oversight

Internal Revenue Service's Controls Over the Use of Confidential Informants: Recent Improvements Not Adequate

Published by the Government Accountability Office on 1977-09-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DCCUMENT RESUME

03451 - tA2E33751]

Internal Revenue Service's Contrcs over the Use of Confidential
Infczmants: Recent Improvements Not Adequate. GGD-77-46;
B-147762. September 1, 1977. 54 pp. + 5 appendices (53 pp.).

Repor; to Chairman, Joint Committee on Taxation; Vice Chairman;
by Elmer E. Staats, Comptrcllez General.

Issue Area: Law Enfor-ement dnd Crime Prevention (500); Tax
    Administraticn: Intelligence Activities to Insure Tax Law
    Compliance (2703).
Contact: General Government Div.
Budget Function: General Government: Central Fiscal Operations
     (803); Law Enforcement and Justice: Federal Law Enforcement
    and Prosecuticn ()51).
Organization Concerned: Internal Revenue Service.
Congressional Relevance: House Ccmmittee on Ways and Means;
    Senate Committee on Finance! Joint Committee on Taxation.
Authority: 26 U.S.C. 7623. Internal Revenue Code of 1954, sec.
    7623.
         Primarily because of inadequate management attention,
the Internal Revenue Service (IRS) had not done all it could to
get the most benefits with the least :isk in dealing with
confidential informants. Findings/Conclusions: Informants were
sometimes used in ill-defined and overly broad intelligence
gathering efforts, procedures for evaluating their information
were inadequate, and their use was not systematically reviewed
by management. Since 1975, the IRS has strengthened its
controls. but it could do more. Management needs to pay more
attention to the fact that an informant is used only after the
potential benefits and risk. have been properly assessed.
Recommendations: The Commissioner of Internal Revenue should
require that higher level management officials--preferably
regional ccmrissicners--authorize the use of any informant who
will be gathering information at the Service's request or
encouragement after a determination that there is: reasonable
cause to believe a tax law has been violated, no practical
alternative for obtaining essential information, and. a specific
limitation cn the time and scope of the informant's activities.
The Commissioner should also require that requests to rse each
such informant show, among other things, why the informant is
needed, how be was developed and determined reliable, and how he
will be used. In ord:!r to spur proper implementation of the
guidelines and adequate management attention to informant
activities, the Commissioner should review those activities at
least annually. (Author/SC)
             REPORT TO THE JOINT COMMITTEE
             ON TAXATION
             CONGRESS OF THE UNITED STATES
uo-~I        BY THE COMJPTROLLER GENERA '.
    : ':it   OF THE UNITED STATES




             Internal Revenue Service's
             Controls Over The Use Of
             Confidential Informants:
             Recent Improvements Not Adequate
             Department of the Treasury
             Primarl'y because of inadequate man igement
             attention, the Internal Revenue Service had
             not done all it could to get the most benefits
             with the least risk in dealing with confidential
             informants. Informants were sometimes used
             in ill-defined and overly broad intelligence
             gathering efforts, procedures for evaluating
             their information wt-e inadequate, and theii
             use was not systematically reviewed by
             management.

             Since 1975, the Internal Revenue Service has
             strengthened its controls but it could do
             more. Management needs to pay more at-
             tention to the fact that an informant is used
             only after the potential benefits and risk?
             have been properly assessed.




             GGD-77-46
                                                       SEPTEMBER 1, 1977
                COMPTROLLER GENERAL OF THE UNITED STATES
                           WASHINGTON. D.C.   20548




B-137762




To the Chairman and Vice Chairman
Joint Committee on Taxation
Congress of the United States

     In response to your Committee's request, we are
addressing the Internal Revenue Service's management
cont-ols ier the use of confidential informants.   The
Service agrees with most of our proposals for improving
these controls; it does not agree, however, that regional
commissioners should be responsible for approving the
use of an informant. Inatead, the Service intends to
delegate this authority to the district director who
is the management official responsible for all Service
activities in a district.
     We would consider, on a trial basis, delegating
this responsibility to the district director as an
acceptable alternative.
     As arranged with your Committee, we plan no fur-
ther distribution until 30 days from the date of the
report unless you publicly announce its contents earlier.
At that time, we will send copies to interested parties
and make copies available to others upon request.




                                       ptroller General
                                    of the United States
 COMPTROLLER GENERAL'S REPORT           INTERNAL REVENUE SERVICE'S
 TO THE JOINT COMMITTEE ON              CONTROLS OVER THE USE OF
 TAXATION                               CONFIDENTIAL INFORMANTS:
 CONGRESS OF THE UNITED STATES          RECENT IMPROVEMENTS NOT
                                        ADEQUATE
                                        Department of the Treasury
              DIGEST
              The Intelligence Division of the Internal
              Revenue Service is responsible for enforcing
              the criminal provisions of the tax laws.
              Confidential informants have contributed
              to this mission. However, their use can
              endanger Service employees, jeopardize tax
              cases, and violate taxpayers' rights. Such
              serious risks reveal a need for strong
              management controls. In the past, such
              controls were inadequate. While the Service
              has taken steps recently to strengthen
              these controls, GAO recommends that more be
              done.
              No attempt is made in this report to deter-
              mine how many intelligence gathering efforts
              were gooc or bad in terms of results but
              GAO did look at results to see if confiden-
              tial informants are valuable to the Service.
              They are, but their use also entails risks.

              WHY CONTROLS ARE NEEDED

             The Intelligence Division's informant activity
             is small in terms of dollars--about $800,000
             was paid out of operating expenditures totaling
             $261 million to confidential informants in
             fiscal years 1973 through 1975. It is not
             small, however, when one considers that those
             payments were made to about 2,000 informants
             while thousands more provided information for
             free.  (See p. 3.)
             In dealing with confidential informants, the
             Internal Revenue Service is faced with trying
             to get the most benefits with the least risk--
             a difficult task.

             If an informant is bent on violating the law,
             giving false information, or the like, there
             is little, if anything, the Service can do to
             prevent it. But with good management controls,

Tuw Samt.  Upon removal, thereort                     GGD-77-46
covr dte should be noted heon.
                                    i
the Service can lessen the chances of such
things happening and, if they do happen,
can take quick corrective action, such as
terminating an informant's services. At
the same time, these controls can help the
Service make the most of the benefits it
might derive from an informant's services.
(See p. 11.)
HOW PAST CONTROLS WERE
INADEQUATE
It is essential that intelligence gathering
efforts by informants have clear objectives
and precise plans of action. Many of the
intelligence gathering operations Gp_
reviewed were begun on the basis of assump-
tions or allegations that an illegal acti-
vity was being conducted in a geographical
area or by a large group of people rather
than sn specific allegations of tax law
viiolations by specific individudls. CO:her
intelligence gathering programs were started
primarily beceuse informants were available
and willing, if paid. They were sent out
not for well-defined purposes but simply to
gather whatever information they could on
any individuals they might identify as pos-
sibly being invnlved in illegal activities.
(See p. 12.)

Informants are valuable only if they provide
information which the Service determines
to be useful for further intelligence
gathering; a criminal investigation, indict-
ment, or prosecution; or tax assessments
and collections and which otherwise would
not be available to the agency.

This requires timely, systematic analysis and
evaluation to determine the information's tax
implications. (See p. 26.)

Internal Revenue Service procedures generally
provided that an informant be paid only after
his information was evaluated.  In theory this
procedure provided for systematic, timely eval-
uation of information.  In reality, it proved
inadequate.




                   ii
 If an informant approached the Service
 voluntarily with information that he wanted
 to exchange for money, the procedure worked
 well--the Service reviewed the information,
 evaluated its worth, and paid for it.
 However, if an informant were sent out to
 gather information, the procedure became
 inoperable because these informants were
 paid for their services rather than for
 information.   (See p. 22.)

 In gathering intelligence about pezsons and
 groups who derive their income from illegal
 activities, the Service cannot avoid getting
 into sources of income such as gambling,
 loan sharking, political corruption, and
 narcotics trafficking--crimes which are out-
 side of its enforcement authority. To do
 otherwise would be remiss. It would be
 tantamount to granting immunity from com-
 pliance with the tax laws to a segment of
 the population having a high probability of
 willful nonccmpliance. (See p. 20.)
  To obtain information on illegal dealings,
  the Service used informants to infiltrate
  those activities, identify individuals
  involved, and gather information on them.
  The information they gathered frequently
  was general in nature, was not always
  clearly tax related, and contained names of
  numerous individuals. Even so, the infor-
  mation might still have been useful to the
  Internal Revenue Service and should have
  been systematically evaluated, but was not.
  (See pp. 24 and 26.)

  Finally, the Intelligence Division's use of
  confidential informants was not systematically
  reviewed at any level of management.
  Systematic review is necessary to insure
  that the use of informants is in line with
  the Service's mission and consistent with
  established procedures.  (See p. 28.)




Te-ar   ~hn~iii
WHAT THE INTERNAL REVENUE SERVICE
HAS DONE TO IMPROVE ITS CONTROLS
After adverse Publicity and controversy in
1975 over its use of confidential informants,
the Internal Revenue Service took steps to
strengthen its controls.
New guidelines, issued in 1975 and 1977

-- require a written authorization before
   any Service employee gathers intelligence;
-- require the chief of intelligence in
   each district office to approve the use
   of each paid informant and each unpaid
   informant who is encouraged to provide
   information and to maintain a record on
   each such informant used;
-- spell out what informants can and cannot
   do in working for the Service, and
   provide instructions as to what Service
   employees should do when they become
   aware of illegal informant activity;
-- specifically require managers to review
   and report on informant activities; and
-- provide for the timely evaluation and
   processing of information received from
   informants.  (See pp. 40 and 45.)
WHAT MORE SHOULD BE DONE
The Service's new guidelines do not provide
adequately for management assessment of
potential benefits and risks before an
informant's use is authorized.
rJnder the guidelines, primary responsibility
for authorizing the use of an informant rests
with the chief of intelligence. District,
regional, and national office managers need
not be involved unless confidential funds
are to be expended. Involvement of these
other managers is an exercise of fiscal
responsibility. They may ask Questions
about why and how an informant is to be
used but their primary purpose is to


                    iv
              authorize expenditures, not the use of an
              informant.  (See p. 48.)
             Informants who gather information at the
             Service's request or encouragement present
             special risks. Therefore controls over them
             should be greater than controls over infor-
             mants who furnish information at their own
             initiative. Failure to clearly distinguish
             between these two types of informants results
             in too much control in some instances and
             not enough in others.

             Under the new guidelines, for example, a
             chief of intelligence can approve the use
             of an unpaid informant who is going to be
             gathering information at the Service's
             request or encouragement. Yet, under the
             procedures on confidential expenditures,
             the chief must obtain the district direc-
             tor's approval to pay even a few dollars
             to a person who voluntarily walks into all
             Internal Revenue Service office with valu-
             able tax'-related information.

             While controls over money are important and
             should be properly emphasized, control over
             informant activities should be based primarily
             on how an informant will be used--not
             on the amount of money to he spent--because
             the risks associated with using an informant
             do not vary depending on the dollars to be
             paid.  (See p. 48.)
             Revised guidelines alone are not the answer.
             Past guidelines often were not complied with
             so there is no assurance that the revised
             guidelines will be unless management pays
             more attention to these activities than in
             the past. Although Intelligence Division
             officials directed and encouraged their
             people to use confidential informants, nei-
             ther they nor other Service managers were
             sufficiently concerned with how those infor-
             mants were being used.   (See pp. 28 and 49.)
             Intelligence officials at the national,
             regional, and district offices tended to
             ignore or condone potential problems and
             weaknesses by not requiring compliance


Tear Sheet
                                 v
with existing guidelines and by not respond-
ing to problems as they arose.
Service managers outside the intelligence
function appeared to have a "hands off"
philosophy regarding informant activities.
This attitude that intelligence personnel
should be left to manage their own affairs
appeared pervasive and generally accepted.
(See p. 50.)
This lack of management attention at all
levels was the underlying cause of problems
discussed in this report. It may have arisen
because management failed to fully appreciate
the problems that can arise when dealing with
informants. Whatever the reason, it must
change.
GAO RECOMMENDATIONS
Accordingly, GAO recommends that the Commis-
sioner of Internal Revenue require that
higher level management officials--preferably
regional commissioners--authorize the use of
any informant who will be gathering information
at the Service's request or encouragement after
a determination that there is
-- reasonable cause to believe a tax law
   has been violated,
--no practical alternative for obtaining
  essential information, and
--a specific limitation on the time and
  scope of the informant's activities.
The Commissioner should also require that
requests to use each such informant show among
other things, why the informant is needed,
how he was developed and determined reliable,
and how he will be used.
To better spur proper implementation of the
guidelines and adequate management attention
to informant activities, the Commissioner
should review those activities at least
annually. One way this can be accomplished



                      vi
is through an inuependent third Party like
the Service's Internal Audit Division.
(See p. 50.)

INTERNAL REVENUE SERVICE COMMENTS

The Service did not agree that the use of
informants should be approved by reqicnal
commissioners in order to remove this
decision from the intelligence function.
It believes district directors should
have this authority. Although GAO believes
that regional commissioners would be in a
better position to authorize the use of an
informant it is willing to accept the Ser-
vice's position, on a trial basis.

The Service said that it does distinquish
between informants who provide information
on their own initiative and those who pro-
vide information at the Service's request
or encouragement and that its guidelines
already call for information on why an
informant is needed, how he was developed
and determined reliable, and how he will be
used.

While the guidelines do contain bits and
pieces of GAO's recommendation, the', fall
short of providing the total control GPO
is seeking.
The Service agreed with the concept of
GAO's last recommendation but noted that
Internal Audit has always been involved
in reviewing informant activities. GAO's
recommendation, however, is not directed
toward Internal Audit; it is directed
toward the Commissioner. GAO's recommen-
dation was intended to provide for more
direct oversight of informant activities
by the use of periodic reports to the
Commissioner.  (See p. 51.)




                   vii
                  Contents


DIGEST
CHAPTER

   1      INTRODUCTION                              1
              IRS' intelligence mission
                and the role of confidential
                informants                          1
              History of IRS' involvement
                with confidential informants        3
              Review objectives and scope           6
  2       THE RISKS ASSOCIATED WITH CONFIDENTIAL
            INFORMANTS DICTATE THE NEED FOR
            EFFECTIVE MANAGEMENT CONTROL            8
              How valuable are informants?          8
              Conclusions                          10
  3       PREVIOUS MANAGEMENT CONTROLS WERE
            INADEQUATE TO MAXIMIZE BENEFITS
            AND MINIMIZE RISKS                     12
              Confidential informants used
                in ill-defined and overly
                broad intelligence gathering
                efforts                            12
              Conclus.ions                         19
              Procedures for accumulating,
                evaluating, and processing
                information provided by
                informants were inadequate         21
              Conclusions                          26
              Management emphasized expanding--
                not evaluating--informant
                activities                         28
              Conclusions                          38
  4       MANAGEMENT CONTROLS HAVE BEEN IMPROVED
            BUT MORE NEEDS TO BE DONE              40
              Actions taken to correct
                weakne sss                         40
              Conclusions                          48
              RecommEndations                      50
              IRS con.vents and our evaluation     51
APPENDIX

      I    Letter dated July 27, 1977, from
             the Commissioner of Internal
             Revenue                           55

  II       Operation Leprechaun                60

 III       IRS guidelines on informants,
             confidential expenditures, and
             information gathering             80

  IV       Congressional hearings on IRS
             intelligence activities after
             publication of allegations
             about Operation Leprechaun       106

      V    Principal officials responsible
             for administering activities
             discussed in this report         107

                      ABBREVIATIONS

GAO        General Accounting Office
IRS        Internal Revenue Service
                            CHAPTER 1

                           INTRODUCTION


     At tile request of the Joint Committee on Taxation, we
reviewed the use of confidential informants by the Internal
Revenue Service's (IRS') Intelligence Division.

IRS' INTELLIGENCE MISSION AND THE
ROLE OF CONFIDENTIAL INFORMANTS

     IRS' overall mission is to encourage and achieve the
highest possible degree of voluntary compliance with the tax
laws and regulations and to conduct itself so as to warrant
the highest degree of public confidence in its integrity and
efficiency. To successfully carry out this mission, IRS must
seek out and prosecute persons who violate those laws.  The
most frequent violations prosecuted as crimes are willful (1)
attempt. to evade tax, (2) failure to collect or pay over
tax, and (3) failure to file returns.

     IRS' Intelligence Division is responsible for enforcing
the criminal provisions of the tax laws.  The Director of that
division at the national office reports tc the Assistant Com-
missioner for Compliance, who in turn reports to the Commis-
sioner.  Like IRS in general, the intelligence organization
is highly decentralized among 7 regions and 58 districts.

     At the regional level, the assistant regional commis-
sioner for intelligence acts as the principal assistant to
the regional commissioner in planning, coordinating, and
evaluating those intelligence activities under the juris-
diction of the regional commissioner to insure that policies
and programs are properly executed.

      At the district level, the chief of intelligence, under
the  direction  of the district director, enforces the criminal
statutes  by  developing information on alleged violations,
evaluating   allegations and indications of such violations to
determine  whether  investigations  should be undertaken, invest-
igating suspected   criminal violations,   recommending prosecu-
tions, and measuring   the effectiveness   of  the investigation
and prosecution processes.    Thus,  the  responsibility   for day-
to-(ly  intelligence  operations rests   with  the chief  of intelli-
gence and the group managers   and  special   agents 1/  assigned to
him.


1/ Special agents are the Intelligence Division employees who
actually gather intelligence on and investigate charges of
criminal violations of the tax law.

                                 1
      The use of confidential informants is just one of many
 means that the Intelligence Division employs to identify
 investigate suspected criminal violators of the tax laws. and
 Special agents also gather information and coniduct investi-
 gations through surveillance of suspected violators, inter-
 views of witnesses and potential defendants, and reviews
                                                           of
 public documents, third party records, and taxpayer records,
 if available. Special agents sometimes act in an undercover
 capacity.
Who are informants?

       According to TRS,   informants are persons who furnish
information on their own initiative or as a result of being
encouraged to do so by a special agent or other IRS employee.
Such persons include those who furnish leads or bits of
                                                         in-
formation as well as those who submit detailed information
regarding alleged violations. A confidential informant
one who furnishes information on the expectation that hisis
identity will be held in strict confidence.
     Section 7623 of the Internal Revenue Code of 1954
(26 U.S.C 7623) authorizes IRS to make payments which
                                                       it
determines are "necessary for detecting and bringing to trial
and punishment" persons who violate tax laws. This provision
was first enacted, in substantially the same form, as Section
7 of the act of March 2, 1867.
     Based on this general provision, it has been repeatedly
affirmed through various decisions and actions by the courts,
the Congress, and the Comptroller General of the United States
that IRS has authority to make payments from appropriated
funds to support and maintain informants
tion which may lead to the prosecution of who gather informa-
                                           tax law violators.
      According to IRS, its informants usually fall into
of three general groups: average citizens, tax violatorsone
their associates, and disturbed persons. They are motivated and
by such things as money, egotism, friendship, revenge,
fear.                                                   and
        In general, informants are either (1) referred to IRS
by other law enforcement agencies, (2) identified by special
agents and requested to gather information because of
                                                       their
unique position, or (3) known to IRS intelligence personnel
through prior intelligence gathering or investigative efforts.

     The Intelligence Division pays its confidential
from imprest funds 1/ established for that purpose andinformants
                                                        classifies

1/ Fixed sums of cash (currency or Government checks) advanced
   to duly authorized cashiers for specified purposes.



                              2
those payments as confidential expenditures.  These expen-
ditures include payments made to informants for specific infor-
mation and for expenses and services which are not directly
related to specific information. Confidential expenditures
also include expenses incurred by special agents while con-
ducting surveillance or operating in an undercover capacity.

     Intelligence Division expenditures for fiscal years 1973
through 1975 totaled $261.2 million--only a small portion of
which went to confidential informants.  Information IRS accum-
ulated in March 1975 shows payments of about $800,000 to about
2,000 confidential informants during those 3 years.

     Not all confidential informants are paid, however.  In
reporting on its review of informant activities in 22 dis-
tricts, IRS' Internal Audit Division showed the extent to which
IRS used unpaid informants when it noted that:

     "The 22 districts prepared lists that identified
     3,759 unpaid informants that had been utilized to
     provide information on a recurring basis during the
     period July 1, 1971 through March 31, 1975."

     IRS recognizes that many investigations cannot be success-
fully completed without using informants and purchasing evidence
particularly if the alleaed violator is engaged in an illegal
activity.  IRS, like other law enforcement agencies, considers
the use of informants necessary in carrying out its enforcement
mission because they can furnish information which otherwise
might not oe available.

HISTORY OF IRS' INVOLVEMENT
WITH CONFIDENTIAL INFORMANTS

     IRS does not know, and we were unable to determine, when
it first used a confidential informant but one may have been
used as far back as the 1930s during IRS' investigation of
Al Capone. Our research of available literature, review of
intelligence gathering efforts, and interviews with intelli-
gence personnel indicate that IRS' confidential informants are
mostly involved in gathering information on organized crime.
A history of IRS' involvement with organized crime, therefore,
should provide a fairly accurate history of its involvement
with confidential informants.

     Although !RS had been successful in jailing some infamous
racketeers for income tax evasion, it did not have a well-
organized racketeer investigation program until 1951, at which
time it initiated its Tax Fraud Drive on Racketeers.  This




                               3
drive, which was intended to force compliance with the Federal
income tax laws by all members of the underworld, began after
the Kefauver Committee 1/ had criticized IRS for failing to
sufficiently enforce the tax laws against organized crime.

     From 1954 to 1957, the program against racketeers de-
clined because, under the Eisenhower Administration, IRS was
generally not permitted to request appropriations for addi-
tional personnel to expand enforcement activities and because
several Commissioners were not sympathetic to an emphasis on
organized crime.  In 1955, for example, the Commissioner of
Internal Revenue, in a letter to the Attorney General, noted
that IRS policy:

     "does not envision, in view of manpower limi-
     tations and the necessity for maintaining a
     balanced enforcement program, this Service
     engaging in a 'drive' against any particular
     segment of taxpayers."

     But the November 1957 Apalachin meeting of racketeers
triggered a Justice Department drive on racketeers and
increased IRS' interest.

     After President Kennedy's inauguration in 1961, the
drive against organized crime became a more prominent Govern-
ment-wide policy and all Government agencies were "enlisted
and ordered" to joint in combating it.  According to a former
Director of the Intelligence Division, emphasis qiven this
effort by IRS declined in 1965 and 1966 due to the departure
of Robert Kennedy as Attorney General and hearinqs held by
Senator Edward Long 2/ which disclosed instances of agents
overstepping the bounds of constitutional restraint with
respect to electronic surveillance.

     In November 1966, President Johnson voiced administration
support of the organized crime program which led to the first
Strike Force in January 1967.  The objective of the Strike Force
concept is to coordinate, through the Justice Department, the
combined forces of Federal law enforcement agencies against the



l/Special Committee of the United States Senate to Investigate
  Organized Crime in Interstate Commerce, established May 3,
  1950.

2/Hearings before the Subcommittee on Administrative Practice
  and Procedure of the Committee on the Judiciary, United
  States Senate, 89th Cong., 1st Sess., pt. 3, pp. 1126-27,
  Hon. Edward Long, Chairman.


                             4
criminal element in our society.  Support for this combined
Federal effort was reemphasized in 1969 by President
Nixon 1/.

     In 1971, President Nixon ordered all agencies to join in
an effort to suppress narcotics trafficking--a facet of orga-
nized crime. Because profit is the main motive for trafficking,
and taxes are a consequence, the Treasury Department called on
IRS to play a major role.  The objective was to direct IRS'
civil and criminal tax enforcement efforts against those who
financed and profited from trafficking, as experience had shown
such income was rarely reported for tax purposes.

     In June 1975, IRS discontinued its Narcotics Traffickers
Program as a separate enforcemnent effort. The drive against
traffickers was reemphasized in April 1976 when President Ford
directed the Secretary of the Treasury and the Commissioner of
IRS, in consultation with the Attorney General and the Admini-
strator of the Drug Enforcement Administration, to develop a
tax enforcement program aimed at major drug traffickers.

IRS' recent reviews of confidential
expenditures and informant activities

     In November 1974, Internal Audit began a review of the In-
telligence Division's confidential imprest fund at the national
office which involved inquiries into the payments to and the
effectiveness and management of confidential informants.

     In February 1975, IRS initiated a joint Internal Audit/
Internal Security investigation of the intelligence gathering
function in the Jacksonville, Florida, district office because
of indications )f improper activities.  A month later, an
article in the Miami News alleged that IRS agents were paying
informants to spy on the sex lives and drinking habits of
prominent public officials as part of an intelligence
gathering effort called "Operation Leprechaun"--a code name
applied to certain intelligence operations in Miami.   Three
days later, on March 17, 1975, the Deputy Commissioner
revoked IRS' guidelines on confidential expenditures and
centralized approval of such expenditures at the national
office pending a review and evaluation of those activities.
The centralization remained in effect until December 10, 1975,
when IRS issued new guidelines giving regional commissioners
authority to approve confidential expenditures up to $2,000.



1/For a more complete discussion of the Federal Strike Force
  effort see our report entitled "War on Organized Crime
  Faltering--Federal Strike Forces Not Getting the Job Done"
  (GGD-77-17, March 17, 1977).

                             5
     Because of these events and the results of Internal
Audits' national office review (1) IRS expanded its joint
Internal Audit/Internal Security investigation in the Jack-
sonville district and (2) Internal Audit initiated a review
of management and internal controls over information qather-
ing, confidential funds, and informants in 22 other district
offices--some in each of the 7 regions.  Concurrently, IRS'
Internal Security Division investigated alleged misconduct
by Intelligence Division employees, including several who
were in some way identified with Operation Leprechaun.

REVIEW OBJECTIVES AND SCOPE

     Our review was directed toward evaluating the use of
confidential informants by the Intelligence Division with
attention to the

     -- role of confidential informants in IRS'   intelliqence
        mission,

     --contributions made b- informants,

     -- procedures for initiating intelligence gathering efforts
        in which informants were used,

     -- procedures foL accumulating and processing informa-
        tion Provided by informants, and

     -- extent of management involvement in the use of
        informants.

     We reviewed the procedures and practices followed by the
national office, two regional offices, and five district
offices in those two regions for initiating and c&rrying out
intelligence activities in which confidential informants had
major roles 1/.  The national office and the two regions
we reviewed accounted for 33 percent of the 2,000 informants
and 62 percent of the $800,000 paid them during fiscal years
1973, 1974, and 1975.

     As part of our review, we evaluated the work that IRS'
Internal Audit Division had done since November 1974.  IRS
auditors bad done work at the national office and three of



1/Because infcrmant activities are highly sensitive, we
  are not identifying regions, districts, or intelligence
  gathering efforts by name except for Operation Leprechaun
  which is already a matter of public record.



                              6
the district offices we visited. Their work included
determining the extent to which information was gathered
on the personal habits of taxpayers, the adequacy of con-
trols over confidential expenditures, and the propriety
of methods used by IRS employees and confidential infor-
mants to gather information.
     The one aspect of Internal Audit's work with which
we differed was the classification of information gath-
ered during Operation Leprechaun as sex related.
(See p. 76). Because our overall evaluation showed that
Internal Audit's work was adequate, however, we were
able to limit the scope of our review by using their work
to supplement ours. Although Internal Audit reviewed and
reported on weaknesses in both accounting and management
controls and although we also reviewed both types of con-
trols to satisfy ourselves as to the adequacy of their
work, we are limiting our report to a discussion of
the more important management controls.
     The activities we reviewed were undertaken by IRS
between July 1971 and March 1975. During that period
written procedures were in effect which have since been
discontinued or substantially revised. Since March 1975,
IRS has reissued guidelines for practically all aspects
of its intelligence gathering activities. We reviewed
the new guidelines to determine if they adequately deal
with the problems and weaknesses identified in our review
and in IRS internal audits, studies, and investigations.
    Because of the publicity, interest, and contro-
versv surrounding Operation Leprechaun, which involved
exyensive use of informants, we reviewed that project
in some depth and have summarized it in appendix II.




                            7
                          CHAPTER 2

           THE RISKS ASSOCIATED WITH CONFIDENTIAL

               INFORMANTS DICTATE TIE MEED FOR

                 EFFECTIVE MANAGEMENT CONTROL


     In discussing confidential informants, two factors must
be considered--the benefits they can pros i.e and the problems
they can cause.  While these informants c-    be vdiuable to
IRS' intelligence mission, they also can      . source of ad-
verse publicity, criticism, and embarrass    .t as vividly de-
monstrated by Operation Leprechaun.  More importantly, they
can give false information, violate the law, encroach upon
privileged communications, unlawfully inhibit free association
of individuals and expression of ideas, ccmpromise the inves-
tigation and prosecution of suspected tax violators, or
attempt to further their own interests at IRS' expense. Such
actions could endanger IRS employees, jeopardize tax cases,
and violate taxpayers' rights.

     Such risks cannot be taken lightly, as indicated by the
following excerpt from the April 1976 report by the Senate
Select Committee to Study Governmental Operations with respect
to Intelligence Activities (Book II, p. 183):

     "Although there are circumstances where these
     techniques [informants and others) if properly
     controlled, are legal and appropriate   * * their
     very nature makes them a threat to the personal
     privacy and Constitutionally protected activities
     of both the targets and of persons who communicate
     with or associate with the targets."

HOW VALUABLE ARE INFORMANTS?

     Intelligence Division personnel assigned to gather
intelligence and conduct investigations can draw on a number
of information sources outside IRS.  These sources include
other Federal agencies such as the Federal Bureau of Investi-
gation, the Drug Enforcement Administration, the Bureau of
Alcohol, Tobacco and Firearms, the Securities and Exchange
Commission, and the Department of Labor; businesses including
banks, security and commodity brokers, and other financial
institutions; and state, county, and municipal agencies.   IRS
believes, however, that many criminal tax cases could not
have been successfully completed except for the use of confi-
dential informants who supplied information otherwise unavail-
able, especially concerning taxpayers engaged in illegal
activities.

                               8
     It is difficult, however, and often misleading to measure
the value of confidential informants.  Sometimes it is fairly
easy to identify the informant's contribution because his in-
formation leads directly to a prosecution or an audit.  Other
times it is no_ so easy because the informant may be only a
small, yet necessary, part of an intelligence gathering effort.
An informant may provide information, for example, which by it-
self means little but, when combined with information obtained
from other sources, gives the special agent the evidence he needs
to proceed with an investigation. The informant's contribution
in such an instance is difficult to determine.

     We are unable, therefore, to assess in quantifiable
terms the benefits derived from IRS' use of confidential in-
formants.  We do know, however, that in some intelligence
gathering efforts confidential informants furnished information
which was general in nature and of no apparent use to IRS while
in other efforts informants provided information which was di-
rectly tax related and useful int criminal prosecutions, criminal
investigations, and assessments of additional tax.

     In one intelligence gathering effort, for example, IRS
paid an informant to obtain information on organized gambling,
loan sharking, fencing, and police corruption in a certain geo-
graphical area.  The informant was unsuccessful, however, and
the district subsequently reduced the scope of the effort to
focus on gambling.

     In all, this effort lasted over a year and the district
paid about $1,520 to three informants.  Yet, not enough speci-
fic information was gathered to be useful to IRS.  For the most
part, the informants used in this intelligence gathering effort
provided general information rather than specific tax informa-
tion from which intelligence cases with good prosecution poten-
tial could be developed.

      During another intelligence gathering effort, special
agents purchased information from eight informants in areas
where bootlegging, bookmaking, and lottery operations were
 .1.legedly taking place. The objective was to gather enough
intelligence on individuals and others to warrant formal
criminal investigations.   Our review showed that the infor-
mants provided

     -- information which resulted in an investigation of two
        taxpayers,

     -- leads on two taxpayers which were further developed
        by special agents before investigations were initiated,




                             9
      -- information which was used by special aqents in two
         intelligence investigations that were already under-
         way, and
     -- information on one taxpayer which was referred
        to the Audit Division and used by that Division
        in auditing the taxpayer's tax return and
        recommending an additional tax assessment of
        $58,677.
     As a result of the investigations initiated or developed
with information supplied by the informants, two tarpayers
were convicted and two had been recommended to the Department
of Justice for prosecution as of January 1977. Of the two
cases involving information provided by informants after in-
vestigations were underway, one resulted in the taxpayer's
conviction and the other was dropped after the taxpayer's death.

     In a third intelligence gathering effort, informants
contributed to 10 intelligence investigations.

     At the time of our review, 8 of the 10 investigations
had been completed. Of these eight, five had resulted in
recommendations of nonprosecution by the investigating agent,
one was recommended for prosecution but declined by IRS'
Regional Counsel, and two were forwarded to the Justice
Department for prosecution. Of the latter two, one resulted
in the taxpayer's conviction and the other was awaiting
prosecution.

     In addition to their contributions to intelligence cases,
informants contributed to audits of these same 10 taxpayers
and 4 others, which resulted in recommended assessments of
additional tax and penalties totaling about $595,000. Of
this amount, $265 had been collected and about $543,000 was
believed by Audit Division personnel to have good collection
potential, should the recommended assessments stand. It
should be noted that additional tax and penalties recommended
by Audit Division examiners are subject to a variety of
reviews and taxpayer appeals. Any of these reviews or appeals
could result in actual assessments less than the amounts
recommended.

CONCLUSIONS

      Because informants' contributions are difficult to
quantify, we have avoided getting into a discussion of how
many intelligence gathering efforts were good or bad in
terms of results. But, we did look at results to see if
informants were valuable to IRS and we concluded that they
were.


                           10
     The use of confidential informants entails not only
benefits but also significant risks.   In dealing with confi-
 .-
  "'ial informants, therefore, IRS is faced with trying to
r   'nize the benefits while minimizing the risks--a difficult


     If an informant is bent on violating the law, giving
false information, or the like, there is little, if anything,
IRS can do to prevent it.  With sound managment controls, how-
ever, IRS can minimize the chances of such things happening
and, if they do happen, can take quick corrective action,
such as terminating the informant's services. At the same
time, these controls can help IRS maximize the benefits it
might derive from the informant's services.

     Such controls should include (1) sound justification for
using a particular informant with well-defined objectives
and a specific plan of action so that everyone, including the
informant, has a clear understanding of what IRS is trying to
achieve and his role in that effort, (2) periodic evaluations
of his information to facilitate its effective use, to deter-
mine whether the informant's efforts are consistent with the
agreed-on objectives, and to provide a basis for timely ter-
mination of unproductive or improper informant activities,
and (3) systematic management evaluations of informant acti-
vities to insure that the Intelligence Division's use of
informants is in line with IRS' mission and consistent with
established procedures.  As shown in the next chapter, sound
controls did not exist in the past.




                              11
                          CHAPTER 3

        PREVIOUS MANAGEMENT CONTROLS WERE INADEQUATE

          TO MAXIMIZE BENEFITS AND MINIMIZE RISKS

     IRS had not done all it could to maximize the benefits
that informants can provide while minimizing the problems
they can cause.  Informants were used in intelligence gathering
efforts that were ill-defined as to purpose and overly broad
in scope, IRS did not have a workable system or procedure for
evaluating and assuring effective use of informants' informa-
tion, and the Intelligence Division's use of confidential in-
formants was not subjected to systematic review at any level
of management. These serious weaknesses in management control
resulted from lack of attention at all levels.
CONFIDENTIAL INFORMANTS USED IN
ILL-DEFINED AND OVERLY BROAD
INTELLIGENCE GATHERING EFFORTS

      IRS management did not adequately participate in initiating
confidential informant activities. Identification, develop-
ment, and use of informants were left up to the special agents
and other intelligence personnel who would be having direct
contact with informants. Intelligence personnel were not re-
quired to obtain higher level approval before using an inform-
ant or before initiating an intelligence gathering effort in-
volving informants unJess confidential funds were to be used;
even then established procedures were often disregarded.
Also, the procedures for requesting approval to expend
confidential funds did not require the requester to submit
information snowing how informants would be used, who they
were, and how they were determined to be reliable. This
lack of management participation and noncompliance with estab-
lished procedures resulted in the use of confidential in-
formants in intelligence gathering efforts which were ill-
defined as to purpose and overly broad in scope.

Need for more adequate justifications
before approving the use of informants
     The only formal means that IRS district, regional, and na-
tional management had of becoming aware of and approving the use
of confidential informants was through confidential imprest fund
procedures. II confidential expenditures, including payments
to be made to an informant, were expected to exceed $500, a
written request to gt the funds authorized had to be made
to the district director, the regional commissioner, or the
Director or Assistant Director of the Intelligence Division,
depending on the amount of money needed. Guidelines in effect


                              12
until March 1975 required that
     n*   * * written requests for authority to make confidential
     expenditures must contain a clear and concise statement
     of the objective sought, the amount requested, the pro-
     posed plan of action, the period of time over which the
     expenditure will be made, the anticipated results, and
     any other information of value to the official who will
     act upon the request."
These requirements were usually not complied with.

     We reviewed 52 requests for approval to expend
confidential funds in intelligence gathering efforts invol-
ving informants. These were all the requests for money in
excess of $500 on file for fiscal years 1972 through 1975 in
the two regions selected for review, except for requests
submitted in conjunction with the Narcotics Traffickers Pro-
qram. We did not include these latter requests because
IRS' national office initiated that program with formal guide-
lines stating the objectives and establishing a committee at
the national office to select specific targets.
     Of the 52 requests, 35 did not contain all of the re-
quired information but were approved nonetheless. Of the 35
     --22 did not contain a statement of the objectives sought,

     -- 26 did not show the proposed plan of action,
     --22 did not document the anticipated results, and
     -- 14 did not st ce the time period for making the
        expenditures.
     The following examples of unclear and incomplete re-
quests to expend confidential funds show the type of ill-
defined and broad-based intelligence gathering efforts in
which confidential informants were involved.

Example A
     The national office approved two related intelligence
gathering efforts, involving payments of about $10,000 to one
informant, to determine the extent of organized crime in a
certain area.
     In 1973, a difference of opinion surfaced within IRS
as to the extent of organized crime and its control of
illegal activities in a particular IRS district.



                               13
District officials felt that illegal activities were not or-
ganized; national office officials felt otherwise. To resolve
this controversy, the national office initiated an intelligence
gathering effort without the knowledge of regional or district
officials. The request for authorization to expend confidential
funds during this effort read as follows:

          "For approximately three months during the latter
     part of 1971 we utilized the services of a national
     type informant in [a specific geographical area] for
     intelligence purposes. This individual has been avail-
     able to us for the past eight years and has always
     proven reliable and industrious.

          "As a result of his numerous and varied contacts,
     he is able to obtain tax information which has been very
     useful to the Service wherever he may find himself.
          "This informant has advised me that he will be in
     the * * * area again in the very near future and would
     like to make available his services.

          "We are requesting authority to expend confidential
     funds in the amount of $6,000 for the period January
     14, 1974 through March 31, 1974 so that we may purchase
     information from this informant."
     This request was approved by the Director, Intelligence
Division, in January 1974.

     The informant was paid $5,345 during the term of this
intelligence gathering effort. His information did not result
in any investigations, indictments, prosecutions, convictions,
or additional tax assessments. A national office official told
us, nevertheless, that the then Director, Intelligence Division,
considered the intelligence gathering effort successful because
it indicated that illegal activities in the district were con-
trolled by organized crime.

     About 2-1/2 months after the informant ceased operations,
the district and region, unaware of those operations, requested
national office assistance in resolving the question about
the extent of organized crime in the district. Rather than
use an undercover special agent, as the district and region
had originally requested, it was decided to use the same in-
formant as before because he was experienced and could save
time, rm.oney, and effort. Accordingly, the Director, Intelli-
gence Division, approved a request for authority to expend
$12,000 for the purchase of information from this informant
for the 6 months ending January 31, 1975.



                              14
     We were told that the Director expected this second
intelligence gathering effort to result in the identification
of targets for investigation since the first effort had con-
vinced him that illegal activities in the district were
organized. The request for authority to expend $12,000
was not that specific, however. It merely stated that the
informant would be used to resolve the controversy over
organized crime's involvement in the district; to identify
evidence relating to loan sharking, prostitution,
bookmaking, wagering, and public corruption; and to
identify large-scale tax frauds of any other nature.

     The informant was paid $5,041 during this second project.
His information did not result in any investigations, indict-
ments, prosecutions, convictions, or additional tax assess-
ments. We were told that the Director, Intelligence Division,
considered the intelligence gathering effort a failure. The
Assistant Regional Commissioner for Intelligence, however,
considered the informant's activity a success because it
showed that gambling and loan sharking operations in the district
were not organized.
Example B

     IRS regional intelligence officials initiated an effort to
gather information on political corruption because (1) an in-
formant was available, (2) the district needed work, and (3)
district and regional officials believed there was potential
for developing cases in the area of political corruption.
     On June 3, 1974, the Acting Regional Commissioner approved
a request submitted on that date by the Acting Assistant Re-
gional Commissioner for Intelligence to expend not more than
$5,000 in confidential funds through December 31, 1974. The
request stated that an informant who had been proven reliable
in the past by another Federal law enforcement agency
     "* * * has many connections and contacts in other
     districts in [this] Region and has expressed a
     willingness to conduct covert gatherings of in-
     telligence in areas of interest to the * * * Dis-
     trict. The Chief [of district intelligence] is
     interested in developing intelligence in the field
     of public corruption and the area of kickbacks from
     contractors to public officials."
     The Chief of Intelligence told us that he thought the
effort had merit because the local news media had made numer-
ous charges of political corruption against elected and ap-
pointed State and local officials. He also told us, however,
that the district had done very little preliminary work
before the informant's arrival, and that the region considered
                              15
the effort a "shot in the dark."  The district's work had
consisted primarily of compiling a list of gubernatorial
candidates which contained such information as their ages,
previous employment, and current political status.

     The informant was to take the names of the candidates
and attempt to identify the major contributors to their
campaigns who might expect favors in return for their
contributions.  Then he was to attempt to develop information
on candidates who IRS believed would accept payoffs if elected.

     The informant gathered information in the district for
about 7 weeks and was paid $3,288.  On July 26, 1974, the dis-
trict suspended the effort pending an evaluation.  It was not
resumed primarily because the informant's information indi-
cated that the objectives and scope of the effort were too
broad.  The special agent assigned to work with the informant
evaluated the effort and recommended to the Chief of Intelli-
gence that it be discontinued because

     "* * * it appears that the undercover assignment was an
     attempt to cover too broad an area.  * * * If a specific
     entity, individual or a group of individuals can be
     isolated, it is possible that an undercover assignment
     of this type might prove effective."

     Regional intelligence officials who had sent the informant
to the district subsequently evaluated the effort and also con-
cluded that it should not be continued.  One of them told us
that (1) widespread political corruption was thought to exist
in the area, (2) most of the special agents were known locally
and therefore an informant was needed to gather information,
and (3) he had determined that the informant was reliable.   He
said the objectives were intentionally broad so as to not
restrict the informant's intelligence gathering activities.

Example C

     On September 27, 1973, the Chief of Intelligence in one
district asked the Assistant Regional Commissioner for Intelli-
gence to authorize the expenditure of up to $2,500 in confi-
dential funds through June 30, 1974.  This was a continuation
of an effort begun under a $500 authorization approved by the
Chief of Intelligence in April 1973.  The September 1973
request is quoted below:

    "Tne * * * District is probing for intelligence on
    [certain illegal activities].  We are also probing for
    intelligence in the general program.  On October 1,
    1973, we will begin paying an informant on a regular
    monthly basis.  We are considering two others for



                             16
    similar arrangements.  To maintain our activities we
    will need an authorization of $2,500 for the remainder
    of fiscal year 1974, with $1,000 set up in a local
    imprest fund.  [The Chief of Intelligence] will be
    cashier with [a group manager] an alternate."

The Acting Regional Commissioner approved the request on
October 2, 1973.

     On June 19, 1974, the Chief of Intelligence asked the
region for an additional $3,000 to continue the effort through
June 30, 1975, and this request was even more vague.  The ob-
jective, plan of action, and anticipated results were alluded
to in only one sentence:

     "The * * * District is continuing to expand its program
     of developing informants and making payments for the
     production of evidence for use in the program."

This request was also approved by the Acting Regional
Commissioner.

Example D

     On July 8, 1974, a special agent in another district sub-
mitted a request, which was approved by the District Director,
for authority to expend up to $2,000 in confidential funds.
The request did not specify objectives, a plan of action, anti-
cipated results, or the estimated time frame; it stated that:

     "The Intelligence Division currently has a confidential
     informant working in close association with an indivi-
     dual who is * * * involved in narcotics, gambling, pro-
     stitution, and possible loan-sharking.   He is respected
     and acknowledged by persons within the  [district] having
     strong organized crime connections."

Example E

     On June 11, 1973, a District Director authorized the
Chief of Intelligence to expend confidential funds up to
$2,000.  District officials were unable to locate a written
request for the funds; the Chief of Intelligence told us the
request was probably an oral one.  In authorizing the funds,
the District Director described generally the purpose of the
funds as follows:

          "In accordance with our previous meeting in this
     regard, I understand that any authorized expenditures
     will be for the purpose of obtaining information
     valuable to the Internal Revenue Service and that the
     amounts expended will be consistent with your evaluation
     of the information received."
                              17
The authorization did not set out a time limit for expending
the funds.

     The preceding examples are typical of most of the requests
we reviewed--devoid of the minimum information specifically re-
quired by IRS guidelines.  The following, however, is an exam-
ple of a request that contained more information than required;
namely, information on why an informant was needed, how he was
developed and determined to be reliable, and what his role would
be in the intelligence gathering effort.

Example F

     On November 1, 1973, the Chief of Intelligence requested
the District Director to approve confidential expenditures
up to $2,000 to pay an informant for a proposed 2- to 3-
week effort.  The request contained the following background
information:

     "We [the district] currently have a Strike Force probe
     underway * * * with regard to allegations of illegal
     activities on the part of certain [county] officials.
     We have received information to the effect that the
     [sheriff and mayor] have been receiving payoffs to
     allow prostitution, pornography, and coin-operated
     gaming devices to flourish in [the city and county].
     [Another individual] who owns a number of taverns
     and bars in the county and controls most of the coin-
     operated gaming devices, is alleged to be in control
     of most of the illegal activities in the county. * * *
     [This individual! is also alleged to have made payoffs
     to [state liquor control commission] agents in order
     to obtain liquor licenses for the various taverns
     and bars.

     "* * * We [the district] have exhausted our sources of
     information and are now seeking other ways to determine
     the truth of the allegations and the extent of the
     alleged corruption if the allegations are true.

    "[Another district] utilized an undercover operator
    on a situation somewhat similar to this [in another
    location] this past year.   * * * The information
    provided by this undercover operator was of great
    value to the [other district] and assisted them in
    developing several criminal cases.   [A district em-
    ployee has contacted this undercover operator] and
    has determined that the undercover operator would
    be available for [this] assignment.

     "The objective in placing an undercover operator in
     [the city] would be to determine whether or not an inter-


                              18
     state prostitution ring is operating [in the county];
     to try to determine whether allegations that possible
     organized crime money is being invested in [targeted
     individual's] coin-operated game devices operation,
     are true; to determine if, in fact, [state liquor control
     commission] employees are being paid off in order to
     obtain liquor licenses; and to determine whether or
     not the [sheriff and mayor] are, in fact, receiving
     moneys to allow prostitution, pornography, and
     gambling to occur in their city and county.

     "The exact approach the undercover operator will take
     to try to gather this evidence will be left up to him.
     His probable approach will be to try to go in and set
     up a house of prostitution and/or offer to buy a tavern
     or bar in order to determine what approaches he
     would have to make to the local officials and [the
     other target] in order to be allowed to [operate].

     "The undercover informant feels that he could ac-
     complish this within a two to three week period of
     time.  He wants living expenses plus $20 to $30 per
     day to purchase drinks and information.  He also
     wants mileage for his automobile at the rate of 11
     cents per mile. He also expects to receive payment
     for the information developed, if such information
     is of value to the Intelligence Division. * * *"

The District Director approved the request on November 6, 1973.

CONCLUSIONS

     To maximize the benefits confidential informants can pro-
vide while minimizing risks and potentially bad effects, it is
essential that intelligence gathering efforts involving inform-
ants have clear objectives and definitive plans of action.

     Many of the intelligence gathering efforts we reviewed
were initiated on the basis of assumptions or allegations that
an illegal activity was being conducted in a geographical area
or by a large group of people rather than on specific allega-
tions of tax law violations by specific individuals.  Other
intelligence gathering efforts were initiated primarily be-
cause informants were available and were willing to gather
intelligence if paid.  They were sent to localities not for
any well-defined purpose but simply to gather whatever infor-
mation they could on any individuals they might indentify as
possibly being involved in illegal activities.

     In these efforts, !RS sent confidential informants out to
gather and turn over information.  These individuals therefore


                             19
served essentially in the capacity of undercover agents who, in
effect, furnished their services to IRS, as distinguished from
other confidential informants who furnished information on
their own initiative and received no instructions or encourage-
ment from IRS to obtain that information.

     IRS considers it necessary to use informants in undercover
roles to gather intelligence about persons and groups who de-
rive their income from illegal activities.  But should IRS
be involved in gathering intelligence on these type activities?
This question looms important because in gathering such in-
telligence IRS cannot avoid getting into the illegal sources
of that income such as gambling, loan sharking, political cor-
ruption, and narcotics trafficking, which are crimes outside
of IRS' enforcement authority.

      The Intelligence Division's mission is to identify the
existence of willful noncompliance by taxpayers and the de-
vious and complex methods employed by them to evade the tax
laws.   In furtherance of this mission, the Intelligence Di-
vision tries to identify and prove noncompliance by many
individuals that derive their income from legal activities,
such as tax return preparers, landscapers, horse trainers,
jockeys, doctors, nurses, funeral directors, accountants, at-
torneys, golf professionals, interior decorators, scrap metal
dealers, dairy farmers, moonlighting policemen, and sales-
men.

      In light of its mission and in the interest of equity,
IRS would be remiss to ignore persons and organizations who
derive their income from illegal activities and also vio-
late the tax laws.   To do so would be tantamount to granting
immunity from compliance with the tax laws to a segment of
the population--a segment considered by IRS as having a high
probability of willful noncompliance.   As stated by the Com-
missioner of Internal Revenue in hearings before the Subcom-
mittee on Oversight of the House Ways and Means Committee in
1975:   "* * * those who make their livelihood from violations
of the laws of this Nation other than [the tax laws] are some-
what unlikely to comply with the tax laws."

     Accepting the premise that IRS cannot iqnore the tax
impact of illegal activities, the question then centers
around the use of confidential informants in efforts directed
toward those activities.  Intelligence Division personnel at
all levels believe that confidential informants are essential
because (1) they can sometimes provide information not other-
wise available to IRS because of their association or relation-
ship with individuals suspected of violating the tax laws, (2)
they sometimes have special experience and knowledge which a
special agent does not have and could not acquire, and (3) they
are sometimes already in a position to provide information.

                             20
     Although confidential informants may sometimes be
essential, they can also cause serious problems.  Thus IRS
must exercise caution in deciding when and how to use their
services.  By using confidential informants in undercover
efforts that were ill-defined as to purpose and overly broad
in scope, IRS was not exercising sufficient caution.   Indeed,
even exploratory efforts can and should be properly focused.

     Even though many requests to expend confidential funds
did not contain information required by IRS procedures, they
were approved by officials at all levels of management--dis-
trict, regional, and national.  By approving the requests
these officials were not exercising sound management control
over intelligence gathering activities but were, in effect,
condoning and contributing to noncompliance with established
procedures and controls.

     Not only were established procedures not followed but
the procedures themselves were inadequate because they did
not require all the information necessary for adequate manage-
ment control of informant activities.  Because of the risks
involved, informants should be used only if the information
needed cannot be obtained through regular enforcement tech-
niques.  Therefore, approving officials should have information
available to enable them to determine whether the objectives
could be achieved through more desirable and less risky means.
IRS procedures, however, did not require inclusion of this
type of information in the requests. Specifically, the proce-
dures did not require an explanation of how informants were
going to be developed and used, how they were determined to be
reliable, and why it was necessary to use them rather than other
enforcement tools, such as undercover special agents.  Thus,
the approving officials did not always know whether an inform-
ant was really needed or what role the informant would play in
the intelligence gathering effort.

PROCEDURES FOR ACCUMULATING,
EVALUATING, AND PROCESSING INFORMATION
PROVIDED BY INFORMANTS WERE INADEQUATE

     The quality of a confidential informant's information and
the way it is used determine the extent to which the Intelli-
gence Division is successful in using confidential informants
to identify individuals and organizations not complying with
the tax laws.  Intelligence officials in one IRS region said:

     "An effective Intelligence operation is a direct function
     of its capacity to develop sources of information and to
     act intelligently on the information at the earliest
     possible time."




                             21
     IRS intelligence officials directed and encouraged
special agents to develop and use confidential informants.
About 2,000 such informants furnished information for pay
during fiscal years 1973 through 1975 while thousands more
furnished information free.  This information supplemented
that developed through other means by the Intelligence
Division's 2,600 special agents.

     Although the Intelligence Division accumulated a mass of
 information from informants and other sources, it did not have
 a workable system Jr procedure for evaluating that information
 --either when it was obtained or at periodic intervals--or
 for assuring its effective use.  Such a system or procedure
 could have not only improved the tax consequences of informants'
 information but also provided a means of controlling informants'
 activities and intelligence gathering in general.

 Procedures for evaluatinq information
             q for it were ineffective
 before_pay__g

      IRS' policy on confidential expenditures stated that, as
a rule, informants should be paid "* * * only after the infor-
mation or evidence has been obtained, evaluated, and determined
worthy of compensation."  IRS recognized, however, that situa-
tions might arise where this would not be practicable.   There-
fore, IRS permitted payments to be made to "* * * lay the
groundwork for the procurement of information."  This would
include undercover work and other activities requiring the ex-
penditure of confidential funds to obtain information.   It
may be necessary, for example, to rent an apartment that the
informant could use as a base for gathering information.

     The policy requiring information to be evaluated before
it was paid for had little effect because the Intelligence
Division generally did not purchase specific information.
Instead, the Division usually paid informants to gather infor-
mation. Although this practice was permitted, it nullified
the basic requirement that information be evaluated before
any payments were made.

     Intelligence personnel usually made fixed, periodic pay-
ments to informants for their efforts in gathering information.
District intelligence officials told us this was often the
only practical way to pay informants because they devoted much
of their time to IRS.  In other words, if IRS expected an
informant to devote a good deal of time gathering information,
IRS was going to have to pay him periodically--much like a
regular employee. Obviously, there was no intent to receive
and evaluate information before paying informants, and the
payments did not necessarily bear any direct relationship to
the value of the information received.


                             22
     For example, special agents in one district paid an in-
formant $100 a week for approximately 7 months to identify
and covertly gather information on individuals thought to be
involved in narcotics trafficking. The Chief of Intelligence
in the district told us the informant had proved himself in a
prior investigation in another district and had the ability
to gather valuable tax information. The Chief said that
the first few hundred dollars were paid to get the informant
set up in an apartment and that Intelligence personnel did
not evaluate each item of information before paying the in-
formant but that he believed the information was worth at
least $100 a week.
     Intelligence officials at IRS' national office also
made fixed, periodic payments to informants. For example,
one informant received 17 monthly payments between January
1972 and July 1973--15 of $240 each, 1 of $200, and 1 of
$300--while another informant received 8 weekly payments of
$375 each and a total of $493 for expenses.
     An intelligence official in one IRS regional office paid
an informant $462 to gather information about alleged skimming
(taking money before it is reported in the records as received)
in the textile industry. The official told us that the infor-
mation the informant was gathering was not very good, but the
payments were made to retain him in case a situation might
arise when he could obtain gocd information. This same offi-
cial made two payments to another informant totaling $1,660
"to keep the informant happy and willing to co-operate" rather
than for specific information he was providing.
     Because of the procedures followed in using and paying in-
formants, we could not always relate payments with information
received, if any, and could not always determine whether the in-
formation was evaluated. IRS internal auditors reported that in
11 of the 22 districts they visited, they could not effectively
evaluate the type and quality of information obtained from
informants because a written record of the information was
not always prepared. They reported further that:
     "* *   *   information obtained from informants was not
    always evaluated prior to incurring confidential
    expenditures as required by [IRS policy].  For
    example, in 9 of the 22 districts, 13 confidential
    informants were paid a total of $206,585 on a weekly
    or other recurring (i.e., biweekly or monthly) basis.
    As a result, the information from these informants
    was generally purchased without any evidence of evalu-
    ation prior to payment and there was little if any
    direct control exercised over the type of information
     provided."


                                23
Informants' information was not
periodically reviewed and evaluated

     Special agents were given broad discretion as to the ex-
tent and type of information they could gather through inform-
ants and the disposition of that information.   Information was
usually kept in background files which were set up and main-
tained by the special agents or group managers having contact
with informants.  These files were not a part of any formal
IRS information system, were not subject to formal periodic
reviews, and sometimes contained personal taxpayer information
that did not appear needed to enforce the laws.

     Agents and group managers were encouraged by intelligence
officials to build their own information files on individuals
who might be candidates for formal IRS investigations.  These
files were arranged by informant or taxpayer name, by
professional group, or in any other convenient manner.
Agents and group ma agers were not required to tell anyone
about the files until they filt enough information had been
accumulated to initiate a forrial investigation. One Chief
of Intelligence, at a meeting of special agents and group
managers, described the procedure as follows:

    "* * * Each Group Manager should have a drawer full of back-
    ground items that he feels would be adequate to assign
    for criminal investigations as needed.  He should ac-
    cumulate this information by requiring each Spkecial
    Agent to have at least three background items in his
    file, developing them to a point where they will be
    ready to go for a criminal investigation.  The Group
    Manager might also assign an agent in his group to
    Intelligence Gathering for whatever percentage of
    time is necessary to accumulate and maintain this
    inventory of background items worthy of assignment.
    (These should not be made into Information Items but
    get copies of returns, public records, etc., and hold
    for assignment.)  Once the Manager has this 'Bank',
    he can evaluate these items and pick the better ones
    to assign as needed."

     This method of accumulating and maintaining taxpayer
information did not provide fo. any formal evaluation until
the special agent requested it.  Once the agent decided an
evaluation was needed, he would prepare an intelligence infor-
mation item showing, among other things, the taxpayer's name
and a description of an alleged tax violation.  At that point,
the information would be formally evaluated by the group mana-
ger and a decision made as to whether specific enforcement
action was warranted.




                           24
      IRS guidelines did not adequately define tax-related
information, and IRS had no procedure for identifying and
properly controlling information which did not relate to
possible tax violations or other Federal crimes.   Because
of this and because of the absence of systematic reviews of
information accumulated, the background files maintained by
special agents contained personal information on taxpayers
which did not appear essential to enforcing the tax laws.
IRS auditors reported. fnr example, that of 4,004 documents
prepared from infori; !. ' information in 22 districts, 562, or
14 percent, contair - i isically non-tax-related information.
Of the 562 documentb. 4 or 1.3 percent contained information
of a derogatory nature such as references to taxpayers' sex
and/or drinking activities.

      In reviewing background files we, too, noticed that special
agents occasionally obtained information from informants
that related to individuals' social relationships and activi-
ties and that did not appear necessary for enforcing the tax
laws.   Intelligence officials told us, however, that this type
of information may be useful.   The Chief of Intelligence in
one district, for example, told us that special agents were
trained to document all information provided by informants and
that information about a taxpayer's girlfriend, spouse, and
spending habits could be useful in developing further information
on the taxpayer's taxable income.

     In any event, IRS had not attempted to define or limit
the type of information which could be gathered and retained
by special agents, and the information gathered was not sys-
tematically reviewed.

Problems in the design and implementation
of an overall intelligence gathering and
retrieval system

     Because it recognized the need for a formal system of
gathering and using information obtained from confidential in-
formants and other sources, IRS developed a computerized in-
telligence gathering and retrieval system. The system was
tested in five districts from May 1972 to May 1973, when it
was formally adopted for implementation nationwide.

     IRS intended the system to provide an effective, uniform
means of gathering, evaluating, cross-indexing, and retrieving
intelligence data.  A group or an individual in each district
was responsible for evaluating newly received information, ar-
ranging for it to be entered into the system, and periodically
reviewing it.  Guidelines for the system did not define tax-
related information but did provide (1) criteria for including
information in the system and (2) examples of documents which
could be included.  The system provided periodic listings

                            25
of national and district intelligence data in several formats.
In general, the system was designed to provide better control
over a'd more effective use of intelligence data.

     In December 1974, IRS began a study to determine whether
only directly tax-related information was being entered into
the system and in January 1975 the Deputy Commissioner directed
that all activities related to the system be suspended until
completion of the study.

     In a Juie 20, 1975, report on a test of the system in four
districts, IRS internal auditors reported problems relating to
supervisory control over information entering the system, re-
trival and evaluation of information, and compliance with in-
structions.  They also reported a need for more specific in-
structiors an the type of information to be entered into the
system and the objectives of accumulating information. The
system was officially discontinued on June 23, 1975, when IRS
issued new information gathering guidelines.

CONCLUSIONi.

     Informants are valuable to IRS only if they provide in-
formation hiich is determined to be useful in terms of further
intelligence gathering; a criminal investigation, indictment,
or prosecution; or tax assessments and collections and which
otherwise would not be available to the agency. This requires
a timely, systematic analysis and evaluation to determine the
information's tax implications.

      IRS' procedures generally provided that an informant be
paid only after his information was evaluated. This procedure,
in theory, provided for systematic, timely evaluation of
information. In reality, however, it proved inadequate. If
an informant would approach IRS voluntarily with information
that he wanted to exchange for money, the procedure would work
perfectly--review the information, evaluate its worth, and pay
for it. If an informant was sent out to gather information,
however, the procedure would become inoperable because the
Intelligence Division tended to pay such informants for their
services rather than for specific information.   In such cases,
IRS should have had some other procedure to insure timely
and systematic evaluation of information, but it did not.

     To obtain information on narcotics trafficking, gambling,
political corruption, and other illegal activities, IRS used
informants to infiltrate those activities, identify individuals
involved, and gather information on them.  In these situations,
the informants' efforts were not (1) directed toward obtaining
specific information, (2) limited to specific individuals, and
(3) restricted to specific time periods. As a result, they
frequently gathered information over long periods of time--
                           26
information that was general in nature, that was not always
clearly tax related, and that contained the names of numerous
individuals. Even so, the information might still have been
usefu. to IRS and therefore should have been systematically
evaluated.

     IRS did not adequately define what information could be
gathered and retained; after information was accumulated, it
was stored by special agents in their background files and
not subject to formal, periodic evaluation. We could not
quantify the effects of this practice in terms of prosecutions
lost, taxes not assessed, or the like. It is reasonable to
assume, however, that a procedure requiring thorough evaluation
and effective processing of information received from inform-
ants would have enhanced IRS' chances of achieving meaningful
results from its intelligence gathering efforts.  Its attempt
to develop a uniform system to gather and retrieve information
was clear recognition of this.

     Without periodic reviews of information gathered by special
agents, IRS also has little assurance that agents are using in-
formants to gather information related to tax law enforcement
and in ways which will not embarrass IRS and violate taxpayers'
rights. Although reviews may not prevent these things from
happening, they would provide better assurance of early detec-
tion and correction.
IRS comments and our evaluation

     In a July 27, 1977, letter (see app. I), thc Commissioner
of Internal Revenue strongly disagreed with our contention that
IRS did not have a workable system or procedure for evaluating
and assuring use of the information received from informants.
The Commissioner noted that

          "* * * Until March, 1976.   it had been a long-
    standing procedure that when the Intelligence Divi-
    sion received an information item, it would be
    evaluated by the Chief, intelligence Division, or
    his/her delegate for possible criminal potential.
    If the information item did not have criminal po-
    tential, but did have Audit or Collection potential,
    the Chief, Intelligence, would forward the informa-
    tion item to the appropriate function for evaluation.
    In March, 1976, the evaluation process was trans-
    ferred to the Service Centers.
    "We believe that the probler-, that GAO discovered
    were related to the handling of information items
    generated from long-term informants, which were not
    prepared and evaluated as expeditiously as would


                            27
     have been expected.  However, this was not completely
     a problem with the procedures, but rather in the
     fact that a few Chiefs of the Intelligence Division
     did not follow existing procedures. * * *."

     The Commissioner is making the point that IRS' procedures
were good once an information item was prepared.  We do not
disagree.  As we said on p. 24:

     "This method of accumulating and maintaining tax-
     payer information did not provide for any formal
     evaluation until the special agent requested it.
     Once the agent decided an evaluation was needed,
     he would prepare an intelligence information item
     * * *. At that point, the information would be
     formally evaluated by the group manager and a de-
     cision made as to whether specific enforcement
     action was warranted."

     Thus, the problem noted during our review and confirmed
by IRS' comments, related to the procedures for accumulating,
evaluating, and processing informant information before an
information item was prepared.      IRS recognized that its pro-
cedures were  inadequate   when  it developed the computerized
intelligence  gathering   and  retrieval   system ard again later
when it discontinued    that  system.   We  believe the results
of our review  and  the  actions  taken  by  IRS clearly demonstrate
that IRS' system   or procedure   for evaluating   and assuring
effective use  of  informant   information   was unworkable.

MANAGEMENT EMPHASIZED EXPANDING--NOT
EVALUATING--INFORMANT ACTIVITIES

     Intelligence officials at all levels emphasized and en-
couraged developing and using informants as sources of in-
formation--an emphasis that managers outside the intelligence
function were aware of and approved. Managers within and
outside the intelligence function, however, exhibited in-
adequate concern over the risks and potential problems of
this aspect of intelligence operations and did not provide
for systematic evaluations of it.  When intelligence
operations were reviewed, managers were generally more
concerned with the number of cases generated and individuals
prosecuted than with the methods used to achieve those
results.

Management emphasis on greater
use of informants

     IRS management, at all levels, continually emphasized
improving intelligence gathering through greater use of
informants.

                              28
     National, regional, and district offices prepared annual
plans establishing priorities and goals for intelligence
operations. The plans were approved by the Assistant Commis-
sioners for Compliance, regional commissioners, and district
directors respectively.
     In its plans, the national office established goals and
objectives in such areas as intelligence gathering, allocation
of resources, case selection, and case management.  For ex-
ample, plans for fiscal years 1973, 1974, and 1975 required
each region and district to spend 5 to 10 percent of direct
investigative time on identifying noncompliance. The fiscal
year 1974 plan stated that the primary objective of the intel-
ligence gathering activity would continue to be the discovery
of willful noncompliance situations that have widespread
implications and that:
     "* * * Attainment of this objective requires emphasis on:
     * * * Development of, and regular contact with individuals
     who have access to significant information pertinent to
     tax law violations."

The plan established a general goal for allocating resources
to intelligence gathering as follows:
     "Not less than 10 percent of direct investigative time
     must be allocated by each region for identifying non-
     compliance."

     The regional offices developed plans in line with the
general goals established by the national office but refined
them to meet the particular needs of the districts. The re-
gional plans usually contained an assessment of the districts'
past efforts in meeting established goals and were more speci-
fic in establishing goals and identifying areas to be empha-
sized in the upcoming year.

     In particular, the regional plans were much more emphatic
about instructing districts to expand information gathering
activities through the use of informants. For example, the
fiscal year 1972 plan prepared by one region emphasized the
need to develop sources of information and stated:

     "There has been too little effort and money going into
     the development of hard information."

     "Many special agents have not been fully attuned and
     devote too little attention to developing meaningful
     contacts."

      "There are unfortunate 'hang-ups' about purchasing
      information."
                             29
The plan also stated that the region would look at "develop-
ment of information s.urces" in evaluating district office
performance for fiscal year 1972.

     The fiscal year 1973 plan for the same region reempha-
sized the need to gather intelligence through informant' and
stated:

     "Each district must do more to develop current informa-
     tion in Intelligence on noncompliance."

     "There should be a significant increase in cases orig-
     inating from special agent sources in FY 1973."

     "A significant increase should occur   in information
     arising from paid informants."

     The fiscal years' 1974 and 1975 plans for this region
continued to emphasize intelligence gathering and the use of
informants.  For example, the fiscal year 1974 plan stated:

     "FY 1973 marked the beginning of real progress in the
     development and use of Intelligence information sources.
     However, there are marked differences among the districts
     and much remains to be done in the current fiscal year
     to broaden the scope of our activities, to develop a
     large group of informants, and to refine existing infor-
     mation retrieval systems in the districts."

     District offices prepared work plans which reflected the
emphasis placed on information gathering and the development
of informants as sources of information.  For example, the
fiscal year 1973 plan for one district stated:

    "* * * Our prime purpose will be the development of a
    true sense of urgency in everything we do. Our broad
    objectives will relate to fostering an effort which
    will result in the identification of areas of noncom-
    pliance."

     "The objective of each manager and special agent will
     be to know his geographical area of consideration for
     the purpose of identifying noncompliance in industries
     and occupations by the development of informants and
     [other] sources of information."

This plan also established a specific informant goal for
each special agent:

     " * * one of the prime functions of Intelligence is
     the gathering of meaningful data or information rela-
     tive to areas of noncompliance.  In chis regard, each
                             30
    agent will be responsible for the development of at
    least one workable informant. 10% of our manpower
    will be expended in [the intelligence gathering] area."
     The fiscal year 1974 plan prepared by another district
emphasized intelligence gathering and the use of informants
as follows:
     "*   * * Each special agent has shown an active interest
     in Intelligence gathering activities and as a result we
     have developed many of the projects and cases presently
     in inventory. During Fiscal Year 1974 we will continue
     with the high degree of activity in this program."
     "*   * * each special agent will continue to devote a
     portion of his work time to case development activities.
     Except under unusual circumstances this should not ex-
     ceed 13% of each agent's total duty time."

     "Each agent will develop sources of information and
     cultivate informants who can provide us valuable
     information."

Informant activities not systematically
reviewed by national, regional, and
Tistrict office management

     Even though IRS man-gers repeatedly emphasized greater
use of informants in intelligence gathering activities, they
did not focus on how informants were being used in their
subsequent reviews of intelligence operations.
     National and regional management periodically evaluated
overall Intelligence Division operations. In addition, re-
gional intelligence officials evaluated specific projects or
programs to resolve problems or answer specific questions as
they arose, such as those related to the need for additional
funds. None of these evaluations, however, routinely included
a review of informant activities. Moreover, district manage-
ment did not periodically review Intelligence Division opera-
tions.
     National office evaluations
     The national office intelligence staff usually visited
each region each fiscal year under a National Office Review
Program. The overall purpose of the program was to deter-
mine the extent of the regions' familiarity with district
operations and determine whether the regions were providing
adequate leadership and guidance to district offices.



                               31
     Reviews of intelligence operations were made in conjunc-
tion with reviews of appellate and audit operations.  There
were no formal guidelines setting out the review procedures
to be followed.  Usually, the national office representative
who conducted the intelligence review would hold discussions
at the regional office on problems identified in previous
reviews, problems identified by Internal Audit, and specific
programs of interest.

     The national office representative would normally visit
oie or more districts in each region to review such things as
management effectiveness, staff problems, and the responsive-
ness of the districts to priority programs such as narcotics
trafficking and Strike Force.  The reviewing official would
prepare a report and submit it to the Assistant Commissioner
for Compliance.  The Deputy Commissioner would be briefed on
the results of the reviews and would attend the closeout con-
ferences held with the regional commissioners.

     We reviewed the reports of the national office reviews
made during fiscal years 1973 through 1975 in two regions.
The format of the reports varied somewhat, but the content
was generally the same.  The fiscal year 1974 reports for
these regions assessed the impact of the office of the as-
sistant regional commissioner for intelligence on regional
intelligence operations in terms of program direction and
support provided to the districts and generally summed up
the region's statistical accomplishments in terms of recom-
mended prosecutions.

     None of the reports ,we reviewed contained an assess-
ment of informant activities as such.   The fiscal year 1974
report on one region, however, addressed a problem relating
to the lack of direction and uniformity in information
gathering.  The problem was identified as a result of an
analysis of fiscal year 1973 information gathering efforts
in selected districts in that region.   This report stated:

    "There was a great disparity among districts in the
    percentage of time applied and the manner of collecting,
    storing and evaluating information.  In the three dis-
    tricts visited * * * there appeared to be a need for
    greater direction and more specific objectives in their
    infcrmation gathering efforts."

    "The [Assistant Regional Commissioner for Intelligence]
    is aware of the situations described above and recently
    conducted a seminar of district information gathering
    representatives.  The purpose of the meeting was to
    exchange ideas and to discuss common problems in this
    area.  The meeting enabled the smaller districts, in


                            32
    particular, to learn from the larger districts that had
    more experience in this activity. The [Assistant Regional
    Commissioner for Intelligence] plans to monitor the
    future direction of this program to ensure that districts
    have specific objectives outlined [for information gathering
    efforts]   * * *." (Emphasis added.)

The national office reviewing officials concluded that the
districts should have specific objectives for information
gathering and that this would result in the districts being
able to limit the allocation of their resources for informa-
tion gathering to the 10-percent goal established by the na-
tional office for fiscal year 1974.
     National office officials apparently did not attempt
to determine whether this problem was widespread so as to
identify underlying causes and provide nationwide guidance
and control. Instead, when national office reviews identified
problems with intelligence operations, the approach seemed
to be one of dealing with the specific problem rather than
making comprehensive evaluations.
     For example, the report on the fiscal year 1975 visit
to the region discussed earlier did not mention the informa-
tion gathering problem identified in the prior year even
though the problem seeded unabated.   We analyzed 13 requests
for confidential funds prepared by districts in that region
after fiscal year 1973; 7 contained vague objectives--the
same problem identified in 1973.

     Of the national office reports that we reviewed, only one
directly referred to informant activities. The report empha-
sized the need for one of the districts in the region covered
by the review to develop and use informants. This fiscal year
1973 report stated:
     " * * * They [the district]    are aggressive in developing
     intelligence regarding organizations. However, no
     real 'street work' is being done in intelligence gathering.
     For instance, the Narcotics Traffickers Program Group
     Supervisor expressed a negative attitude toward developing
     informants in this area. This attitude was derived from
     his own unsuccessful experiences in obtaining useful in-
     formation from informants when he was an agent and does
     not reflect any lack of enthusiasm for his present duties."
     "Concerning the Strike Force Program, the Chief expressed
     the opinion that there is no identified organized crime
     in the * * * area. While we recognize that this opinion
     is expressed by many people in the * * * area, we believe
     that Intelligence should make an effort to develop in-
     formants and gather street intelligence to identify the

                               33
     scope and extent of organized illegal activity in this
     large permissive city where prostitution, pornography,
     gambling, and narcotics are ever present."

     "The Chief also expressed the opinion that in the * * *
     area there is little to gain from informant development;
     that none of the enforcement agencies have developed
     informants.   [The] NTP Group Supervisor, shares this
     negative view.    [The supervisor] said that he does not
     encourage the use of informants and that his personal
     experiences with informants were less than gratifying."
     "The * * * Intelligence Division is now developing a
     program designed to identify the nature and scope of
     organized crime through investigative techniques in-
     cluding surveillance and informant development."

     The report praised another district in the same region
as follows:

     "[the district] - Very effective in investigating
     targets.   * * * Agents are developing informants and
     gathering information on all types of criminal activity."

     Regional office evaluations
     IRS required each assistant regional commissioner for
intelligence or his staff to visit each district at least
twice each fiscal year and the assistant regional commissioner
had to personally participate in one visit to each district or
in the closing conference with the district director. The
assistant regional commissioner was to use the visits as a
means to keep the district directors and regional commissioner
informed of district intelligence operations. The major
purposes of the visits were to

     -- evaluate the effectiveness of district intelligence
        programs, activities, and supervisory personnel;

     -- discuss intelligence problems with district officials
        and provide on-the-spot suggestions and assistance for
        improving intelligence operations; and

     -- follow up on actions taken to correct deficiencies noted
        in internal audit reports.

     The guidelines required the assistant regional r':mmissioner
to submit a written report on each visit to the -; ,;.al com-
missioner who in turn was required to furnish a copy to the
district director. A copy of each report also was to be



                             34
furnished to the Director of Intelligence at the national
office.  The reports were to cite important observations
made during the visit, deficiencies noted, and corrective
actions the district director had taken or planned to take.

     Intelligence officials made these visits, but they did
not specifically evaluate informant activities.  Instead,
they were concerned with such things as case management,
case inventory, referrals from the Audit Division, special
agent caseload, overall staffing levels, and effectiveness
of district intelligence managers.  One regional official
told us that review teams were mainly concerned with assess-
ing case management and were not concerned with specifically
assessing informant activities.  This official told us that
the region assumed an operational view; that is, the visits
attempted to answer such questions as:  Are the districts
using their people to the best advantage? Is a specific
program or effort having an impact on compliance? Are the
districts following established procedures?

     According to reports issued on these visits, regional
officials sometimes reviewed areas directly related to in-
formants, such as the effectiveness of a district's overall
intelligence gathering program, but they did not focus on
how informants were being used, the type of information they
were providing, or the procedures being used to pay them.

     Generally, when a report mentioned intelligence gathering,
it was an expression of concern over too little intelligence
gathering or a statement emphasizing its importance.  For
example, in a report prepared on one district in fiscal year
1972, the Assistant Regional Commissioner for Intelligence
stated:

     "Your [the district's] case development and [certain
     other efforts] have consumed 10.3% of your direct in-
     vestigative time in the first eight months of FY 1972.
     Other priorities might dictate a temporary reduction
     of [this] effort going into FY 1973.  However, we 1the
     region] ask that you resist any such temptation.   In
     fact, there is a great need to expand intelligence
     gathering relative to organized crime and corruption
     in [the State] generally."

     "We [the region] know that you [the district] will
     continue to give priority to your Narcotics and Strike
     Force Program commitments.  You have done well in
     both program areas and future potential looks even
     better. We only ask that you take two additional
     steps as soon as possible."



                             35
     "(2) Additional 'street' information is needed con-
     cerning organized crime and corruption particularly
     in the * * * area."

     A report on another district indicated concern that
intelligence personnel were depending too much on Audit
Division referrals and stressed the need for special agents
to become more involved in intelligence gathering.

    Special reviews of intelligence operations

     Regional intelligence officials made unscheduled visits
to review specific information gathering efforts or programs.
Officials in one region told us that such visits were not made
to evaluate informant activities.  Instead, they were made
either (1) to investigate and resolve specific problems or
(2) because of interest in a particular information gathering
effort or intelligence program.

     We reviewed the reports on unscheduled visits in one
region.   Informant activities were reviewed in detail in
only one instance.   In November 1973 the Director of Intelli-
gence at the national office requested the regional office
to review the intelligence gathering effort known as Operation
Leprechaun before a decision was made on whether to authorize
additional confidential expenditures.   A member of the regional
intelligence staff reviewed the effort and prepared a report
that included information on how informants were being used
and references to the type of information being obtained from
informants.   A copy of this report was sent to the Director
of Intelligence.   (The results of this visit are discussed in
more detail in app. II.)

     Although other visits included reviews of specific
information gathering efforts, they dealt primarily with
the expected results of the effort and problems related to
staffing.

    District office evaluations

     Consistent with management at all other levels, district
officials did not periodically evaluate and report on inform-
ant activities.  District directors authorized confidential
expenditures for amounts between $500 and $2,000; however,
they did not conduct, or provide for, systematic reviews of
the information gathering efforts for which the funds were used.

     The chief of intelligence in each district could authorize
confidential expenditures up to $500 but did not have to submit
a report showing how the money was used or the specific re-
sults achieved.  In addition, the chiefs did not periodically


                            36
review the information obtained from informants or require
group managers to perform such reviews.

     District management generally did not feel that inform-
ant activities warranted much of their attention.  The Dis-
trict Director in one district told us, for example, that he
wanted the Chief of Intelligence to keep him apprised of pro-
blems but that he did not want to become involved in the de-
tails of informant activities.  A Chief of Intelligence in
another district told us that, under the procedures in effect
prior to March 1975, an information gathering effort was
reviewed "when someone decided it was necessary" and the
success of an effort was measured by results, such as the
number of investigations and prosecutions.

Informant activities not
evaluated by Internal Audit

     IRS internal auditors periodically reviewed specific
Intelligence Division programs such as those involving
narcotics traffickers and the Strike Force and the reports
resulting from those reviews occasionally contained comments
pertaining to informant activities. As a matter of policy,
however, Internal Audit did not specifically review informant
activities during its regular audits.

     Internal auditors in the southeast region told us that
their reviews sometimes included intelligence gathering
activities, but that this was only incidental to their work
on specific intelligence programs and was not an area
specifically designated for review.  In 1974, for example,
IRS auditors rtviewed the Strike Force program in two
districts.  Although their review covered certain aspects
of intelligence gathering, it did not specifically deal with
informants.

     In addition to audits of selected Intelligence Division
programs, internal auditors annually reviewed confidential
imprest funds.  The auditors, however, did not evaluate the
activities the funds were being used for or the information
received to identify management controls over the use of
informants.

     Internal Audit officials at the national and southeast
regional offices told us they had not reviewed informant
activities because they did not have full access to
Intelligence Division records, primarily those showing
informants' names.  Internal Audit officials in the region
told us that intelligence officials resisted auditors'
attempts to review confidential payments made to, and
information supplied by, informants.


                              37
     The Director of Internal Audit told us that internal
audit coverage of informant activities in the southeast
region had been inadequate because his auditors continually
met resistance whenever they delved into intelligence mat-
ters requiring access to informant records. According to
the Director, this frustration finally led to less than
adequate audits of the imprest funds. For example, the
auditors would do their work at the regional office where
the imprest fund was located but ignore supporting docu-
mentation in the affected district. The Director noted,
however, that this was not the case in all regions.
     The Director of Intelligence, on the other hand, told
us that Internal Audit had access to any records it wanted
except for the true identities of confidential informants.
     IRS apparently resolved the question of access by
issuing guidelines in February 1977 which specifically
provide for Internal Audit access to informants' names.

CONCLUSIONS

     Although informant activities represent a relatively
small facet of Intelligence Divison operations, they
require special management attention because of the
unique risks they create. It is not enough to review
informant activities when problems or questions relating
to those activities arise because that fails to provide
the continuous feedback that IRS management needs to
assess the risks of using informants versus the contri-
butions they may provide.

     While IRS managers encouraged development and use
of informants as an investigative tool, particularly in
intelligence efforts directed toward illegal sources of
income, they did not acknowledge the need for special
management attention to how those informants were being
used. This failure to appropriately recognize the inher-
ent risks involved in using informants was due in part to
the apparent sense of urgency on the part of intelligence
officials to "get the job done."  While management exhibited
a great deal of concern for establishing goals and producing
results, it gave little attention to how those results were
achieved.




                            38
     By independently examining and appraising operations,
Internal Audit can provide a valuable source of information
on how the Intelligence Division conducts its operations,
thereby complementing all other elements of management con-
trol. To be of maximum usefulness, however, the scope of
Internal Audits' activity cannot be restricted.   It should,
instead, extend to all agency activities and related  man-
agement controls. By not adequately reviewing   informant
activities IRS internal auditors did not effectively
contribute to management control of those activities.




                             39
                            CHAPTER 4

                  MANAGEMENT CONTROLS HAVE BEEN

             IMPROVED BUT MORE NEEDS TO BE DONE

     Between 1975 and 1977 IRS issued new guidelines which
addressed many of the weaknesses we identified concerning
the use of confidential informants.  IRS could do more,
however, to better insure that an informant is used only
after the potential benefits and risks have been properly
assessed and that management is sufficiently attentive to
how informants are being used.

ACTIONS TAKEN TO CORRECT WEAKNESSES

     When Operation Leprechaun was publicized in 1975, the
Intelligence Division's management controls over the use of
confidential informants were inadequate.  The only formal
guidelines IRS had relating to informants were those dealing
with confidential expenditures.  In 1975, these guidelines
were substantially revised to strengthen controls over paid
confidential informants.  Since 1975 IR3 has developed new
guidelines for many other aspects of the Intelligence Divi-
sion's operations including the use of informants and infor-
mation gathering.  (See app. III.)

     The guidelines provide needed procedures and controls
for initiating intelligence gathering efforts and controlling
informant activities.  They

     -- require a written authorization before any IRS employee
        gathers intelligence,

    -- prescribe controls over the use of all paid informants
       and those unpaid informants who are encouraged to
       furnish information to the Intelligence Division by
      requiring the chief of intelligence in each district
      to approve their use and maintain a record on each
      one used,

    -- spell out what informants can and cannot do in gathering
       information for IRS and provide instructions as to what
       IRS employees should do when they become aware of il-
       legal informant activity,

    -- specifically require managers to review and report on
       informant activities, and

    -- raise the management level at which confidential
       expenditures may be authorized.


                              40
     The guidelines require a timely evaluation of information
provided by informants and provide clear and specific proce-
dures for processing the information.  The guidelines also (1)
state that only "directly tax related information" may be
gathered, (2) define "directly tax related," and (3) provide
examples.  Intelligence and other IRS officials are now re-
quired to periodically evaluate those aspects of intelligence
operations directly related to confidential informants.

     Implementing the guidelines will be a step toward over-
coming past problems and weaknesses in managing confidential
informant activities.  To help achieve effective manegement
control over informant activities, however, several aspects
of the guidelines need to be strengthened.  Specifically, the
guidelines do not

     -- provide enough control over the use of informants with
        the result that informants could be used to covertly
        gather information without approval above the level of
        the chief of intelligence or

     -- provide for adequate consideration of such factors as
        how an informant was developed and determined reliable,
        how he will be used, and why he is needed before au-
        thorizing the use of an informant, the gathering of in-
        formation, or the expenditure of confidential funds.

Initiating intelligence gathering
efforts and using informants

     Under IRS procedures in effect until March 1975, intelli-
gence gathering efforts involving informants had to be approved
only if confidential funds were going to be expended.  Approval
above the level of chief of intelligence was required only if
the total amount of the payments to informants and other confi-
dential expenditures was expected to exceed $500.

     In 1975 IRS, for the first time, issued forical guidelines
which required written authorization for information gathering.
The guidelines distinguish between (1) a study, survey, or can-
vassing activity on a group of taxpayers (who may or may not be
identified by name) within such categories as an occupation, an
industry, a geographic area, or a specific economic activity and
(2) an information gathering effort directed at one or more
specifically identified taxpayers.   In connection with this dis-
tinction, the guidelines require studies, surveys, or canvassing
activities to be approved by the district director, while the
chief of intelligence can approve information gathering on spe-
cific taxpayers. Intelligence gathering efforts to be conducted
by the regional or national offices require the approval of the
regional commissioner or Assistant Commissioner for Compliance,
respectively.

                             41
     A request for authorization to conduct a study, survey,
or canvassing activity must state the purposes, define the
scope, and specify the est dlated life of the effort and the
type of information to be 5(,thered.  In authorizing informa-
tion gathering on individuals, the chief of intelligence must
specify the known or assumed name of the taxpayer and the
reason information gathering has been authorized.

     In December 1976, the Commissioner of Internal Revenue
asked for our views on IRS' proposed informant guidelines.
We provided comments in January 1977, and IRS issued the
guidelines in February after making some of the changes we
suggested.

     The guidelines require the use of each "controlled
informant" to be authorized by the chief of intelligence.
Controlled informants are those who receive payment or who,
although not paid, are encouraged to furnish information
to the Intelligence Division.  The chief is to consider cer-
tain factors in evaluating the potential use of each con-
trolled informant and is to prepare for the file a written
summary ot the factors considered.  The factors include

     -- the available background information on the informant,
        such as his address, criminal record, and associates;

     -- the reliability of information provided to IRS and
        other agencies, if known; and

     --the informant's source and means of securing informa-
       tion.

     Special agents who use controlled informants must instruct
them to not use unlawful techniques (such as breaking and en-
tering, electronic surveillance, and opening or otherwise tam-
pering withl the mail) in obtaining information. In addition,
the guidelines prohibit using informants to do things which
IRS could not authorize its undercover special agents to do.

     The chief of intelligence must also authorize the use
of a "restricted source."  This is an unpaid informant who is
known to an IRS employee but who refuses to provide informa-
tion without assurance that his identity will not be included
in any IRS record. 1/ The chief may authorize his use only
if the following conditions are met.



l/This type of informant differs from an anonymous inffrmant--
  a person whose identity is unknown to anyone in IRS, such
  as a person who provides information by means of an anony-
  mous telephone call or unsigned letter.

                            42
     --The information is represented by the informant as
       being of such significance and IRS feels that it will
       be, that failure to obtain it--even under such re-
       strictions--would likely be neglect of duty.

     -- Reasons exist for believing the informant to be highly
        reliable.

     -- There is no reason to believe that the informant is
        engaged in an illegal activity.

     -- Little likelihood exists that IRS can obtain the
        information from other sources.

     In our January 1977 comments on the proposed guidelines,
we questioned the appropriateness of classifying some inform-
ants as "restricted sources" because we felt it important, for
control purposes, that IRS have a record of the true identity
of every individual who provided information at IRS' request
or encouragement.  Although IRS did not delete that classifica-
tion from its guidelines, it did revise them to require each
regional commissioner to evaluate the use of restricted sources
fcr a 6-month trial period beginning February 3, 1977.  The
evaluation is to show the number of times each district used a
restricted source informant and is to include a determination
of whether the value of the information was such that IRS
would have been negligent not to accept it.  Each regional
commissioner is to forward his evaluation along with recom-
mendations to the Deputy Commissioner who will then deter-
mine whether IRS will continue to use restricted source in-
formants.

     Also pursuant to our suggestion, the proposed guidelines
were revised to provide that IRS, under no circumstances, will
take any action to conceal a crire committed by one of its
informants and to establish specific procedures for employees
to follow when they suspect, or know, that an informant has
committed a crime.

     If it appears that the informant illegally obtained in-
formation, or committed a serious crime not related to infor-
mation gathering, the employee who has knowledge of the vio-
lation must notify the chief of intelligence.  The chief must
report the violation to the appropriate law enforcement agency.
If this is inadvisable, he is to immediately notify the Director,
Intelligence Division, of the facts and circumstances con-
cerning the violation, including his recommendations on
reporting the violation and on continuing to use the informant.
After the Director reviews the matter, he is to notify the
Deputy Commissioner and provide him with his comments on the



                            43
chief's recommendations. The Deputy Commissioner is then to
determine

     -- when the appropriate law enforcement authorities
        shall be notified of the violation,

     -- what to do with the information gathered through
        violation of the law, and

     -- whether IRS should continue to use the informant.

     In determining the advisability of notifying appropriate
law enforcement authorities of an informant's criminal activity
the responsible officials are supposed to consider

     -- whether the crime is completed, imminent, or in
        progress;

    -- the seriousness of the crime in terms of danger to
       life and property;

    -- whether the crime is a violation of a Federal or
       State law and whether it is a felony, misdemeanor,
       or lesser offense;

    -- the degree of certainty regarding the criminal activity;

    -- whether the appropriate authorities already know of the
       criminal activity and the informant's identify; and

    -- the significance of information provided or to be
       provided by the informant, and the effect on IRS'
       investigation if the other law enforcement agency is
       notified.

     If informants are to be paid from confidential funds,
approval to expend those funds must be obtained from the dis-
trict director, the regional commissioner, or the Assistant
Commissioner for Compliance, depending on the amount involved
(district directors up to $1,000, regional commissioners up to
$2,000, and the Assistant Commissioner in excess of $2,000).
The requests must be in writing and, to the extent possible,
must show

    -- the name of the taxpayer or entity,

    --the case or project number if applicable,

    -- the specific amount being requested,

    --the location of the imprest fund to be used,


                            44
     -- the proposed plan of action,

     -- the period over which the expenditures will be
        made, and
     -- a complete description of the purpose of the
        expenditures with a separate statement
        explaining proposed expenditures for purposes
        other than purchasing information.

Accumulating, evaluating, and
processing information
     Before March 1975, IRS procedures for accumulating,
evaluating, and processing information obtained from infor-
mants were weak. Specifically, the type of information IRS
employees could gather using informants was not defined and
systematic evaluations of potentially valuable information
obtained from informants and removal and separate handling
of non-tax-related information supplied by informants were
not required. The new procedures are designed to correct
these weaknesses.
     The guidelines define directly tax-related information
and also include examples of information which would be con-
sidered directly tax-related, such as

     -- personal expenditures or investments not
        commensurate with known income and assets;
     -- receipt of unreported income;

     -- overstatement of itemized deductions, business
        expenses, cost of sales, and tax credits;
     -- improper deduction of capital or personal and
        living expenses;

     -- failure to file required returns or pay tax due;
     -- omission of assets of improper deduction or
        exclusion of items from real estate and gift
        tax returns; and

     -- violation of conditions and requirements
        relating to tax exempt status of organizations.

     The guidelines also provide for the timely evaluation and
processing of information received from informants.    Special
agents are prohibited from maintaining  information in  background
files unless the information pertains  to an assigned  investi-
gation or an authorized information gathering effort. The

                             45
 guidelines also prescribe procedures for evaluating and
 processing any information received from informants that
 does not meet the criteria for inclusion in background
 files.

     The guidelines require various reviews and evaluations
of the information gathered.  A special agent must
periodically review information gathered on each taxpayer
to determine if he should (1) recommend to the chief of
intelligence that an investigation be opened on a taxpayer
or (2) submit the information, no longer of interest to
the Intelligence Division, to the chief to be purged from
the files.

     The chief or assistant chief of intelligence must
personally conduct a quarterly review of samples of infor-
mation gathered to insure that only directly tax-related
information is being retained.  The reviewing official must
forward a record of the review to the district director.

Managenent involvement
in informant activities

     The new guidelines require more management review of
activities directly related to the use of informants than
did the procedures in effect before March 1975.  In addition
Internal Audit has broadened its reviews of Intelligence
Division programs and its audits of confidential imprest
funds to concentrate more on informant activities.

     Management reviews

     The new guidelines require managers at all levels to re-
view the information IRS employees are gathering and retaining.
District directors must provide for quarterly reviews of all
authorized information gathering efforts to insure compliance
with policy and procedures.  Regional commissioners are re-
quired to conduct semiannual reviews of each district's infor-
mation index system to determine that only directly tax-related
information is entered and that unnecessary information is de-
stroyed or retired.  The Assistant Commissioner for Compliance
must include an annual review of information gathering activi-
ties as part of the National Office Review Program.

     At our suggestion, the new guidelines on informants were
revised to require assistant commissioners and regional com-
missioners to examine informant activities during regularly
scheduled reviews to insure compliance with IRS policy and
procedures.

     Each regional commissioner and district director is re-
sponsible for closely monitoring and accounting for the

                            46
expenditure of confidential funds.     Each regional commissioner
or his delegate  is to  maintain a cumulative   file of confi-
dential expenditures,   by district, for  each  assigned case or
authorized  information  gathering effort  to  insure  that
authorized  amounts are  not exceeded.   During  their  regularly
scheduled visits to regions and districts, assistant commis-
sioners and regional commissioners are required to review
confidential expenditures to ascertain compliance with the
guidelines.

     Within 30 days after the end of each fiscal year, each
chief of intelligence must prepare a report summarizing the
cost and results of transactions with all informants.  The
report is to include data on the number of information items
for which informants were the source, cases opened as a result
of information received from them, and the status of those
cases.  The district director must concur in the report and
the assistant regional commissioner for intelligence must
provide a copy of the report to the regional commissioner
and the Director, Intelligence Division.

     This is the first time IRS has required such a report.
It should greatly assist IRS management in evaluating and
quantifying the benefits of using informants.

     Internal audit coverage

     IRS' Internal Audit Division has revised its audit plans
to concentrate more on informant activitie's.  In auditing
confidential imprest funds, internal auditors will (1) test
the fiscal controls over the transfer and custody of funds
and the payments made to informants, (2) verify the existence
of paid informants, (3) determine what information they pro-
vided for the payment, and (4) determine how that information
relates to the administration of the tax laws.

      Internal audit officials in the southeast region told us
that they intend to include evaluations of informant activities
in their revievs of intelligence programs such as those relating
to narcotics trafficking and Strike Force activities.   In line
with this, the internal auditors told  us that they would review
specific information gathering efforts in  these programs and
determine, among other things, (1) the type of information
informants were providing, (2) how they were being used, and
(3) the contributions they were making to tax law administra-
tion.

     The new guidelines specifically provide the internal audi-
tors access to informants' names which will permit them to make
some of the tests necessary for a full review of a district's
transactions with informants.


                               47
CONCLUSIONS

     IRS has taken some important steps to strengthen its
controls over the use of confidential informants.  But guide-
lines it has issued in the past 2 years do not adequately
provide for management assessment of potential benefits and
risks before an informant's use is authorized.

     Under the new guidelines, primary responsibility for
authorizing the use of an informant rests with the chief
of intelligence.  Other district, regional, and national
office managers do not have to get involved unless confi-
dential funds are to be expended.  The involvement of these
other managers, however, is an exercise of fiscal responsi-
bility,  Although they may ask questions about why and how
an informant is going to be used, their primary purpose is
to authorize the expenditure of confidential funds, not to
authorize the use of an informant.

     IRS should distinguish between two types of informants--
those who provide information to IRS on their own initiative
and those who gather information at IRS' request or encourage-
ment--and should prescribe controls accordingly.

     The failure to clearly distinguish between types of
informants results in too much control in some instances and
not enough in others.  Under the new guidelines, for example,
a chief of intelligence can approve the use of an unpaid in-
formant who is going to be gathering information at IRS' request
or encouragement.  Yet, under the procedures on confidential
expenditures, the chief must obtain the district director's
approval to pay even a few dollars to a person who voluntarily
walks into an IRS office with valuable tax-related information.

     Controls over money are important and should not be de-
emphasized, but controls over informant activities should be
based primarily on how the informant will be used and not on
the amount of money that will be spent because the risks as-
sociated with using an informant do not vary depending on the
dollars involved.  Because informants who gather information
at IRS' request or encouragement present special risks, the
controls over them should be greater than those over informants
who furnish information on their own initiative.  Thus, the
approval to use such an informant, whether he is to be paid
or not, should come at a high enough level to permit a thor-
ough and objective assessment of what might be gained in using
the informant relative to what might be lost.

     In this regard, before the Intelligence Division can
use a highly trained special agent to gather information in
an undercover capacity, approval has to be obtained from the



                             48
chief of intelligence, the district director, the assistant
regional commissioner for intelligence, and the Director of
the Intelligence Division at the national office.      Yet, IRS
gives the chief of  intelligence  sole responsibility   for
authorizing the use  of a  less reliable  informant to  do the
same thing.  We find  that  inappropriate.

     We believe that a regional commissioner is in a better
position than a chief of intelligence to objectively weigh
the need for an informant against the potential risks in
using him. A chief of intelligence is primarily concerned
with IRS' intelligence activity which could easily affect
his decision to authorize use of an informant.  A regional
commissioner is responsible for and concerned with all IRS
activities and thus would be better qualified to assess the
benefits and risks of using an informant in the context of
IRS' overall mission.

     We recognize that district directors are also responsible
for and concerned with all IRS activities and that they, too,
could be expected to objectively assess the need for an in-
formant. We believe that a regional commissioner should make
this assessment, however, because (1) he is more detached
from the operating level and thus less likely to base his
decision solely on a desire to achieve results and (2) it
would provide for more uniformity.  Instead of 58 district
directors making decisions, there would be just 7 regional
commissioners.

     It is important that the approving official have suffic-
ient information to properly assess the need for an informant
and the potential benefits and risks.  Accordingly, any request
for approval to use an informant to gather information at IRS'
request or encouragement should state why the informant is
needed, how he was identified and determined reliable, and how
he will be used.  IRS guidelines do not require this.

     The new guidelines require (1) periodic evaluations of
confidential informant activities, (2) a summary report on
the results of using informants, (3) a review of information
collected, and (4) close monitoring of confidential funds.
The guidelines pinpoint managers who will make the evaluations
and show how the evaluations will be made and what will be
covered and reported on.

     But revised guidelines alone are not the answer.   Past
guidelines often were not complied with and there can  be no
assurance that the revised guidelines will be unless  manage-
ment pays more attention to these activities than it has in
the past.



                                49
     Intelligence officials at the national, regional, and
district offices tended to ignore or condone potential prob-
lems and weaknesses by not requiring compliance with existing
guidelines and by not responding to problems as they arose.

      IRS managers outside the intelligence function appeared
to have a "hands off" philosophy regarding informant activ-
ities.   This attitude that intelligence personnel should be
left to manage their own affairs appeared pervasive and
generally accepted.

     The lack of management attention at all levels was the
underlying cause of the problems discussed in this report.
It may have arisen because management failed to fully appre-
ciate the problems that can arise when dealing with informants
but, whatever the reason, it must change.

RECOMMENDATIONS

     We proposed that the Commissioner of Internal Revenue
revise IRS' guidelines on informants to require

     -- that regional commissioners authorize the use of any
        informant who will be gathering information at IRS'
        request or encouragement after determining that (1)
        there is reasonable cause to believe a tax law has
        been violated, (2) there is no practical alternative
        for obtaining essential information, and (3) there
        is a specific limitation on the time and scope of
        the informant's activities; and

     -- that requests to use each such informant show, among
        other things, why the informant is needed, how he
        was developed and determined reliable, and how he
        will be used.

     Also, to encourage proper implementation of these
guidelines and adequate management attention to informant
activities, we proposed that the Commissioner review IRS'
informant activities at least annually. One way this could
be accomplished is through an independent third party like
IRS' Internal Audit Division.




                             50
IRS COMMENTS AND
OUR EVALUATI",

     IRS did not agree that regional commissioners should
authorize the use of informants. In commenting on our
proposals, the Commissioner of Internal Revenue said:

         "We believe that this authority should be
    maintained within the District.   The District
    Director should have the authority to authorize
    the use of informants, as this is the management
    official responsible for all of the IRS activities
    within a district.  The control of the use of
    informants by the District Director is consistent
    with this overall responsibility.   Our current
    procedures will be revised to include this provision
    and will be issued within a month."

         "We feel that our current procedures with the
    modification for the authorization to approve the
    use of informants will be adequate and proper and
    should be given a chance to work.  Therefore, we
    would welcome GAO to return and review our procedures
    after they have been in effect for a year or so."

          "The Deputy Commissioner is issuing a memorandum
    to all Regional Commissioners advising them that our
    procedures are being amended to require District Dir-
    ector approval on the use of informants, with the pro-
    vision that this authority may not be redelegated.    In
    this memorandum the Deputy Commissioner will emphasize
    the need for close adherence to our guidelines in this
    sensitive area and the necessity for close management
    monitoring.   Also, the Assistant Commissioner (Compliance)
    has requested the Assistant Commissioner (Inspection) to
    give high priority to this activity in Internal Audit
    program reviews and to require an audit of this area
    in the Internal Audit conducted of every District Intel-
    ligence Division.   In addition, each Regional Commis-
    sioner will review this area as a part of his management
    responsibilities of each district office.   The National
    Office Review Program, which evaluates the effectiveness
    of each region, also will continue to follow-up and
    review this program area."

         "We feel that the combination of [Internal Audit]
    reviews and our National Office and reginnal reviews
    will ensure that the procedures relating to the use of
    informants will be properly followed by our field
    officials.  We also feel that such reviews will compel
    the involvement of managers with regard to the control
    and use of informants, as well as to the value of the

                            51
      results obtained from the use of informants, which
      may have been lacking in the past."

       Although we believe that regional commissioners are
                                                            in
 a better position to authorize the use of an informant,
                                                           IRS'
 intention to give that authority to the district directors
 is not inconsistent with the main thrust of our proposal--to
 get more management involvement from outside the intelligence
 function before an informant is sent out to gather informa-
 tion.   Accordingly, we cnnsider IRS' position acceptable, on
 a trial basis,

      IRS said also that

     -- it does distinguish between informants who provide
        information on their own initiative and those who
        provide information at IRS' request or encouragement
        and

     -- information on why the informant is needed, how he
        was developed and determined reliable, and how he
        will be used is already called for in its guidelines.

     Although IRS does recognize the distinction between
                                                          the
two types of informants, its controls do not adequately
flect that distinction.                                  re-
                         As we said before, a chief of intel-
ligence can approve the use of an unpaid informant
                                                   who is going
to be gathering information at IRS' request or encouragement,
but must obtain the district director's approval before
even a few dollars to a person who voluntarily walks     paying
                                                     into an
IRS office with valuable tax-related information. With
                                                         regard
to the latter, IRS noted that "Cases in which informants
                                                          pro-
vide IRS with information on their own initiative generally
involve a one-time, non-paid situation * * *." However,
                                                          as
indicated by IRS' use of the word "generally," there
                                                     is nothing
to preclude such an informant from being paid.

      In concluding that IRS should distinguish between
types of informants and establish controls accordingly, two
                                                          we
were prima   ly influenced by the fact that IRS' existing con-
trols are money oriented.   In establishing controls, IRS
seemed more concerned with whether or not an informant
                                                        was
going to be paid than it was with how the informant
                                                     was go-
ing to be used.   Indeed the level of management involvement
is predicated on the amount of money to be expended.
                                                       Our
purpose was to redirect IRS' concerns.   In dealing with an
informant, the important question is not "How much are
                                                        we
going to pay him?" but rather "What is the informant
                                                      going
to do and how?"




                             52
      Likewise, although IRS' current guidelines do call for
some of the information we ask for, they do not call for all
of it.   Specifically, as noted by IRS, the guidelines do re-
quire the chief of intelligence to consider the following
factors in evaluating the potential use of an informant:
available background information on the informant, such as
his address, criminal record, and associates; the reliability
of information provided to IRS and to other agencies, if known;
and the informants' source and means of securing information.
The guidelines do not require the chief to consider why the
informant is needed and how he will be used--information that
we think is vital before making any decision to use an infor-
mant.

     In its response, IRS also referred to its guidelines
on confidential expenditures.  Although, ; discussed earlier,
these guidelines do call for including certain information,
such as the proposed plan of action, in requestrin- author;
zation to expend confidential funds, they do not specifJ_dlly
call for all the information we think necessary.   It should
be remembered also that these guidelines apply  to approving
the expenditure of confidential funds; they do not apply to
authorizing the use of an informant.

      In summation, therefore, IPS' guidelines do not, in
total, provide the control that we are striving for.       The
most important  element  of  that control--the  involvement  of
someone outside the intelligence function in deciding whether
to use an informant--is absent from the guidelines.      Because
the guidelines  are  already  confusing, we felt  it would  be
easier to  recommend  a total  control package  rather than  try
to recommend  piecemeal  changes  to existing  guidelines.

     IRS agreed that Internal Audit should review informant
activities but noted that this would be nothing new.  We
agree that Internal Audit has always been responsible for
reviewing these activities although, as we said, it had not
done as much as it should have. Our recommendation, however,       is
not directed at Internal Audit; it is directed toward the
Commissioner.

     IRS' new guidelines and its response to our report call
for increased management involvement in approving and review-
ing informant activities.  This increased involvement is
important and should lead to better control over the use of
informants provided all levels of management are committed to
the need for such involvement.  Without this commitment,
review and approval of informant activities can easily
deteriorate into a "rubber stamping" exercise.  To guard
against this, oversight by the Commissioner is essential.



                              53
     We are giving the Commissioner the option of using
Internal Audit, or any other third party, to assist him
in providing that oversight.  If the Commissioner were
to choose Internal Audit, we would anticipate his receiv-
ing a report, at least annually, on the scope and results
of its reviews and taking any action necessary to correct
management deficiencies.  While Internal Audit's responsi-
bility for reviewing these activies would be nothing new,
its formalized reporting to the Commissioner would be.




                            54
APPENDIX I                                                            APPENDIX I
  Internal Revenue Service                     Department of the Treasury

  Commissioner                                 Washington, DC 20224

                                               JUL 2;
  > Mr. Victor L. Lowe
   Director, General
      Government Division
   United States General
      Accounting Office
   Washington, D. C.    20548




   Dear Mr. Lowe:

        We appreciate the opportunity to review your recently prepared
   draft report entitled "IRS Management Controls Over the Use of
   Confidential Informants." The findings and recommendations have been
   given much thoughtful consideration, and we have had--as you suggested
   in your letter requesting our review--informal sessions with your staff
   to work out technical issues. As a result, agreement on certain of our
   comments has already been reached and the final report will reflect
   suggested changes deemed appropriate by your staff.

         I will not repeat these agreed upon changes here. Rather, I would
   like to add the following comments documenting our general response
   to i sy recommendations in the report and raising issues that have not
   been resolved in our informal talks.

         (1) We do not agree with the recommendation that the Regional
             Commissioner authorize the use of informants. We believe
             that this authority should be maintained within the District.
             The District Director should have the authority to authorize
             the use of informants, as this is the management official
             responsible for all of the IRS activities within a district.
             The control of the use of informants by the District
             Director is consistent with this overall responsibility.
             Our current procedures will be revised to include this
             provision and will be issued within a month.

                 We feel that our current procedures with the modification
                 for the authorization to approve the use of informants will
                 be adequate and proper and should be given a chance to work.
                 Therefore, we would welcome GAO to return and review our
                 procedures after they have been in effect for a year or so.

        (2) The draft GAO report recommended on page 77 that all requests
            to use informants state "...why the informant is needed,
            how the informant was developed and determined reliable,


                                          55
APPENDIX I                                                      APPENDIX I
                              -2-

Mr. Victor L. Lowe


         and how the information will be used." IRS Manual Supplement
         9G-40, Intelligence Division Guidelines on Informants, dated
         February 3, 1977, provides that the Chief, Intelligence Division,
         in evaluating the potential use of an informant, will consider
         such factors as: (1) available background information on the
         informant, such as the address, criminal record and associates;
         the reliability of information provided to the Service and to
         other agencies if known; and the informant's source and means
         of securing information. In addition, the Chief, Intelligence,
         has available to him/her as part of his/her review the special
         agent who contacted or was contacted by the informant as well
         as the information item prepared by the special agent which
         would provide the specific information furnished by the informant.
         The same sources can be made available to the District
         Director for his evaluation of the use of informants.

         Also, the procedures in our Manual Supplement 9G-24, Confidential
         Expenditures, dated December 10, 1975, pertaining to the payment
         of informants specify that the following material be developed
         in a written request to the authorizing official: (1) the
         name of the taxpayer or entity; (2) the case or project number
         when applicable; (3) the specific amounts being requested;
         (4) the location of the imprest fund to be utilized; (5) the
         proposed plan of action; (6) the period of time over which the
         expenditure(s) u:11 be made; and (7) a complete descritpion of
         the purpose of the expenditure(s) for laying the groundwork
         for procurement of information. The description of the purpose
         should also set forth any tentative arrangements and amounts
         previously discussed with the informant. We feel that the
         procedures in Manual Supplements 9G-24 and 9G-40 as described
         above cover all the points recommended by GAO.

    (3) We agree with the concept expressed in the GAO recommendation
        th'at the Internal Audit Division should review our informant
        activities to provide an independent view of how we are following
        our prescribed written procedures. However, this would not be
        a new responsibility for Internal Audit since they have been
        and will continue to be involved in a review of informant
        activities (see comment n~. 7 below). We feel that the combination
        of their reviews and our National Office and regional reviews
        will ensure that the procedures relating to the use of informpets
        will be properly followed by our field officials. We also feel
        that such reviews will compel the involvement of managers with
        regard to the control and use of informants, as well as to the
        value of the results obtained from the use of informants,
        which may have been lacking in the past.

    (4) The GAO report contends that, "IRS did no. ilave a workable
        system or procedure for evaluating and assu.ing effective use


                                    56
APPENDIX I                                                      APPENDIX I

                               -3-

Mr. Victor L. Lowe


          of the information received from informants." We strongly
          disagree with this statement. Until March, 1976, it had been
          a long-standing procedure that when the Intelligence Division
          received an information item, it would be evaluated by the Chief,
          Intelligence Division, or his/her delegate for possible criminal
          potential. If the information item did not have criminal
          potential, but did have Audit or Collection potential, the Chief,
          Intelligence, would forward the information item to the
          appropriate function for evaluation. In March, 1976, the
          evaluation process was transferred to the Service Centers.

          We believe that the problems that GAO discovered were related
          to the handling of information items generated from long-term
          informants, which were not prepared and evaluated as expeditiously
          as would have been expected. However, this was not completely
          a problem with the procedures, but rather in the fact that a
          few Chiefs of the Intelligence Division did not follow existing
          procedures. Latest guidelines outlined in our Intelligence
          Divisions Guidelines on Informants, dated Febrtary 3, 1977,
          are designed to guard against the possibility that this could
          happen again.

     (5) With regard to a further GAO recommendation that IRS distinguish
         between two types of informants, those who furnish information
         on their own initiative and those who gather information at
         IRS' request or encouragement, we again feel that our procedures
         in Manual Supplement 9G-40, Intelligence Division Guidelines
         on Informants, already make this distinction. Section 3 of the
         Supplement provides procedures for the use, control and evaluation
         of those informants which the Service is encouraging or requesting
         to gather information. Cases in which informants provide IRS with
         information on their own Initiative generally involve a one-time,
         non-paid situation in which the informant provides the information
         either in person, by telephone or by letter. For this type of
         informant, we feel that the only procedures necessary relate
         to the processing of the information received from them, and
         control procedures for this are found in Section 6 of the
          Supplement. Under these procedures, the Intelligence Division
         would either engage in information gathering activities pertaining
          to the particular taxpayer(s) reported by the informant or
          input the information into either the Centralized Information
          Item Processing System or the Information Indexing System. We
          feel that these procedures are adequate and furthet clarification
          is, therefore, not necessary.

      (6) We also propose two language changes which we feel are necessary
          to accurately reflect the scope of GAO's review. The first
          change relates to the first paragraph of the cover summary.


                                       57
APPENDIX I                                                         APPENDIX I

                                      -4-

  Mr. Victor L. Lowe


              We suggest the following language (our changes are in parenthesis):
              "Primarily because of inadequate management attention, IRS had
              not done all it could to maximize the benefits and minimize
              risks in dealing with (long-term paid confidential) informants.
              (Such) informants were (sometimes) used in ill-defined and overly
              broad intelligence gathering efforts; inadequate procedures
              existed for evaluating information received from such informants;
              and the use of these informants was not subjected to systematic
              management review." Our other language change relates to page 8
See GAO       of the GAO report, second paragraph, under the sec'-ion "Review
Note 1,       Objectives and Scope." We suggest that this para,raph be changed
              to read as follows: "To do the work, we reviewer the procedures
              and practices followed by the National Office, two regional offices
              and five district offices for initiating and carrying out
              intelligence activities in which confidential informants had
              major roles. (As stated earlier, the Intelligence Division paid
              2,000 confidential informants about $800,000 during the fiscal
              years 1973 through 1975. For this same period, the two regions
              we reviewed had 662 confidential paid informants, who received
              $471,000. This represented 33 1/3% of the total informants and
              about 59% of the total monies paid the informants. However,
              our in-depth review was limited to 52 confidential paid informants.")

          (7) The GAO draft report suggests that the Internal Audit Division
              can provide an independent third-party review of confidential
              informants (page V of the Digest and 77 of the Report).
              Thus, GAO leaves an implication that Internal Audit was not
              involved in independent third-party reviews prior to the
              Operation Leprechaun review. This implication is incorrect
              and distorts the report. Internal Audit historically has
              provided coverage to the controls on use of confidential
              informants.

       The Deputy Commissioner is issuing a memorandum to all Regional
  Commissioners advising them that our procedures are being amended to require
  District Director approval on the use of informants, with the provision
  that this authority may not be redelegated. In this memorandum the
  Deputy Commissioner will emphasize the need for close adherence to
  our guidelines in this sensitive area and the necessity for close
  management monitoring. Also, the Assistant Commissioner (Compliance)
  has requested the Assistant Commissioner (Inspection) to give high
  priority to this activity in Internal Audit program reviews and to require
  an audit of this area in the Internal Audit conducted of every District
  Intelligence Division. In addition, each Rogional Commissioner will
  review this area as a part of his management responsibilities of each
  district office. The National Office Review Program, which evaluates
  the effectiveness of each region, also will continue to follow-up and
  review this program area.



                                         58
APPENDIX I                                                     APPENDIX I

                                 -5-

  Mr. Victor L. Lowe


       I hope these comments will be useful to you in developing your final
  report. We will, of course, be happy to discuss any of these issues with
  you or your staff if further clarification is necessary.

      With kind regards,


                                       /-.? Sincerely,




 GAO notes:    1.   We have added most of this suggested
                    language to our report.   Some of the
                    language was not added because it was
                    either unnecessary or incorrect. As
                    stated on p. 13 we reviewed 52 requests
                    for approval to expend confidential
                    funds on intelligence gathering efforts
                    involving informants.   However, our re-
                    view was not limited to 52 informants.
                    Some of the efforts involved more than
                    oale informant. We believe that our scoDe
                    which was augmented by the work Internal
                    Audit did, was sufficient to enable us
                    to draw conclusions on the Intelligence
                    Division's use of confidential informants.

               2.   Page references in IRS' comments may not
                    correspond to pages in the final report.




                                       59
APPENDIX II                                          APPENDIX II



                      OPERATION LEPRECHAUN

     In early 1975 a series of articles appeared in Miami,
Florida, newspapers which led to considerable interest and
controversy regarding an IRS intelligence gathering effort
known as Operation Leprechaun.  The articles alleged that
IRS was paying undercover agents and informants to gather
data on the sex lives and drinking habits of Federal judges
and other public officials in Miami.

     The newspaper disclosures were followed by a sequence
of events in IRS which included

       -- the immediate revocation of IRS' guidelines on
          confidential expenditures and the requirement
          that all such expenditures be approved at the
          national office,

      -- a detailed examination of Operation Leprechaun by the
         Internal Audit Division,

      -- investigations of 25 IRS employees by the Internal
         Security Division, 1/

      -- a serious rift among IRS officials and employees
         over the merits and faults of the intelligence gather-
         ing effort,

      -- the departure from IRS of several key personnel
         associated with the effort, and

      --major changes in guidelines affecting practically all
        aspects of Intelligence Division operations.

After the newspaper stories, several congressional committees
and subcommittees held hearings on Operation Leprechaun and
IRS' intelligence gathering efforts in general.  (See app. IV.)
A Federal grand jury also inquired into Operation Leprechaun
and the allegations surrounding it.

       We reviewed Operation Leprechaun to determine the nature
of   the effort and why it was undertaken, the extent of manage-



1/As of March 1977, IRS had closed all but one of these inves-
  tigations and had taken no administrative action against any
  employee for misconduct arising out of Operation Leprechaun.

                               60
APPENDIX II                                       APPENDIX II




ment's involvement in the effort, and the type of information
gathered and its usefulness to IRS in enforcing the tax laws.
We also wanted to know whether IRS' management of this effort
differed markedly from its management of other efforts we
reviewed.

WHAT WAS OPERATION LEPRECHAUN AND
WHY WAS IT UNDERTAKEN?
     Operation Leprechaun was not directed toward the sexual
and drinking activities of taxpayers. Rather, the effort,
which was approved at IRS' Jacksonville district, southeast
region, and national office, was directed at organized
crime and alleged corruption among public officials in the
Miami area.
     Operation Leprechaun was not an official IRS designation.
Until the newspaper allegations in early 1975, the words had
little meaning to anyone except one special agent in the Miami
office of the Jacksonville district. The special agent coined
the term to refer to an intelligence gathering effort assigned
to him from May 1972 until September 1973.  In September, ad-
ditional special agents were assigned to the effort, and the
special agent initially in charge stopped using the term. For
ease of presentation, we will also refer to this intelligence
gathering effort as Operation Leprechaun.
Why_Operation Leprechaun was initiated
     Operation Leprechaun was initiated because certain Fed-
eral and local officials strongly believed that political
and judicial corruption was deep seated and widespread in
Miami and because certain Department of Justice and IRS
officials wanted IRS to become more involved in the Strike
Force program.
     IRS national office and Department of Justice personnel
were concerned about the decline in IRS' participation in the
Strike Force program. IRS intelligence officials in the na-
tional office were dissatisfied with IRS Strike Force efforts
in Miami and wanted to use undercover agents and informants
to develop information on organized crime in that area. De-
partment of Justice officials were also concerned about the
drop in IRS staff-years devoted to the Strike Force proqram
nationwide. For example, at a Strike Force representatives'

                             61
 APPENDIX II
                                                    APPENDIX II




seminar in November 1972 attended by officials
                                               from the
Department of Justice, the Department of
                                         the Treasury,
and IRS, the Assistant Attorney General made
                                             the following
comments.

     "The basic purpose for setting up a Strike
     Force program was that we wanted to bring
                                                into
     our concept your [IRS'] knowledge of the system
     in which you operate.  To date I would qrade the
     IRS 90 plus for its cooperation.

     "More and more we will be choosing sophisticated
     type individuals as targets.

     "What concerns me now is the decrease of IRS
                                                  manpower
     to combat organized crime.  I strongly suggest your
     consideration in manpower.  There is so much work to
     be done."

At that meeting, the Chief of the Organized
                                            Crime and
Racketeering Section in the Department of
                                          Justice, commented:
     "In the Jastice Department we consider and
     the Audit and Intelligence Divisions of IRS recognize
                                                  as the
     strong arms in the fight against crime.
                                              IRS has
     accounted for approximately 60% of our criminal
     prosecutions.

     "One of the most recent concerning factors
     Strike Force program is the reduction in    in the
                                               number
     of IRS examinations and investigations pending.
     Man-years expended are also on a downward
                                                trend.
     Most importantly, we need to impress the
                                               district
     offices for the needed manpower to identify
                                                  new
     cases."

The Director of the Intelliqence Division
                                          emphasized the
importance of continuing to improve IRS performance
                                                    in
the Strike Force program, and stated:

    "In Strike Force we need new ideas, new
                                            approaches in
    case development and investigations, and we
                                                need to
    provide leadership in district offices.



                             62
APPENDIX II                                       APPENDIX   II




     "District offices have a responsibility to buy informa-
     tion and conduct surveillance.  Greater emphasis should
     be placed on the development and use of informants."

     In addition, the Department of Justice attorney acting
as Chief of the Miami Strike Force at the time of Operation
Leprechaun encouraged IRS' Jacksonville district to become
more actively involved in the Strike Force.  In a June 1972
Strike Force meeting attended by Justice and IRS personnel,
the Chief stated that corruption of local public officials
would be emphasized and estimated that "* * * at least 50
percent of all judges and commissioners are corrupt."  In
that meeting the Chief described the role he wanted IRS to
play in gathering information on certain specific individuals.

Authorization to expend
confidential funds

     Local law enforcement agencies, in cooperation with the
Miami Strik? Force, had been probing political and judicial
corruption in Miami.  The Dade County Department of Public
Safety and the Miami Police Department had conducted joint
surveillance which produced information indicating that
public officials were taking bribes.

     During the probe the Chief of the Miami Strike Force
held several discussions 'with the Chief of Intelligence in
the Jacksonville district and the Assistant Regional Commis-
sioner for Intelligence in the southeast region regarding
corruption among local public officials.   In one meeting,
the Chief of the Strike Force provided the Chief of Intel-
ligence with the names of 15 persons identified during
their surveillance, and the Chief of Intelligence agreed
to initiate an intelligence gathering effort.

     On Mar-h 30, 1972, the Chief of Intelligence requested
the Assistant Regional Commissioner for Intelligence to approve
confidential expenditures to develop intelligence through
informants.  The request stated that (1) an acute need existed
to finance the covert gathering of intelligence because Miami
had become "* * * a watering hole for racketeers of national
notoriety as well as a spawning ground for local corruption,"
(2) Strike Force efforts represented a significant portion of
the investigative effort of the Intelligence Division in


                            63
APPENDIX II                                       APPENDIX II




Miami, and (3) the Chief of the Strike Force had identified
loan sharking, extortion, gambling, labor racketeering, and
corruption of law enforcement and judicial officials, at all
levels, to be areas of particular concern.  The request also
stated that:

     "Intelligence gathering via the usual techniques
     provides only surface information of little real
     value.  Meaningful intelligence can only be obtained
     from inside the organizations of interest by the use
     of paid informants.  While this latter technique has
     been utilized with a great deal of success on a case-
     by-case basis, we now most urgently need to utilize
     this technique in the gathering of intelligence con-
     cerning the activities of organized criminals and
     others in the areas of concern previously enumerated."

The Assistant Regional Commissioner for Intelligence con-
curred in the request and estimated $30,800 would be needed
to finance the effort through June 30, 1973.

     Because the request exceeded the $5,000 limit for regional
approval, the Assistant Regional Commissioner for Intelligence
sent it to the national office and noted that the effort would
include the services of three to five undercover agents and
five to seven local informants.  The Acting Director of In-
telligence approved the request on April 25, 1972.
     In February 1973, after the Assistant Chief of Intelli-
gence had evaluated the intelligence gathering effort, the
Chief of Intelligence in Jacksonville asked the Assistant
Regional Commissioner for Intelligence to approve an additional
$17,000 in confidential expenditures to continue the effort
through June 30, 1973. The Chief stated that a joint investi-
gation by local enforcement agencies and the Miami Strike
Force disclosed widespread corruption of public officials,
particularly criminal court judges, which made it imperative
to continue the effort.  This request was forwarded to the
Director of Intelligence who approved it on February 28, 1973.

     In May 1973, the Group Manager recommended to the Chief
of Intelligence that confidential funds of $50,000 be author-
ized to continue the intelligence gathering effort through




                            64
APPENDIX II                                       APPENDIX II




June 30, 1974.   The Chief sent a request for confidential
funds of $50,000 through the Assistant Regional Commissioner
for Intelligence to the Director of Intelligence.   The
Director granted  an interim authorization of $10,000 and
requested the Jacksonville district to submit a plan for
confidential expenditures.   The Chief submitted a plan in
October 1973 to probe loan sharking, extortion, gambling,
labor racketeering, and corruption in order to identify
"the extent of national participation of organized crime."
He estimated confidential expenditures of $51,500 would
be required and stated that undercover agents and ten
informants or operatives, selectively placed, would be
used.  He also stated:

          "Space rentals and utilities will be
     necessary in order to conduct observations, to
     meet confidential informants or undercover
     agents periodically and in one situation, to set
     up a business front.. Rental autos will be used
     to meet informants and for other intelligence
     activities."

     In late 1973 and early 1974, national and regional in-
telligence officials reviewed confidential expenditures and
information gathered in Operation Leprechaun.  In February
1974, the Director authorized an increase in confidential
funds from $10,000 to $40,000 for use through June 30, 1974.

INADEQUATE STAFFING AND EVALUATION
OF OPERATION LEPRECHAUN

     Not long after Operation Leprechaun was initiated,
problems began to arise and the overall effort began to
deteriorate because:

     -- The Intelligence Division had not adequately staffed
        the effort, but instead had left almost everything
        to the discretion of one special agent.

     -- Management oversight and control was inadequate
        during most of the special agent's 16-month in-
        telligence gathering effort even though the scope
        of the effort was greatly expanded and a number of
        problems surfaced during the 16 months.



                             65
 APPENDIX II                                          APPENDIX II




        -- The information accumulated by the special agent
           during the effort was not systematically evaluated
           to determine its tax-relatedness and usefulness.

     Placing one special agent in charge of a broad intelli-
gence gathering effort and not exercising reasonable manage-
ment control over his activities or the information he
                                                       gath-
ered created unnecessary risks and hampered IRS' chances
                                                         of
maximizing the effort's contribution to the Intelligence
Division's enforcement mission--a problem that was not
                                                       unique
to Operation Leprechaun.

 Inadequate staffing

     After confidential expenditures were first authorized
                                                            in
April 1972, the Intelligence Division assigned a special
                                                         agent
to establish a network of informants and left him in charge
                                                             of
setting up the operation, identifying targets, and determining
sources and techniques to be used.  He was given the broad
mission of gathering intelligence on alleged political
                                                       and
judicial corruption in Miami but was given little guidance
or assistance in setting up and carrying out the effort.

     The then Chief of Intelligence told us that he selected
the special agent for the assignment because the agent
                                                       had
been successful in two previous assignments and was in
                                                       contact
with informants in Miami.  The agent was furnished the names
of 12 to 15 persons identified by the Chief of the Miami
                                                         Strike
Force and was instructed to develop intelligence files
                                                       on them.
      As the intelligence gathering effort continued, however,
the agent began to accumulate information involving hundreds
of individuals.   For example, he prepared 594 records of con-
tact with informants, containing an average of about
                                                      10 names
each.   It is not clear how many of the persons named in those
documents were targets of intelligence gathering because
                                                          no
formal process existed for identifying and approving targets.
Instead, the special agent identified individuals as
                                                      targets
based on (1) his knowledge of suspected tax violators
                                                       and his
experience over the years, (2) information provided by other
law enforcement agencies, (3) the intelligence gathering
                                                          effort
itself, and (4) newspaper stories about organized crime
                                                         figures.
        The special agent relied primarily on confidential infor-
mants    to gather information on targets.  In September 1972,


                               66
APPENDIX II                                            APPENDIX II




about 4 months after Operation Leprechaun's inception, the
special agent sent a memorandum through his group manager to
the Chief of Intelligence evaluating his network of informants.
The Assistant Chief of Intelligence had requested the evalu-
ation because during a September 6, 1972, Strike Force meeting
attended by IRS regional and district officials, the special
agent had asked for help in handling informants.

     In his September 1972 evaluation, the special agent said
the primary purpose of Operation Leprechaun was "to infiltrate
and subvert organized crime and corruption to the end that
information, leads, and evidence are obtained peculiar to
criminal tax investigations."  The evaluation outlined the
procedures the agent followed in establishing an informant
network which included:

     1.   Identifying potential    informants   in the areas of
          interest.

     2.   Recruiting and   training informants.

     3.   Obtaining personal background information on each
          informant.

     4.   Directing   informants and receiving    information from
          them.

     5.   Verifying   informants' allegations and    information.

     6.   Disseminating informat on to other agents and to
          the information gathering and retrieval system.

     7.   Periodically reviewing informants'      files and planning
          future strategy.

     8.   Identifying employment opportunities for      informants
          in the areas of interest.

     9.   Paying   informants.

    10.   Coordinating with the Strike Force and other agencies.

     The agent began recruiting informants by asking other IRS
special agents and representatives of other law enforcement
agencies and State agencies about individuals who might assist


                                  67
APPENDIX II                                         APPENDIX IT




in information gathering.  Some informants used in Operation
Leprechaun were recruited in his previous work, some were re-
cruited through his personal contacts, and some were recruited
by other informants at the direction of the special agent.
According to the special agent, the confidential informants
came from all ethnic, social, professional, and occupational
ba-kgrounds and some had criminal records.
     In his memorandum the special agent described the scope
of his intelligence gathering, the risks involved, and some
of the problems he was having as follows:
     "There are presently 34 informants within OPERATION
     LEPRECHAUN, but only a handful are paid.   There are
     several informants which I nave never met.   They were
     developed by other informants. In other words, o help
     offset limited time and manpower, I use informants to
     instruct and even to pay other informants; to conduct
     surveillances on suspects arid other informants; and to
     conducL background ar.nd public records checks on suspects.
     Admittedly, this it,not orthodox and is a risky
     proposition."
                            *   *   *   **


     "In my opinion the assignment to set up and operate
     a network of paid informants is next to impossible for
     one man to manage on a continuing basis in an effective
     and efficient manner. However, I strongly believe in
     tho need and propriety of such an undertaking. Along
     with it is a need for office facilities separate from
     the general Internal   Relenue Offices, a full group of
     Special Agents with Supervisor and Clerical Staff,
     various investigative equipment (including electronic
     devices), and financing. There is no doubt in my mind
     that_a group such as this would be hJ_il __successful if
     properly fiaancta, staffed, and_equpped."

ineffective man:agement control
     IiS   officials outside the intelligence   .nction -ere not
kept informed of. developments and therefore did not exercise
any control over Operation Leprechaun.   IRS in'elligence of-
ficials at all levels, however, were maade await from time to



                                68
APPENDIX II                                        APPENDIX II




time of the nature, scope, problems, and risks of Operation
Leprechaun but did nothing to change the situation.
     Management oversight

     The Chief of Intelligence in the Jacksonville district,
the Assistant Regional Commissioner for Intelligence in the
southeast region, the Director of Intelligence in the national
office, and others at each management level were generally
aware of (1) what the nature and purpose of Operation Lepre-
chaun was, (2) who the targets were, (3) how the information
was being gathered, and (4) what type information was being
gathered.
      IRS intelligence officials in the southeast region and
the Jacksonville district were informed of the special agert's
activities through requests for authority to expend confi-
dential funds; memoranda, progress reports, and project eval-
uations prepared by the special agent conversations with
the special agent's group manager; and regional and district
evaluations. In his September 1972 memorandum, for example,
the special agent specifically described the problems he wasWe
having with informants and emphasized the risks involved.
found no evidence that, as a result of the September 1972
evaluation, IRS intelligence officials in the southeast region
or Jacksonville district took steps to change the way in which
the special agent was carrying out the operation and, indeed,
the agent continued to operate in the same way over the next
year.
     In a January 1974 memorandum to the Director of Intelligenc?
the Assistant Regional Commissioner for Intelligence summarized
the type of information being gathered by the special agent.
This review was requested by the Director to help him decid
whether to continue expending confidential funds in the .ntel-
ligence gathering effort. The report tu the Director included
information similar to that reported oy the special agent in
his Septemiber 1972 evaluation, such as:
      -- Informants were being used to instruct other informants.
      -- Informants were being used to conduct surveillances
         and to perform background and public record checks.



                              69
APPENDIX II                                        APPENDIX II




     -- Informants had been placed on the payrolls of suspects
        and in other positions close to either the suspects or
        their confidants and aides.

      Included in the report were the results of a detailed
examination of information obtained from three informants
who received a substantial part of the funds expended during
Operation Leprechaun.   The report contained references to
the type of information obtained and stated that the infor-
mants

     -- recruited other informants and performed
        surveillances on and took pictures of subjects,

     -- identified a subject's girlfriend,

     -- infiltrated a major pornography dealer's operation
        and recruited his manager,

     -- were socially close to the targets,

     -- determined the subject owned three houses/apartments
        and kept girlfriends in two of them while he rented
        out the third, and

     -- determined a target took a trip to Santa Domingo
        in 1971 to join a girlfriend.

     After receiving the report in late January 1974, the
Director expressed serious concern over the way the special
agent had used informants.   He advised other Intelligenzce
Division officials that either instructions were unclear or
district intelligence personnel did not accurately understand
the purpose of paying informants.   He also strongly empha-
sized that information gathered must be tax related and that
payments should not be made for information relating pri-
marily to violations under the jurisdiction of other law
enforcement agencies.   He said that guidelines had to be
clarified and controls made more effective, and he requested
a review of the matter.

     In response, Intelligence Diviscn personnel stated that
a revised policy statement on confidential expenditures was
being reviewed and that new guidelines would be prepared.
The policy and guidelines were not changed, however, until
1975, after the Operation Leprechaun disclosures.  In addi-

                             70
APPENDIX II                                       APPENDIX II




tion, the Director continued to authorize confidential ex-
penditures for the Miami office including a $30,000 authori-
zation on February 4, 1974.

     Supervision

     The special agent was assigned to IRS' Miami office under
a group manager who was in charge of special agents gathering
intelligence on and conducting investigations of taxpayers
as part of IRS' efforts under the Strike Force program.  Tie
degree to which the group manager supervised the special agent
in charge of Operation Leprechaun has been a matter of debate
and disagreement, and questions have been raised about whether
the special agent was actually under the direction and control
of the Chief of Strike Force (a Department of Justice attorney)
and the extent to which the agent reported to him.

     The special agent in charge of Operation Leprechaun
received little direct supervison from the group manager.
The special agent selected individuals as targets of intel-
ligence gathering, chose informants, decided on intelligence
gathering procedures and techniques and, to a large extent,
controlled the payments made to informants and the information
received.

     The group manager's role was limited and passive.   His
principal duties were to act as custodian of  the funds and
to process paperwork generated by the special agent, such
as fund requests, expenditure documents, and memoranda con-
taining information received fror informants.   He did not
direct or participate in the special agent's day-to-day
operations such as informant contact, surveillances, and
other "street work."  In describing the group manager's
role, the Chief of Intelligence stated that the group mana-
ger approved the information gathered by the special agernt
and dispersed funds to "ne agent to pay for the information.

     Arrangements made by the Chief of Intelligence may have
restricted the group manager's supervision of the special
agent's activities, but the facts are not clear as to the
scope and duration of those arrangements.  In a March 1975
affidavit furnished to IRS during the joint Internal Audit/




                            71
APPENDIX II                                     APPENDIX    II



Internal Security investigation of intelligence gathering
activities in Jacksonville, the group manager stated:

    "It was [the Chief's] further direction that 'L.,
    special agent] would consult directly and closely
    with [the Chief of Strike Force] about the corrup-
    tion in Dade County.   [The Chief] advised me that
    I would only learn of [the special agent's] activi-
    ties on a need-to-know basis.    [The Chief] asked me
    if T could work with [the special agent] under such
    an arrangement and I told him that I saw no problem.
    My responsibility would be to fund [the special
    agent's] activities concerning the payments to infor-
    mants; and to conduct the initial review of the
    efficacy of any such payments.



    "[The special agent] met with [the Chief of Strike
    Force] at the Miami Strike Force headauarters almost
    every day concerning 'Operation i .rechaun.'  I
    have no knowledge of the specific nature of their
    meetings; however, I assumed it was to keep each
    other abreast of any current developments involving
    the individuals [the special agent] was developing
    information on."

     Similarly, in a July 1975 interview conducted as part
of that same Internal Audit/Internal Security investi-
gation, the group manager stated:

    "I was [the special agent's] supervisor with respect
    to 90 percent of the normal supervisory relationships,
    I would judge.  * * * With respect to particular
    information gained from his contacts at the Strike
    Force, * * * and his contacts with our Division
    Chief, I did not enter into those, in the normal
    supervisory relationship ' * *."

     In February 1976, the group manager said that the
Chief of Intelligence had told him in May 1972 that the
special agent would be receiving highly sensitive infor-
mation from the Department of Justice which was to be
revealed to the group manager only ca a need-to-know
basis.  The group manager also said that a few days later
the Chief of Intelligence told him that he was to know



                             72
APPENDIX II                                     APPENDIX II




everything about the special agent's work.  In May 1976,
the special agent told us that the Chief's original
instructions were in effect only a short time.

     According to the special agent in charge of Operation
Leprechaun, he visited the Strike Force offices in Miami
to discuss his intelligence gathering activities, but only
infrequently.   The Chief of Strike Force said he did not
have daily, or even weekly, contacts with the agent or
supervise his intelligence gathering efforts.

     Because the meetings between the special agent and
Strike Force attorneys were not documented, we could not
determine the frequency of the meetings or whether the
Strike Force attorneys directed or supervised the soecial
agent's efforts.

Information was not systematicall y
evaluated and generallywas not
related topossible tax violations

      The special agent in charge ot Operation Leprechaun
was given the broad mission of gathering intelligence
on political corruption and organized crime in the Miami
area.   He was not responsible for conducting investigations
of specific individuals; this responsibility was assigned
to other special agents who initiated investigations using
informnation from Operation Leprechaun and ocher sources.
     To the special agent, qat.l- ing infurmltation tended
to be an end in itself, btcause ie was not responsible
fo' using it to initiate investigations or for other pur-
poses.




                              73
APPENDIX II                                         APPENDIX II




      At the time of Operation Leprechaun, IRS policy was
to evaluate information, whenever practicable, before pay-
ing foL it.   As with other intelligence gathering efforts
we reviewed, however, the special agenit did not always
obtain and evaluate information before paying his infor-
mants.   The special agent used informants to gather infor-
mation and many times made regular, periodic payments to
them.   In addition, some informants obtained information
from and paid other informants for the special agent.
These practices did not always permit the special agent
to determine the value of information before paying for it.

     After he received information the special agent had
to decide what to do with it.  No procedure or system had
been developed to control, process, and evaluate the infor-
mation.  In March 1974, at the group manager's request, the
special agent developed local guidelines for administrative
control of informants' information.   The special agent sug-
gested establishing a separate set of informant control files
for each agent and the group manager.   The agent stated:

     "* * * Because of the several different * * * posts
     of dut-y and the agent's need to continually evaluate
     his confidential sources, it becomes necessary for
     him to maintain a control file on each C.I. [confi-
     dential   informant]   *   * *
                                  *."

     In describing the controls to be implemented by the
group manager, the agent wrote:
     "Any intelligence organization faces a necessary
      .ind continuing flood of paper; an ever increasing
     need of clerical and technical personnel; irternal
     organizational problems; and building and maintain-
     ing a network of confidential sources. The added
     need for strong control becomes evident when (gents
     are dispersed throughout the state and each is
     workinn with paid C.I.'s.     In my opinion, this need
     for st     -g and effective control prevails over the
     nominal duplicity that is required in certain in-
     stances."




                                    74
APPENDIX II                                         APPENDIX II




In March 1974, the group manager transmitted the special
agent's suggestions to other agents in the group and directed
that the controls be implemented immediately.

     Intelligence officials reviewed and evaluated informa-
tion accumulated by the special agent only .s the need arose
to answer specific questions.  In December 1972, the group
manager advised the Chief of Intelligence that funds were
almost depleted and suggested a decision be made on whether
to continue the project.  As a result, the Assistant Chief
of Intelligence visited the Miami office and discussed the
special agent's intelligence gathering efforts.   Similarly,
in January 1974, national end regional intelligence offic-
ials completed a review of the special agent's files.   The
Director of the Intelligence Division asked for this review
after he received a request for additional funds.

     We reviewed 594 memoranda and other documents containing
information obtained from informants by the special agent.
The information in those memoranda and documents can be cate-
gorized generally as information on:

     --Individuals' personal lives, such as their acquaint-
       ances, girlfriends, boyfriends, mistresses, drinking
       habits, and personal problems.

     -- Individuals' daily activities and personal contacts
        resulting from informants' surveillances.

     -- Individuals' lifestyles, such as their spending habits,
        purchases of personal property, and mistresses being
        financially maintained.

     -- Financial transactions that might involve kickbacks,
        payoffs, loan sharking, prostitution, and pornography.

    -- Taxpayers taken from police   reports and newspaper
       articles.

     Most of the information was general and did not relate
,o possible tax violations. Some of it, however, was speci-
fically tax related and useful to IRS.  For example, there
were records relating to a skimming operation at a movie
theater which the special agent reported involved unreported
income exceeding $125,000 a year.  The information was obtained


                             75
APPENDIX II                                       APPENDIX II




from informants in connection with a joint audit/intelliqence
investigation which led to the proposed assessment of taxes
and penalties totaling $344,300 and conviction of the tax-
payer.
     Extent to which information was
     gathered on the sex lives and
     drinking habits of private citizens
     As a result of newspaper articles alleginq that IRS
gathered personal information on prominent citizens, Internal
Audit expanded an investigation of the Jacksonville district' s
intelligence gathering activities to include Operation Lepre-
chaun. A June 1975 report on that investigation stated that
of 594 documents containing information that the special aqei.t
obtained from informants, 135, or 23 percent, included refer-
ences to sexual and/or drinking activities. According to the
report, only 70 of the 135 documents contained tax-related
information. National office intelligence officials, on the
other hand, reviewed the 65 supposedly non-tax-related docu-
ments and told us that most were tax related.

     We found that the documents accumulated by the special
agent in Operation Leprechaun contained sporadic references
to taxpayers' sexual and drinking activities. This type of
information was a minor part of the overall content of the
documents, however, and generally consisted of the casual or
incidental mention of individuals in terms connoting or des-
cribing sexual cr drinking activities.  In all cases the ref-
erences were intermingled either with other information of a
general background nature or with information which had spec-
ific tax implications.
     Some references to sexual activities were includeu in
information which was not tax related; they did relate,
however, to the objectives of the intelligence gathering
effort--organized crime and political corruption. Several
documents, for example, contained rather explicit references
to c judge's sexual relations. Although the information had
no appa-ent relevance to possible tax violations, the docu-
ments indicate the information Hid relate to political cor-
ruption--a blackmail scheme in v iich the judqe was allegedly
coerced into judicial actions favorable to the perpetrators
of the scheme.



                             76
APPENDIX II                                        APPENDIX II




     The documents having references to sexual and/or drink-
ing activities were generally quite lengthy and detailed.
Many were submitted to the special agent by informants as
periodic reports of their activities.  In preparing the
documents, the special agent and informants spoke freely
of taxpayers' activities and often referred to their social,
as well as business and financial, affairs.   The references
to sexual activities often were made in the context of the
taxpayers' business operations such as pornography, prosti-
tution, and the operation of massage parlors.

     In identifying references to sexual and/or drinking
activities in the 594 documents, Internal Audit used a broad
definition of the terms and made no distinction as tc the
type or extent of such information in each document.  In
addition, their June 1975 report did not explain the nature
or context of the references to sex and drinking.

     Among the 135 documents identified by Internal Audit as
containing such references were 39 documents in which refer-
ence was made to individuals in terms such as:    "girlfriend,"
"a lover," "a mistress," and "a pornographic writer."    In-
cluded also were 50 documents in which mention was made of
individuals or their activities by reference to their sexual
or drinking proclivities:  "a known homosexual," "an alcoho-
lic," "a lesbian," "a prostitute," and "prcstitution."    A
third category (46 documents) included more explicit refer-
ences to individuals' sexual or drinking activities such as:
" * * * an alcoholic and usually is 'smashed' * * * ," "* * *
an orgy of women and narcotics * * *," "* * * have had social
and sexual relations with    * **," "* * * became intoxicated
one night and    *,"  and, "* * * a lesbian homosexually
married to * * *."

     An Internal Audit official in the southeast region told
us the auditors classified as sex related any document that
implied or contained any statement specifically involving the
sex activities, habits, or relationships of the individual.
He said they took the most conservative approach because the
news media had been accusing IRS of a "cover up," and he had
understood that the results of their work on the type of infor-
mation collected would be qualified.  In the memorandum trans-
mitting the results of the investigation to the national
office, the Regional Inspector responsible for Internal Audit
and Internal Security activities in the southeast region wrote:


                             77
 APPENDIX II
                                                   APPENDIX II




     "The attached reports also comment on the extent that
     'sex related' material or information was located in
     the Intelligence files. There is some danger that these
     results will be misunderstood.

     "In brief, there is sex data in the file. It should be
     noted as well that for the purpose of these reports
     'sex data' has been broadly applied. eg. 'Mr. X has a
     mistress', was interpreted by us to be 'sex data.'
     Caution therefore, should be exercised in drawing con-
     clusions that IRS was involved in 'sex spying'.

CONTRIBUTION OF OPERATION LEPRECHAUN
TO THE INTELLIGENCE MISSION

     We reviewed the result        oration Leprechaun as re-
ported by the Intelligence b         and the Internal Audit
Division. Although both diva.ons reported on the results
of the operation, they differed as to the extent of addi-
tional taxes expected to be collected.

     In July 1975, the Intelligence Division summarized the
results of the special agent's efforts. It attributed  15 tdx
cases to the special agent's work, involving actual or estima-
ted taxes and penalties of $6.9 million. The Division said
the information was still being processed and considerably
more revenue was expected.

     In August 1975, Internal Audit evaluated the Intelligence
Division's assessment of tax cases and revenue resulting from
the special agent's efforts and determined that the special
agent's information was valuable in 13 cases and that the
estimated taxes and penalties in those cases totaled $4.7
million. Of that amount, $2.6 million had been assessed, and
the other $2.1 million represented cases awaiting review and
approval within IRS.

     The $2.2 million difference between the estimates by
Intelligence and InteLnal Audit resulted primarily because
the two disagreed on the value of the special agent's infor-
mation in initiating or developing tax cases.  Internal Audit
determined that information obtained by the special agent was




                             78
                                                   APPENDIX II
APPENDIX II




                                                      Intelli-
of value in initiating two cases not included in the
gence Division's estimates.   Also, Internal Audit determined
that information obtained  by the special agent was of no value
                                                       esti-
to four cases included in the Intelligence Division's
mates.  The net effect was to cause Internal Audit's esti-of
mate to be $1.7 million lower.   The remaining difference
                                                    recent and
$500,000 resulted because Internal Audit used more
more formal estimates of  tax assessments.

     As of January 1977, IRS had assessed taxes and penalties
                                                          $49,000.
in the 13 cases totaling $2.7 million and had collected
                                                           of
Included in the $2.7 million, however, was an assessment
             against one taxpayer who subsequently  died.   IRS
$2.6 million
wrote off $1.6 million as uncollectible, leaving an  assessment
of $1 million outstanding.

     IRS also took criminal prosecution action against five
                                                       Oper-
taxpayers based in part on information gathered during
ation Leprechaun.  As of January 1977, the status of these
five cases was as follows:

     --One case resulted in conviction and sentencing.

     -- One case resulted in a fine after the taxpayer
        pleaded guilty.

     -- One case was scheduled by the Department of
        Justice for prosecution.

     -- Two cases were recommended to the Department of
        Justice for prosecution but were declined.




                               79
APPENDIX III                                                                                      APPENDIX III


   0MGQESOnU&UlaO
            Department
            of the
                                                         Intmnal
                                                         RosnUe       I   93G-152, Amend. I
                                                                          l(1l;)-91,          l
   supplem ent
   CORRECTED COPY*
                                          Treasury       Service
                                                                                     Amend.
                                                                          41c-lS, Amend.  1
                                                                                                  1l-11R, Amend. I
                                                                                                  5(12)c-25. Amend. 1
                                                                        42c-328,   Amend. 1       61C-3, Amend. I
                                                                        45C-231,   Amend. 1       71G.-Q, Amend. 1
  March 16,       1976                    Information Gatherin   Guidelines                       q4r-57, Amend. I


     Section 1.          Purpose

           The purpose of this Supplement is to amend the basic Supplement in conformance with
     a memorandum to all Regional Commissioners and'All District Directors dated December 2,
     1975.

     Section 2.          Memorandum of December 2,    1975

          .01   The effect of the December 2, 1975 memorandum was to revise Section 5.06 of
     the basic Supplement to read as follows:

                 ".06 Employees assigned to projects or individual information gathering may
     obtain information from sources outsidea the Service for purposes of verifying the filing
     of required returns, payment of tax, exempt status, proper reporting of income, deductions
     or credits, or otherwise determining compliance with the tax laws. These guidelines are
     for information gathering only and do not affect information item evaluation as set forth
     in IRM 9311.204).   The information obtained musr be directly tax related and necessary
     to the administration of the tax laws.    (See Sections 4.01 and 4.02) The '...sources
     outside the Service...' which may be contacted and the activities which may be performed
     by special agents in connection with authorized information gathering aessinments are as
     follows.

                "1 Inquiries at federal, state and local governmental agencies,
     including, but not limited to:

                           "a   law enforcement b,dies

                           "b   crime commiasaions

                           "c   regulatory and licensing brarcicas

                           "d   motor vehicle registration

                           "e   real estate records

                    "2     Inquiries at state ane local tax authorities.

               "3 Contact with the orig.,nal informant and other informants who are believed
    to possess pertinent information.

                    "4     Contact with foreigr governments (both tax treaty and other nations).

                    "5     Surveillance   (approved by the Chief).

               "6 In making these inquiries the special agent is allowed to disclose the
    name of the taxpayer for identification purposes in an effort to secure information that
    is directly tax related and necessary to the administration of the tax laws."

    Section 3.           Effect on Other Documents


    5G-118l, 5(12)G-25, 61C-3, 71-9, 94.-57.    This "effect" should be annotated by pen and
    ink on the basic Supplement with a reference to this Amendment.

      * Dispose of all previous  copies of :anual
        Supplement, also dated M.arch 16, 1975, dt ich              7
        inadvertently showed CR "l(15)G-9h,eni                   Aodistant Commsi      r
        1" instead of "1(15)G-91, Ame nd. 1."                       (Compliance)

  Distribution:




                                                         80
APPENDIX III                                                                    APPENDIX III


                                                                                  91G-118
                                         maoxodf~IgG~                             5(12)G-25
                                Supplem            .t                 42G-105
                                                                      420-328
                                                                                  61G-3
                                                                                  71G-9
                               fOOPWU     oM4006             i           t        91G-33
                                                                                  94G-57
  June 23, 1975                     ,Inf,&ionth        n Guidelines


  Section 1.    Purpose

        .01 This Supplement implement, Policy Stateent P-1-1 (Approved 6-23-75). attached.
  and provides guidelines for the gahering of information that may be solicited, obtained and
  retained for use by Service personnel as background material prior to the aseignment of a caer
  for collection. examination or investigation.

        .02 Them guidelinos are not intended to alter in any    y the pgathering. solicitation     C
   and documentation of tel related fact aend evidoece nacesury In developin cases that have       -


   been aseigued for collection of taxes. examintion or investigation of a t&x liability.


   Section 2.     Backaround

        .01 Compliance with tlhe tax 1v which the Service is authorized and directed to enforce
   cannot be determined solely by rexirence to the information on returns and documents filed Withl
                                                                                         the
   the Service. Therefore, the Service must obtain information fro outside sources for
   effective administration of the tax lasN.

         .02 Information gathring activities which were suspended by telegrae to All Regional
                                                                         Manul *a Manual Supplement    1
   Comissionere on January 22, 1915 (reissued in the Internal Revenue
   91RDD-7, CR 41IDD-18 and 51RD0-20 and 71IDD-1) and by telegran to All Regional Coioonerse
   District Directors and Service Center Directors ne February 7, 1975 (reissued in the Internal
                                                                                            udy be
   Revenue Mnual as Manual Supplent 93G-148, CR 420-323, 45C-223, 5(12)G-22, and 71C-3)
   resuned in accordance with the gutidelines and definitions met otit in this Mnu l Suppleant

   Section 3.     Record Reteatio   end Destructionu

         .01 No information documnt of any type preently on hand or hereaft-r acquired in the
   Service concerning Intelligence Information Gatbhering Joint Compliance ProgrSmCoordinated
   Compliance Projects and Returns Compliance Progre will be destroyed util    the Senate Select
   Comittee and all other official reviewing bodies. completo their investigations  of intelligencC
   activities carried out by or on behalf of the Federal Government. The supenion of destrue-
   cloa procedures doe not preclude use of such information for civil or cr]ni-ul tax adminia-
   tration purpouen, provided such use does not include destruction. Instruction concerning
   records diaposition will be issued as soon as the investigation are cope..ted.

          .02 District Directors will ensure that documents nd information relating to or arising
    from information gathering activities (ir,.uding projects and prograM), whether eolicited  or
                                                                                      not indicate
    iusolicited, which ate not necesary to ta aedminietration of the tax lanv and do
    a violation of a Federal 1aw enforced by another agency will be segregated and placed in a
     eaparate storage are with access limited to Division Chiefs, To the xtunot praeticable, the C
    data should be filed according to taxpayer nae. An index of all documents from the dis-            C
    continued Information Gathering and Retrieval System should be retained. These records may
    be transmitted to the Federal Records Center, or destroyed in accordance with IN 1(15)59,
    when the Congressional investigations specified in Section 3.01 are concluded.

         .03 Directly tax related documents (defined in Section 4) remaining after the review
    specified in Section 3.02 *hall be maintained in accordance with the provisions of there
    gtideline.




        1t(15)59, 4100, 4200, 4500, 5100, 5(12)00, 6100, 7100, 9100, 9300, 9400




                                                        81