INTELLIGENCE ACTIVITIES AND THE

RIGHTS OF AMERICANS

_______

BOOK II
_______

FINAL REPORT

OF THE

SELECT COMMITTEE
TO STUDY GOVERNMENTAL OPERATIONS

WITH RESPECT TO

INTELLIGENCE ACTIVITIES
UNITED STATES SENATE

TOGETHER WITH

ADDITIONAL, SUPPLEMENTAL, AND SEPARATE
VIEWS

APRIL 26 (legislative day, April 14), 1976

THE INTERNAL REVENUE SERVICE: AN INTELLIGENCE RESOURCE AND COLLECTOR

INTRODUCTION AND SUMMARY

The Internal Revenue Service functions as an intelligence agency in two respects. First, through its Intelligence Division, it both collects general intelligence about possible tax violators and investigates specific allegations of tax fraud to secure evidence for criminal prosecution. Second, the IRS accumulates vast amounts of information about the financial and personal affairs of American citizens from the tax returns and supporting information which Americans voluntarily submit each year. As a rich deposit of intelligence and an effective intelligence gatherer, the IRS is a powerful tool which other agencies of government, including Congress and the executive branch, have periodically sought to employ for purposes other than tax law enforcement. This report is primarily an exploration of the reasons these uses of the IRS have led to serious and illegal abuse of IRS investigative powers and to a compromise of the privacy and integrity of the tax return.

1. Intelligence Collection

The IRS Intelligence Division, with 2,800 special agents trained to gather financial data, unlimited access to tax returns, and the power to issue summonses requiring the production of financial information without probable cause to believe a crime has been committed, represents a great investigative capability. Because of this capability, Congress, the Federal Bureau of Investigation, and even the White House have sought, sometimes successfully, to direct the efforts of IRS against certain groups or individuals, many of whom would not have been investigated under normal IRS criteria. In part because of the absence of any statutes which meaningfully limit IRS authority to gather general intelligence, IRS had little basis for resisting pressure when it was applied. In any event, IRS did not always attempt to resist. In the late 1960s and early 1970s, many groups and persons were selected for investigation by the Special Service Staff essentially because of their political activism rather than because specific facts indicated tax violations were present. The evidence suggests the IRS readily acceded to the congressional and White House pressure which led to the formation of the Special Service Staff, and that the targets of the Staff's activities were, in practice, largely determined by input from the FBI for reasons unrelated to tax enforcement.

Special Service Staff is the principal instance of the use of the IRS for a fundamentally improper non-tax purpose: selective enforcement of the tax laws against dissenters. However, the use of IRS to achieve even laudable non-tax objectives has also generally resulted in serious abuse of IRS power.

The use of IRS intelligence collection capability to achieve desirable non-tax objectives has resulted in loss of control over investigative techniques, and a loss of the capacity to limit the scope and nature of information gathered to that which is related to tax enforcement. Operation Leprechaun, for example, was an effort to employ IRS investigative power to combat political corruption. The operation led to the collection of details on the personal and sexual lives of certain Florida political figures and to illegal acts on the part of IRS informants.

Abuses such as Operation Leprechaun and others discussed in this report have resulted from a combination of factors which have generally accompanied the use of the IRS for non-tax purposes. The IRS system of organization and control over investigative activities has not proved compatible with the pursuit of non-tax objectives. The IRS was decentralized in 1952 in an effort to end widespread political influence congressional investigators had discovered. Under this decentralized structure, the intelligence chief in each of the fifty-eight IRS districts largely controls and supervises investigations. The essence of decentralization is heavy reliance upon the professional, independent judgment of agents at the field level, subject to the setting of general policy by the National Office. Under these general guidelines, agents and supervisors in the field apply tax related criteria in making decisions concerning the identification of targets of investigations, and the initiation and scope of investigations. The result has generally been that investigative resources are applied to particular taxpayers or categories of taxpayers in proportion to the tax compliance problems they present, based upon the IRS experience of prior years. This system is generally known as "balanced tax enforcement."

The use of the IRS for non-tax purposes requires "unbalanced enforcement," where the target group is selected for reasons other than the significance of the tax compliance problem it presents. Unbalanced tax enforcement has given rise to a combination of elements which have produced abuse: (1) the subordination of tax criteria to achieve a concentration of enforcement resources creates an atmosphere within the IRS which encourages excessive zeal and departure from other normal criteria of IRS operation; (2) the pursuit of non-tax objectives through selective tax enforcement by the IRS Intelligence Division has historically involved the use of techniques such as paid informants, electronic surveillance, and undercover agents, all of which are prone to abuse; (3) because the IRS decentralized organizational structure is designed to achieve tax objectives and is, by design, resistant to pressure from above, in order to bring about the desired imbalance in the enforcement program, the IRS has generally found it necessary to bypass its normal organizational structure; (4) in doing so, the IRS has bypassed the normal administrative mechanisms which check excess and abuse at the lower levels.

The loss of control over investigative techniques, over the scope and nature of information gathered, and over the identification of proper targets has not proved to be a function of whether the particular non-tax objective the IRS has been called upon to pursue is right or wrong. The Committee's investigation strongly suggests that more effective oversight and new controls over IRS intelligence gathering are necessary if the IRS is to be used for any non-tax purpose.

2. IRS as an Intelligence Resource

Because the information submitted by taxpayers and gathered by the Intelligence Division is so extensive, IRS has often been viewed by other governmental intelligence and investigative agencies as a data bank on which these agencies could draw for their own purposes unrelated to enforcement of tax laws. Both the FBI and the CIA have had virtually unrestricted access to any tax information they sought for any purpose.

The dissemination of tax returns and related information ("disclosure") is governed by statutes and regulations designed to limit access to and use of the information. These restrictions, however, have often failed to protect the information, in some cases because the laws themselves were inadequate and in others because they were circumvented. Moreover, the uses to which the information was later put were often questionable. In some cases, such as the FBI's COINTELPRO, the uses were clearly illegal.

SUMMARY OF RESULTS OF INVESTIGATION
The Committee's investigation of abuses of IRS intelligence was divided into two parts: (1) a study of abuses of IRS because of the uncontrolled access which other federal intelligence agencies have had to tax returns and other tax information, and (2) a study of alleged abuses in the IRS' own intelligence gathering.

Part I. Access of Federal Intelligence Agencies to Tax Return Information

The extent to which other federal agencies should have access to tax information for non-tax purposes has been under study by several congressional committees. This Committee, however, is the only committee studying the question of disclosure, which was authorized and directed to investigate all intelligence agencies and their interaction. Senate Resolution 21 specifically directed this Committee to study:

The nature and extent to which Federal agencies cooperate and exchange intelligence information and the adequacy of any regulations or statutes which govern such cooperation and exchange of intelligence information. 1

The committee staff reviewed every request by a federal intelligence agency for a tax return of which there is a record either in IRS or in the requesting agency. Most of these requests were from the Department of Justice on behalf of the FBI. In selected cases, the staff obtained the initiating documents from the requesting agency to determine the purpose for which the information was desired, compared this purpose with the reason or lack of reason given in the request, then traced the tax information back into the requesting agency to determine what use was actually made of it. As a result of its access to the records of other intelligence agencies, this Committee has had a unique opportunity to evaluate the problems of disclosure of tax returns to intelligence agencies.

The most important facts the staff found were:

(1) The IRS has not required either the CIA or the FBI to state the specific purpose for which it needed tax return information.

(2) ln the absence of such a specific statement, the IRS could not judge whether the request met the regulatory criteria for release of the information. In effect, IRS had delegated the determination of the propriety of the request to the requesting agency.

(3) Further, in the absence of a statement of the specific, reason the tax return is needed, there is no basis upon which to limit the subsequent use of the return to the purpose for which it was initially released.

(4) As a result of these weaknesses in the disclosure mechanism, the FBI has had free access to tax information for improper purposes. The FBI obtained tax returns, for example, in an effort to disrupt the lives of targets of its COINTELPRO operations, by causing tax audits. The FBI used as a weapon against the taxpayer the very information the taxpayer provided pursuant to his legal obligation to assist in tax collection and, in many cases, on the assumption that access to the information would be restricted to those concerned with revenue collection and used only for tax purposes.

Because of the importance of the disclosure problem and its potential impact on all United States citizens, the Committee culminated its investigation into the matter by holding a public hearing on October 2, 1975, calling the Commissioner of the Internal Revenue Service, Donald C. Alexander, as the witness.

Part II. Abuses in Intelligence Gathering

A. Areas of Inquiry. -- The Committee's investigation of possible abuses of IRS' own intelligence gathering required a selective approach. First, the Committee lacked both the time and resources necessary to investigate the activities of the Intelligence Division in each of the fifty-eight districts. Second, numerous allegations of abuse appeared in the press in the early and middle portion of 1975, the very period of this Committee's active investigation into IRS. Some of these allegations were fully investigated by other congressional committees having specific oversight responsibilities over IRS, and this Committee decided not to duplicate those investigations. Others were investigated preliminarily by this Committee but determined to be unfounded, in which case they are not discussed in detail in this report.

The Committee focused most of its efforts on reviewing major projects which represented systematic rather than isolated abuses and which illustrated problems of control common to other IRS projects. The Committee therefore examined:

(1) The causes of the breakdown of controls which permitted improper electronic surveillance and other abuses of IRS intelligence gathering in the drive against organized crime (1960-1964), as documented by the Subcommittee on Administrative Practice and Procedure of the Committee on the Judiciary, United States Senate, 89th Cong., 1st Sess. (1965) (the Long Committee).

(2) The origins and function of the Special Service Staff (SSS) (1969-1973) and the Ideological Organizations Audit Project of the early 1960s, whereby politically active groups were targeted for investigation.

(3) The operation of the Information Gathering and Retrieval System (IGRS) used to collect and index general intelligence (1973-1975) and, on occasion, personal information.

(4) Operation Leprechaun in the Jacksonville, Florida, district which involved improperly controlled informants who unjustifiably collected personal and sexual information on some targets (1969-1972), and committed a burglary.

(5) IRS actions, including use of undercover agents to monitor meetings, against groups known as "tax protesters" which refused to pay taxes as a form of protest against the tax system or against certain government policies.

B. Method Of Investigation. -- The Committee's investigation of intelligence gathering abuses included: (1) reviewing reports of IRS internal investigations; (2) corroborating the findings of those IRS investigations on which the Committee relied, through independent investigation; (3) intensively investigating intelligence operations in six IRS district offices, including reviewing thousands of documents relating to the Information Gathering and Retrieval System and the Special Service Staff, as well as other special projects; interviewing numerous special agents charged with intelligence-gathering functions, particularly those concerned with IGRS; interviewing most of the principals and reviewing IRS Inspection Division summaries of interviews as well as key documents in Operation Leprechaun; interviewing Audit and Collection personnel who handled Special Service Staff field referrals; reviewing tax protester intelligence files; and interviewing special agents in charge of tax protester projects in three districts.

Throughout its investigation, the Committee staff received full and willing cooperation from all IRS officials in both the National Office and the field. It had full access to all documents it requested and to all employees it wished to interview. 2

C. Summary of Results. -- As the criminal investigative arm of IRS, the Intelligence Division normally investigates tax fraud allegations. Because the scope of such an inquiry is self-defining, it has been practical for IRS to give the agent assigned to a case wide discretion in selecting investigative techniques and the kinds of information collected. The same inherent limitation upon the scope of the inquiry made local supervision of such investigations practical. But, as the following cases reveal, abuses inevitably arose when IRS intelligence powers were employed to collect general intelligence rather than to investigate specific tax fraud allegations, and to target groups for purposes other than "balanced enforcement" under programs directed from the National Office.

1. IRS Use of Electronic Eavesdropping Techniques -- The Long Committee Findings

In 1965, the Long Committee 3 discovered a number of cases of unlawful electronic surveillance by IRS agents, mostly in the course of investigating organized crime figures under the aegis of the Nationwide Organized Crime Drive. The Long Committee hearings indicated that the normal system of control over intelligence investigations was inadequate for those which, unlike ordinary tax fraud investigations, involved the use of abuse-prone investigative techniques, such as electronic surveillance.

The IRS had established a National Office Coordinator for the Organized Crime Drive. In a number of the cases of improper electronic surveillance uncovered by the Long Committee, the testimony established that the agents performing the surveillance were operating either under the authority or general guidance of the Coordinator, with the knowledge of the Intelligence Division personnel in the district in which the operation was taking place. The effect of creating the Coordinator was to bypass normal administrative controls without introducing effective new controls.

2. Special Service Staff (SSS) : 1969-1973

The Special Service Staff was formed in 1969 in response to congressional and White House criticism of inadequate IRS efforts against "activism" and "ideological" organizations and individuals. The critics believed IRS had a special responsibility to determine the sources of funds of large activist groups and their leaders and to assure their adherence to the tax laws.

The Special Service Staff was a special National Office organization designed to concentrate IRS attention on "activists" and "ideologies" in order to preclude criticism of the adequacy of IRS attention in that area. In part because of the probable resistance of the decentralized IRS structure to selective enforcement on a political basis, the National Office deemed it necessary to act through a National Office organization to achieve the desired imbalance in the enforcement program. The Special Service Staff, using lists of political activists, including lists supplied by the FBI and the Department of Justice, proceeded to "unbalance" the enforcement program against "dissidents" and "extremists." By deciding what cases to bring to the field's attention, it bypassed normal screening procedures and focused audit efforts on groups and individuals selected for their political activities and beliefs. In a few cases, SSS employed its position in the National Office to bypass the district's normal structure and influence the handling of individual cases.

The effect was that SSS reviewed the tax status of groups and individuals in the absence of specific evidence of tax violations because they exercised First Amendment rights. SSS targets included 8,000 individuals and 3,000 groups. Some of these groups historically had not engaged in illegal activity of any kind, much less tax violations. For example, targets included the Ford Foundation, the Head Start Program, and fifty branches of the National Urban League.

The Special Service Staff, which had operated in secrecy, was abolished by Commissioner Alexander when he learned of its existence shortly after taking office in 1973.

Although the purpose of SSS differed fundamentally from that of the Organized Crime Drive, both were efforts to employ tax weapons for essentially non-tax purposes. Both required the creation of a special National Office structure to achieve the desired emphasis in the enforcement program. While IRS participation in the Organized Crime Drive represented the pursuit of a laudable government objective, in both cases, the special structure resulted in the bypassing of normal administrative controls and permitted abuse to occur.

Ideological Organizations Audit Project
The Special Service Staff was not the first IRS effort directed at groups and individuals because of their political ideologies and actions. In 1961, the IRS initiated a test audit of right-wing organizations which had drawn stern criticism from the President. The test audit grew into a planned attempt by IRS to conduct intensive investigations of 10,000 tax-exempt organizations in order to determine whether or not they engaged in political activities, which are impermissible for tax-exempt organizations. The plan also called for investigation of non-exempt right-wing organizations through reviews of the contributors' returns for improper deductions.

While IRS efforts directed at these political action groups were not as extensive as the coverage given organizations by the Special Service Staff, the efforts did result in a significant departure by IRS from a balanced enforcement program, and a concentration of tax enforcement on certain individuals and groups because of their political beliefs. The efforts IRS directed at these ideological organizations established a foundation and precedent for the later Special Service Staff.

The Committee did not find abuses of the normal IRS functions beyond the abuse which inheres in concentration of audits on organizations and individuals selected for political reasons (and in part by the White House). The program illustrates responsiveness of the IRS to the subtle pressures of other government agencies, and demonstrates the need for close scrutiny of any IRS activities the primary purpose of which is to achieve non-tax objectives.

3. Information Gathering and Retrieval System (IGRS)

Partly as a result of its participation in the Organized Crime Drive, the IRS Intelligence Division perceived a need to improve its ability to gather and retrieve intelligence beyond the scope of investigations of specific allegations of tax fraud. The Information Gathering and Retrieval System, which IRS developed between 1963 and 1975, was an effort to increase the collection of such "general" intelligence and to index and store this intelligence efficiently. Ultimately, it included information about 465,442 persons or groups.

The gathering of general intelligence differs from the investigation of alleged tax violations in two fundamental respects: (1) there is no inherent standard of relevancy by which to determine what kinds of information to collect, and (2) there is no clear standard for deciding who should be investigated. In the absence of such standards, normal IRS reliance upon agent discretion presents dangers. Nevertheless, the creators of IGRS failed to supply any meaningful criteria for target selection or for the relevancy of the information to be gathered. The results were tremendous overbreadth and a glut of largely useless information gathered under IGRS. For example, the system contained information not only about persons suspected of ties with organized crime, but also individuals who had routine commercial business transactions, such as selling a restaurant, with these persons. In addition, in some districts, intelligence was collected about political groups. IGRS became so encumbered by irrelevant data that it was not effective for the purposes for which it was created. It was terminated in 1975.

4. Operation Leprechaun -- Collection of Personal Information 1969-1972.

The perceived need to gather general intelligence, and thus to establish IGRS, was largely a result of IRS participation in efforts against organized crime and political corruption. Operation Leprechaun was part of a drive against political corruption and involved the worst examples of abuse of any project associated with IGRS. The evidence indicates:

(a) that the special agent in charge of Operation Leprechaun, operating through informants, collected an excessive amount of information on the sex and drinking habits of some of the targets of the operation;

(b) that he engaged in electronic surveillance contrary to IRS regulations;

(c) that two of his informants burglarized the office of a congressional candidate, apparently without the Special agent's knowledge or consent, and stole a filing cabinet containing tax-related information, some of which they then delivered to the special agent; and

(d) that the special agent's string of thirty-four informants were not under effective control.

The agent's ability to gather highly personal information on the targets which was not tax related, is a reflection of the absence of meaningful written standards establishing criteria for relevancy of information gathered under IGRS. The failure was less that of the agent or of his superiors than of the creators of IGRS, who failed to recognize that reliance upon agent discretion in general intelligence gathering required more stringent, specific guidelines for relevancy than ordinary tax investigations.

Similarly, the agent's inability to control his informants represented a failure of the IRS structure within which the agent's actions took place rather than of the agent himself. IRS lacked a system under which supervisors, rather than agents, could make key decisions on recruitment and handling of informants. Instead, such decisions were left to the agents, unassisted by clear guidelines.

In 1975, after analyzing the deficiencies of IGRS and investigating the Leprechaun abuses, IRS management began to impose restrictions upon intelligence gathering designed to assure that non-tax-related information would not be gathered, that targets of information-gathering operations would not be selected by the agent's personal predilections, and that agents and management would have greater control over informants. If fully implemented, they will reduce the likelihood of recurrence of abuses such as those associated with Operation Leprechaun.

Many of the controls which are necessary to avoid a repetition of the abuses of Operation Leprechaun and IGRS might not be necessary if IRS confined its activities to a balanced tax enforcement program. Many of these necessary controls may actually impede the special agent in the performance of the normal IRS intelligence mission. The price of the continued use of the IRS for purposes such as Operation Leprechaun will either be continued abuse in the absence of stringent controls or the imposition of controls which are necessary to prevent abuse in the area of selective enforcement but may be excessive for traditional tax collection activities.

INTRODUCTION AND DISCLOSURE
The data Americans voluntarily provide the IRS every year make it the largest, potential source of information about the personal lives of Americans. 4 The raw data which IRS holds and its special capability for obtaining financially related information in addition to that which taxpayers voluntarily furnish, including the power to issue a summons for records without a showing of probable cause, constitute an intelligence resource which is of great potential usefulness to other intelligence agencies pursuing non-tax objectives.

This Committee has studied the means by which federal intelligence agencies have gained access to tax information, the stated purposes for which they have obtained the information, and the uses they have made of the information they obtained. The Committee has not attempted to develop a comprehensive set of criteria for access to tax returns, though its findings show that current regulations, as applied, have permitted access for purposes which should be excluded. The Committee has examined the current system of controls over access in light of the uses intelligence agencies have made of the information to which they have gained access under that system of controls. It has found that the mechanism through which disclosure criteria are enforced has serious weaknesses. An effective mechanism for enforcement of disclosure criteria is as crucial to protection against access for improper purposes as the criteria themselves.

Under the current system, the FBI has obtained returns for purposes for which they should not have been released even under existing, liberal standards for release of tax information. 5 The FBI was able to do so because the IRS failed to apply existing regulations to require the requesting agency to state the reason for its request so that the IRS could determine whether the purpose of the request fell within the limits for permissible disclosure. The failure to require a specific statement of purpose in the request for tax information has also resulted in an absence of effective limitations upon the uses to which the FBI could put the information it obtained.

Proposed legislation to narrow the purposes for which investigative agencies can obtain tax information will not eliminate the potential for repetition of the kinds of abuse the Committee has uncovered unless the disclosure mechanism is also overhauled to assure that those limitations are more effectively enforced than the broader limitations have been enforced in the past. The purpose of this report is to analyze those weaknesses in the present control mechanism which are responsible for the abuses which have occurred.

I. THE STATUTORY AND REGULATORY SETTING
Under section 6103 of the Internal Revenue Code, "returns made with respect to taxes . . ." are open to inspection "only upon order of the President and under rules and regulations prescribed by the Secretary or his delegate and approved by the President." "Returns" are not defined in the statute, but are defined by regulations [Treasury Regulation See. 301. 6103 (a) -1 (a) (3) (i)] to include both actual returns and

Other records, reports, information received orally or in writing, factual data, documents, papers, abstracts, memoranda, or evidence taken, or any portion thereof, relating to [returns].

The present regulations provide that the Department of Justice shall have access to "returns", stating:

[a] return in respect of any tax shall be open to inspection by a United States attorney or by an attorney of the Department of Justice where necessary in the performance of his official duties. The application for inspection shall be in writing and shall show ... (4) the reason why inspection is desired. 26 C.F.R. § 6103 (g). [Emphasis added.]

This regulation differs from those applicable to other agencies (such as the CIA), which are covered by the blanket provisions of section 6103 (f) :

... if the head of an executive department ... or of any other establishment of the Federal Government desires to inspect a return in respect of any tax ... in connection with some matter officially before him, the inspection may, in the discretion of the Secretary of the Treasury or the Commissioner of Internal Revenue ... be permitted upon written application. ... The application shall ... set forth ... (4) the reason why inspection is desired . ... 6 [Emphasis added.]

Section 6103 (a) -1 (a) (3) (i), supra, which, by defining "tax return" broadly, has the effect of broadening the information the IRS is obliged 7 to furnish to the Justice Department upon proper request to include the results of IRS audits and intelligence investigations. In the course of some of these audits and investigations, the IRS develops information through the use of strong powers given it to determine and collect the revenue (principally the power to obtain financial information by means of a summons without any showing of probable cause) which neither the Justice Department nor the FBI could legally obtain on its own without demonstrating probable cause. The regulations contain no requirement that the Justice Department establish probable cause to obtain this information from the IRS even where it is to be used for criminal investigatory purposes unrelated to enforcement of the tax laws.

II. IRS PRACTICE
A. Before 1968

Until 1968, the FBI obtained tax returns and other tax information directly from the IRS Intelligence Division, under a procedure which the Chief of the IRS Disclosure Branch termed "illegal" upon learnmg of it in 1968. 8 Under that procedure the IRS failed to exercise vigilance to determine the purposes for which the FBI obtained returns. 9

In one case, for example, in order to develop information "discrediting or embarrassing to the United Klans of America" 10 or to a Klansman who was the subject of FBI interest, the FBI field office recommended obtaining the Klansman's returns in order to attempt to determine whether he was reporting income from the Klan as income from other sources. The recommendation was approved by FBI headquarters in November 1964. The returns were obtained from the IRS through its Intelligence Division.

One of the express purposes of this operation was, in part, to "expose [the Klansman] within the Klan organization, publicly or by furnishing information to the Internal Revenue Services." 11 Thus, the planned operation envisaged the illegal public disclosure of tax information.

On November 20, 1964, the FBI requested the returns of the Klansman for the years 1959 through 1963 and for the Klan organization for 1961 and 1963, and received the returns from IRS in January 1965. 12 AIthough FBI documents do not indicate whether or not the planned disruptive action was ever carried to fruition, the returns had left IRS, to be used by the FBI for whatever purpose it deemed necessary.

Because of the lapse of time and the absence of records, the precise nature of the procedure by which the FBI obtained returns before 1968 is not determinable. A review of FBI administrative files in the Bureau's Liaison Section and the testimony of the FBI agent responsible for liaison with IRS, 13 however, indicates that the essential steps in the process were as follows:

1. The FBI would decide to request a particular return or set of returns on the basis of a memorandum setting forth the reasons for the request in some detail;

2. The FBI would prepare a form letter for signature by the Assistant Attorney General, Internal Security Division, Department of Justice, setting forth that the returns were necessary in connection with an official investigation, but stating no specific reason;

3. The Assistant Attorney General was not given the detailed memorandum stating the reasons for the request;

4. Liaison Section (the FBI Section responsible for liaison with other agencies and the White House) delivered the signed form letter to someone in IRS Intelligence, who obtained the requested information; 14

5. IRS Intelligence Division kept no record of the transmittal of the information; 15

6. IRS Intelligence did not consult anyone outside the Intelligence Division (including the Disclosure Branch -- which was theoretically charged with the responsibility for disclosure of this kind of tax information) regarding action on the request. 16

B. After 1968

In 1968, the Chief of the Disclosure Branch learned that the Intelligence Division had been handling FBI requests for returns, branded the practice "illegal" in a memorandum to his superior, 17 and effected the transfer of all FBI requests to his jurisdiction. 18

Though FBI requests for tax information were thereby regularized after 1968, there is scant indication the IRS subjected them to more meaningful scrutiny than it had while the Intelligence Division handled the requests even though the regulations arguably required such scrutiny. The regulation (26 C.F.R. § 6103 (g) ) requires that the return be "necessary in connection with the official duties" of the requesting attorney, and also requires that the "reason" for the request be given in writing.

After 1968, the Internal Security Division of the Department continued to obtain returns by means of a form letter which recited the conclusion that the regulatory criteria were met. It stated that the return was "necessary in connection with an official matter before this office involving the internal security ...," i.e., that it was "necessary in connection with the official duties of the requesting attorney," but contained no separate statement of a "reason" for the request. 19 On the basis of these letters, 20 the IRS could make no independent evaluation of whether the reason for the request was in fact within the official duties of the requesting attorney, or of whether the return was "necessary". In short, the IRS delegated to the Justice Department -- and in reality to the FBI -- the administration of the disclosure regulations with respect to the FBI's requests. Former Deputy Assistant Commissioner (Compliance) Leon Green advised the Committee: "I do not think we ever questioned their need for a tax return." 21 Mr. Green, whose duties included broad supervisory responsibility over the Services disclosure activities testified as follows:

A. Any of the Assistant Attorney Generals could request access to specific tax returns by name and generally they were granted access without any questioning of the background or the need for them.

Q. You say without any questioning of the background?

A. I do not think we ever questioned their need for a tax return. If an Assistant Attorney General signed a letter saying in the course of their own operations they required access to certain returns, they were given access ...

Q. As a general rule, what kind of a reason would the Internal Security Division give?

A. I do not think they would give any reason other than to state in connection with a matter that they had under consideration the Department of Justice required access to specific returns.

Q. So, in effect, the judgment as to whether the tax return was necessary was left to the Justice Department?

A. The Assistant Attorney General who signed the letter, right.

Q. In fact, the determination of whether the ... need for the tax return was actually in connection with their official duties was also left to the Justice Department?

A. Yes. 22

The FBI requests and IRS responses invariably contained language to the effect that the use of the return would be limited to the purpose stated in the request. There is no specific regulation imposing such a Iimitation in 26 CFR 6103 (g), 23 but the limitation upon use is implicit in the requirement that the "reason why inspection is desired" be stated in the application. The release of the return is predicated upon the reason given, and therefore made only for the stated purpose. This limiting language is meaningless where the reason given is simply a recitation that the regulatory criteria are met. The absence of any meaningful limitation on use of returns has led to serious abuse. 24

III. FBI USE OF RETURNS IN COINTELPRO
Between 1966 and 1974, the FBI (either directly or through the Internal Security Division of the Justice Department) made approximately 200 requests to the IRS for tax returns. 25 Of the 200 requests, approximately 40 (20%) involved foreign intelligence matters; 26 30 (15%) involved criminal matters; and 130 (65%) were for domestic intelligence or "counterintelligence" (COINTELPRO) 27 purposes. Although records are not complete, Mr. Green's belief that IRS "never questioned their need for a return" indicates that virtually all requests were honored.

The major portion of the 130 domestic intelligence requests were part of two FBI "counterintelligence" programs, one directed at the "New Left" (anti-Vietnam War) movement and the other at the so-called "Black Nationalist" movement. 28 Each of these two programs had two components:

1. Targeting of individuals in either movement for intensive intelligence-gathering activity.

2. Targeting of the same individuals for so-called COINTELPRO operations. 29

FBI COINTELPROs (counterintelligence programs) were designed to:

expose, disrupt and otherwise neutralize the activities of [the target organizations and their leadership]. [Emphasis added.]

A. Use of Tax Returns in FBI Key Activist Program

1. Program Purposes and Tax Returns. -- The "Key Activist" program was established in January of 1968 for the purpose of "intensive investigations" of the leaders of the New Left movement. 31 Four months later, on May 9, 1968, a COINTELPRO was recommended against the New Left and the "Key Activists" of that movement, on the following basis:

The New Left has on many occasions viciously and scurrilously attacked the Director and the Bureau in an attempt to hamper our investigation of it and to drive us off the college campuses. With this in mind, it is our recommendation that a new Counterintelligence Program be designed to neutralize the New Left and the Key Activists. The Key Activists are those individuals who are the moving forces behind the New Left and on whom we have intensified our investigations. 32 [Emphasis added.]

The next day the Director established the program. 34

Two weeks later, on May 24, 1968, the FBI requested tax returns of 16 Key Activists for the years 1966 and 1967. 35 These returns were requested under the new procedure initiated in 1968 following IRS Disclosure Branch's discovery that returns had previously been furnished the FBI by the Intelligence Division. On October 24, 1968, the Key Activist program was enlarged. 36 0n December 6, 1968, the FBI requested returns on 19 additional Key Activists. 37 According to the authorizing memorandum:

As part of our overall intensive investigation designed to neutralize these individuals in the New Left movement, inquiry into their financial status has proved productive. 38

All of these returns were requested by form letters. 39 In no case did the IRS inquire further into why the returns were necessary or for what precise purpose. The actual purpose of the requests is reflected in a February 3, 1969, Headquarters memorandum in which the Bureau reported upon the success of the return requesting effort:

We have caused a survey to be made by Internal Revenue Service (IRS) concerning Key Activists. We have found a number where no record exists for payment of taxes in 1966, 1967. Included in this group are [names deleted], IRS has initiated appropriate investigations as a result of our inquiries. It is anticipated the IRS inquiry will cause these individuals considerable consternation, possibly jail sentences eventually. We now have sent requests on 35 Key Activists to IRS and anticipated many will have filed no returns. This action is consistent with our efforts to obtain prosecution of any kind against Key Activists to remove them from the movement. 40

The purpose of the requests was at least in part to develop ways of using tax information as a COINTELPRO weapon. 41

The February 3 memorandum reflects a by-product of the disclosure mechanism which enhanced its attractiveness to the Bureau. A simple request for information was in and of itself a means of directing IRS attention at the COINTELPRO target, resulting in an IRS investigation if no return was found for a particular year. The FBI documents suggest that the requests for Key Activists returns were not selective, and were not predicated upon any specific information suggesting the individual Key Activists were delinquent in their tax obligations. The IRS response was also all inclusive, and constituted unknowing IRS cooperation in the COINTELPRO effort. 42

2. An Example of the Use of Tax Information in a COINTELPRO Operation. -- One of the Key Activists who was the subject of a May 24, 1968, FBI request to IRS for 1966-1967 tax returns was a professor at a midwestern university who the Bureau anticipated would be a leader in demonstrations at the forthcoming Democratic National Convention in Chicago. 43 A detailed analysis of the means by which the FBI obtained his returns and the COINTELPRO use the FBI was able to make of them demonstrates a key weakness of present disclosure statutes and regulations.

The FBI presented to J. Walter Yeagley, Assistant Attorney General in the Internal Security Division, a form letter addressed to the Commissioner of the Internal Revenue Service 44 listing six Key Activists whose returns were "necessary in connection with an official matter before this office (i.e., the Internal Security Division) involving the internal security of the United States." Assistant Attorney General Yeagley signed the letter. Yeagley has stated that the FBI did not advise him that a purpose of the request was to use the tax information as a tool for taking disruptive action against the subjects, and that he was unaware that any COINTELPRO program existed. 45 The FBI does not claim the contrary. 46 Yeagley apparently did not inquire into the purpose of obtaining the return, stating that he generally assumed the purpose of such a request was to develop investigative leads. 47

This letter was forwarded to the IRS, where it was determined that the regulatory criteria, were satisfied since the letter recited that the returns were "necessary in connection with the official duties" of the Assistant Attorney General. IRS inquired no further into the specific purpose for which the returns were to be used, but relied upon the Assistant Attorney General's statement that the purpose met the regulatory criteria. 48 The Assistant Attorney General, in turn, relied upon the FBI. The IRS furnished the returns.

Upon receiving the returns of Professor X, the FBI forwarded them to its local office in the city where the professor taught, for examination for COINTELPRO potential. 49 In examining the returns, the local office was acting pursuant to the memorandum establishing the Key Activist COINTELPRO program:

The purpose of this program is to expose, disrupt, and otherwise neutralize the activities of the various New Left organizations, their leadership and adherents. It is imperative that the activities of these groups be followed on a continuous basis so we may take advantage of all opportunities for counterintelligence and also inspire action in instances where circumstances warrant. ... In every instance, consideration should be given to disrupting the organized activity of these groups and no opportunity should be missed to capitalize upon organizational and personal conflicts of their leadership. 50

The local office examined Professor X's returns and found some questionable deductions which "at the very least, provide a basis for questioning by IRS," and requested the authority of the FBI Director to call these questionable deductions to the attention of the local office of the IRS. The express purposes of doing so, according to the Airtel by which the request was made, were:

1. Due to the burden upon the taxpayer of proving deductions claimed, [Professor X] could be required to produce documentary evidence supporting his claims. This could prove to be both difficult and embarrassing particularly with respect to validating the claim for home maintenance deductions when, in fact, he doubtless has only the usual type of study found in many homes rather than actual office space. Validations of contributions to SNCC, SDS, and the [privacy deletion] Counseling Service may also be productive of embarrassing consequences.

2. If [Professor X] is unable to substantiate his claims in the face of detailed scrutiny by IRS, it could, of course, result in financial loss to him.

3. Most importantly, if IRS contact with [Professor X] can be arranged within the next two weeks their demands upon him may be a source of distraction during the critical period when he is engaged in meetings and plans for disruption of the Democratic National Convention. Any drain upon the time and concentration which [Professor X], a leading figure in Demcon planning, can bring to bear upon this activity can only accrue to the benefit of the Government and general public. [Emphasis added.] 51

The recommendation was approved, and the local office supplied the information to the local IRS office, but did not advise the IRS contact that the information came from a tax return the FBI had previously obtained from IRS. 52 The FBI merely stated it "had reason to believe that Professor X had claimed deductions for contributions" to certain organizations which would not normally be deductible. 53 As a result of the information the FBI furnished, IRS initiated an audit of Professor X's return.

Because of IRS liberality in granting delays in audits to suit taxpayers' convenience, the audit of Professor X did not achieve the desired purpose of disrupting his planning for demonstrations at the Convention. The audit did result in the imposition of an additional $500 in tax liability for the two years in question, as a result the local FBI office deemed it a COINTELPRO success. 54 While taxpayers should pay taxes which are due, the fact that taxes are due does not justify use of the tax laws to harrass demonstrators.

B. Use of Tax Returns in the FBI Key Black Extremist Program

The Key Black Extremist (KBE) Program was established on December 23, 1970, because of the perceived success of the Key Activist Program. The documentary history of the establishment of the Key Black Extremist Program and inclusion of requests for tax returns as a standard technique are contained in the Committee files and described briefly in the report on COINTELPRO.

According to the Committee staff's review of FBI files, the FBI requested the returns of at least 72 of the 90 designated Key Black Extremists. As in the case of the requests for Key Activists' returns, one of the FBI's purposes in obtaining returns of Key Black Extremists was to use the returns as weapons in its campaign to "neutralize" them. All the Key Black Extremist requests were made on the same forms as the Key Activist requests. There is no evidence the IRS inquired into the specific purpose of any of the requests. All were honored. 55

C. Disclosure of Identity of Contributors to Ideological Organizations

The IRS routinely receives from tax exempt organizations lists of their contributors either on tax returns or on exemption applications. The information is given to IRS in order to enable it to enforce the tax laws with respect to those organizations. The IRS also develops contributor lists of non-exempt organizations during audits, especially if there is reason to believe the contributors may be improperly deducting the contributions. These contributor lists are available to the FBI and other federal investigative agencies by simple request to the Internal Revenue Service, even in cases where those agencies could not legally obtain the information directly.

1. Dr. Martin Luther King and the Southern Christian Leadership Conference. -- One of the organizations the FBI designated a "Black Nationalist-Hate Type Organization" was the Southern Christian Leadership Conference. 56 As part of an earlier intensive investigation of this organization and of its leader, Dr. Martin Luther King, the FBI, in 1964, obtained from the Internal Revenue Service "all available information" concerning Dr. King and the SCLC. 57 This information included tax returns of both Dr. King and the SCLC as well as certain IRS investigative files. The FBI studied IRS audits and investigations of both Dr. King and the SCLC, and discussed with certain IRS employees future IRS action to check on Dr. King's and SCLC's compliance with the tax laws. The information received regarding Dr. King and SCLC was forwarded to the FBI Atlanta office "for further review and coordination with the investigation relating to Dr. King himself." 58 On April 14, 1964, the Atlanta, office responded with a suggestion for disruptive action against SCLC. 59

After noting that SCLC was tax exempt in the sense that it was not subject to income taxation (though contributions to it were not deductible on the returns of the donors), and that its enjoyment of this status required it to file a petition disclosing the names of contributors, the Atlanta office recommended that the following action be taken with respect to the contributors so disclosed: 60

It is believed that donors and creditors of SCLC present two important areas for counterintelligence activities. In regard to the donors it is suggested that official SCLC stationary bearing King's signature, copies of which are available to the Atlanta Office and will be furnished by separate communication to the Bureau Laboratory for reproduction purposes, be utilized in advising the donors that Internal Revenue Service is currently checking tax records of SCLC and that King through this phony correspondence wants to advise the donor insuring that he reported his gifts in accordance with Internal Revenue requirements so that he will not become involved in a tax investigation. It is believed such a letter of this type from SCLC may cause considerable concern and eliminate future contributions. From available information it is apparent that many of these contributors to SCLC are doing so in order to claim tax deductions and in order to be eligible for such deductions, the contribution is being made to the (privacy deletion -- name of a church), which in turn is forwarded to King or the Southern Christian Leadership Conference. 61

The suggestion was considered by FBI Headquarters and was categorized, along with some other suggestions

as not appearing desirable and/or feasible for direct action by the Bureau at this time . ... 62

2. The Students for a Democratic Society. -- In the course of auditing would-be exempt organizations, the IRS will often seek to identify contributors to the organization in order to determine whether the contributors are deducting contributions. 63 Under current disclosure regulations, the results of such audits, including the contributor lists generated in the course of the audit, are available to other federal agencies upon request. Thus, the potential use of IRS as a source of contributor lists is not limited to exempt organizations, such as SCLC. Moreover, such lists have in fact been obtained from the IRS.

In 1968, the IRS was conducting an audit of the Students for a Democratic Society. The audit was initiated in New York, and was subsequently referred to the Chicago District of IRS. An FBI letter from Director, FBI, to SAC, Chicago, dated June 10, 1968, states:

It is noted IRS is presently conducting an audit of SDS funds at the Bureau's request.

The IRS files do not reflect a specific request from the FBI for such an audit, but do reflect considerable input from the FBI in the form of reports suggesting that certain activists (including SDS members) were probable tax violators. 64 The FBI at least sought to direct IRS attention to SDS. 65

Since the SDS exemption application had been denied, it was appropriate for IRS in the course of the audit to identify contributors to the organization, and it did so. The FBI obtained the list which IRS had developed. Later, IRS passed the list on to the White House. According to an April 8, 1970, internal IRS memorandum:

Paul Wright of AOC 66 and Joe Hengemuhle of the FBI called to ask whether the FBI could furnish the White House the list of SDS contributors which was furnished to the FBI by IRS. The FBI has been requested by the White House to furnish a report on the funding of various militant organizations. ...

I advised that from a disclosure standpoint, if the White House staff wanted this on behalf of the President, there was no disclosure problem; but in view of the sensitive nature of the matter and of other investigations and problems, I wanted to check this with Mr. Green to get his approval. 67

Permission was granted and the list was furnished to the White House.

IV. DISCLOSURES TO THE CENTRAL INTELLIGENCE AGENCY
With three possible exceptions, there is no evidence the CIA has ever obtained tax return information through official disclosure channels. 68 Between 1957 and 1972, however, the CIA obtained tax return information on at least thirteen occasions through unofficial channels.

A. Means of Obtaining Returns

The CIA obtained return information informally from IRS employees in the Compliance Branch who had other CIA liaison responsibilities. 69 It has been possible to identify taxpayers on whom the CIA obtained return information, but since there are no records of these disclosures, it has not always been possible to establish which employees released which information. 70 That responsibility has been established in at least two cases. In one case, an IRS employee stated he was authorized to release returns by his superior, but his superior can recall giving no such authority. 71 In one other case, the IRS employee stated he had disclosed return information to a CIA agent who carried the credentials of another U.S. Government agency as a cover. 72 There was no written authority for the informal disclosure of tax return information to the CIA, and, according to the IRS, there is no basis upon which any of the disclosures could be considered legal.

B. Effect of Illegality

Although the purposes of the requests varied, it is clear that all but one of the disclosures would have been legal had the CIA followed legal procedures. The bulk of the requests arose in connection with either CIA investigations of its own employees or other CIA investigations within its charter. 73 Thus, with one possible exception, the illegal practice did not result in the CIA's obtaining information it could not have obtained legally. Like the practice of the FBI prior to 1968 of obtaining returns from the Intelligence Division and bypassing official channels, the CIA's informal, illegal access to return information demonstrates not a weakness in disclosure regulations, but a failure of IRS to apply those regulations.

The atmosphere of extra-legal cooperation between intelligence agencies out of which the CIA's illegal access to returns arose did lead to at least two serious breaches of IRS responsibility for impartial, even-handed enforcement of the tax laws. In one case, the CIA obtained information from the returns of Victor Marchetti, the author of a book, publication of which the CIA sought to prevent. An unidentified IRS source, referred to in a CIA memorandum 74 as "Confidential Informant," supplied the return information on April 5, 1972, and advised the CIA that he:

was extremely interested in the fact that [Marchetti] had authored and published a book but still only reported a total income of [amount deleted] for 1970 and 1971. In this regard, our source would be ready to conduct, at our request, a routine audit of [Marchetti's] income tax for the past three years. [Emphasis supplied.]

Either information the IRS possessed concerning Marchetti justified an audit or it did not. Since no formal relationship existed between the two agencies, the CIA's interest in the matter should not have affected IRS action.

The second case involved Ramparts magazine. A February 2, 1967, internal CIA memorandum of a conversation between the Assistant General Counsel of the CIA, the Assistant to the Commissioner, IRS, and two other IRS executives, including the Deputy Assistant Commissioner for Compliance, indicates a basic willingness on the part of the IRS participants to tailor their treatment of Ramparts to the desires and concerns of the Central Intelligence Agency. The memorandum 75 recites that the CIA Assistant General Counsel:

Told them of the information and rumors we have heard about RAMPARTS' proposed exposes with particular reference to USNSA [U.S. National Student Association] and [an organization]. I impressed upon them the Director's concern and expressed our certainty that this is an attack on CIA in particular, and the administration in general, which is merely using USNSA and [an organization] as tools.

One of the IRS executives advised the CIA of the status of the USNSA application for tax exempt status. The CIA Assistant General Counsel then

suggested that the corporate tax returns of Ramparts, Inc. be examined and that any leads to possible financial supporters be followed up by an examination of their individual tax returns. It is unlikely that such an examination will develop much worthwhile information as to the magazine's source of financial support, but it is possible that some leads will be evident. The returns can be called in for review by the Assistant Commissioner for Compliance without causing any particular notice in the respective IRS districts. The proposed examination would be made by Mr. Green who would advise if there appeared to be any information on the returns worth following up. The political sensitivity of the case is such that if we are to go further than this, it will be necessary for the agency to make a formal request for the returns under a procedure set forth in government regulations. If such a request is made, the Commissioner will not be in a position to deny our interest if questioned later by a member of congress or other competent authority.

V. ANALYSIS
The cases described in this report reveal that more than privacy is at stake in the disclosure of tax returns and tax return information to federal agencies. It is apparently necessary to devise means to prevent disclosure for improper purposes, and to prevent the subsequent misuse of returns disclosed initially for proper purposes. The Justice Department's failure to prevent FBI abuse of access to returns suggests strongly that the control device must be in the hands of the IRS, and not only in the hands of the requesting agency or of its parent agency.
The case of Professor X, in which information supplied by IRS was used in an FBI counterintelligence program, raises a fundamental question concerning the use of IRS for non-tax purposes: whether the selection of a taxpayer for audit or investigation for essentially political criteria is justified by the subsequent discovery of some tax liability. This question is fundamental, and applies whether the non-tax use is through the unwitting manipulation of the IRS because of a weakness in its disclosure laws, or whether the political motivation emanates from the IRS itself. If one underpays his taxes, one argument goes, one takes his chances. One's political opponent, disgruntled neighbor, or disenchanted employee can report the underpayment for the crassest of motives, and will be rewarded 76 for his efforts; therefore, motive is irrelevant as a matter of policy -- all motives, however crass, enhance tax enforcement, and are therefore desirable springboards for audits or investigations. If violation of the tax laws inhibits one's freedom by increasing one's exposure to audit or prosecution, the result is a salutary incentive to comply with those laws.

There is an essential difference, however, between a government enforcement program along ideological lines and any individual effort to bring the IRS down upon an enemy: the government is constitutionally required to be neutral to politics; individuals are not. When the IRS responds to an allegation it receives, the motive underlying the transmission of the allegation is irrelevant. When the IRS selects taxpayers for a tax compliance review because of their politics, the government is employing its power for political purposes. Whether the IRS performs the selection, as in the case of Special Service Staff, or the FBI does, as in the case of Professor X, the fortuitous discovery of a tax liability does not justify the repression inherent in the practice.

Professor X was audited only because he was the target of a COINTELPRO operation in which the FBI, through the use of the disclosure regulations, sought to manipulate the IRS into "neutralizing" Professor X by means of a tax audit. 77 Every IRS witness questioned regarding this case has agreed that Professor X's returns would not have been knowingly disclosed for the purpose for which they were used. 78

The law and practice of disclosure of tax returns made this operation possible. The law requires the IRS to turn over returns to the Justice Department only where they are "necessary" in connection with "official duties." However, the IRS has not, in practice, administered these two requirements, but has delegated their administration to the requesting Assistant Attorney General, who in turn has delegated it to the FBI. As a result, no one outside the FBI made any determination of the actual reason for the request for Professor X's return, or of the compatibility of the reason with the regulatory criteria.

Even if the FBI's initial reason for requesting Professor X's return had been proper, the disclosure procedures provided no safeguard against a subsequent misuse of the return in an operation unrelated to the reason for the request. The letter requesting Professor X's return recited:

Documents furnished in response to this request will be limited in use to the purpose for which they are requested . ... 79

But the "purpose" for which they were requested was stated so generally as to permit any subsequent use. IRS failure to insist upon Justice Department compliance with the requirements that the application for the return state the reason why inspection is desired permitted the FBI to legally obtain Professor X's return to later improperly use the return as a COINTELPRO weapon.

Unrestricted FBI access to contributor lists the IRS compiles in the course of enforcing the tax laws has threatened both the integrity of the tax system and the constitutional rights of the contributors. The identity of members of organizations such as SCLC and the NAACP is privileged to protect members in their right to freedom of association by forestalling the potentially chilling effect which revelation of membership could have. The same reasons justify application of this protection to the identity of contributors to such organizations except to the extent that the act of contribution itself is properly discoverable because of potential tax consequences. It is for this latter purpose that the IRS is empowered to elicit contributors' identities. Presumably, if the FBI were investigating an allegation of criminal tax fraud to which contributors' identities were relevant, it would be entitled to the same information. There is no suggestion in any of the relevant FBI documents that the FBI sought to supplant the IRS in any investigation of the potential tax liability of SCLC contributors. 80 Rather, the FBI contemplated using the list as a means of disrupting SCLC and discouraging contributions, a purpose which constitutes a direct attack on the very interest which the right to anonymity protects, and a purpose for which the FBI could not have obtained a list of SCLC contributors from any court.

That the FBI did not implement the suggestion does not affect the basic point that FBI Headquarters furnished the tax information, including the list of contributors, to the local office in order to enable the local office to devise disruptive actions. COINTELPRO policy (as evidenced in other cases which are discussed in the report on COINTELPRO) makes it clear that the suggestion was not rejected because of concern for the legality of so using the contributor list.

In NAACP v. Alabama 81 the Supreme Court ruled that, even though the specific purpose of a law empowering the government to obtain the identities of members of a political group is legitimate, the court will weigh against that purpose the probability that a consequence of disclosure will be to interfere with the members' exercise of their right of freedom to associate. If the reason for disclosure is not "constitutionally sufficient" to outweigh the danger to freedom of association, the law is unconstitutional. Given the existence of a COINTELPRO policy of using all intelligence for disruptive purposes whenever feasible, disclosure to the FBI of contributor lists of target organizations violated the Constitution the moment the disclosure occurred even if, in the particular case, the FBI failed to devise a feasible means of making disruptive use of the information, and even if the FBI also had a legitimate purpose in obtaining the information.

Obtaining contributor lists for purposes of "counterintelligence" action to discourage contributions is unconstitutional under the NAACP v. Alabama rule. In NAACP v. Alabama, the state was denied access to contributors' lists because an incidental consequence of publication would be non-governmental harassment of the membership. In the case of SCLC, where the FBI sought the list in part for the purpose of developing schemes for government-sponsored disruption, the illegality of obtaining the list is apparent. The case demonstrates the importance of (1) requiring a statement of the purpose of requests for returns; and (2) limiting their use to the stated proper purpose.

The case of FBI access to an IRS list of contributors to SDS further demonstrates that inadequate IRS controls have led to its becoming an agent of a non-tax investigatory agency. It is not clear in this case whether the SDS audit was initiated because of FBI interest. It is clear that the FBI sought to direct the IRS intelligence gathering capability at SDS and then, through the disclosure mechanism, obtained information it could not legally have obtained on its own.

The case demonstrates how the disclosure procedures followed by the IRS makes it possible for an intelligence-gathering power the Congress has bestowed upon IRS for the purpose of tax collection -- the power to obtain the identity of contributors -- to become an investigative power of a non-tax agency, bent upon non-tax purposes. The SDS case also demonstrates that lax disclosure procedures provide an incentive for other agencies to attempt to interfere in IRS selection of taxpayers for audit. 82 An IRS audit is a financial vacuum cleaner. Other governmental agencies have a powerful intelligence gathering capability when they can exert influence over who the IRS selects for an audit and then have uncontrolled access to information gathered during the audit.

While it is clear that on occasion agencies performing intelligence functions will have a legitimate need for tax returns and return-related data, the need for a written record of the reasons supporting an agency's request for the information is also clearly demonstrated by the Ramparts and Marchetti cases in which the CIA informally obtained tax-related information for questionable purposes. The CIA was apparently unwilling to risk requesting tax return information with respect to Ramparts and its supporters unless, through an informal disclosure, it could first learn whether there was information on the returns that would be of interest to them in their effort to stifle Ramparts criticism of a CIA-sponsored organization.

The Ramparts and Marchetti cases demonstrate the dangers of informal exchanges of information between the IRS and other intelligence agencies. These informal exchanges both encourage illegal disclosure and provide the other intelligence agency with a lever by which to manipulate or persuade the IRS into action directed against certain taxpayers for reasons having no bearing upon compliance with the tax laws. In the Marchetti case, the unidentified IRS source offered to conduct an audit of Marchetti at the CIA's request, an offer which arose out of the atmosphere of extralegal cooperation which informal access to tax return information creates.

The existence of informal disclosure channels is dangerous even if the only tax return information that passes along those channels is information that could have been properly disclosed under IRS reguIations. The existence of such channels fosters an atmosphere in which those charged with liaison are tempted to place their desire to be cooperative above their obligation to enforce the tax laws neutrally. The unofficial character of the disclosure makes it possible to insulate these acts of improper cooperation from outside scrutiny. It is far too important that taxpayers have confidence in the confidentiality of the returns they file and in the integrity of the tax system to permit individuals within the IRS to exercise unreviewable judgment regarding the propriety of disclosing tax return information to other Federal agencies.

SELECTIVE ENFORCEMENT FOR NON-TAX PURPOSES
Introduction

Because the investigation of the Internal Revenue Service encompassed several abuses of the rights of American citizens of which some details had previously been studied and revealed to the public by the Congress (e.g., Special Service Staff, Ideological Organizations Project), the staff was able to devote some of its investigation to an analytical evaluation of those abuses. This analysis revealed that many abuses of the IRS intelligence functions occurred when enforcement of the tax laws became an ancillary instead of the primary factor in determining IRS actions.

The Internal Revenue Service, since it was reorganized in 1952, has had a decentralized structure, with each of the 58 districts operating autonomously and being generally responsible for its day-to-day operations while the National Office is primarily responsible for policy decisions. When the IRS participated in an activity in which targets had been chosen on the basis of criteria which included factors in addition to those involved in routine tax law enforcement, it was often necessary for the IRS to impose centralized controls on its basic decentralized structure in order to accommodate the special requirements created by the additional criteria. This has had the practical effect of creating a new structure which has in the past been incompatible with the original decentralized IRS structure and has often resulted in abuse. The investigation revealed that this result occurred regardless of the purpose of the IRS endeavor. For example, abuses attributable to structural anomalies occurred in IRS participation in the Organized Crime Drive, a valuable effort beneficial to the well-being of the country, as well as in the Special Service Staff, where IRS improperly targeted individuals because of their political beliefs.

Part Two of this report, "Selective Enforcement for Non-Tax Purposes," reports on the historical development of the intelligence operations of the Internal Revenue Service since its reorganization in 1952 and discusses the relationship between those abuses addressed and their setting: the decentralized structure of IRS.

I. THE HISTORICAL DEVELOPMENT OF IRS INTELLIGENCE ACTIVITIES
A. Function and Structure of IRS Intelligence

1. Introduction. -- The Intelligence Division of the Internal Revenue Service performs those criminal investigative activities the IRS must perform in order to collect the taxes, i.e., gathering that information beyond what taxpayers normally provide IRS which is necessary to determine the truth of allegations of criminal tax violations and, if necessary, to prepare evidence for prosecution of such violations. These activities are usually lumped under the IRS rubric, the "General Enforcement Program" ("GEP").

In addition to this normal function, the IRS Intelligence Division has engaged in "Special Enforcement Programs" ("SEP"), where it targets major criminal figures for general intelligence collection.

The element of targeting makes the SEP distinct in several important ways from GEP. In the General Enforcement Program, IRS does not single out a taxpayer and seek to develop a case against him, whereas the very purpose of the SEP is to develop tax cases against persons who have been classified as participants in, for example, organized crime. The purpose is a "nontax" purpose in the sense that in most cases the motivation for selecting the investigative target is not to achieve balanced tax enforcement but to seek to develop a tax case against the target because he is believed to be a participant in other criminal activities. The GEP target is investigated because there is reason to believe he has committed a specific act of tax fraud. The SEP target may be investigated in the hope such an allegation can be developed.

This difference in targeting leads to differences in attitudes and technique. Pursuit of SEP figures requires use of many of the techniques of general law enforcement (paid, regular informants; electronic and other forms of surveillance; raids; nationally organized and coordinated enforcement efforts) which the GEP does not require to the same degree. Further, the policy of the SEP is essentially one of consciously "unbalanced" tax enforcement. 83 Balanced tax enforcement is an effort to allocate enforcement resources to achieve the highest degree of compliance with the tax laws. 84 Balanced enforcement does not imply that all classes of taxpayers will be equally subject to tax investigation, but that the criteria for resource allocation will be designed to maximize tax law enforcement. In the SEP, these criteria do not control. Resources may be allocated to SEP targets because they are perceived to be dangers to society in many ways, even though the tax compliance benefits of successful prosecution would not alone have justified allocation of investigative resources. This difference may lead to a different attitude on the part of the agents tasked to "get" the SEP target from the attitude they bring to GEP investigations, and aggravate the difficulties of controlling the agent's exercise of discretion in the field.

The organization of the IRS Intelligence Division and its devices for control of agents reflect the primacy of the "classical" IRS Intelligence function: the investigation of specific allegations of tax fraud in a balanced enforcement program. Unlike any other Federal law enforcement agency, the Internal Revenue Service's Intelligence Division is a decentralized organization. Local and regional offices make virtually all operational decisions. The National Office hierarchy is designed to be a policy-setting organization which seldom interferes with field activities -- and, except in the case of major projects, is unaware of specific activities. This arrangement contrasts strikingly with the organization of the FBI, for example, which has closer control over day-to-day field operations because of its centralized structure, with the chain of authority emanating from the center.

The IRS was decentralized to meet certain needs of tax collection and tax law enforcement. The high degree of local autonomy and agent discretion which accompanied decentralization have made the IRS an effective tax enforcement agency. It has, however, proved to make difficult the effective control of nontax law enforcement activities. To the extent that a nontax emphasis may serve the national interest -- as with the drive against organized crime -- it is apparent that effective control and oversight by the necessarily different organizations is required.

2. Origins of Decentralization. -- The organization of IRS Intelligence parallels the organization of the rest of the IRS. Both are products of an effort in the early 1950s to correct widespread abuses which congressional investigators had uncovered in IRS operations. While the reorganization of 1952 did not arise primarily from abuses by the then functional equivalent of the Intelligence Division, the reasoning which underlay the changes applied equally to all areas of IRS activity. 85

Prior to the reorganization, the IRS collected the revenue through 64 "Collectors," who were Presidential appointees. Congressional investigators found that the Collectors had been susceptible to political influence and to other forms of improper pressure. Commissioners had found they were unable to control the independently-appointed Collectors. 86

The problem was perceived in part as one of excessive centralization, which made the IRS a powerful tool of political forces and threatened public confidence in the tax system. 87 The solution was an effort to readjust the perpetual tension between the need for central direction and the dangers of central control.

The Treasury commissioned a management consulting firm to study how to structure the IRS to insulate it from improper influence while retaining the degree of central direction it needed to perform the mushrooming task of collecting the revenue. The consulting firm's recommendations were ultimately embodied in Reorganization Plan No. 1 of 1952. 88 In broad outline, the Plan called for two changes in IRS structure which, on the surface, appear inconsistent but which were designed to work in tandem to produce greater efficiency and independence from political influence. Under the preexisting system, while the National Office in theory directed field activities, in practice, since the Collectors were Presidential appointees, the Commissioner's authority over the field was in doubt. Further, the field was susceptible to political pressure since the Collectors' job security depended upon political favor. The Reorganization Plan sought to correct both deficiencies by abolishing the Collectors' positions and creating not more than 25 district commissioners who would be civil servants, promoted according to merit, and answerable directly to the Commissioner. At the same time, however, the plan called for a decentralization of most IRS operations and a consequent reduction in National Office authority over day-to-day field operations. The introduction of professionalism into the highest levels of field organization would permit a high degree of field autonomy; the elimination of patronage appointments would create an environment in which field autonomy would not mean field politics. 89

Under the plan, the primary function of the reduced National Office staff would be to advise the Commissioner on questions of broad policy. The Commissioner was to be the only political appointee in the IRS and, as such, he was not to have the bureaucratic muscle necessary to control field operations, but was to have the staff necessary to engage in those activities for which a political orientation was appropriate: setting broad policy. Congressman Cecil R. King of California, Chairman of the Subcommittee on Administration of the Internal Revenue Laws of the Ways and Means Committee, expressed the philosophy underlying the Plan:

Political selection for positions which are primarily policy forming has obvious justification. Where the job is primarily a technical administrative post these are almost entirely lacking. 90

The reorganization of the Intelligence Division paralleled the pattern for the Service. 91 The effect of the Plan was to increase the Commissioner's ability to exercise his general authority over intelligence activities in the field organization by eliminating the politically independent Collectors and streamlining the field organization while, at the same time, minimizing direct National Office control over day-to-day operations by bestowing greater autonomy upon the professional field staff.

With minor differences, the organization envisioned by the 1952 Plan is that which exists today. Intelligence activities in each district (of which there are 58) are run by a Chief, Intelligence, who reports to the Regional Commissioner who reports to the Commissioner. The Intelligence Division in the National Office is not in this chain of command and, therefore, generally has no line authority over the Chief, Intelligence, in the district. It performs its function of assisting the Commissioner in setting policy for all IRS Intelligence activities by issuing rules and guidelines which are to be implemented by the Regional Commissioners and the District Directors, in whom authority to direct actual operations reposes. 92

The Plan did not call for unqualified reliance upon the professionalism of the field organization to achieve independence from influence and high performance. It called for the transfer o