administration of the $10.75 million restitution fund.

March 25, 1998
Portland, Maine
United States Attorney, District of Maine
 father and son sentenced in $2 million tax evasion case that left 125 
                                victims
    ``An offense like this has more victims than even a violent crime 
has''--U.S. District Judge D. Brock Hornby

    Clifford Levesque was the owner and president of Mainely Payroll, 
Inc. a company that provided payroll services to approximately 125 
client businesses. Mainely Payroll computed employee wages, withholding 
taxes, retirement contributions and other benefits. Clifford Levesque 
instructed his employees at Mainely payroll to fill out the clients' 
quarterly income and FICA tax withholding forms in pencil. He then 
selected some of the forms, erased the tax calculations, and entered 
new figures to report a smaller tax amount due. He kept the difference 
between the sum his clients gave him to pay their taxes and the figure 
shown on the forms. The funds he kept were used to pay personal 
expenses and were also invested in his son, Michael Levesque's 
business.
    When clients began receiving notices of tax deficiencies, Clifford 
Levesque blamed an ``IRS computer glitch.''
    The total tax loss as a result of the Levesques' criminal 
activities was approximately 52.3 million. Both Levesque's were ordered 
to make $2.3 million restitution to 80 individuals. Most of those 
individuals sat quietly in the back of the Augusta Civic Center and 
listened as the United States Attorney explained the details of the 
guilty pleas of the Levesques. They realize that their money is gone 
and restitution will probably never be made.
    Clifford Levesque was sentenced to 5 years and 11 months in prison. 
Michael Levesque was sentenced to 3 years and 1 month. The IRS waived 
the penalties for the affected companies but not the taxes.

                               __________

                 Prepared Statement of Hon. Connie Mack

                            [april 28, 1998]
    I commend Chairman Roth and the Finance Committee staff, for 
keeping a spotlight focused on the IRS. The culture of waste, fraud, 
and abuse that was uncovered when our oversight hearings began last 
September was no surprise to the millions of taxpayers who have had 
unpleasant interactions with the IRS.
    The arrogant and abusive IRS has been a long time in the making. It 
is the result of years of inadequate oversight by past IRS 
Commissioners, by past Treasury Secretaries, and by past Presidents. 
But the Congress must share in the blame. As the people's voice, eyes, 
and ears, the Congress through its oversight powers has a crucial role 
in keeping our society free.
    Congress is in the best position to check the misuse of Executive 
power. Mr. Chairman, by revitalizing the oversight function of this 
Committee, you are providing a crucial service to our citizen 
taxpayers. We cannot allow this oversight to wane. The IRS interacts 
with more Americans than any other government agency in the country, 
and these interactions are not limited to April 15th. Indeed, taxpayers 
have greater reason to be upset with Congress than with the IRS at this 
time of the year, as the record amount of taxes being taken by the 
federal government, and the complexity of the tax code (caused in large 
part by the current Administration's obsession with income caps and 
phase-outs), cannot be blamed on the IRS.
    But there is a lot that can be blamed on the IRS. Our hearings last 
September exposed a rogue agency that was literally out of control. We 
learned about the illegal use of enforcement statistics to evaluate IRS 
employee performance--in other words, judging employees based on how 
much they say the taxpayers owe. We heard testimony that IRS management 
encourages IRS employees to mislead and lie to taxpayers about their 
rights, and to fabricate evidence against taxpayers and fellow 
employees. We learned that IRS management encourages IRS employees to 
ignore tax code provisions that would result in a favorable adjustment 
to taxpayers, and to violate the laws concerning taxpayer privacy and 
the commencement of liens, levies, and seizures. This was shocking. 
Taxpayers who spend more than $8 billion to run the IRS deserve at 
least honest service.
    But our September hearings revealed that the IRS views itself more 
as a law enforcer rather than a service provider. We heard that many 
IRS managers believe that all tax debtors are tax cheats that must be 
punished. This is hard to accept. IRS employees, of all people, should 
recognize that our complex tax code can easily lead to innocent 
mistakes on the part of well-meaning taxpayers. The attitude of 
antagonism toward the taxpayer must end.
    The IRS restructuring and reform bill will begin to correct many of 
these problems--particularly by increasing taxpayer confidentiality, 
correcting the presumption that the IRS is always right and the 
taxpayer always wrong, and treating the Service as it treats the 
taxpayer by making it pay for its mistakes.
    The IRS cannot operate in a vacuum and disregard the rights and 
needs of taxpayers. Fiscal mismanagement and negligence only undermine 
taxpayers' faith in the fairness of any tax system. Outright abuse and 
harassment destroy this faith. We cannot tolerate an IRS that treats 
regular citizens like violent criminals, and that acts itself as if it 
were the collections arm of racketeers.
    The problems existing at the IRS have been decades in the making, 
and we cannot expect them to go away without constant vigilance on the 
part of this Committee. We must continue to provide the oversight 
necessary to get the IRS back in line.

Attachments. 


    Insert GPO SCAN 496502-14.eps here.



          Responses of William A. Moncrief, Jr., to Questions

                     From Senators Kerrey and Mack

                  Law Offices, Williams & Connolly,
                                            Washington, DC.
May 7, 1998

Hon.William V. Roth, Jr.,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.

Re: Hearings on IRS Misconduct

    Dear Chairman Roth: This firm is counsel to William A. Moncrief, 
Jr., one of the non-government witnesses who testified at last week's 
hearing concerning the activities of the IRS. During the course of Mr. 
Moncrief's appearance before the Committee on Finance, Senators Kerrey 
and Mack asked for his comments on the Internal Revenue Service 
Restructuring and Reform Act of 1998, Approved by Senate Finance 
Committee as Substitute for House-Passed Version (H.R. 2676). In 
particular, Mr. Moncrief was asked during his formal testimony on 
Wednesday, April, 2-9, 1998, to comment on Titles I, III, and IV of the 
Finance Committee's version of the legislation. He asked for, and was 
given, an opportunity to review the legislation and to discuss it with 
his counsel. This letter constitutes his response to the Senators' 
questions about the legislation during the hearing.
    Title I of the Bill concerns reorganizing the structure and 
management of the Internal Revenue Service. It would create a six-
member board to oversee the management, administration, conduct, 
direction and supervision of the Service. Three of those members would 
be affiliated with Treasury or the IRS, and would include: the 
Secretary or Deputy Secretary of Treasury; the IRS Commissioner; and a 
representative of the IRS employees' union. A quorum would consist of 
five members and it would conduct business by a simple majority vote.
    If the purpose of these provisions is to provide active independent 
oversight of the Service and its management, the board would be heavily 
weighted in favor of the agency and agency interests, rather than 
taxpayers. Greater independence could be achieved with fewer Treasury-
affiliated members or more outside members representing the taxpaying 
public's interest. As in the corporate world, a board of directors 
heavily weighted in favor of directors affiliated with management is 
likely to be a rubber-stamp for management decisions. It is essential 
that the insular IRS culture that has made it insensitive to the 
taxpaying public be meaningfully counterbalanced by a board having 
greater independence from the agency than is contemplated in the 
current legislation.
    In addition, the current legislation contemplates the oversight 
board's review of ``procedures of the Internal Revenue Service relating 
to financial audits required by law.'' Under this statutory wording, 
the IRS could contend that the oversight board lacks jurisdiction to 
review or even consider procedures relating to criminal tax 
investigations. The Criminal Investigation Division would be emboldened 
to feel, therefore, that it has a mandate for treating its procedures 
and actions as essentially unreviewable. This mandate could subject 
more, rather than fewer, taxpayers to the kind of stomach-turning 
investigative overkill suffered by the Moncriefs.
    Title I of the Bill would also create the Office of the Taxpayer 
Advocate under the supervision of the National Taxpayer Advocate. This 
office would have the power to assist taxpayers by proposing ``changes 
in the administrative practices of the Internal Revenue Service'' and 
by identifying ``potential legislative changes which may be 
appropriate'' to mitigate taxpayer problems in dealing with the IRS. 
This mandate includes a broad catchall to report to the House Ways and 
Means Committee and the Senate Finance Committee ``such other 
information as the National Taxpayer Advocate may deem advisable.'' 
This advisory role does not explicitly include criminal investigations, 
the use of paid informants, or the use of search warrants. However, the 
statutory language may be broad enough to include oversight of the 
Service's ``paramilitary'' activities. If there is any doubt, Mr. 
Moncrief would favor clearly giving the National Taxpayer Advocate 
authority to advise Congress and make legislative recommendations 
concerning inappropriate uses of such law enforcement tools against 
nonviolent taxpayers.
    Title I also creates the new, independent office of Treasury 
Inspector General for Tax Administration. Its purpose is to conduct 
auditing and investigating functions concerning the activities of the 
Internal Revenue Service. This would be a welcome change, if it results 
in real investigations of the conduct of IRS personnel not perfunctory 
whitewashes of agent wrongdoing. One major problem Mr. Moncrief had 
after the investigation ended was getting the IRS Inspection Division 
to take a serious, honest, and thorough look at the conduct of the 
agents who had initiated the massive raid on his business and had 
pursued the investigation long after it was clear that the Moncriefs 
had committed no crime. This bill could change all that.
    Title III addresses a whole series of new taxpayer protections and 
rights. This title contains a number of welcome safeguards for 
taxpayers, but it does not include any protections against making 
outrageous payments to informers, using search warrants against 
nonviolent taxpayers in criminal tax cases, or demanding releases from 
civil liability for illegal searches and other wrongful conduct. 
Although this title would help some taxpayers, it would not put any 
restriction on the activities of the Criminal Investigation Division. 
Mr. Moncrief urges the Committee to place statutory restrictions on the 
use of search warrants in routine criminal tax investigations involving 
nonviolent taxpayers and to limit the rewards paid to informers.
    The major lesson of the Moncrief investigation is that it was 
simply too easy for a greedy disgruntled employee to retaliate by 
generating a full-scale criminal tax investigation on the basis of 
false or misleading information. Accordingly, the taxpayer rights 
portion of the legislation should limit the ability of informers to 
generate criminal investigations of other taxpayers or, at a minimum, 
require the IRS to investigate such leads thoroughly with less 
intrusive means than a search warrant. Finally, there is no question 
that the Committee should include a provision barring the government 
from resolving any tax case in exchange for a release from statutory or 
other liability for its investigating agents.
    The Internal Revenue Code currently affords IRS criminal 
investigators broad authority to obtain evidence using summonses. The 
Service should not be permitted to use more drastic means--such as 
search warrants--to obtain information from taxpayers without 
demonstrating that the use of summonses would be unavailing. Finally, 
court rulings have held that the IRS need not follow its internal 
procedures for handling investigations. IRS criminal investigators 
should be required to adhere strictly to internal review procedures and 
not be permitted routinely to inflict the tools of the Drug War on 
nonviolent taxpayers. Mr. Moncrief believes that the taxpayer rights 
portion of the legislation would be substantially improved, if it 
included such safeguards relating to the handling of criminal tax 
investigations.
    Finally, Mr. Moncrief favors the congressional accountability 
provisions in Title IV of the Bill. Certainly the Internal Revenue Code 
is very complicated and these provisions would make simplification a 
congressional priority. One area, which is not mentioned in the 
proposed legislation, concerns statutory amendments relating to the 
conduct of criminal investigations by the IRS. In all such instances, 
proper respect for taxpayer rights should be an important consideration 
and the Commissioner should be required, as with all other tax 
legislation, to report on such matters to the House Committee on Ways 
and Means and the Senate Committee on Finance. The IRS should not be 
permitted to urge legislation infringing or limiting taxpayer rights 
before other Committees in Congress in a way that might result in 
insufficient consideration of taxpayer rights. Several of the Senators 
noted in the hearing that the use of the statutory weapons used to 
fight the Drug War were never intended to be used against nonviolent 
and non-drug-related taxpayers. Yet Mr. Moncrief's experience shows 
that they, in fact, are.
    We appreciate the opportunity to comment on Mr. Moncrief's behalf 
on the pending legislation, and, as he stated at the hearing, he 
greatly appreciates the Committee's time and gracious consideration of 
his case. We believe that great strides are being made properly to 
balance taxpayer rights against IRS powers. Please do not hesitate to 
contact me, if the Committee needs anything further.

            Sincerely,
                                   James A. Bruton, III.

                               __________

             Prepared Statement of Daniel Patrick Moynihan

    Mr. Chairman: We thank you for your continuing commitment to 
oversight of the Internal Revenue Service (IRS). The United States 
began as a Nation in protest against taxation that was improper and 
illegal, and for more than two centuries the issue has never been far 
from our concerns. However, not until last September had the Finance 
Committee exercised its oversight jurisdiction. It is our duty to know 
what is going on in this large public agency, which was founded in 1862 
when the Federal Government for the first time imposed an income tax.
    Since our hearings last September, the Committee has taken two 
important actions to address the problems at the IRS. First, we 
approved unanimously the nomination of Charles O. Rossotti to be 
Commissioner of Internal Revenue. He was then confirmed unanimously by 
the full Senate. I join with the Chairman in congratulating 
Commissioner Rossotti for his leadership since being sworn in not quite 
six months ago. That agency needs energy, and Commissioner Rossotti is 
providing it. He has put in motion a plan to modernize the agency by 
reorganizing according to type of taxpayer or tax (e.g. individual, 
small business, large corporate, excise taxes), rather than according 
to function (e.g. examination, collection, customer service) or 
geography. Mr. Rossotti has also appointed former Comptroller General 
Charles Bowsher to perform an independent review of the IRS Inspection 
Service; established programs to improve the treatment of taxpayers; 
and has announced a comprehensive plan to improve the IRS Criminal 
Investigation Division that includes an independent review of its 
activities and operations to be led by an expert in Federal law 
enforcement. This is important because, as we are about to hear, there 
are some real problems in the Criminal Division. I would think today's 
testimony by the tax attorneys may lead to disciplinary action or even 
dismissals for some Criminal Division employees.
    In addition to getting a strong Commissioner in place, the 
Committee also reported out, by a vote of 20 to 0, the IRS 
Restructuring and Reform Act of 1998. We look forward to that 
legislation's early approval by the Senate and its enactment as soon as 
possible.
    Two further points. We must continue to attend to problems of abuse 
and other organizational matters. But until we simplify the Internal 
Revenue Code, we will fail to address the heart of the problem. I 
continue to be concerned about the effects on taxpayer compliance and 
on tax administration of increasing tax code complexity resulting from 
frequent statutory changes enacted by Congress. Mr. Chairman, we would 
like to work with you to try to reduce tax evasion in the United 
States, which according to some estimates costs taxpayers more than 
$100 billion per year. Finally, I thank the Chairman and Commissioner 
Rossotti for the attention they have devoted to the Year 2000 computer 
conversion at the IRS. The Chairman's request that $50 million in 
unspent IRS funds (from fiscal years 1993-1997) be made immediately 
available to the IRS for reprogramming will help insure that the IRS 
has the resources necessary to address this problem. I also appreciate 
the Chairman's willingness to look at the effective dates of provisions 
in the IRS Reform bill and consider moving some beyond January 1, 2000. 
The Commissioner has made the Y2K problem his highest priority, as well 
it should be. This could be a crisis, both in the IRS and in the 
economy generally. As the Commissioner has said, ``twenty-one months 
from now, there could be 90 million taxpayers who won't get their 
refunds, and 95% of the revenue stream of the United States could be 
jeopardized.'' Economists are concerned about the possibility of 
worldwide recession, and just last week Andrew Grove, the CEO of Intel 
Corporation, stated that ``the Federal government faces an ugly 
situation if it does not step up efforts to correct the Year 2000 
programming error in its agencies' computers.'' I am pleased that the 
Senate is forming the Special Committee on the Year 2000 Technology 
Problem to oversee the progress both in government and in the private 
sector on this matter.
    I thank the Chairman and look forward to hearing from our 
witnesses.

                               __________

               Prepared Statement of Harry G. Patsalides

    Mr. Chairman, members of the Committee, I appear before you today 
to discuss our investigative work at the Internal Revenue Service (IRS) 
since the September IRS hearings before this Committee. As the Deputy 
Assistant Inspector General for Investigations, I have overseen our 
office's investigations of the IRS, and will discuss some of these 
recent investigations.
    The hearings held before this Committee last September produced 
several groups of allegations which were referred for investigation to 
the Treasury Office of Inspector General (OIG). Telephone calls to the 
OIG hotline more than doubled in response to those hearings. This 
provided a serious challenge to our investigative resources as the OIG 
Office of Investigations has the responsibility for investigating all 
employees at the eight non-law enforcement bureaus, as well as senior 
level officials and all employees in the Offices of Inspection, 
Internal Affairs and Chief Counsel at each of the four law enforcement 
bureaus. The OIG staffing was insufficient to conduct the number of 
significant cases that warranted investigation. Because of this, many 
issues had to be returned to the bureaus for action because we lacked 
the resources to pursue all allegations.
    As a result of the September 1997 hearings, this office received 
four significant allegations involving misconduct by IRS officials. All 
of the allegations were investigated. However, due to our limited 
resources, we could only independently conduct one of the 
investigations, and we had to commit most of our investigators, for 
five months, from one of our three regional offices to conduct the 
investigation. We requested IRS Inspection to conduct two 
investigations. The fourth investigation was conducted by the OIG, but 
assistance was needed from three IRS Inspectors and two Bureau of 
Alcohol, Tobacco, and Firearms (ATF) agents.
    The four allegations pertained to a series of complaints involving 
IRS mismanagement and mistreatment of taxpayers, the use of collection 
statistics by IRS Collection Division managers to determine employee 
and group ratings, the establishment of an IRS national policy 
regarding the use of collection statistics, and reprisals against IRS 
employees who testified before this Committee.
    Because of its large scope, we referred the allegation regarding 
the questionable use of collection statistics to the IRS Chief 
Inspector's Office. Subsequently, we reviewed their work with the 
assistance of experienced investigators on detail to us from the other 
Treasury law enforcement bureaus--ATF, the U.S. Secret Service, and the 
U.S. Customs Service.
    Our office investigated the allegations made by Jennifer Long 
regarding the IRS Houston office. This was a substantial investigation 
involving most of our Houston office.
    Senator Nickles in the February 5th Finance Committee hearing, 
requested that we investigate a group of allegations he received 
regarding the Internal Revenue Service. We obtained the assistance of 
investigators from ATF and the IRS to work under OIG supervision on 
these allegations.
                               background
    The difficulties we encounter in performing our investigative 
mission are the result of a unique oversight structure. The result, 
developed over the last 20 years, hampered procedurally and in terms of 
resources. When the Inspector General Act of 1978 was being debated, 
the question of having an Inspector General for the Department of the 
Treasury was discussed extensively. A major item of debate was the 
Inspector General's access to the programs, activities and functions of 
the Department of the Treasury law enforcement bureaus: the ATF, the 
Customs Service, the Secret Service, and IRS. Initially, it was decided 
not to have a statutory OIG for the Treasury, but this debate continued 
for the next 10 years.
    In the meantime, the Treasury Department established an 
administrative Inspector General, but it was small and did not include 
the internal audit and internal investigative units of the four law 
enforcement bureaus. In 1986, GAO recommended that the Congress 
establish a statutory Office of Inspector General at the Department of 
the Treasury. The GAO also suggested that Congress consider special 
legislative provisions to accommodate the Department's concerns over 
the possible disclosure of sensitive law enforcement and tax 
information.
    When the Inspector General concept was expanded with the Inspector 
General Act Amendments of 1988, Congress created a statutory Inspector 
General in Treasury despite continued concerns about access to the law 
enforcement bureaus. As with other Departments that handle sensitive 
matters, Congress acknowledged that some special provisions were 
required. Accordingly, Congress created a unique structure for the 
Treasury Inspector General. Under the 1988 Amendments, the internal 
audit functions of the Bureau of Alcohol, Tobacco and Firearms, the 
Customs Service and the Secret Service were transferred to the 
Department of the Treasury's Office of Inspector General. However, 
those three bureaus retained their internal investigative units. The 
Office of Inspector General was given oversight, but not supervisory 
authority, for those internal investigative units.
                         investigative process
    With respect to the IRS, the internal audit and investigative 
functions were retained by the IRS Chief Inspector. As defined by the 
Congress and the Department's implementing procedures, the Inspector 
General's authority is carried out through an oversight, as opposed to 
supervisory, function that determines the degree of compliance with 
applicable professional standards and with Departmental and Service 
policies and procedures.
    The IRS Office of the Chief Inspector performs one of the most 
important audit and investigative functions in the Government, but has 
none of the elements of independence provided to the Presidentially-
appointed Inspectors General. The OIG, in order to ensure the most 
comprehensive coverage, routinely investigates alleged misconduct by 
senior-level IRS officials (officials in positions at the grade 15 
level or higher) and employees in the Office of Inspection and the 
Office of the Chief Counsel. As the Chief Counsel reports to the 
General Counsel for the Department of the Treasury, the Office of 
Inspector General has sole audit and investigative jurisdiction of that 
office. Usually, the Office of Inspector General refers allegations 
involving IRS employees who are in positions at the grade 14 level, and 
sometimes 15, or below, to the Internal Revenue Service for appropriate 
action. Since most taxpayer complaints are made against employees at 
this level, currently, our office has only minor involvement in 
taxpayer complaints against the IRS.
    The result of this action is that the IRS Chief Inspector has 
primary cognizance for internal audit and investigative activities in 
the Service. The Chief Inspector pursues his mission through two major 
organizational components Internal Audit and Internal Security. The IRS 
Office of the Chief Inspector carries out its duties with approximately 
1200 FTEs located in the four IRS regional offices and its National 
Office.
    organizational structure and resources for oversight commitments
    Within our Office of Investigations, we have approximately 46 FTEs, 
which include 33 criminal investigators, to conduct investigations at 
the twelve Treasury bureaus. With this staffing, we have responsibility 
for investigating all employees at the eight non-law enforcement 
bureaus, as well as senior level officials and all employees in the 
Offices of Inspection, Internal Affairs and Chief Counsel at the four 
law enforcement bureaus. The Office of Inspector General has an 
Oversight unit with a current staff of 11 which conducts oversight 
reviews of the four law enforcement bureau's internal investigative 
functions, including IRS. In addition, this unit handles most of our 
special reviews which result from congressional requests and hotline 
complaints. Currently, almost all of that unit's staffing is devoted to 
issues involving IRS.
    The Treasury OIG's Office of Investigations receives and processes 
complaints of alleged misconduct involving employees in each of the 
twelve Treasury bureaus. The complaints are evaluated by Office of 
Investigations management officials who initiate appropriate 
investigative action.
    When the Office of Inspector General conducts an investigation, an 
investigative report is issued and referred for prosecutive and/or 
administrative action. The administrative action imposed on Treasury 
employees is a management decision. The OIG has neither the authority 
nor any influence in determining the extent or the nature of the 
administrative action imposed on Treasury employees.
    The OIG Office of Oversight is currently performing a mult bureau 
review of investigative statistics reported by the four Treasury 
enforcement bureaus. The objective of the review is to assess the 
accuracy of investigative statistics sent to the Inspector General by 
these bureaus with reference to reports of investigation pending 
management adjudication. The review was structured to determine the 
dependability of reported statistics and, to a limited extent, to 
evaluate the adjudication processes at the enforcement bureaus and to 
identify possible causes for delay.
    In dealing with the Internal Revenue Service, this office has 
encountered its share of case-related problems. The Internal Revenue 
Service has failed to timely refer complaints to this office, the 
Internal Revenue Service has been slow to take administrative action 
against certain IRS employees, and this office has viewed some 
adjudicative actions taken by the IRS as weak decisions.
    Treasury Directive 40-01, Part I, 5, Duties and Responsibilities of 
Heads of Internal Affairs and Inspection Offices, requires the 
immediate referral of allegations involving ``senior officials'' and 
``employees of Internal Affairs and Inspection Offices.'' IRS has 
violated this directive. For example, Inspection referred an allegation 
of possible misconduct by a senior IRS official to the OIG, seven or 
more months after they received it. In the interim, Inspection 
conducted inquiries allegedly to assess the validity of the allegation 
and determine if a pattern of such conduct existed. As part of that 
investigation, Inspection questioned the senior official about the 
employee's conduct.
    Another example of the problem was identified during an OIG 
investigation of an allegation involving a senior Treasury official. An 
OIG special agent found a note prepared by an IRS senior official. The 
note showed that two IRS senior officials met with the then-acting 
Chief Inspector concerning ``possible/potential attempts to influence 
IRS action'' by a Departmental official. However, no referral was 
received by the OIG on this matter.
    Subsequently, by memorandum dated approximately 16 months later, an 
IRS senior official notified the Chief Inspector of allegations 
regarding possible bribery, graft and conflict of interest involving a 
Treasury official. The allegations were related to the prior referral 
made to the acting Chief Inspector. Again, no referral was received by 
the OIG from the IRS. The allegations eventually were reported to the 
OIG. This delay, of over two years, in reporting allegations to the 
OIG, has seriously impacted on the effective and timely resolution of 
the allegations.
    These delays by the Office of the Chief Inspector are not only a 
disservice to the OIG, but are a disservice to the Treasury Department 
and to the public we serve.
                       access to tax information
    The Office of Inspector General must provide IRS management with a 
``Notice of Intent'' to access tax information, which must be 
authorized by IRS, before IRS employees will provide the Office of 
Inspector General with tax information. The following is an example of 
the difficulties that can result from this procedure.
    As part of our review of the Chief Inspector's investigative 
coverage, we requested two Reports of Investigation that had not been 
issued. Our request to review both of these reports was initially 
refused. However, with regard to one of the reports, our efforts to 
review the report continued for about 30 days, at which time the Chief 
Inspector indicated that he would allow us to review the report but we 
could not make copies.
    In yet another case, after making arrangements with the Chief 
Inspector's personnel to review the report, we were informed that our 
initial Notice of Intent to Access was not sufficient. Further, we were 
informed that IRS needed another Notice of Intent if we wanted to 
review the document. In total, it took 45 days to access the report.
                         investigative results
    The OIG Office of Investigations has its 33 criminal investigators 
assigned in six cities to conduct investigations across this country. 
During FY 97, with these limited investigative resources, the 
Treasury's OIG Office of Investigations closed a total of 112 cases 
which resulted in 7 successful prosecutions, 41 administrative actions 
and the debarment of two contractors. During FY 1995, 1996 and 1997, 
the Office of Investigations closed a total of 413 cases which resulted 
in 31 successful prosecutions, 158 administrative actions and the 
debarment/suspension of 9 contractors.
    During these three fiscal years (1995-1997), the Office of 
Inspector General received a total of 846 complaints related to the 
IRS, and initiated 111 cases based on these complaints.
    We have not been able to conduct needed investigations of all 
significant allegations involving IRS officials due to our limited 
investigative staff. Consequently, we had to refer several significant 
allegations to the IRS Chief Inspector's Office for investigation. The 
Chief Inspector reports back to us on the results of these 
investigations.
                      jennifer long's allegations
    On October 23, 1997, the Office of Inspector General initiated an 
investigation regarding the allegations raised to the Senate Finance 
Committee by IRS employee Jennifer Long.
    The OIG reviewed Long's testimony before the Committee and 
summarized her testimony into eight separate allegations. The OIG 
limited the scope of its investigation to Long's allegations as they 
pertain to the IRS Houston District. Although Long's allegations of IRS 
problems raised before the Committee were broad in nature, the OIG 
requested Long to provide specific examples of each allegation. An 
investigative report was prepared that examines in detail, the facts 
surrounding her specific allegations. The information in the report 
cannot be extrapolated to the IRS nationwide.
    The results of this report relate only to the findings of the 
examples Long provided to the OIG. For example, the report states that 
the OIG did not substantiate Long's allegation that IRS Inspection is a 
tool of the District Director. That statement relates to the Houston 
District only. The OIG did not examine that issue in any other IRS 
District. In addition, Long alleged that IRS managers harass and 
retaliate against IRS employees. Although the report does not 
substantiate her specific allegations of harassment, it cannot be 
concluded that IRS managers do not harass or retaliate against 
employees in the Houston District or in other Districts.
    During the investigation of the allegations raised by Jennifer 
Long, additional issues were identified which have led to possibly six 
new cases being opened.
    As a result of the investigation of Long's allegations, several 
areas of significant concern were noted by the OIG. IRS management 
appears to treat managers differently than employees when it pertains 
to disciplinary action. OIG was advised that IRS managers are allowed 
to ``voluntarily'' step down from their management position rather than 
being involuntarily removed. IRS management stated this is done to save 
money in case of a lawsuit. An Inspection manager also stated that IRS 
managers are punished less severely than IRS employees. This manager 
was of the opinion it is based on human nature since most managers, to 
have attained their position, have probably worked well over a long 
period of time with little or no prior disciplinary action.
    Also, if an employee files a grievance, an EEO complaint, or a 
lawsuit against an IRS manager and the employee wins the settlement, 
usually no disciplinary action is taken against the manager for 
allegedly violating the rights of the employee. This process could 
allow managers the freedom to ``harass'' an employee since no action is 
taken against them. This process could give employees the perception 
that they cannot take any action against a manager who harasses them or 
retaliates against them.
    Employees may feel they are retaliated against by management for 
reporting complaints to Inspection. A supervisor, Internal Security, 
Houston, TX, said employees may feel they are routinely ignored after 
providing the information to Inspection, because the office does not 
notify the complainant of the action taken by Inspection.
    Long alleged that Inspection advises IRS management of allegations 
provided to them, and who provided the information. When employees make 
a complaint to Inspection, they usually are not advised whether the 
information will be investigated by Inspection or referred to IRS 
management for action. If management addresses the allegation, 
management does not advise Inspection of the action taken regarding the 
employee's allegation. If an employee complains about a manager to 
Inspection and Inspection refers the information to management for 
action, the manager may be advised of the complaint and the 
complainant's name. When employees are questioned about their 
complaints by management, an employee may feel that the manager will 
retaliate against the employee for complaining. There appears to be 
confusion on the part of IRS Inspection managers and employees 
regarding the process of providing complainant's names to IRS 
management. Several of the Inspection employees interviewed said the 
complainants' names are provided to management, while others indicated 
the names are not provided to management.
                               conclusion
    In summary, although there are serious difficulties we work through 
in performing our investigative mission at the IRS, we believe the 
Treasury Office of Inspector General has performed a significant amount 
of investigative work in response to the September 1997 hearings on the 
IRS.
    The Office of Inspector General was able to obtain needed 
investigative resources from other organizations to meet the 
challenges. Our efforts have established that there are significant 
concerns yet to be addressed by the IRS.
    Thank you for the opportunity to share my thoughts with you. I will 
be happy to answer any questions that you may have.

                               __________

               Prepared Statement of Charles O. Rossotti

    Mr. Chairman, I want to thank you for this opportunity to appear 
before the Committee. I also want to thank you and Senator Moynihan for 
your leadership in ensuring that our taxpayers are treated fairly and 
receive quality service.
    I remember the Chairman's opening statement at my confirmation 
hearing last October. You said that the Congress will remain a 
committed and vigilant ally of the American people, and I am grateful 
for that resolve.
    We understand that the duty of Congress, and specifically the 
Finance Committee, to exercise its oversight responsibility of the IRS. 
You must identify problems and weaknesses at the agency. You must 
ensure that we are doing our job properly, and when we are not, point 
out the mistakes and suggest remedies to correct them.
    Mr. Chairman, at my confirmation hearing, I pledged to bring about 
fundamental change at the IRS to improve in the broadest sense the way 
the agency serves the public. I reaffirm that commitment today.
    The hearings of the past week further demonstrate that fundamental 
change at the IRS is needed. I think every American who heard the 
testimony would be disturbed, and we must change the conditions that 
lead to the kind of situations described by your witnesses. We must 
help and better serve taxpayers who comply with their obligations. We 
must have absolute respect for the rights of all taxpayers. We must 
insist on fairness and accountability throughout the agency. We must 
have a quality workplace which provides every employee the positive 
environment needed for them to be productive and to provide quality 
service to taxpayers.
    As you, Mr. Chairman, and others on the Committee have noted, the 
overwhelming majority of the IRS workforce are honest, hardworking, 
dedicated employees and they are just as upset about allegations of 
misconduct and mistreatment of taxpayers. After all, we are all 
taxpayers.
    And although I am legally prevented from speaking about the 
individual cases discussed this week, I want to tell the Committee 
today that the abuse of even one taxpayer or one employee is one too 
many. I promise you today that we will investigate every allegation and 
take appropriate disciplinary action where the allegations are 
substantiated.
    The changes I have proposed will require a dramatic break from past 
practices in every facet of the agency, from internal structure and 
technology, management roles and responsibilities to recruitment of 
senior executives. And I stress that in many cases, this top-to-bottom 
review of operations and modernization requires the help of outside 
experts.
    However, change of this magnitude will take time. There is no magic 
formula that will instantly solve the IRS' problems and transform it 
into a quality service organization. Fundamental change will require a 
comprehensive, systematic and sustained approach. We will make 
progress, Mr. Chairman, but it will be step by step over a period of 
years. And we must set priorities as to which problems we first turn 
our attention. For example, much as we wish we did not have to, we must 
do whatever is needed to solve the Century Date Change problem, and 
this massive problem consumes much management time. And while we are 
changing the IRS and managing the Century Date change, we must also 
operate the IRS, which even in normal times is a demanding and risky 
task.
    Effecting meaningful change at the IRS will require help from the 
Congress, especially the IRS restructuring legislation that the Senate 
will soon debate. The bill reported out of the Finance Committee 
contains initiatives that are key to our modernization effort, from 
changing the organizational structure to establishing an oversight 
board and expanding and enhancing taxpayers' rights and providing 
essential personnel flexibilities.
    On a basic level, reform of this magnitude requires a total 
rethinking of the IRS's goals and guiding principles which point the 
way to essential cultural change. The Senate Finance Committee 
legislation is on target by directing the IRS to revise its mission 
statement to provide greater emphasis on serving the needs of 
taxpayers. That service credo must be instilled throughout the agency.
    In my testimony before this Committee on January 28, 1998, I 
articulated the three goals by which we should measure our success at 
the IRS: first, service to each taxpayer by making filing easier and 
providing prompt, professional and helpful treatment to those who may 
owe money; second, service to all taxpayers by ensuring that compliance 
is fair; and third, productivity through a quality work environment.
    In the same testimony, I also stated the five principles that 
should guide the operations of the modernized IRS: (1) understanding 
and solving problems from the taxpayer's point of view; (2) expecting 
managers to be accountable; (3) using balanced measures of performance; 
(4) fostering open, honest communications; and (5) insisting on total 
integrity. You may recall the large chart included again as Exhibit 1 
which pointed the future direction of the IRS and which has been widely 
distributed inside the IRS.
    This week's hearings directly reinforce the need to integrate these 
goals and principles throughout the IRS's organization and operations. 
For example, proper treatment of individual taxpayers means that the 
Criminal Investigation Division must always follow proper procedures 
and be ever mindful of the impact of its investigation techniques on 
those taxpayers. The goal of a quality work environment clearly 
requires no toleration of discrimination and one which we give the best 
to each employee so the taxpayers can get the best from each employee.
    My challenge is to fit all of these pieces together and to 
implement--not just articulate--the changes needed to make them a 
reality.
                            law enforcement
    Mr. Chairman, as part of my ongoing review and systematic study of 
all parts of the IRS, I concluded that a particular approach was needed 
for the agency's specialized law enforcement operations. Because of 
these units' special authority and unique characteristics as well as 
their importance to the integrity and functioning of the IRS, I 
concluded it was important to engage the service of some highly 
respected experts to assist in my efforts.
    First on my list was how the IRS polices itself. The IRS' 
Inspection Service, consisting of Internal Audit and Internal Security, 
performs a vital role in protecting the agency against external 
attempts to corrupt the tax system or threaten its employees. It is 
also charged with detecting and deterring fraud and abuse in our 
internal operations.
    For example, since FY 1990, the Internal Audit function performed 
64 reviews of criminal investigation activities, and from FY 1995 
through FY 1997, Internal Security investigations resulted in 
administrative actions against 173 Criminal Investigation Division 
employees and eight criminal actions.
    In February 1998, former Comptroller General Charles Bowsher 
accepted my offer to head up an independent review of the Inspection 
Service to advise me how it can best perform its essential mission. He 
is being assisted by a staff of experienced auditors and investigators 
on detail from agencies outside the IRS. When Mr. Bowsher completes his 
report, which I expect to receive in June, I will make it public and I 
will be very much guided by his findings and recommendations.
    Mr. Bowsher and his team are currently investigating any and all 
aspects of the Inspection Service including: (1) a review of the 
organization and methodology used by Inspection to plan and deliver its 
audits and investigations; (2) the relationship between the Inspection 
Service and IRS management; and (3) the relationship between the 
Inspection Service and Treasury Inspector General. The Senate Finance 
Committee bill will move most of the Inspection Service to the Treasury 
Department--a plan which Secretary Rubin and I both support--in order 
to create greater independence. Mr. Bowsher's report will, 
nevertheless, be quite useful.
    For example, Mr. Bowsher's interim reports have already indicated 
to me that there is a need to improve the process for investigation and 
action on allegations of misconduct by managers--when those allegations 
fall short of what would be a criminal offense. As indicated in some of 
the testimony in your hearings, this problem must be addressed.
    As an interim step, I have set up a special panel of officials from 
outside the IRS to act on possible misconduct cases arising from the 
misuse of statistics cases that have been under investigation since 
last fall. This will ensure a fair and objective resolution of these 
important cases. The panel has recently received the final 
investigational reports on certain cases and has begun its 
deliberations.
    Mr. Chairman, in an organization as large and geographically 
dispersed as the IRS, it should some as no surprise that there are 
instances of inconsistent action with regard to employee discipline.
    The legislation reported out of your committee strengthens our 
actions by clearly establishing removal from one's position for serious 
misconduct. While I still have some concerns about how this will be 
administered, the message is clear. Serious wrongdoings involving 
either a taxpayer or another IRS employee will be dealt with swiftly 
and harshly.
    In addition, in order to improve the fundamental process, I am 
setting up a disciplinary task force to ensure that the IRS has 
sufficient processes and procedures in place to identify, evaluate and 
take consistent and timely action on allegations and complaints against 
IRS employees. It will also ensure that complaints or allegations of 
misconduct lodged by employees are identified, evaluated and acted upon 
in a consistent and timely fashion. This task force will also be 
advised by an experienced outside expert.
    My next action concerned the second major specialized law 
enforcement unit of the IRS is the Criminal Investigation Division. The 
ClD's primary mission is to foster voluntary compliance with our tax 
laws. It plays a vital role by investigating tax evasion, enforcing our 
tax laws in cases of willful non-compliance and ensuring the overall 
fairness of the tax system. Our tax system depends on each taxpayer 
having confidence that neighbors or competitors are paying their fair 
share of taxes. Although our specific measures of non-compliance are 
outdated, the current extrapolations indicate that non-compliance of 
all varieties, commonly known as the ``tax gap,'' now is approximately 
$195 billion/year, which equates to more than $1600-per-year for every 
tax return filed by compliant taxpayers. It is critical that the public 
have confidence in IRS' ability to fight tax evasion and the CID be 
beyond reproach.
    At the direction of Congress, ClD's statutory authority was also 
expanded to include not only criminal violations of the Internal 
Revenue Code, but also money laundering and currency reporting 
violations. The CID also has an important role in combating narcotics 
trafficking.
    The testimony you heard this week raised questions about whether 
CID is observing taxpayer rights in all instances, and whether 
appropriate investigative techniques are being employed. Given the 
enormous importance of the Criminal Investigation Division to the IRS 
and to the nation, I proposed the following seven-point action plan in 
conjunction with Secretary Rubin and the Treasury Department.
    One, I launched an independent review of the Criminal 
Investigations Division that will be headed by former FBI and CIA 
Director William Webster. Judge Webster's integrity and years of 
experience in Federal law enforcement make him an ideal candidate for 
the job. He will be assisted by Mr. Michael Shaheen Jr. and a group of 
personnel with criminal investigatory and law enforcement experience 
within the federal government. Mr. Shaheen is Chief Counsel and Deputy 
Executive Director of the Commission on the Advancement of Federal Law 
Enforcement. Until recently, he also served as Counsel/Director of the 
Office of Professional Responsibility of the Department of Justice.
    Like the independent evaluation of the IRS Inspection Service being 
led by Mr. Bowsher, the CID review is part of my overall strategy to 
assess the full range of IRS operations. This review will examine all 
aspects of CID--including operations, procedures, case outcomes, case 
review practices, discipline, and performance measures for managers and 
employees.
    Mr. Chairman, I want to stress that as part of his evaluation, I 
have asked Judge Webster and his team to examine the cases involving 
the CID that were brought before the Committee this week.
    Two, as I mentioned with regard to the Inspection Service, I 
support the creation of a new Inspector General for Tax Administration 
at the Treasury Department. Like all Inspectors General, the new IG for 
Tax Administration will report directly to Congress and will have the 
independent authority to investigate all allegations of employee 
misconduct, including those at the CID.
    Three, we will centralize the disciplinary process for CID managers 
and employees. To ensure appropriate and consistent discipline in CID 
misconduct cases, a specified group of labor relations experts will 
review all such cases and recommend disciplinary actions.
    Four, we are creating a new complaint system for taxpayers and 
employees who have complaints about CID investigations. The new 
Treasury IG for Tax Administration will accomplish this task by 
performing the following functions.
    The IG will designate officials within the office of the IG for Tax 
Administration to specialize in Criminal Investigations. They will be 
responsible for tracking and following up on complaints. The CID 
specialists will be expected to make prompt initial contact with the 
complainant. The CID specialists will also identify problems, recommend 
solutions, and track the implementation of these solutions. The IG will 
also publicize its 1-800 number, fax line, and E-mail address to ensure 
that taxpayers and employees know how to register complaints about the 
CID. It will also work with local Taxpayer Advocates and Citizen 
Advocacy Panels to help achieve this goal. In addition, the IG will 
establish clear procedures to ensure that taxpayer and employee 
complaints, including anonymous ones, are taken seriously, properly 
reviewed, and kept confidential. Penalties will be established for IRS 
employees who violate confidentiality.
    Five, we will institutionalize oversight of CID within Treasury's 
Office of Enforcement. To the extent permissible by law, the Under 
Secretary for Enforcement will ensure that ClD's policies and 
procedures are fully consistent with those of Treasury's other law 
enforcement bureaus (Customs, Secret Service, and ATF). The Office of 
Enforcement will conduct periodic reviews to ensure compliance with 
policies and procedures.
    Six, I am requesting that the Joint Committee on Taxation join the 
Treasury and the IRS in conducting a study of willful noncompliance. 
This review will examine the sources and extent of taxpayer 
noncompliance and measures that might address this problem.
    Seven, we must promote a culture of openness, quality, and 
integrity within the CID, consistent with my vision for the entire 
agency. I have issued a directive to all IRS employees about their 
obligation to report misconduct, fraud, waste, and abuse, and to 
guarantee employees freedom from reprisal when they report any 
misdeeds. The directive will apply, of course, to CID employees, as 
well as the IRS work force.
    In addition, as indicated in the testimony of Mr. Burnham and Ms. 
Long, there is no reason whatsoever for IRS statistics on 
investigations, prosecutions and convictions to be suspect. We will 
work with Justice to reconcile our statistics and we will work with 
outside groups to publish the maximum amount of statistical data 
permissible under our disclosure laws.
    Mr. Chairman, these actions are focused on near-term problems. 
Another longterm issue is the proper organization and management 
structure for CID. Judge Webster's review, together with the study 
being conducted by Booz Allen, will speak to these larger issues, such 
as the proper structural placement of CID in the modernized IRS. Thus, 
we will end up with a thorough review and proper and effective 
organization and management of CID, both in the short- and long-term.
                        work environment issues
    Mr. Chairman, as a manager with 28 years of experience, I am also 
deeply troubled and distressed by reports of discrimination and 
harassment in the IRS workplace. I cannot emphasize enough the 
importance I place on creating a positive working environment free of 
racial discrimination, reprisal and harassment, and a work place that 
insists on accountability and open and honest communications among 
employees and management.
    As I previously stated, one of the three goals for my modernization 
plan is productivity through a quality work environment. It is key to 
creating an organization that places a premium on service. From my 
experience, there is a direct relationship between customer service and 
employee satisfaction. Those companies and organizations that excel in 
customer service invariably have employees who feel respected as 
individuals and valued by management for the contribution they make to 
the overall service effort.
    As we seek new ways to work together in a diverse environment, the 
IRS reflects many of the challenges and divisions that our society as a 
whole faces. In a nationwide organization of more than 100,000 
employees, some serious incidents occur. I am committed to addressing 
each and every complaint and I believe the new Inspector General, as 
proposed by the restructuring legislation, will prove to be an 
invaluable resource in addressing these concerns. In addition, the new 
Disciplinary Action Review Task Force that is conducting a study on the 
complaint and disciplinary processes for all IRS operations should also 
prove to be helpful in our efforts to combat discrimination and 
harassment.
    The employee complaints are also symptomatic of some broader IRS 
management and work environment issues. There are specific stresses 
upon the organization and its work force, such as downsizing, an 
archaic, heavily-layered organizational structure and antiquated 
technology. In addition, the IRS' mission is changing from one of pure 
collection to focusing on taxpayers rights and service. For some, it is 
not an easy adjustment to make. Our employees are also sensitive to the 
public criticism of the agency. Most of them had nothing to do with 
many of the well-publicized cases discussed in these hearings and the 
media, but nevertheless, many employees internalize this criticism.
    Mr. Chairman, there are no quick fixes to these problems, but that 
does not diminish my commitment to solving them. Once again, I will 
ensure that each of the cases that were presented during this week's 
hearings is examined. I have also recently issued guidelines and 
information on specific aspects of these issues. On April 28, 1998, I 
issued a memorandum to all IRS employees stating that they have an 
obligation to report misconduct, fraud, waste and abuse. I made it 
clear that the IRS has a stringent policy that guarantees employees 
freedom from reprisal when they report such action. IRS employees were 
also provided with a description of different reporting avenues.
    On April 29, I issued the new performance standard for executives 
and managers on EEO matters. This new standard comes after consultation 
with the Departments of Justice and Treasury, and reaffirms our 
commitment to further progress in eliminating discrimination, promoting 
employees based on merit and qualifications, and encouraging a diverse 
workforce and to better the taxpayers.
    On a broader scale, the modernization process calls for a 
management structure and working environment that will over time create 
a more positive working environment. These fundamental changes include:
          (1) Stronger and direct internal communications; (2) open and 
        direct employee communications with management and the ability 
        of employees to grow to their full potential; (3) a flatter 
        management structure that focuses on broad goals and a team 
        approach; and (4) high-quality and tailored training.
                     audit selection and execution
    Mr. Chairman, the final area I want to address is audit selection. 
First, I stress that I am new to this area. I am not a CPA or a tax 
attorney; I look at audits much like the average business person does. 
And there is a distinct advantage in that perspective in that I will 
not believe that we are doing things right until I feel I can explain 
it to the average taxpayer.
    The audit process and our published statistics are terribly 
confusing and in some cases, frightening for taxpayers. For example, 
how many taxpayers know the difference between a correspondence audit 
and a field audit? Very few, I would guess. Some taxpayers also believe 
that they are being audited when they receive a letter from the IRS 
trying to match a 1099 or W-2 form. Math errors also no longer count as 
audits, when they once did, making historical trends hard to 
understand.
    Once again, it's a classic problem of focus. For too long, the IRS 
expected taxpayers to understand our terminology and our way of doing 
things. Mr. Chairman, that business philosophy no longer works. We must 
demystify the audit process and make it clear that an audit is not a 
signal that a taxpayer has done anything wrong. An audit should be used 
only to determine whether taxpayers have paid their correct tax 
liability; audit selection should never be punitive and audits should 
never be aimed at generating any specific amount of revenue. And all 
audits should be conducted in a thoroughly professional manner.
    Concerns have also been raised that IRS audits unfairly target the 
poorest taxpayers. This can be broken down into two parts. As shown in 
Table 1, included in audit statistics are two special categories of 
activities, comprising 45% of what the IRS reported last year as 
audits. One category is audits of taxpayers who filed no return for the 
year. The second is taxpayers who claimed Earned Income Tax Credits 
(EITC) an area that Congress has asked the IRS to pay special attention 
to because of historically high overclaim rates.
    For the remaining 55% of audits, which comprise all audits of 
individual taxpayers who filed returns and did not claim ElTCs, the 
statistics indicated two important points: One, the chance of a low-
income taxpayer being audited is only about 1/2 of 1%, and second, the 
chance of a taxpayer with income over $100,000 being audited is 
actually higher.
    This set of statistics is a small indicator of the work that needs 
to be done to provide the public a greater understanding of the IRS 
compliance activities.
    Audit coverage also varies from district to district. This is 
partly because incomes and compliance vary widely; the population is 
not homogeneous from district to district. To be fair and efficient, we 
must audit taxpayer returns that have the greatest probability of 
error, and they are not uniformly distributed in each district. For 
example, the eight districts with the consistently highest audit rates 
had a much larger concentration of business returns than those with low 
audit rates--7.6 percent of the returns filed versus 5.6 percent. 
Studies also show that taxpayers tend to be less accurate in reporting 
their business income-typically due to the absence of third party 
information reporting--than in reporting wages, interest, dividends and 
pension. With respect to conduct of individual audits, proper 
supervision--in which quality standards are the paramount concern--is 
of the utmost importance. As with all areas of the IRS, the role of the 
independent IG in investigating any instance of improper influence on 
an audit, is essential.
    I am convinced that the long-term solution to many audit concerns 
lies in the IRS modernization concept that I have advanced. It will 
allow better management of compliance resources on a nationwide basis. 
Its customer focus will stress preventing problems before they occur, 
such as EITC Awareness Days and Problem Prevention Days. Proper 
measurement which focus on quality and the taxpayers' viewpoint will be 
an essential element.
    This reorganization, which would streamline the IRS' complex 
structure, would allow for a better explanation of how we allocate our 
resources, in terms of activities, personnel and location. Moreover, by 
designing the IRS around taxpayer groups, we would have a much better 
mechanisms for managing and controlling compliance activities. I pledge 
to the Committee that in designing the new organization, we will place 
great emphasis on the control over audit selection.
                               conclusion
    Mr. Chairman, last October, I commented that the renewed interest 
of the Congress in IRS management issues is an essential force for 
positive change. Six months later, I still firmly believe that.
    The first round of Senate Finance Committee hearings produced 
positive results for taxpayers, as I hope these will. The IRS stopped 
the practice of ranking the 33 districts on enforcement results. We 
prohibited the use of enforcement results to evaluate employees. We 
established new procedures requiring a higher level of approval for 
seizure of property for non-payment of taxes to ensure that collection 
enforcement tools, such as seizures are only used in appropriate cases. 
We spent over 8,600 staff days and $3.4 million investigating and 
auditing the use of enforcement statistics in collections.
    We also put more muscle behind the Taxpayer Advocate's 
recommendations to IRS functions. There is now a new authority to 
mandate that administrative or procedural changes requested by the 
Advocate be implemented.
    We also created the new Taxpayer Treatment and Service Improvements 
Program to implement the hundreds of recommendations that will improve 
our treatment of taxpayers and the service we provide them. I stress 
again that appropriate disciplinary action will be taken if allegations 
of misconduct and mistreatment prove true.
    Since the September hearings, the IRS has also created a number of 
initiatives to improve taxpayer service and help taxpayers comply with 
the law. Last November, we began hosting monthly Problem Solving Days 
which did not end with the conclusion of filing season but will 
continue to be offered across the country to help taxpayers clear up 
longstanding tax problems.
    As part of our Saturday Service Days, we also hosted Problem 
Prevention Days--keeping with my commitment to assist taxpayers in 
preventing problems--and sponsored an Earned Income Tax Credit 
Awareness Day to help taxpayers determine if they are eligible for the 
credit and then show them the correct way to fill out the tax return.
    Mr. Chairman, I realize that these are small, first steps 
addressing some very large problems. Much more needs to be done, and 
will be done. Fundamentally changing the way the IRS does business is a 
long-term process requiring a long-term commitment from both the 
Congress and the IRS. I am here again today to pledge myself to that 
goal and to our partnership. Thank you.

Attachments.



                                                      Table 1.--Examinations and Related Activities
                                                                         FY 1997
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Examinations                                 Related Activities
                                                        ------------------------------------------------------------------------------------------------
                        Programs                         Correspondence                   Total
                                                          Examinations     District   Examinations  Underreported      ASFR      Math Error     Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         RETURNS
Earned Income Tax Credit (EITC)........................        360,101                     360,101       903,941     1,264,042
Dependent Taxpayer Identification Number (TIN) Issue...                                                                           1,300,000    1,300,000
Nonfiler...............................................        217,141       111,701       328,842                     392,598                   721,440
All Contacts excluding EITC TIN and Nonfilers..........        226,386       603,914       830,300       931,354                               1,761,654
    Total..............................................        803,628       715,615     1,519,243       931,354       392,598    2,203,941    5,047,136
All Contacts excluding EITC TIN and Nonfilers--Business
 vs Non-Business Analysis
Non-Business:
  Under $25,000........................................        292,586       178,985       271,571       319,376                                 590,947
  $25-$100K............................................         61,521       205,034       266,555       434,969                                 701,524
  $100 K & Over........................................         36,659        73,923       110,582       102,620                                 213,202
Business:
   Under $25,000.......................................          8,870        32,887        41,757        10,869                                  52,626
  $25-$100K............................................         13,661        56,094        69,755        34,792                                 104,547
  $100 K & Over........................................         13,089        56,991        70,080        28,728                                  98,808
All Contracts excluding EITC TIN and Nonfilers.........        226,386       603,914       830,300       931,354
                                                                                                                                  1,761,654
EITC, Dependent TIN & Nonfiler Tolal...................        577,242       111,701       688,943             0       392,598    2,203,941    3,285,482
    Total..............................................        803,628       715,615     1,519,243       931,354       392,598    2,203,941    5,047,136
EITC, Dependent TIN & Nonfiler Total as %..............            72%           16%           45%            0%          100%         100%          65%
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                Table 1.--Examinations and Related Activities--Continued
                                                                         FY 1997
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Examinations                                 Related Activities
                                                        ------------------------------------------------------------------------------------------------
                        Programs                         Correspondence                   Total
                                                          Examinations     District   Examinations  Underreported      ASFR      Math Error     Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        COVERAGE
Earned Income Tax Credit (EITC)........................         00.00%         0.00%         0.76%         1.07%
Dependent Taxpayer Identification Number (TIN) Issue...          0.00%         0.00%         0.00%         0.00%         0.00%        1.10%        1.10%
Nonfiler...............................................          0.18%         0.09%         0.28%         0.00%         0.33%        0.00%        0.61%
All Contacts excluding EITC TIN and Nonfilers..........          0.19%         0.51%         0.70%         0.79%         0.00%        0.00%        1.49%
    Total..............................................          0.68%         0.60%         1.28%         0.79%         0.33%        1.86%        4.26%
All Contacts excluding EITC TIN and Nonfilers--Business
 vs Non-Business Analysis
Non-Business:
  Under $25,000........................................          0.16%         0.30%         0.46%         0.54%         0.00%        0.00%        1.01%
  $25-$100K............................................          0.13%         0.44%         0.58%         0.94%         0.00%        0.00%        1.52%
  $100 K & Over........................................          0.70%         1.41%         2.10%         1.95%         0.00%        0.00%        4.05%
Business:
   Under $25,000.......................................          0.36%         1.33%         1.69%         0.44%         0.00%        0.00%        2.14%
  $25-$100K............................................          0.38%         1.56%         1.94%          097%         0.00%        0.00%        2.90%
  $100 K & Over........................................          0.64%         2.79%         3.43%         1.41%         0.00%        0.00%        4.84%
All Contracts excluding EITC TIN and Nonfilers.........          0.19%         0.51%         0.70%         0.79%         0.00%        0.00%       1.49%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Glossary
 Correspondence Examination: Examinations performed in the Service Center through correspondence.
District: Examinations performed by Revenue Agents and Tax Auditors in the field.
Underreporter: Document matching program that matches third party information (wages, interest, etc.) with the amounts reported on returns.
ASFR (Automated Substitute For Return): Process in which Information Reporting Program (IRP) documents are matched to establish a tax liability where no
  return is filed and a substitute return is generated by the Service.
Math Error: Process that allows the IRS to correct certain ElTC/Dependent TIN errors made by taxpayers on their returns. This does not reflect the 3.73
  million math error contacts that are not EITC or Dependent related.
TIN: Taxpayer Identification Number.

                        Department of the Treasury,
         Internal Revenue Service, Communications Division,
                                                    Washington, DC.

NEWS RELEASE--4/27/98

  SEVEN-POINT PLAN TO IMPROVE THE IRS CRIMINAL INVESTIGATION DIVISION

    WASHINGTON--Commissioner Charles O. Rossotti today announced a 
seven-point plan to improve the Internal Revenue Service's Criminal 
Investigation Division (CID).
    ``This is part of my long-term commitment to effect fundamental 
change at the IRS--to ensure fairness of treatment and give the 
American people the quality service they deserve,'' Rossotti said.
    The seven-point action plan is part of an ongoing assessment of IRS 
activities that Rossotti began when he assumed office in November 1997. 
In February, Rossotti appointed former Comptroller General Charles 
Bowsher to head an independent review of the IRS Inspection Service. In 
March, he created a special program to implement the hundreds of 
recommendations to improve the IRS's treatment of taxpayers and the 
service it provides them.
    In recent months, concerns have been raised about the activities of 
CID. ``The Criminal Investigation Division of the IRS plays a pivital 
role in fighting tax evasion, and it is critical that its operations be 
beyond reproach,'' Rossotti said. ``We must address these concerns in a 
thorough, fair and objective fashion.''
    ``I fully support Commissioner Rossotti's efforts to take 
aggressive actions to improve the Criminal Investigation Division at 
the IRS,'' said Treasury Secretary Robert E. Rubin. ``These steps will 
increase accountability and openness at the IRS and are a part of our 
continuing commitment to delivering to the American people the IRS they 
deserve  an agency that respects taxpayer rights while collecting the 
revenue due.''
    The plan the IRS announced today is attached.

     Plan to Improve the Criminal Investigation Division at the IRS

    1. Launch an independent review of the Criminal Investigation 
Division (CID). This effort will be led by an expert in federal law 
enforcement. Like the independent evaluation of the IRS Inspection 
Service being led by Charles Bowsher, the former head of the GAO, the 
CID review is part of the Commissioner's overall strategy to review the 
full range of IRS operations. This review will examine all aspects of 
CID- including operations, procedures, case outcomes, case review 
practices, discipline, and performance measures for managers and 
employees.
    2. Support the creation of a new Inspector General for Tax 
Administration at the Treasury Department. Like all Inspectors General 
(IG), the new IG for Tax Administration will report directly to 
Congress and will have the independent authority to investigate all 
allegations of employee misconduct, including abuse of force and Equal 
Employment Opportunity (EEO) complaints.
    3. Centralize the disciplinary process for CID managers and 
employees. To ensure appropriate and consistent discipline in CID 
misconduct cases, a specified group of labor relations experts will 
review all CID misconduct cases and recommend disciplinary actions. In 
addition, Commissioner Rossotti has requested that a new Disciplinary 
Action Review Task Force conduct a study on the complaint and 
disciplinary processes across the entire IRS. This study will be 
conducted with the assistance of a qualified outside expert.
    4. Create a new complaint system. The new Disciplinary Action 
Review Task Force will closely examine all types of complaints and 
their tracking systems across the IRS, including CID. In addition, the 
new Treasury IG for Tax Administration will:
   Designate officials within the office of the IG for Tax 
        Administration to specialize in Criminal Investigations. 
        Specialists. who will have a background in law enforcement but 
        cannot be former CID employees. will be responsible for 
        tracking and following up on complaints The CID specialists 
        will be expected to make initial contact with the complainant 
        within three business days of receiving the complaint
   Identify systemic problems within CID. The CID specialists 
        will monitor all databases containing information on special 
        agent performance to identify trends and systemic problems 
        recommend solutions, and track the implementation of those 
        solutions.
   Publicize the IG's 1-800 number, fax line and E-mail address 
        to ensure that taxpayers and employees are aware of how to 
        register complaints about CID. Work with local Taxpayer 
        Advocates and Citizen Advocacy Panels to help achieve this 
        goal.
   Establish clear procedures to ensure that taxpayer and 
        employee complaints, including anonymous ones, are taken 
        seriously, properly reviewed, and kept confidential. Penalties 
        will be established for IRS employees who violate 
        confidentiality.
    5. Institutionalize oversight of CID within Treasury's Office of 
Enforcement. To the extent permissible by law, the Under Secretary for 
Enforcement will ensure that ClD's policies and procedures are fully 
consistent with those of Treasury's other law enforcement bureaus 
(Customs, Secret Service, and ATF). The Office of Enforcement will 
conduct periodic reviews to ensure compliance with those policies and 
procedures.
    6. Request that the Joint Committee on Taxation join the Treasury 
and the IRS in conducting a study of willful noncompliance. This review 
will examine the sources and extent of taxpayer noncompliance and 
measures that might address this problem.
    7. Promote a culture of openness, quality, and integrity within 
CID, consistent with Commissioner Rossotti's vision for the entire 
acency:
   Commissioner Rossotti has issued a directive to all IRS 
        employees about their obligation to report misconduct, fraud, 
        waste, and abuse, and to guarantee employees freedom from 
        reprisal when they report any misdoings. The directive will 
        apply to CID employees, as well as all other IRS employees.
   Education and training programs will provide detailed 
        information to employees and managers--including within CID--on 
        whistleblower policies, procedures and protections.
                             Communications

                              ----------                              


                       Statement of Terry Bjerke

    Mr. Chairman and Honorable Members of this Committee. I present 
this information to you in the hopes that corrective laws and measures 
would be instituted regarding the IRS that would prevent what happened 
to me from occurring to anyone else.
    I would like to present the attached letter to District Director of 
IRS, Jack Cheskaty as evidence of my treatment by the IRS.\1\
---------------------------------------------------------------------------
    \1\ Letters and attached tax forms were retained in the committee 
files.
---------------------------------------------------------------------------
    As you can see the IRS has manufactured bogus liens and spent 
almost eight years trying to collect over $1,600,000 from me.
    Following this letter and the increased pressure being applied by 
Congress, the IRS wrote me on March 4, 1998 that, ``The taxes for '83-
'87 should have been discharged in your Chapter 7 Bankruptcy proceeding 
that was concluded on February 3, 1993,'' and ``We apologize for the 
inconvenience this matter has caused you.'' No response to the fact 
that I never owed the taxes dismissed.
    I certainly believe that without Congress' investigation into the 
Internal Revenue Service this bogus tax lien would still be enforced 
against me. Therefore I thank you and others in Congress for your 
efforts as this is finally put behind me.
    I would like to propose the following legislative changes:
          1. The IRS must serve in person any assessment notice on the 
        taxpayer and not just mail it out to any address they deem 
        appropriate.
          2. Any taxpayer should have the right to have a court set 
        aside a lien while the merit of the lien is being pursued not 
        as it currently is. The taxpayer paying off the lien and then 
        suing the IRS for incorrect seizures.
          3. The IRS is mandated to adhere to present Bankruptcy Laws 
        and Orders of Discharge, not just continue to collect as they 
        have been doing.
          4. Financial compensation should be available to the taxpayer 
        for actions taken by the IRS and any law should be retroactive 
        at least ten years. The basis of 10 years should be applied as 
        that is the current amount of time the IRS has to collect from 
        the taxpayer. This should now be reduced to 6 years.
          5. Errors and emissions insurance should be required for all 
        IRS employees which would allow for compensation to the 
        taxpayer for wrongful actions taken by the IRS. Agents without 
        insurance would be terminated.
          6. The taxpayer can record any meeting with IRS employees.
          7. Internal Revenue employees should be fired for their 
        wrongful actions.

                               __________

                  Statement of Samuel J. Granata III *
---------------------------------------------------------------------------

    * Thesis Summary, prepared for Congressional Record. Copyright 
1998--All Rights Reserved.
    Samuel J. Granata III, B.A., Grove City College, 1991; Master's 
Degree Candidate in Public Policy; Robertson School of Government, 
Regent University, Virginia Beach, VA.
---------------------------------------------------------------------------
                  i. irs retaliation against oversight
    Background. The IRS has demonstrated its ability to overpower its 
overseers by instilling fear of retaliation. Over the years, the IRS 
has investigated members of Congress who held hearings concerning IRS 
abuses, leaked information to the press to damage reelection bids of 
congressmen that were openly critical of the agency, investigated the 
President of the United States, and remarkably, in one case, initiated 
an investigation of a congressman that led to his wrongful 
incarceration.[1]
    In 1924, Senator James Couzens, chairman of a committee charged 
with investigating the Bureau of Internal Revenue, was approached while 
leaving the Senate floor by Bureau Commissioner Blair with notice that 
he was being assessed $10,861,131.50 in back taxes. Couzens continued 
his investigation despite the apparent retaliation and later was 
awarded a refund of $989,883 for his overpayment of taxes by the Board 
of Tax Appeals.[2] Then, in 1972, Senator Joseph Montoya announced his 
plan to hold hearings on the agency's performance. Shortly after his 
announcement, the IRS launched an investigation against Senator 
Montoya. Commissioner Donald C. Alexander eventually canceled the 
investigation. Nevertheless, a leak to the press that the agency had 
begun to investigate the Senator, contributed to Montoya's defeat at 
the polls in 1976.[3] Also, in 1973, a leak to the press brought into 
question President Nixon's tax records. This led to an investigation of 
his 1969 to 1972 tax returns, the results of which became a factor in 
Nixon's resignation in August of 1974. The investigation concluded that 
Nixon owed a total of $432,787.13 in back taxes for the years in 
question.[4]
    Another example of retaliation against oversight is the story of 
Congressman George Hansen. Hansen, an outspoken critic of IRS abuses, 
narrowly won his 1976 reelection bid after his political opposition 
charged that irregularities appeared in his tax history. After criminal 
proceedings over three years, the IRS found no wrongdoing and issued 
him a $10,000 refund. But, this was not the end of Hansen's troubles 
with the agency. The Congressman remained an outspoken critic of the 
IRS, and, in 1980, published an expose called To Harass Our People: The 
IRS and Government Abuse of Power. In 1984, in another apparent case of 
retaliation, the Congressman was charged with and convicted of one 
count of ``Willful Failure to File'' under 18 U.S.C. 1001 for the 
content of filings under the Ethics in Government Act and fined 
$40,000. He served out this conviction by spending four years in 
federal prison over a ten-year time span. Surprisingly, George Hansen 
was the only congressman ever prosecuted under this law. In 1995, the 
Supreme Court declared his conviction a wrongful prosecution and 
summarily vacated the ruling against him. His $40,000 was returned but 
the ten years of legal fees and loss of income was financially 
devastating.[5]
    Recommendations. These examples show that the agency's extensive 
powers of investigation can be used to attempt to suppress oversight. 
Tax historian Charles Adams, in his book For Good and Evil: The Impact 
of Taxes on the Course of Civilization, recommends making Congress and 
all federal judges immune from the IRS.[6] Congress should adopt this 
recommendation. Additionally, all congressional staff level employees 
working on IRS oversight committees--the President, the Vice President, 
and all others in position of IRS oversight or governance--should be 
immune from the agency. However, these individuals must still file tax 
returns. Thus, Congress will need to establish an alternate system of 
filing tax returns for those declared immune from IRS examination 
powers.
                   ii. due process and trial by jury
    Background. Tax laws and regulations have been written that deny 
taxpayers due process. The Fifth Amendment to the United States 
Constitution declares that in criminal cases the accused will not ``be 
deprived of life, liberty, or property, without due process of law,'' 
and the Sixth Amendment declares that ``In all criminal prosecutions 
the accused shall enjoy the right to a speedy and public trial, by an 
impartial jury.to be informed of the nature and cause of the 
accusation; to be confronted with the witnesses against him; to have 
compulsory process for obtaining witnesses in his favor; and to have 
the assistance of counsel for his defense.''
    Nonetheless, the IRS deprives taxpayers of property by pursuing 
seizure of assets under civil, not criminal actions, thereby avoiding 
the letter of the Fifth Amendment due process clause and the Sixth 
Amendment right to trial by jury. Additionally, the provision in the 
Seventh Amendment for jury trials in common law civil cases is likewise 
treated as non-applicable since the Tax Code is statutory law, not 
common law. The result is the IRS seizes property, shuts down 
businesses, or levies bank accounts without granting taxpayers a trial 
at all.
    Recommendations. Lawmakers should draft legislation granting 
taxpayers a right to trial by jury where a home, business, means of 
transportation, bank account, or any other asset over a certain dollar 
value (to be set by Congress) has been tagged for seizure. Trial by 
jury mitigates the injustice and conflict of interest where the 
government is both plaintiff and judge in matters involving the seizure 
of taxpayers' assets. In such matters, a jury could confirm the 
legitimacy of actions taken by government, thus strengthening the 
government's position, or it could act to protect taxpayers against 
collection actions considered too harsh by the jury. Eventually, 
lawmakers will need to amend the Constitution to include a specific 
declaration of the right to trial by jury in property seizure cases 
prosecuted under civil statutory law.
    Also, the main factor determining the applicable standard of 
justice in a tax case, civil or criminal, is the judgment of the 
revenue agent. This situation leads to different and arbitrary 
standards of treatment. Charles Adams recommends decriminalizing the 
Tax Code in order to establish one civil standard of law enforcement 
for tax crimes. His suggestion is buttressed by words of the great 
writers, William Blackstone, and Adam Smith. They wrote that tax 
evasion is a natural response to excessive taxation, and that 
governments should not resort to excessive punishments by making 
capital offenses of common crimes
                     iii. personal recommendations
    A. Taxpayer Protection Agency. Congress should codify legislation 
that creates an independent body called the Taxpayer Protection Agency. 
This new agency should be placed under Legislative Branch management, 
not under Treasury or Executive Branch control. The Taxpayer Protection 
Agency would provide checks and balances against efforts by the IRS to 
enforce the Tax Code. It should not be under Treasury management 
because the Treasury could conceivably benefit financially from 
overlooking IRS abuse of taxpayers. Although under Legislative Branch 
control, it could still provide regular reports and recommendations to 
both the President and Congress. Moreover, like all other IRS 
overseers, employees of this new agency should file tax returns to 
Judicial Branch auditors, not to the IRS.
    The independence of the Taxpayer Protection Agency from Executive 
Branch management guarantees its effectiveness. An example of the 
importance of independence in oversight is the Office of the 
Comptroller of the Currency's (OCC) relationship with private banking 
institutions. The OCC, a Treasury Department bureau that is entirely 
independent of private banks, regularly audits banking institutions' 
debt collection practices to ensure compliance with consumer protection 
statutes. If the Department of the Treasury does not trust private 
banks to police their own debt collection practices, then the 
Department of the Treasury should not be trusted to solely police its 
own collections agency, the IRS. The Taxpayer Protection Agency as 
proposed would be independent of the Treasury chain of command, and 
therefore, would guarantee taxpayers effective, independent oversight 
of the IRS.
    B. Political misuse. If anyone within the IRS seeks to audit any 
political or religious group, whether it be tax-exempt or not, the 
agent or management official seeking the audit should first submit a 
request to the independent Taxpayer Protection Agency. This proposed 
agency would then track all requests, have approval authority over such 
requests, and track the conclusion of all approved audits. Congress 
would receive regular statistical reports on these audits. Furthermore, 
the Taxpayer Protection Agency should have power to discipline agents 
or executives found to have political agendas in their selection of 
audits.
    C. Secrecy and accounting. Congress should grant the Taxpayer 
Protection Agency full immunity from the taxpayer privacy restrictions 
found in the Tax Code, section 6103. Furthermore, this new agency 
should be given authority to review all IRS internal documents. All 
requests for information such as freedom of information requests should 
be submitted to the Taxpayer Protection Agency for review of taxpayer 
privacy concerns and monitoring of the agency's timeliness in meeting 
approved requests. Standards should be set for the handling and 
retention of documents to be enforced by the Taxpayer Protection 
Agency, and the General Accounting Office should be staffed with 
accounting specialists whose sole responsibility is the ongoing review 
of and assistance in producing IRS financial reports and budget 
requests.
    D. Enemies Lists. Congress should enact legislation that would make 
it illegal for the IRS to label taxpayers based upon their political 
views or to keep lists of taxpayers based upon such information. Also, 
lawmakers should establish penalties against individuals found to have 
violated such a law. For enforcement purposes, Congress should charge 
the independent Taxpayer Protection Agency with the responsibility to 
investigate and punish this type of activity.
    E. Taxpayer Advocacy. The legislature should make the Office of 
Taxpayer Advocate independent of Treasury management.[7] Lawmakers 
should make this change by creating an advocacy office within the 
independent Taxpayer Protection Agency. This new agency would use its 
authority to view all taxpayer confidential data to quickly assist 
taxpayers with their problems. Also, it would work closely with IRS 
management to resolve taxpayers' concerns.
    F. Inspection Service. Having the Department of the Treasury solely 
police the IRS is a conflict of interest. The Treasury may benefit 
financially from overlooking IRS abuse of taxpayers. Therefore, the 
Treasury should not be solely responsible for policing the agency. In 
order to establish independent and more objective external policing of 
the IRS, Congress should move the twelve hundred member IRS Inspection 
Service to the proposed Taxpayer Protection Agency. The Office of 
Inspector General should remain under Treasury control; however, two 
thirds of its staff should move to the Taxpayer Protection Agency as 
well. Inspectors that move from Treasury management to this new agency 
would retain their current responsibilities until the new agency 
determines if a reallocation of responsibilities will take place. The 
remaining one hundred inspectors working in the Office of Inspector 
General should remain available to Treasury management for 
investigations of broad organizational concerns.
    G. Performance measures. The IRS should establish quality of work 
and efficiency standards, and monitor quality of performance. In 
addition to management monitoring, Congress should provide resources to 
the Taxpayer Protection Agency for monitoring live collection calls and 
audits, and for joint monitoring with management. Employees should be 
held accountable to their performance on these audits.
    The Internal Revenue Service has already taken steps to halt the 
improper use of statistics in employee evaluations. Lawmakers should 
guard against the resurfacing of this problem by passing legislation 
that prohibits Congress or the IRS from establishing any organization-
wide dollar goal under the Government Performance and Reporting Act of 
1993. The IRS should be held to the goal that assessments are to be 
made for the amount the law requires--no more, no less.
    H. Penalties and interest. Too many penalties exist in the Tax 
Code. Lawmakers should vastly reduce the number of penalties present in 
the Code. A reduction would improve the tax complexity problem and 
would support the IRS's policy that penalties are applied to encourage 
compliance, not to raise revenues.
    In the credit card industry, the law requires creditors to present 
a bill showing the amount due prior to assessing interest and/or 
penalties to debtors. Although it should, this standard does not apply 
to federal tax collections. Often, the amount of interest that 
taxpayers are required to pay varies greatly depending upon the time it 
takes the IRS to identify and notify taxpayers of the amount that is 
owed in back taxes. This practice is too arbitrary. As in the private 
sector, it should be illegal to assess interest charges for the period 
between the occurrence of an error and notification of the amount due.
    Finally, the IRS is not in the banking business; the agency 
collects taxes. Congress should place a percentage cap on the total 
increase that can be added to an assessed underpayment of taxes. In 
Ancient Israel, the penalty for false swearing was 20 percent. 
Israelites were required to pay the value of whatever was sworn falsely 
about plus a fifth of its value.[8] This 20 percent rule would make a 
good standard for capping the assessment of interest and penalties. For 
instance, a taxpayer is hypothetically assessed $200,000 dollars for an 
underpayment of taxes. Applying the rule of 20 percent, this taxpayer's 
total tax bill from the assessment could never exceed $240,000. This 
rule would eliminate the horror stories of tax bills growing 
exponentially until they drive taxpayers into bankruptcy or financial 
destitution and would retain the agency's ability to assess penalties 
and interest as a means to encourage accurate and timely compliance.
    I. Bureau of Labor Statistics. The Bible contains words that apply 
to the issue of fair tax assessment. First, in the Gospel of Luke, tax 
collectors approached Jesus with a question. Luke 3:12-13 reads, ``And 
some tax-gatherers also came to be baptized, and they said to him, 
`Teacher, what shall we do?' And he said to them, `Collect no more than 
what you have been ordered to.' '' Second, Proverbs 20:10 reads, 
``Differing weights and differing measures, both of them are abominable 
to the Lord.'' The practice of inflating income and assessment, by 
whatever means, violates these time-honored principles found in 
Scripture. Congress should bar the use of statistically generated 
average expenses to inflate taxpayer income in all cases, except 
perhaps where a taxpayer refuses to file a tax return altogether.
    J. Extensions and waivers. H.R. 2676 requires the agency to provide 
notice to taxpayers of their right to refuse signing a waiver of the 
statute of limitations. Providing notice is not enough protection. 
Congress should completely bar this and any other practice involving 
the waiver of taxpayer rights.
    K. Whipsaw Technique. The whipsaw technique is the seizure of 
property belonging to a third party to a tax dispute, issuance of 
nominee liens (liens against a third party without prior notification), 
or the levying of a third party's paycheck. This tactic is usually 
employed when an IRS agent has reason to believe a third party is 
protecting assets for a delinquent taxpayer or assets were transferred 
for less than fair consideration. However, David Patnoe, a former 
revenue officer and current representative of taxpayers before the 
Collections Division, testified that he represented taxpayers in cases 
where agents used this technique in an extortive fashion.[9]
    On its face, this practice clearly violates a basic tenet of 
contract law. Under contract law, individuals are not liable for 
contracts to which they are not a party. Before taking action against 
third parties, the government should have to prove in Tax Court the 
validity of such actions and third parties should enjoy the due process 
right of trial by jury. Otherwise, the Fair Debt Collection Practices 
Act (FDCPA) forbids creditors collecting on delinquent accounts on 
behalf of another party from demanding payment of third parties in an 
effort to collect debts. FDCPA does not apply to the IRS because the 
agency collects its own delinquent accounts. However, Congress should 
draft legislation that directs the IRS to fully comply with all third-
party provisions in the Fair Debts Collection Practices Act. Likewise, 
the courts should recognize the rights of third parties to a delinquent 
debt specified in this act. Like the adopted provision from the 
Republican Contract With America that declares Congress should not be 
exempt from the laws it has passed, so should the IRS not be exempt 
from existing standards enacted by Congress that apply to private 
banking institutions' debt collection practices.
    L. Other recommendations. The Taxpayer Protection Agency should 
monitor the sale of seized assets to ensure that the IRS receives the 
minimum bid required before selling seized property. Moreover, certain 
protocols exist within the IRS for a revenue agent to obtain 
authorization to use a pseudonym. However, the Senate Finance Committee 
heard testimony that these protocols are being loosely followed. The 
result is, at times, taxpayers are unable to get in contact with agents 
who are handling their cases or they are unable to find and report 
abusive revenue officers. Therefore, Congress should forbid the use of 
pseudonyms by revenue officers and should require agent names to be on 
all written correspondence with taxpayers. Also, legislators should 
establish maximum allowable length of audits for four distinct 
entities: small businesses, large corporations, tax exempt 
organizations, and single or joint filers. Beyond the prescribed 
maximums set by Congress, investigations should cease and desist. 
Furthermore, any regulation written by the Internal Revenue Service or 
change in the Internal Revenue Manual should be approved by Congress 
prior to implementation.
              iv. response to roth amendments to h.r. 2676
    On March 25, 1998, Senator Roth, Chairman of the Senate Finance 
Committee, issued a press release with recommendations to alter H.R. 
2676.[10] Overall, the recommendations made in this press release are 
consistent with the recommendations and findings of this study and 
should be adopted by the Senate. Specifically, Congress should adopt 
banding of pay scales and bonus compensation plans for cost-saving, 
innovative ideas. Also, Congress should adopt proportionate liability 
for joint filers and the provisions for automatic termination of IRS 
employees where employees have committed perjury, assault and battery, 
fraudulent destruction of documents to hide wrongdoing, or violations 
of policies or procedures for the purpose of harming another. However, 
there are a few items that could be improved.
    First, giving the Oversight Board ``big picture'' authority over 
law enforcement and collection activities will negate the Board's 
objectivity over time. Instead, the Oversight Board should be a review 
board only. Second, Senator Roth's proposal to make the Office of 
Taxpayer Advocate ``more'' independent of IRS management does not go 
far enough to ensure taxpayers get fair and objective assistance. 
Congress should make this Office completely independent of the Treasury 
chain of command.
    Third, transferring IRS Internal Security and portions of Internal 
Audit to the Treasury Office of Inspector General will not cure the 
Internal Revenue Service's self-policing ills. In the current 
environment, Internal Security is already under Treasury management 
since the IRS is a Treasury branch agency. Therefore, moving the 
Inspection Service so that it reports directly to the Office of 
Inspector General is not a significant change. Furthermore, having the 
Department of the Treasury solely police the IRS is a conflict of 
interest. The Treasury may benefit financially from overlooking IRS 
abuse of taxpayers. Therefore, the Treasury should not be solely 
responsible for policing the agency. Fourth, following this logic, the 
Treasury Inspector General should not be solely responsible for 
tracking and reporting the status of taxpayer complaints; nor should 
the Inspector General be ultimately responsible for monitoring the use 
of statistics in performance measures or ensuring that taxpayer rights 
are not being violated. These types of policing responsibilities should 
reside in an agency that reports directly to the Legislative Branch, 
not to the Department of the Treasury.
    Fifth, making the burden of proof in tax court rest on the IRS when 
the agency uses Bureau of Labor statistics to determine a taxpayer's 
income would be an improvement. However, greater steps should be taken 
to protect the taxpayer from being assigned income unfairly by the IRS. 
The practice of using Department of Labor statistics to determine 
income should be discarded entirely, except perhaps where the taxpayer 
refuses to file a return altogether. Sixth, the provision to allow 
civil damages for unauthorized collection actions against third parties 
falls well short of the standard established in the Fair Debt 
Collection Practices Act. In this act, collection actions against 
anyone other than the debtor are illegal. This standard should also 
apply to collection of federal taxes. If an agent of the government 
feels a third party is unfairly sheltering assets for a delinquent 
taxpayer, the government should have to prove its case before a judge 
and jury.
    And lastly, the provision calling for the suspension of interest 
and penalties on delinquent taxes after one year if by that time the 
IRS has not brought the matter to the taxpayer's attention, does not 
sufficiently protect taxpayers. Senator Christopher Bond (R-Missouri) 
sponsored Senate Bill S. 1669, which has language that comes closest to 
the private sector standard that interest should not accrue on the 
amount due until notice is given of the amount owed. Congress should 
adopt Christopher Bond's language as found in Senate Bill 1669.[11]
          v. author's recommended new taxpayer bill of rights
    Congress should draft a new taxpayer bill of rights that includes 
the following provisions:
          1. Taxpayers have a right to know that the Internal Revenue 
        Service cannot intimidate overseers of the agency from 
        performing their oversight responsibilities through retaliatory 
        audits or the threat thereof. All members of the Executive, 
        Congressional, and Judicial Branches involved in oversight of 
        federal income tax collections should be immune from 
        accountability to the IRS. If this policy is adopted, lawmakers 
        will need to arrange an alternate system for processing these 
        members' tax returns.
          2. Taxpayers have a right to independent policing of the IRS. 
        Congress should move the twelve hundred member IRS Inspection 
        Service and two thirds of the three hundred member Office of 
        Inspector General--along with Office of Taxpayer Advocate--
        under the control of a new, independent organization to be 
        established by Congress called the Taxpayer Protection Agency. 
        This agency should report directly to the Legislative Branch of 
        government, not to the Department of the Treasury. It should 
        investigate taxpayer complaints, conduct investigations of IRS 
        personnel, monitor the quality of work done by IRS agents, and 
        provide regular reports to Congress.
          3. Taxpayers have a right to a Tax Code that is simple and 
        clear to understand, is not arbitrary as to the amount to be 
        paid, is enforceable without the employment of an army of tax 
        collectors whose salaries consume a large part of public 
        revenues, and is not so intrusive as to require frequent 
        examinations. Congress should not fashion it with many 
        penalties and exorbitant interest rates so that delinquent 
        taxpayers cannot satisfy outstanding tax debts amicably, or 
        with many loopholes and special provisions so that marginal tax 
        rates must be excessively high on taxpayers not benefiting from 
        such provisions. Also, it should be progressive in that it 
        excludes the impoverished from paying the tax and fair in that 
        it treats various classes of taxpayers equally.
          4. Taxpayers have a right to a cap on the total amount of 
        additional tax that the IRS can legally place on a delinquent 
        tax debt through penalties and interest or by any other means.
          5. Taxpayer's due process rights should include a right to a 
        trial by jury in all cases where a home, business, means of 
        transportation, bank account, or any other asset over a certain 
        dollar value (to be set by Congress) is to be seized. An 
        amendment to the Constitution guaranteeing this right should be 
        submitted to all fifty states for ratification.
          6. Taxpayers have a right to restitution for all expenses 
        incurred, including lost wages, when the government falsely 
        accuses the taxpayer, is negligent in its collection practices, 
        or acts in violation of the law.
          7. Taxpayers have a right to equal justice under the law. 
        Criminal charges are filed against delinquent taxpayers quite 
        arbitrarily, and in more than half of the Internal Revenue 
        Service's criminal cases, charges filed by the agency were for 
        matters that could have been handled by other government 
        agencies. Legislators should establish one standard of justice 
        in tax matters by decriminalizing the Tax Code. This change 
        will ensure that all classes of taxpayers are treated equally.
          8. Taxpayers have a right to know that the IRS rates tax 
        collectors based on their ability to determine the correct 
        amount due, not based upon statistics, such as dollars 
        collected or total number of properties seized.
          9. Taxpayers have a right to know the basis in the Tax Code 
        for the disallowance of deductions or increase of income. The 
        Internal Revenue Service should bear the burden of proving the 
        validity of any disallowance or increase in court. Bureau of 
        Labor statistics should never be considered adequate proof, 
        except perhaps in cases where the taxpayer refuses to file a 
        tax return altogether.
          10. Taxpayers have a right not to be asked to waive their 
        rights.
                                endnotes
    [1] Dick Bachert, The George Story: No Good Deed Goes Unpunished 
(visited 10 December 1997) 
    [2] David Burnham, A Law Unto Itself: Power, Politics, and the IRS 
(New York: Random House, 1989). 291-294.
    [3] Burnham, 296-302.
    [4] Congress, House, Committee on the Judiciary, Impeachment 
Inquiry, Book III, 93rd Cong., 2nd sees., 20 June-23 July 1974, 2242.
    [5] Bachert, 1-6.
    [6] Charles Adams, For Good and Evil: the Impact of Taxation on the 
Course of Civilization (New York: Madison Books, 1993), 466-467.
    [7] Congress, Senate, Committee on Finance, Practices and 
Procedures of the Internal Revenue Service, 105th Cong., 1st sess., 23, 
24, and 25 September 1997, 103 (testimony of Thomas Savage).
    [8] Leviticus 6:1-5.
    [9] Hearings, supra note 7, at 113 (testimony of David Patnoe).
    [10] Congress, Senate, Committee on Finance, Roth IRS Reform 
Proposal the ``Most Comprehensive Overhaul of the IRS Ever Proposed,'' 
Press Release No. 105-274, 25 March 1998, finance/105-274.htm>.
    [11] Congress, Senate, The Putting the Taxpayer First Act of 1998, 
105th Cong., 2nd sees., S. 1669, Congressional Record, vol. 144, daily 
ed. (24 February 1998), S924.

                               __________

     Statement of the International Coalition for Religious Freedom

                    [submitted by pastor tony alamo]
    The following case is respectfully submitted for inclusion in the 
record of the U.S. Senate Finance Committee's IRS Oversight Hearings of 
April 28, 29 and May 1,1998. We bring to your attention the religious 
persecution case of Pastor Tony Alamo (Bernie LaZar Hoffman). Pastor 
Alamo was the subject of a twenty-year IRS investigation that violated 
his First Amendment rights and his rights to due process under the law.
    In June of 1994, Pastor Tony Alamo was wrongly convicted of filing 
a fraudulent income tax return for 1985 in violation of 26 U.S.C. 7206 
(count one) and failing to file income tax returns for years 1986 
through 1988 (counts two through four), in violation of 26 U.S.C. 7203. 
He was sentenced to an unduly harsh six-year prison sentence, which 
will end in December 1998.
    Recently released Freedom of Information Act documents (described 
later in this statement), however, expose that Mr. Alamo, pastor of 
Alamo Christian Ministries and the Music Square Church (MSC), was the 
victim of improper conduct by IRS investigators who went to great 
extremes to secure a conviction against him. New evidence proves that 
the IRS lied to the jury, withheld information and pertinent 
documentation from the defense, intimidated witnesses, and relied on 
unreliable witnesses and anti-religious organizations who had ulterior 
motives and used the IRS, a supposed neutral government agency, for 
their own ends. In addition, the IRS staged an unnecessary armed raid 
on church members, all citizens of this country, who were neither 
dangerous nor violent and did not possess arms.
    IRS unconstitutionally ``determined'' that Pastor Alamo's church 
was illegitimate, and took away its tax exemption; and then set out to 
``prove'' that all church income was generated solely for the benefit 
of one person, Pastor Alamo. The IRS claimed Pastor Alamo was the 
``owner'' of numerous businesses that were, in reality, owned by Music 
Square Church, and that he had diverted funds from MSC and its 
businesses for his own use. In order to convict Pastor Alamo, the IRS 
had to establish that he exerted absolute control over both the members 
of the church and the businesses of MSC. To prove this theory, the IRS 
readily adopted the language and theories of the Cult Awareness Network 
(CAN), an anti-religious organization, that attacked churches and 
religions that they deemed were illegitimate.
A Brief History
    Pastor Alamo and his wife Susan Alamo (now deceased) built a 
fundamentalist orthodox Christian ministry by going out on the streets 
of California and preaching to young people, many of whom were drug-
addicts, criminals and hippies. In 1969, they incorporated the Tony and 
Susan Alamo Foundation (TSAF), which was granted tax-exempt status in 
1973. As a result of their work, hundreds of youth turned to the church 
for salvation, and the church grew quickly. As it grew, Alamo also 
attracted the attention of CAN. CAN, acting as the ``almighty'' arbiter 
of religious correctness, made a fortune ``cult-baiting'' churches that 
they did not like, and CAN psychologists charged susceptible parents 
thousands of dollars to ``deprogram'' their children. CAN has since 
been forced into bankruptcy for these practices, after a jury fined 
them $4 million for religious persecution, and for illegally kidnapping 
and deprogramming a young man.
    While there is nothing illegal, per se, with the government seeking 
CAN's help, what is illegal is for the government to adopt the 
perspective of an organization like CAN when that perspective is an 
attack on constitutionally protected religious practices and beliefs. 
Over the past several years, major religious scholars and leaders have 
attested to Pastor Alamo's deep religious convictions, whether or not 
they agree with these convictions. At the same time CAN's ``cult/
brainwashing'' construct has been debunked by the American 
Psychological Association, the Society for the Scientific Study of 
Religion, and the American Sociological Association. Furthermore, the 
courts have repeatedly ruled that anti-cult and brainwashing testimony 
is inadmissible in court because it does not rely upon a generally or 
even substantially accepted scientific foundation.
    The IRS, however, never consulted with religious scholars or 
leaders to determine the validity of Pastor Alamo's religious theories, 
or, for that matter, CAN's theories. They ignored a Supreme Court 
decision, which recognized the legitimacy of the church, and they 
ignored the protections provided to First Amendment activities against 
government interference or persecution. The IRS completely disregarded 
the missionary activities of the church, and the fact that the church 
provided food, clothing, lodging, schooling, and jobs for its 
followers. The church's good works, such as taking young people off 
drugs, and giving them faith in God and a reason to live, were also 
completely ignored. The IRS spent close to 20 years devising (and 
imaginatively building) a criminal case against Pastor Alamo.
    The IRS launched its investigation. They initiated two criminal 
investigations of Pastor Alamo, the first from 1973 to 1975, and the 
second from 1977 to 1980, both of which were dropped after no criminal 
liability was found. Yet this didn't stop the IRS--they initiated a 
third investigation.
    In the middle of its criminal investigation, two former church 
members, Robert and Carey Miller, hooked up with CAN and attorney Peter 
Georgiades, and sued the church for supposedly stealing their trucking 
business. In actuality, the Miller brothers had been forced to leave 
the church after it was discovered that they embezzled over $100,000 of 
church money. However, the judge in the trial was apparently taken in 
by a frenzy of ``cult hysteria'' and sensationalized hostile news 
accounts about Pastor Alamo, and took the case to trial without Pastor 
Alamo or any representatives from the church present. He issued a $1.4 
million default judgement against Alamo, stating that church workshops 
and businesses, including the trucking business, were ``alter egos'' of 
Pastor Alamo. In other words, Alamo followers were brainwashed, and 
Pastor Alamo controlled all church-run activities.
    After the trial, the government went a step further, and indicted 
Alamo for threatening to kidnap the judge in the case, Morris S. 
Arnold. The government literally based their case on one newspaper 
account. Alamo had merely publicly criticized the judge's decision, but 
the media hype was bordering on hysteria. The case went to a jury 
trial, and Alamo was immediately acquitted.
    The Millers were to become the government's key witnesses against 
Pastor Alamo. And as we will see later, the IRS withheld from the 
defense its financial relationship with the Millers.
IRS Storms Church Property
    With this as a backdrop, in June of 1990, the IRS issued a jeopardy 
assessment, claiming Pastor Alamo owed $745,000 in personal income tax 
for the years 1977-1980, and church-owned workshops owed $5 million in 
corporate income taxes, and $1.6 million in unpaid employees' 
withholding taxes. On June 11, the IRS seized all church property in 
Nashville, Tennessee and Alma, Arkansas, including the famous ``Alamo 
of Nashville'' store along with its inventory, and all church records. 
Alamo challenged the IRS in court and Judge Thomas Wiseman abated the 
seizure, and ordered the merchandise and records resumed. However, 
instead of resuming the property, the IRS turned everything over to the 
Miller's attorney, Peter Georgiades, toward the $1.4 million judgement.
    Even though more than a million dollars worth of property and 
merchandise had already been seized, the IRS staged a second raid. On 
February 13, 1991, 60 U.S. Marshals with guns drawn, accompanied by 
Peter Georgiades and IRS officials, stormed the church's Alma and 
Georgia Ridge, Arkansas communities, where over 200 families lived. 
They confiscated their homes, businesses, personal possessions, and all 
church property, including two large office buildings containing all 
church records from beginning of ministry to the present. An estimated 
$50 million worth of property was taken. Several hundred families, 
including countless young children, were thrown out on the street, with 
only what they could carry. They lost all their personal belongings--
their private homes, furniture, clothing, all their cash, food, toys, 
school materials, etc. One can only speculate that the government 
viewed these children as ``worthless brainwashed zombies'' who did not 
deserve a roof over their heads.
    The church made seven legal attempts in five different courts to 
get back their records in order to properly defend Pastor Alamo. They 
failed. The government disingenuously claimed that the church abandoned 
the records. However, church members were not allowed back on church 
property to get the records. Armed guards were at the gates, telephone 
lines were cut, and offices were sealed.
Newly Discovered Documents Expose IRS Abuses
    The Alamo Christian Churches recently received approximately 40,000 
pages of IRS documents through the discovery process and through FOIA 
requests.
1. New IRS documents make plain that the IRS prosecuted Alamo because 
        they decided he was a ``cult'' leader and not a real religious 
        leader.
    The IRS attitude toward Alamo was made clear at an IRS policy 
meeting of 617190. IRS Group Manager Ed Campbell counseled 16 fellow 
agents on how to deal with ``cults'' and on ``the nature of Tony 
Alamo's organization's followers as to their cult, brainwashing 
nature'' (page 24003).
    The IRS issued a ``Background'' paper on the Tony and Susan Alamo 
Foundation which stated: ``Through brainwashing, Tony and Susan Alamo 
required the associates to provide increasing amounts of free services 
to the Foundation . . . '' (p. 53255).
    IRS documents reference meetings between IRS agents and Cynthia 
Kisser, chair of CAN, Pricilla Coates, Director of Los Angeles Chapter 
of the Cult Awareness Network, and the Cult Committee of the Jewish 
Federation (p. 51399, 51506, 52390-2, 52395-6, 52387-8 -9, 51419-61, 
58423-58425).
    By the time the trial began, however, the IRS obviously recognized 
the First Amendment implications of their cult-baiting, and agreed to 
have the term ``cult'' stricken from the court records. Nonetheless, 
the cult/brainwashing construct dominated the trial and was used by the 
probation office to write Pastor Alamo's Pre-Sentence Investigation 
report (PSI). The probation officer inserted all the unsubstantiated 
allegations made against Pastor Alamo at the trial by members of CAN. 
The PSI has plagued Alamo through the prison system. He has been de-
facto jailed for crimes he has never been accused of or tried for in a 
court of law. He has been denied parole because of allegations in the 
PSI, and prison authorities refused to move him to a prison camp 
because of the PSI.
2. Newly discovered documents prove that the prosecutor knowingly 
        concealed exculpatory material that he had a duty to disclose.
    Robert and Carey Miller, crucial government witnesses, submitted 
applications to the IRS for reward money. Applicants submitted Form 211 
to supply information to the IRS in exchange for a portion of the 
taxes, penalties and fines recovered as a result. The prosecutor, 
Assistant US Attorney, J. Christopher Belcher, failed to notify the 
defense. If the jury knew that the Millers were getting $21,000 each 
for assisting in Alamo's conviction, they may have listened to the 
brother's testimony differently, and would have gotten a more complete 
picture of why they were testifying. As it was, the jury had mixed 
feelings, and took three days before issuing a verdict.
    During the trial, Prosecutor Belcher knowingly elicited perjurious 
material and misleading testimony from these government witnesses. 
Belcher asked Robert Miller and the two IRS agents responsible for the 
investigation, Larry Howlett and Charles Beuregard, whether they knew 
of any deals made with government witnesses. All three witnesses denied 
these accusations. This testimony was false. All the witnesses knew it 
was false, and the prosecutor knew it was false.
3. New documents expose that the government misled the jury by 
        portraying Alamo as an obstructionist in its efforts to 
        investigate him and the MSC for withholding of the church's 
        financial ledgers. New documents show that the IRS agents lied 
        and were in possession of the ledgers long before the trial.
    During the trial, Prosecutor Belcher asked Agent Howlett if he ever 
received any ledgers from MSC. Howlett answered, ``No, sir.'' Newly 
discovered documents proved that the IRS had recovered these records 
from the church. Howlett knew this to be true, and Prosecutor Belcher 
actually had these ledgers in his custody before the trial. Yet, the 
government portrayed Alamo as attempting to derail its investigation by 
the fact that the IRS was unable to retrieve ledgers from the church. 
Judge McCalla chose to believe IRS agents and used Alamo's supposed 
failure to turn over these ledgers as the major reason for sentencing 
him to the maximum time allowed.
    A notation in Howlett's IRS Case Chronology Record February 22, 
1991 reads: ``There are more ledgers than expected . . . .To safeguard 
all the ledgers and journals, we moved all ledgers and journals . . . 
and sent them to the IRS office and stored them in their property 
room'' (p. 51380-2).
    In a July 21, 1993, IRS memorandum written by Howlett to case file, 
he indicated possession of MSC ledgers and that Prosecutor Belcher knew 
about them: ``I explained that there was one such box, and that was box 
16 containing the general ledgers. I mentioned that I was through with 
ledger [sic] and far as I was concerned they could take them, however, 
they were under the control of Chris Belcher.''
    In an October 3, 1990 letter to Alamo Attomey Neal Pendergraft, 
Howlett acknowledged that the ledgers had been received for some church 
activities. Alamo had no knowledge of such an agreement. Documents 
further show that arrangements to move the records were done with the 
assistance of US Marshall Rick Bean.
4. New evidence reveals that the prosecutor failed to turn over IRS 
        memoranda of previous investigations of Alamo and MSC, which 
        were discontinued for lack of wrongdoing.
    The IRS did not reveal information of prior IRS investigations of 
Pastor Alamo that should have been turned over in pre-trial discovery. 
Such evidence would have allowed the defense to explore why previous 
investigations did not produce formal charges of criminal or civil 
liability and would have supported the defense's allegations of 
government harassment.
    The IRS also did not reveal a 9/23/82 memorandum by the Civil 
Rights Division of DOJ that a DOJ/FBI criminal investigation of Alamo 
for involuntary servitude was dropped after concluding there was no 
basis to pursue criminal charges.
5. New evidence exposes that the IRS hid pertinent interviews with 
        Alamo accountants from the defense.
    The IRS conducted two interviews with Alamo's accountant in 1981. 
IRS notes establish that the accountant knew of no wrongdoing. On 3/6/
81, IRS Agents Erickson and Clarke interviewed two New York CPA's, 
Arthur Appleman and A.B. Wiener, who had worked on Alamo's financial 
books. Appleman stated that during the course of the firm's work, 
nothing was brought to his attention indicating that Alamo was paying 
personal expenses from Foundation funds, and that ``nothing was brought 
to his attention regarding improper handling of cash receipts.'' While 
not directly related to the years in questions, this could have helped 
Alamo's attorney prepare more thoroughly for cross-examination of 
former church members and in terms of possible witnesses for the trial.
    IRS documents show that on 10/01/90, Agent Dan Brautweiller 
contacted CPA Bill Bealle who had done work for the Tony and Susan 
Alamo Foundation (TSAF). Bealle stated that he did not feel Alamo was 
required to file with the IRS. The content of this interview was 
withheld from the defense.
    The IRS quotes from an interview with former TSAF attorney Stanley 
Rader: ``We considered [church] associates to be volunteers; and 
businesses were rehabilitation facilities and Form 990-T would not be 
required.''
6. Agent's Howlett and Beauregard testified that no deals were made 
        with any witnesses. Besides Robert and Carey Miller, at least 
        three other witnesses who agreed to cooperate with the IRS 
        filed for reward money.
    These witnesses included, Chris Coie, the estranged daughter of 
Susan Alamo. IRS documents reveal that the IRS worked with Chris Cole 
for 17 years.
    Another witness was Elizabeth Caldwell (a former wife of Alamo). 
Howlett wrote of his efforts to retrieve her furniture, which had been 
taken along with hundreds of others when the IRS raided Georgia Ridge 
(p. 23877).
    IRS notes reveal they gave immunity to Diana Williams at her grand 
jury testimony in the western District of Tennessee, March 10, 1993 (p. 
51369-71). Williams testified against Pastor Alamo.
7. IRS documents expose that agents knew, but did not disclose, that 
        information they received from former disgruntled church 
        members was less than reliable.
    Howlett wrote that the [church's] Tyne Blvd house ``did not look as 
good as witnesses had said that it would.'' Former church members 
claimed the Tyne Boulevard property was a mansion, and that Alamo lived 
a lavish lifestyle (p. 23975).
    Dave Kroopf, a former church member, stated in an affidavit to the 
IRS that Alamo had guns on various church sites. IRS agents discovered 
this not to be true, nonetheless, relied on Kroopf for important 
information regarding church business.
    The IRS relied on information from a private investigator hired by 
the Millers and Elizabeth Caldwell. The investigator claimed that Alamo 
had fled the country with large sums of money. The IRS never checked 
the information, and used this as an excuse to levy a jeopardy 
assessment against Alamo. All the merchandise at the church's Nashville 
store was seized. While the judge ordered the assessment abated, and 
ruled that there was no basis for it, the merchandise was never 
returned (p. 51401-2, 23872-23882).
    The IRS relied on pertinent information from Chis Coie, Susan 
Alamo's estranged daughter whom she had disowned. Coie's accusations 
had to be suspect when she claimed that her mother did not have cancer 
and was using it as a ploy to solicit money from sympathetic people. 
Susan Alamo died of cancer in 1982. At one point, based on Coie's 
recommendation, the IRS ordered a doctor to release Alamo from a 
hospital. The doctor refused.
8. IRS documents reveal that agents used ``persuasive means'' to get 
        witnesses to talk.
    Documents expose that the IRS met several times with Birgitta 
Gyllenhammer (a former Alamo wife) to convince her to reverse her 
decision not to talk with them. While there is no mention of how 
Gyllenhammer suddenly became a government witness, there is a 
handwritten note from Howlett reminding himself to check her 1040's. 
Gyllenhammer had substantial tax liens on her clothing business (p. 
51453-55, 51459, 61570-61572).
    In another instance, Howlett wrote, ``I explained to him [Larry 
LaRoche, a former church member who refused to cooperate with the IRS] 
that my purpose was to determine who benefited from monetary 
transactions in which he was involved and to determine the source of 
the funds.'' Howlett later wrote, ``I explained that by having an 
explanation of the fund transfers we wouldn't have to prepare tax 
returns on him individually.'' The IRS did not reveal the content of 
their interview with LaRoche to the defense, which could have impeached 
testimony from CAN witnesses.

                               __________

     Statements of the National Audit Defense Network, Inc. (NADN)

**ASSIGNMENTS/PRODUCERS
  FOR IMMEDIATE RELEASE
  April 27, 1998

                    ROUND TWO: THE IRS vs. TAXPAYERS

 This week the Senate begins another round of taxpayer testimony of IRS

   abuse . . . but will it make a difference the second time around?

    Washington, DC--As many Americans breath a sigh of relief after 
filing their 1997 tax returns, others are holding their breath in 
fearful anticipation of a note from the IRS. Many hoped that the 
hearings from last September would bring swift reform, relieving the 
anxious fear or existing problems millions of Americans suffer through 
when dealing with the IRS every year. But so fare little has changed.
    So . . . can a second round of taxpayer testimony help? This is the 
question everyone will be asking when the Senate Finance Committee 
spends four days this week listening to the horror stories and 
complaints of American taxpayers--and NOW is the time to answer this 
question.
    NADN, a network of 1,000 former IRS agents, will be corresponding 
nationwide during the hearings. Take this opportunity and schedule one 
of our national speakers for your show. Don't settle for news bytes, 
this is your chance to get an inside look at the hearings, hear the 
story of John Coloprete, who was held at gun point by IRS agents. Mr. 
Coloprete, an NADN member, will be offering his testimony to the 
Finance Committee on Wednesday.
    National Audit Defense Network President Robert Bennington, who is 
a Senate option for expert testimony, will be on Capitol Hill 
throughout the hearings.
    NADN's technical staff is also available for comment, including 
Former IRS District Director for Southern California Jesse Coda, Former 
IRS Chief of Examination, Martin Halko, and Former IRS Chief of 
Compliance, Richard Flakus.
    NADN has been profiled on ABC World News Tonight, CNN, FOX News 
Channel, CBS News, CBN News, National Public Radio. The Bob Grant Show, 
The Michael Reagan Show, The G. Gordon Liddy Show, and thousands of 
other radio and television programs.
                                * * * *

                NATIONAL AUDIT DEFENSE NETWORK PRESIDENT

                      ROBERT BENNINGTON'S REMARKS:

              ``TAXPAYER DAY OF OUTRAGE'' WASHINGTON, D.C.

    Washington--Robert Bennington,* President & CEO of the National 
Audit Defense Network--the nation's leading tax audit experts--remarks 
for the April 15th annual Taxpayer Day of Outrage'' news conference 
held directly across from the White House:
---------------------------------------------------------------------------
    * Robert Bennington is a nationally recognized expert, author and 
speaker on taxation, the Internal Revenue Service, tax saving 
strategies & how to prevail if audited by the IRS. A frequent and 
sought after guest on political and general interest television & radio 
programs, Mr. Bennington provides expert advice for anxious taxpayers. 
A successful businessman, Mr. Bennington has provided his knowledge and 
advice on taxation & the IRS to thousands of American taxpayers.
    Mr. Bennington's considerable business experience enabled him to 
successfully lead the National Audit Defense Network, located in Las 
Vegas, Nevada, as the front line defense between American taxpayers and 
the IRS. NADN is a network of former IRS agents, Certified Public 
Accountants, and attorneys who provide members with tax audit defense 
services.
    Prior to becoming President & CEO of National Audit Defense 
Network, Inc., Mr. Bennington was a management executive with extensive 
business experience. Bennington's ability to build highly successful 
sales teams allowed him to help develop and expand a national medical 
supplies company. As national vice president of sales, he opened three 
regional sales departments for the firm. Each new office grossed In 
excess of 3.5 million in sales in less than a year's time.
    Originally from Los Angelea, California, Mr. Bennington has resided 
in Las Vegas, Nevada for the past eight years.
---------------------------------------------------------------------------
          ``My name is Robert Bennington and I am President & CEO of 
        the National Audit Defense Network--a network of over 1000 
        former IRS agents who have switched sides and now defend the 
        American taxpayers against unwarranted & often abusive audits 
        by the Internal Revenue Service.
          ``Traditionally, April 15th is the day Americans focus on 
        taxes & the dreaded IRS. Congress, last summer finally focused 
        it's attention to the hundreds of stories of abuse & harassment 
        of honest American taxpayers by the IRS, and this is a good 
        start.
          ``I am here to point out the fact that while Congress may be 
        talking about reforming the IRS, the system has not changed and 
        is out of control. Even the IRS in a recent press release 
        acknowledges that any reforms would not take effect for at 
        least another two or three years. But there is no more pressing 
        a problem for honest Americans today than when the IRS abuses 
        innocent taxpayers Their stories need to be told so that the 
        American people will understand that any taxpayer, at any time, 
        can be audited and subjected to abuse & harassment by the 
        IRS.''
    The National Audit Defense Netvvork seeks to balance the scales of 
justice between the American taxpayer & the IRS. To do so, NADN has put 
together a network of nearly 1000 of the nation's top tax and audit 
specialists--most of whom are former IRS employees--to give NADN 
members an extremely high ``win'' rate over the IRS.
                                * * * *

                     NATIONAL AUDIT DEFENSE NETWORK

    The National Audit Defense Network (NADN) seeks to balance the 
scales of tax justice between the American taxpayer and the Internal 
Revenue Service. To do so, the NADN has put together a network of 
nearly 1000 of the nation's top tax and audit specialists--most of whom 
are former employees of the IRS--to give NADN members an extremely high 
``win'' rate over the IRS.
    Over seventeen years ago, NADN's founder Pat Cavanaugh--a 
successful accountant and veteran in dealing with the IRS developed the 
concept of a prepaid audit defense representation network. NADN, 
located in Las Vegas, Nevada, has represented thousands of members who 
come from all income levels: from a struggling single mother who was 
questioned when she reported an income that the IRS considered too low 
to companies & professionals who have more complicated tax 
considerations, NADN vigorously defends its members. While NADN staff 
are not attorneys and do not provide legal services, they will appear 
before the IRS on your behalf.
    NADN membership is ``pre-paid'' and for a nominal fee, members are 
defended through the completion of any state or federal taxing 
authority audit. NADN assigns a team of former IRS agents to manage 
your case, develop a strategy, and if necessary, will negotiate a 
settlement on your behalf.
    NADN membership benefits include:
   Audit defense service
   A tax hotline
   NADN newsletter
   Pre-audit
    For further information contact Diana Banister or Nick Thimmesch at 
Craig Shirley & Associates (703) 739-5920.

                               __________

               Statement of the Schiller Institute, Inc.

    During four days of recent public hearings by this Senate 
committee, the American public was presented with stunning evidence of 
political targeting and other criminal misconduct by officials of the 
Criminal Investigative Division (CID) of the Internal Revenue Service. 
The April 30, 1998 testimony of former Sen. Howard Baker, who also 
served as President Reagan's Chief of Staff, was particularly chilling, 
as was the April 29, 1998 daylong testimony of three small businessmen, 
who found their enterprises decimated, their finances ruined, and their 
personal lives shattered, as the result of the outright criminality of 
IRS agents. At one point, Sen. Daniel P. Moynihan queried the three men 
about the role of federal prosecutors and the U.S. Department of 
Justice in their ordeals. Sen. Moynihan correctly pointed out that, 
once the IRS action moved into a phase of grand jury deliberation and 
criminal prosecution, the IRS was necessarily abetted by U.S. Attorneys 
and officials in the Criminal Division of the Main Justice Department 
in Washngton. He pressed for the Webster Commission probe into abuses 
by the IRS to be broadened to include the inter-relationship between 
IRS agents and federal prosecutors.
    The Lyndon LaRouche case, which is the subject of this testimony, 
has been described by former U.S. Attorney General Ramsey Clark as 
``about as close as a case gets to the potential perfidy of justice . . 
. In what was a complex and pervasive utilization of law enforcement, 
prosecution, media, and non- governmental organizations focussed on 
destroying an enemy, this case must be number one. There are some, 
where the government itself may have done more and more wrongfully over 
a period of time; but the very networking and combination of federal, 
state and local agencies, of executive and even some legislative and 
judicial branches, of major media and minor localmedia, and of 
inluencial lobbyist types, the ADL preeminently; this case takes the 
prize.'' Indeed, the LaRouche case represented far more than a run-away 
action by rogue agents of the IRS. In the LaRouche case, the IRS played 
a pivotal role, in a concert of action, involving prominent and 
powerful political figures, typified by former Secretary of State Henry 
Kissinger; elements of the national security establishment; 
politically-driven U.S. Attorneys and high-ranking officials of the 
Criminal Division of the U.S. Department of Justice; elements of the 
national media, who committed the equivalent of witting perjury, by 
transmitting, through television and the print news media, slanders and 
fabrications, provided by the IRS and the DOJ, to mislead the American 
public and create a climate conducive to a railroad prosecution of an 
entire political movement. Again, to quote former Attorney General 
Clark: ``The purpose can only be seen as destroying--it's more than a 
political movement, it's more than a political figure; it is those two. 
But it's a fertile engine of ideas, a common purpose of thinking and 
studying and analyzing to solve problems, regardless of the impact on 
the status quo, or on vested interests. It was a deliberate purpose to 
destroy that at any cost.'' As the accompanying chronology will show, 
the political targeting of Lyndon LaRouche for frame-up and jailing--or 
worse--began in ernest in August of 1982, when Henry Kissinger wrote a 
personal note to then-FBI Director William Webster, demanding that the 
FBI and Department of Justice take action against the LaRouche 
political movement. Throughout the autumn of that year, there was 
correspondence back and forth between Kissinger, his attorneys and 
officials of the FBI and Department of Justice. Kissinger's lawyers 
were, in effect, coached on how to frame their complaints against 
LaRouche, to trigger a national security probe of the LaRouche 
movement, using broad authorities prescribed in Executive Order 12333, 
which was ostensibly aimed at combatting foreign espionage, 
international terrorism and international narcotics trafficking--none 
of which applied to LaRouche and his associates. By January 1983, 
Kissinger's efforts resulted in a formal authorization, from members of 
the President's Foreign Intelligence Advisory Board, for an E.O. 12333 
probe of LaRouche's finances. The Kissinger-instigated action led to a 
decade-long nightmare, culminating in two events:
   On Oct. 6, 1986, over 400 federal, state and local law 
        enforcement officers--including, prominently, officials of the 
        IRS/CID--staged a dawn raid on the publishing offices of Lyndon 
        LaRouche. The ostensible purpose was to execute two search 
        warrants, and four arrest warrants against individuals who had 
        never been previously charged with anything more serious than a 
        speeding ticket. The raiding party, it was later learned, was 
        backed up by armored personnel carriers, helicopters, fixed 
        wing aircraft, and, for good measure, special counter-terror 
        units of the U.S. military. Fortunately, cool heads prevailed, 
        and a Waco-style bloodbath was averted, although court 
        testimony later revealed that there were federal law 
        enforcement officials who were anxious to trigger such an 
        outcome. Wildly fabricated ``informant'' information, that led 
        to the near-bloodbath, was provided, in large part, by 
        individuals working closely with the lead IRS agent in the 
        federal-state ``Get LaRouche'' task force.
   Between Jan. 1989-1992, Lyndon LaRouche and a dozen of his 
        political associates were sent to federal and state prison on a 
        range of frame-up white collar and tax charges; a tax exempt 
        foundation and three commercial enterprises were illegally shut 
        down by a fraudulent federal bankruptcy action, that the courts 
        later ruled was ``constructive fraud upon the court.'' Lyndon 
        LaRouche was sentenced to fifteen years in federal prison. 
        Several LaRouche associates, prosecuted in the Commonwealth of 
        Virginia, were sentenced to up to 77 years in state prison--on 
        first offense white collar crimes!
    As you will see below, the Internal Revenue Service played a 
central role in this travesty of justice. In addition to this written 
testimony, the Schiller Institute will provide the Committee with 
background documentation on all of the matters highlighted here. Among 
the material to be provided is:
   the statements, quoted above, from former Attorney General 
        Ramsey Clark. Clark delivered those comments during testimony 
        at a two day public hearing, Aug. 31-Sept. 1, 1995, before an 
        independent commission co-chaired by former Congressman James 
        Mann of South Carolina, and J.L. Chestnut, one of the foremost 
        civil rights lawyers in America today.
   the correspondence between Henry Kissinger, his attorneys, 
        former FBI Director William Webster, and other senior officials 
        of the Justice Department and the FBI, all of which were 
        obtained under the Freedom of Information and Privacy Act. A 
        memorandum from the President's Foreign Intelligence Advisory 
        Board (PFIAB), also obtained under FOIPA.
    To summarize the pattern of abuse and criminal misconduct by agents 
of the IRS in the LaRouche case, IRS officials:
   Targeted LaRouche for politically motivated reasons and 
        allowed political opponents of LaRouche to utilize the power of 
        the IRS for their political aims.
   Systematically leaked confidential taxpayer information and 
        false allegations to the media and private individuals.
   Allowed its agents to illegally gather information on 
        LaRouche and his political associates without any investigative 
        authorization.
   Issued baseless assessments of taxes to LaRouche and 
        companies associated with his political efforts, which were 
        indefensible in a court of law.
   Engaged in all the above types of activities for the stated 
        purpose of creating financial harm to companies and individuals 
        who were political associates of LaRouche.
    The summary of illicit IRS actions in the LaRouche prosecution 
which follows, has been constructed from independent investigations, 
FOIPA documents, and the public record of court proceedings. It 
represents the information concerning IRS abuses which could be 
obtained by these limited means. Only by further investigation of the 
events listed below can Congress assure itself that the IRS is no 
longer employed as an instrument of political prosecution.
     September 1982-January 1983. Henry Kissinger initiates action 
against LaRouche. President's Foreign Intelligence Advisory Board takes 
formal action.
     1983-1984. A series of meetings is convened at the Manhattan 
apartment of New York investment advisor John Train. According to a 
participant, Michael Hudson, the purpose of these meetings was to 
``coordinate national magazine stuff about you guys and work with 
federal law enforcement to deny you funding and tax exemption is the 
delicate way to put it.'' Other participants include Roy Godson, then a 
consultant to the National Security Council and PFIAB; John Rees, a 
longtime FBI informant; representatives of the Anti-Defamation League 
of B'nai B'rith (``ADL''); representatives of Freedom House, a private 
research organization headed by PFIAB chairman Leo Cherne; financier 
and propagandist Richard Mellon Scaife; NBC producer Pat Lynch; Dennis 
King, a paid propagandist against LaRouche funded by the ADL and the 
Smith-Richardson Foundation; reporters and editors from the Wall Street 
Journal, Reader's Digest, Business Week and the New Republic.
    One participant in the Train salon, Chip Berlet, has stated that he 
was introduced to many other individuals at Train's apartment who were 
identified only as ``gentlemen with a government connection.'' At the 
time, the Fusion Energy Foundation, a leading proponent of beam weapons 
ballistic missile defense, was a tax exempt foundation under the 
Internal Revenue Code. FEF was considered by LaRouche's political 
opponents to be a major source of respectability and funding for 
LaRouche's ideas. According to Hudson, he was put into contact with the 
Baltimore regional office of the IRS to further the slander and 
unwarranted prosecution campaign detailed at the Train salon meetings. 
That office had purview over exempt organizations. In response to FOIPA 
requests, the IRS disclaims that it has a file concerning these events 
or any file at all concerning the Fusion Energy Foundation.
     November 1983-March of 1984. NBC producer Pat Lynch, a participant 
in the Train meetings, produces two major smear pieces on LaRouche, a 
declared presidential candidate, which air in January and March of 
1984. According to its sworn responses to civil discovery requests in a 
subsequent lawsuit, NBC received non- public IRS investigative 
information about LaRouche. The broadcasts promote the idea that 
LaRouche should be investigated by the IRS. Other than a one line 
reference to contacts with Lynch, IRS documents released under the FOIA 
contain no information about these events.
     November of 1984. Boston U.S. Attorney William Weld launches a 
grand jury investigation of LaRouche's presidential campaign based upon 
allegations of credit card fraud. These allegations are first publicly 
aired by Boston NBC affiliate WBZ in collaboration with the FBI and 
receive national media attention.
     February of 1985. Following a request for IRS investigation of 
LaRouche by IRS Agent Larry Lucey of the Criminal Investigation 
Division of the Richmond District, the IRS Richmond Director ordered 
that any investigation of Lyndon LaRouche's non-filer status be handled 
as a civil examination matter. LaRouche declared publicly throughout 
his campaign that he had not filed taxes. LaRouche's attorneys had 
advised him that based upon the unusual circumstances in which LaRouche 
lived and worked because of repeated threats to his life by terrorists, 
he had no taxable income. No civil audit of LaRouche, as recommended by 
the Richmond Director, was ever undertaken however. Such an audit would 
have readily resolved any actual issues concerning LaRouche's income 
tax liability.
     November of 1985. Following a year of grand jury testimony, 
covering every aspect of the finances of the LaRouche movement, Boston 
U.S. Attorney Weld seeks a national tax investigation. The central 
allegation concerns whether it was proper for associates of LaRouche to 
claim independent consultant status for paid political organizing 
activities. Following a February 1986 law enforcement conference called 
by Weld to discuss ``prosecutive theories'' against LaRouche, the 
national tax task force approach is rejected by other prosecutors.
     September of 1985-June of 1986. The IRS through CID agent Larry 
Lucey employs the Loudoun County Sheriff's Department and Loudoun 
Sheriff's Deputy Donald Moore as confidential informants in a rogue 
investigation of LaRouche. No crimimal investigation of LaRouche by the 
IRS had been authorized at the time of these activities--in fact 
authorization had been specifically declined.
     Sheriff's Department personnel stated that the purpose of their 
investigations was to destroy LaRouche's electoral aspirations. During 
the course of their IRS sanctioned activities, the Sheriff's Department 
illegally obtained social security numbers on members of LaRouche's 
political movement when they registered to vote, and engaged in black 
bag jobs, bank account monitoring, and warrantless electronic 
surveillance against LaRouche and his associates. Deputy Donald Moore 
admitted many of these activities to an FBI informant, Douglas Poppa, 
in 1994, subsequent to LaRouche's trial and conviction. The ADL was at 
all times working with Moore and the Loudoun County Sheriff and, in all 
probability, also functioned as a confidential informant to the IRS.
     February of 1986-August of 1986. The participants in the John 
Train salon launch an unprecedented wave of black propaganda and dirty 
tricks against LaRouche and his associates. In an international effort, 
later proved to be the work of the East German intelligence services, 
LaRouche is accused of involvement in the assassination of Swedish 
Prime Minister Olaf Palme. In the wake of the victories of two LaRouche 
associates in the Illinois statewide Democratic primaries for governor 
and lieutenant governor, there are numerous illegal leaks of 
information from the Boston grand jury and the IRS which receive 
nationwide airing in the Wall Street Journal, Reader's Digest, the 
Associated Press, the Washington Post, Newsweek and NBC.
    A central lie repeated throughout the propaganda campaign concerned 
LaRouche's alleged ``lavish'' lifestyle for which he paid no taxes. In 
reality, LaRouche lived on rented properties during this period and had 
no lavish lifestyle, a fact which the IRS well knew. Prominent among 
the defamations during this period were NBC TV news broadcasts in April 
of 1986 for which the IRS provided information and which ended with the 
assertion that there was ``an open IRS investigation of LaRouche and 
individuals associated with him.''
     June of 1986. Newly appointed U.S. attorney Henry Hudson declares 
LaRouche to be an investigative priority in the Eastern District of 
Virginia. He creates a task force which includes the IRS. The declared 
purpose of the task force is to ``create as much probable cause as 
possible'' for search warrants against LaRouche and entities and 
individuals associated with him. Thus, after two years of investigation 
and illegal operations, the government has to create a task force in 
order to obtain a broad license to fish for any crime they can 
fabricate against LaRouche.
     September 1986. Boston U.S. Attorney William Weld is appointed to 
head the Justice Department Criminal Division.
     September of 1986. The IRS falsely claims to the Associated Press 
that the Fusion Energy Foundation's tax exempt status has been revoked 
and releases other information about the FEF to reporter William Welch. 
As a result, the Associated Press, in a national wire, claims that 
solicitors for the FEF are committing tax fraud by stating that the FEF 
is tax exempt. After threats of legal action, the IRS claimed that it 
had made a ``mistake'' concerning FEF's status when discussing the FEF 
with reporter Welch and that the FEF was, indeed, still tax exempt. As 
previously noted, in response to FOIA requests, the IRS has disclaimed 
that it has any file on the Fusion Energy Foundation. ``Law enforcement 
sources'' bragged to the Washington Post during September, 1986 that 
the massive negative publicity in the wake of the Illinois primary 
victories by two LaRouche associates had devastated the LaRouche 
movement financially.
     October 6-7, 1986. IRS agents, along with FBI, ATF, and Virginia 
State Police participate in a 400 person armed raid on offices of 
entities associated with LaRouche. Documents obtained during the raid 
are initially taken to a military facility for examination as a result 
of top secret negotiations with the Pentagon.
     April of 1987. The United States launches an unprecedented 
bankruptcy liquidation of Campaigner Publications, Caucus Distributors, 
and the Fusion Energy Foundation, the principal publishers of 
LaRouche's ideas. IRS Agent Lucey, who was subsequently described in 
government documents as the ``elder statesman'' of the federal criminal 
task force and the ``resident expert'' on LaRouche plays an active role 
in assisting the civil bankruptcy action. The bankruptcy action is 
later dismissed as illegal by Federal Judge Martin Bostetter who 
likened it to a ``constructive fraud'' upon the Court. The bankruptcy 
ends any ability to repay the loans at issue in the subsequent federal 
indictment of LaRouche for loan fraud.
     June of 1987. LaRouche is indicted for conspiracy to obstruct 
justice in Boston as a result of Boston U.S. William Weld's two and 
one/half year investigation.
     May of 1988. The Boston criminal case ends in a mistrial amid 
hearings airing major prosecutorial misconduct. Federal Judge Robert 
Keeton in a written decision characterizes law enforcement misconduct 
in the LaRouche case as ``systemic.''
     February 1987-October 14, 1988. Following examination of 
voluminous financial records seized during the October raid and grand 
jury investigation, the U.S. attorney concludes that no evasion charges 
can be brought against LaRouche or the companies paying LaRouche's 
expenses because such charges lack prosecutive merit. Instead, a 
conspiracy charge will be brought against LaRouche alone and unnamed 
co-conspirators, a charge which the U.S. Attorney described as 
``novel.'' The conspiracy charged is that LaRouche conspired to conceal 
his income from the IRS. In addition LaRouche is charged with a loan 
fraud conspiracy and as an aider and abettor in the obtaining of other 
fraudulent loans. LaRouche's trial occurred-- days after indictment. 
Major defenses, including any reference to the fact that the federal 
government brought the bankrutpcy, were banned by the trial judge. His 
jury which had been saturated with propaganda about his alleged lavish 
lifestyle. The conviction on the nebulous conspiracy charges was a 
foregone conclusion.
     January 1989-1991. The IRS commences civil enforcement actions 
against individuals and companies associated with LaRouche as part of a 
strategy to drive the LaRouche movement out of existence in the wake of 
LaRouche's conviction and jailing. These actions again are widely 
publicized by NBC national news. The most prominent IRS actions involve 
assessments against PGM, the financial management company associated 
with the LaRouche movement and LaRouche personally. The IRS initially 
claimed that PGM owed $2,773,882 in unpaid taxes, an assesment the IRS 
knew to be without merit. After years of litigation and legal fees 
incurred by PGM, in which the IRS repeatedly took indefensible 
positions in the Tax Court, the IRS has agreed, after a review of 
documents which had been available to it all along, that PGM has no tax 
liability. The IRS has taken a similarly outlandish position with 
respect to LaRouche personally. Originally the IRS claimed that 
LaRouche owed $5,844,074 in taxes, interest and penalties. After years 
of litigation, the IRS now states that the figure to be $353,444. 
LaRouche disputes the entire amount. That case is presently scheduled 
for trial in the tax court.
     In conclusion, the Schiller Institute wishes to thank the Senate 
Finance Committee for the opportunity to present this testimony. We 
will be happy to provide the Committee with any further documentation 
that may be required in the course of the ongoing investigation into 
the abuses by the IRS.