Finance Urges Rossotti to Crack Down on Internet Tax Scams

 

The Finance Committee has urged IRS Commissioner Charles O. Rossotti to crack down on Internet tax scams, according to the unofficial transcript of the April 5 panel hearing on tax "schemes, scams, and cons."

 

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The Finance Committee has urged IRS Commissioner Charles O. Rossotti to crack down on Internet tax scams, according to the unofficial transcript of the April 5 panel hearing on tax "schemes, scams, and cons."

 

"I'm worried by claims that the IRS is the dog that doesn't bark -- or perhaps bark enough -- about Internet tax fraud," Senate Finance Committee Chair Charles E. Grassley, R-Iowa, said. "The IRS must be active in this arena, catching these hucksters early before they have time to sell their wares."

 

Senate Finance Committee ranking Democrat Max Baucus of Montana also warned that Internet tax scams cost taxpayers hundreds of billions each year -- witnesses set revenue loss at around $300 billion a year -- and he urged Rossotti to aggressively pursue shutting them down.

 

Rossotti, who called the proliferating Internet tax avoidance schemes "organized tax evasion," told the panel he was intrigued by some of the suggestions -- particularly, ensuring the IRS Web site is named in searches -- but he said education is not necessarily the problem, but rather investigation and follow-up work, both of which are costly.

 

Comments from witnesses indicate they agree that the Internet has become "fertile ground" for scams. "Our government's lack of enforcement is precisely the reason why pyramid and tax evasion scams are flourishing on the Internet today," said Aaron Bazar, who once was involved in an Internet pyramid tax avoidance scam. Certified financial planner J.J. MacNab told the panel she recently spent two hours surfing the Internet and hit 28 Web sites promoting tax avoidance schemes. Attorney Robert Sommers, who runs a Web site exposing tax fraud, suggested the IRS seize on what he considers the one weakness of the scams: the need for a taxpayer identification number. Denver attorney Joseph G. Hodges suggests the IRS establish an amnesty for victims of the scams to encourage them to talk about how they were duped.


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INDEX

STATEMENT OF:

THE HONORABLE CHARLES E. GRASSLEY
A United States Senator from the State of Iowa

THE HONORABLE MAX BAUCUS
A United States Senator from the State of Montana

THE HONORABLE FRANK H. MURKOWSKI
A United States Senator from the State of Arkansas

A Panel Consisting of:

MR. AARON BAZAR
seller of tax scams for Institute for Global
Prosperity, now operates computer website,
www.global-prosperity.com, which alerts taxpayers to the scam he
helped run
North Potomac, MD

MS. JJ MACNAB
tax scam watchdog
Certified Financial Planner
Chartered Life Underwriter
Insurance Analyst
operates website, www.deathandtaxes.com
Bethesda, MD

MR. ROBERT SOMMERS
Attorney
operates computer website partially devoted to
exposing tax fraud, www.taxprophet.com
San Francisco, CA

MR. JAY ADKISSON
Adkisson Financial, LLC
operates computer website, www.quatloos.com,
whose purpose is exposing fraud
Irvine, CA

MR. JOSEPH G. HODGES, JR.
Attorney-at-Law
Member American College of Trust and Estate Counsel
www.actec.org
Denver, CO

A Panel Consisting of:

MR. CHARLES ROSSOTTI
Commissioner
Internal Revenue Service
Washington, DC

MR. HUGH G. STEVENSON
Associate Director for Planning and Information
Bureau of Consumer Protection
Federal Trade Commission
Washington, DC

MR. MICHAEL BROSTEK
Director
Tax Administration and Justice Issues
U.S. General Accounting Office
Washington, DC

OVERSIGHT OF THE INTERNAL REVENUE SERVICE
"TAXPAYER BEWARE: SCHEMES, SCAMS AND CONS"
THURSDAY, APRIL 5, 2001

U.S. Senate,
Committee on Finance,
Washington, DC.

The hearing was convened, pursuant to notice, at 10:25 a.m., in
room 215, Dirksen Senate Office Building, Hon. Charles E. Grassley
(chairman of the committee) presiding.

Also present: Senators Murkowski and Baucus.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM
IOWA, CHAIRMAN, COMMITTEE ON FINANCE


[1] The Chairman. Thank you all very much for your patience while the Senate casts the 2 votes of this task. Normally, it would be my practice to start the hearing and to have the hearing go on with Senator Baucus and myself alternating as chairs to keep the hearing going.

 

[2] We are here today to talk about a growing problem, hundreds of thousands of Americans who are participating in or considering participating in tax scams. Tax scams are as old as our tax code. The Internet is giving them a thriving new life. The number of participants in these tax scams is growing like a weed.

 

[3] The Internet, of course, is greatly helping that growth. The Internet gives these tax con artists the unprecedented ability to reach out to millions of households very cheaply and very easily. We will hear testimony today that tax scams are not limited by income or geography.

 

[4] Through the Internet, the con artists are making their pitch to Americans of every income level and targeting individuals throughout our country. For example, my own State of Iowa reports that it has seen record levels of scams and abuse in related areas of securities fraud.

 

[5] This hearing will give the American people a better understanding of the snake oil that these hucksters are selling. We will hear about the old style scams, such as pure trusts, constitutional trusts, compensation for slave descendants, even setting up your own church. All of these are being put into new bottles and sold.

 

[6] Let me be very clear that the focus of this hearing is solely on those tax schemes that are wholly outside the tax laws. This hearing is not about the gray areas of the tax law that have been referred to as corporate tax shelters. This is certainly a very important topic. And this as a very important topic is one that the committee will be reviewing and addressing later this year.

 

[7] As important in educating the American people to be aware of these tax con artists is, of course, reviewing the IRS' response to Internet-based tax fraud. Some of the bad apples claim that they must be right because the IRS has not caught them.

 

[8] I am worried, of course, about claims that the Internal Revenue Service is a dog that does not have a bark or perhaps not barking enough about this Internet tax fraud. So I think the agency must be active in this arena, catching these hucksters early before they have time to sell their wares because an ounce of prevention is worth a pound of cure, to be true here.

 

[9] Of great concern are those promoters who are encouraging employers not to withhold income and payroll taxes for their employees. These employees are put in a terrible position, having to choose between the tax man and their jobs. And that is not right. And it should be the top enforcement priority of our Internal Revenue Service.

 

[10] The agency should have active enforcement in this area. I think the agency can perform its critical enforcement duties while still giving the taxpayers protection that the constitutional laws allow. This is the same, if you stop to think of it, that police departments across the country are able to successfully perform their duties while balancing the needs to protect citizen's rights.

 

[11] The IRS, tax experts, and we in Congress, all have a duty to ensure that taxpayers do not listen to the silent song of the tax con artist, and even better, that taxpayers do not even hear the song in the first place.

 

[12] Now, to Senator Baucus.

 

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

 

[13] Senator Baucus. Thank you very much, Mr. Chairman. Obviously, this hearing is very important. We have a problem. Eleven days from now on April 16th, most Americans would have filed their returns. All told, they will pay about $1.1 trillion in income taxes at the very time we are debating the $2 trillion budget.

 

[14] We could have a larger tax cut, prescription drug benefits, pay down the debt more quickly, and pay for other priorities simply by cracking down on these 6-figure tax cheats, costing the government and the American people approximately $200 million a year.

 

[15] In return, honest, hardworking taxpayers have a right to expect many things in exchange for their compliance. One of the most basic is fairness. We all understand that people do not like to pay taxes. Nobody does. But they especially do not like paying someone else's taxes. And that is exactly what happens if our tax system allows folks to cheat on their taxes and get away with it.

 

[16] Unfortunately, there is evidence that cheating is becoming increasingly common. I was struck awhile ago this month when I was walking through an airport on my back home to Montana. And I saw a copy of a Forbes magazine headline, "How to cheat on your taxes". I can tell you, that caught my eye. [Laughter].

 

[17] I mean, as a ranking member of the Finance Committee, I thought, hey, I had better learn about that. I better get that article and read it and see what is going on. And so I did.

 

[18] Now, there are articles and there are articles. And you have to take everything you read with a grain of salt. But I was stunned by this article. I have a hunch that it is at least on the mark in terms of being on the right track. I may not be totally accurate, but it is clearly on the right track.

 

[19] The article tells about more and bigger tax shelters than before, Caribbean tax havens, use of sham trusts, websites that promote outright tax fraud, the steady growth in the garden variety under reporting.

 

[20] It is a problem, a big problem. If it persists, the average taxpayer who is playing by the rules and paying his or her share, will feel like a chump. Support for our system based on a largely voluntary system of reporting will deteriorate if not collapse.

 

[21] Today's hearing gives us a chance to get a better understanding of this problem and the most significant forms of tax evasion. Why are they growing so rapidly? Most importantly, what can we do about it? How do we stop it?

 

[22] Nobody loves the IRS. We have to give it the tools to do the job. Otherwise, the vast majority of honest taxpayers who are grumbling, but paying their fair share, are paying higher taxes while someone is getting a free ride.

 

[23] One last point, we have certainly have to be balanced here. You all recall that a few years ago, we were very concerned about an over zealous, sometimes abusive IRS. Hearings were held right here on that point.

 

[24] Now, the pendulum has swung I think a bit too far in other direction. We are concerned that at least in some cases the IRS should be doing more than it now is. Of course, we should react, but we should not over react. We should figure out how to crack down on tax cheats and illegal shelters without posing unnecessary burdens on the average, hardworking, honest taxpayer.

 

[25] I hope this hearing helps us to get this problem resolved. Thank you, Mr. Chairman.

 

[26] The Chairman. I call on Senator Murkowski.

 

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

 

[27] Senator Murkowski. Thank you very much, Mr. Chairman. I look forward to our expert witnesses. I think this is long overdue. And as a consequence, the realization that here we have in America an industry on the Internet whose sole goal is to rip off the American taxpayer.

 

[28] I do not mean the people who pay their money to these scam artists on the phony ways to avoid paying taxes. But the people being ripped off to a large degree are honest Americans who will be struggling this weekend and probably next weekend to fill out their tax forms and pay their taxes.

 

[29] Now, as a former banker, my observation is a little naive out there. But nevertheless, the realization is in the figures. By one estimate, sham trusts and other schemes are costing the treasury as much as $300 billion a year. That is an astounding figure, Mr. Chairman.

 

[30] And you know at this very moment on the Senate floor, what we are engaged in as a historic debate on whether we can return $1.6 trillion of the surplus to honest, taxpaying Americans over the next 10 years.

 

[31] If we could just rip out these tax scams, we could afford to return not $1.6 trillion, but $4.6 trillion back to honest American taxpayers over the 10 years. Just think about it, $300 billion a year is what this is costing.

 

[32] Now, what I do not understand is if there are hundreds of websites advertising and promoting these phony schemes to avoid paying taxes, why hasn't the IRS, why hasn't the FBI, why hasn't the Department of Justice established a specific strike force to shut down and prosecute the operators of these sites?

 

[33] Now, here is a website that I picked up the other day. It claims that it can teach you how to legally eliminate the Form 1040 income tax and keep 100 percent of the money you earn. Think about that. People are buying this evidently. Now, if this claim is true, then every American certainly would have figured it out.

 

[34] But we know it is not true. Yet, the site continues to operate openly and blatantly. Why? Mr. Chairman, if a website advertised legal heroin, legal cocaine, is there any doubt that the FBI and the DEA would have thoroughly investigated and prosecuted the operators?

 

[35] The basic question that I want answered is why hasn't law enforcement been more aggressive in prosecuting these scams? And what type of resources do we really need to aggressively crack down on these frauds?

 

[36] I do not know who said it, Barnum and Bailey, you can fool some of the people some of the time, but not all of the people all of the time.

 

[37] Senator Baucus. I think President Lincoln.

 

[38] Senator Murkowski. Well, in the second round, it was Barnum. That is close enough.

 

[39] This has turned into a circus obviously. Thank you, Mr. Chairman.

 

[40] The Chairman. We thank you, Senator Murkowski.

 

[41] Our first panel here is going to discuss these Internet connections. And they are going to do it from the standpoint of some of them as participants, some of them as combatants.

 

[42] We have Aaron Bazar, computer engineer, North Potomac, Maryland involved with the Institute of Global Prosperity, in a tax scam, lost $8,000, now operates a website that alerts consumers to the Global Prosperity scam.

 

[43] JJ MacNab, Ms. MacNab is an insurance analyst and certified financial planner, a fervent tax scam watchdog who monitors the Internet for newly formed trust scams.

 

[44] Then, Robert Sommers, an attorney in San Francisco, specializing in tax law, operating website www.taxprophet.com, and writes a biweekly tax column in the San Francisco Examiner.

 

[45] Then, Jay Adkisson of Irvine California, an asset protection attorney and investment advisor, also started www.quatloos.com.

 

[46] Is that how you pronounce that?

 

[47] Mr. Adkisson. Yes.

 

[48] The Chairman. A website devoted to warning consumers about various tax and financial fraud.

 

[49] Finally, our panel has Joseph G. Hodges, Jr., attorney and sole practitioner from Denver, speaking on his behalf today, a member of the American Bar Association, Real Property Probate Trust Section, the American College of Trust and Estate Counsel. Like other witnesses, Mr. Hodges seeks to educate consumers of trust scam artists.

 

[50] We will go in the order in which I introduced you.

 

[51] So Mr. Bazar.

 

[52] And then, we will have questions after everybody has testified. Also, let me state an administrative matter. If you have longer statements than your 5-minute presentation, those statements will be included in the record without your asking permission. If you have supplemental material that is not too great of an extent, it will be included as well. Otherwise, if it is larger, it will be received for our files.

 

[53] And the red light, it does not mean that you have to stop right at the red light, but try to at that point summarize very quickly to make your last couple of points.

 

[54] Mr. Bazar.

 

STATEMENT OF AARON BAZAR, NORTH POTOMAC, MD

 

[55] Mr. Bazar. Thank you, Mr. Chairman. Good morning, Senators. Thank you for inviting me to speak today. It is an honor to be here. Last year, I lost approximately $8,000 in 4 month's time in a pyramid scam propagated over the Internet.

 

[56] It all started when I received an unsolicited, bulk e-mail message for a business opportunity. The e-mail said that I could make thousands of dollars and learn how to legally eliminate taxes. Four months later and not a penny richer, I discovered that this business had cease and desist orders in many States.

 

[57] I was already disenchanted with the group because I felt that what they were teaching was not quite right. In addition, nobody I knew was actually making the money, except the person who initially brought us into the pyramid.

 

[58] So I asked for a refund. When that did not work, I tried to get the authorities involved to put a sop to this fraud. Finally, after that did not work, I started my own website to warn the public.

 

[59] The site has received tens of thousands of visitors over the past year. And I am positive that the site has helped many people from getting scammed, a job that the IRS, FBI, and FTC, as well as the State attorney generals are all failing miserably at.

 

[60] Our government's lack of enforcement is precisely the reason why pyramid attacks and evasion scams are flourishing on the Internet today.

 

[61] When I first joined the institute of Global Prosperity, I had never even heard of the freedom movement. And I knew very little about very little about tax protesters. I was just in it for the money.

 

[62] It seemed like such a good idea at the time. I mean, who would not want to work from home, make thousands of dollars a week, and learn how to legally stop paying taxes just like the wealthy elite of our country.

 

[63] One reason these groups are so successful is that they pry on those who already distrust the government. These people are all too willing to believe the misinformation on the Internet and in the teachings of these groups. However, if they are like me and have no anti-government inclinations, then the con men do their best to reeducate you.

 

[64] They drill ideas into new recruits like the government spies on us, we are tracked by our Social Security numbers. They will say things like the 16th amendment was never ratified. So taxes are illegal.

 

[65] They will explain to you how paying taxes is voluntary because the IRS tells us so right in the tax code. So you can just choose not to pay. Or that the Federal Reserve is run by the ultra wealthy and they illegally create money.

 

[66] The majority of citizens in the country know that the tax system is completely unfair and benefits the wealthy. When somebody tells you that you can just leave the system by using special, get out of tax free forms in lieu of a 1040, it sounds too good to be true.

 

[67] When you are then shown in your 1040 instructions exactly where it says that filing taxes is voluntary, you start to wonder. And then, finally, when you see many other people who have stopped paying taxes completely using these documents, you are sold.

 

[68] Senators, I have never heard of the IRS stopping any of the thousands of people who are using these methods to evade paying taxes. And believe me, I have looked. If Americans are really obligated to pay federal income taxes, why does the IRS allow these people to continue to selling these products? And why are they not prosecuting those who are using them?

 

[69] The IRS encourages the tax protestor movement by their lack of enforcement. I have a better chance of being audited because I sent in a 1040 and pay my taxes honestly. Those who do not follow the 1040 seem to be getting away with it.

 

[70] Let me get back to the Internet. Most scams on the web today employ the use of unsolicited bulk e-mail, otherwise known as "spam" to recruit people and their products. In my opinion, spam is truly the root of all evil on the Internet.

 

[71] No legitimate company uses spam to advertise, only pyramid schemes, pornography sites, stock market scams, and other illegitimate businesses use spam. Spam cost consumers billions of dollars a year based on recent studies.

 

[72] I know that there are already bills in Congress that are addressing the spam issue. And I hope it becomes illegal to send out these unsolicited, commercial e-mail. It will save the country billions of dollars paid by consumers and it will help prevent these pyramid and ponzi schemes from spreading as fast as they are.

 

[73] If you have any doubts about how far reaching the problem is, I suggest that you check your private e-mail accounts. The chances are good that you will have e-mail with lines like "make #2,000 to $5,000 per week from home or eliminate credit card debt or legally reduce your taxes".

 

[74] These are e-mails sent out by IGP and other groups like them. If you have not received e-mails like these, then you soon enough. It is only a matter of time. My website has many samples of the spam that IGP sends out. And if you are interested, it is www.global-prosperity.com.

 

[75] If somebody wants to steal from people, the Internet is the place to do it. The chances of getting caught, in my opinion, are virtually nil. IGP has been stealing from people for 5 years now without any repercussions. They ignore cease and desist orders because they know they can get away with it.

 

[76] After I was scammed, I dutifully reported Jeff Seigal, the IGP agent, who ripped me off. I reported him as well as other IGP leadership to my State attorney general, the State attorney general of New Mexico, the GBI, the FTC, and anybody else who might listen.

 

[77] I also contacted the Massachusetts attorney general's office because IGP's drop box was located there. And I also contacted the attorney generals in Washington State and Oregon. Nothing happened.

 

[78] When I spoke to the various attorney generals' offices, they told me things like they had no money, it was the other States' problem, or it is the FBI's jurisdiction because IGP crosses State lines or it was a securities issue.

 

[79] At least, the Maryland attorney general's office was honest with me. The officer there said that nothing was going to be done.

 

[80] The Chairman. I imagine it is a tough spot.

 

[81] Mr. Bazar. Yes. I will finish up. I am about done, Mr. Chairman.

 

[82] The Chairman. Please, go ahead.

 

[83] Mr. Bazar. I guess my point is that the Internet is a great place to be a criminal because you will not get caught. If you area tax protestor, there has never been a better forum to get your message out and make money too.

 

[84] I think I can stop there.

 

[85] The Chairman. Thank you, Mr. Bazar.

 

[The prepared statement of Mr. Bazar appears here on the Senate Finance Committee website.]

 

[86] The Chairman. Ms. MacNab.

 

STATEMENT OF JJ MACNAB, CERTIFIED FINANCIAL PLANNER, CHARTERED LIFE UNDERWRITER, INSURANCE ANALYST, BETHESDA, MD

 

[87] Ms. MacNab. Good morning, Mr. Chairman and members of the committee. Roughly, two and a half years ago, I received a telephone call from a charity, a client of mine. They had just seen a presentation about something called a pure trust and wanted to know whether this remarkable sounding strategy might be beneficial for their donors.

 

[88] The promoters guaranteed that anyone who placed their business and personal assets in this plan would never pay taxes again. From the charity's point of view, this meant that their donors would have much more after-tax income to donate to charity.

 

[89] I started to research the pure trust. And I turned to the Internet for information. I found literally hundreds of websites promoting this concept. And after considerable digging, I finally located the notice from the IRS that they had issued in 1997, warning taxpayers that this particular planning tool was a sham that offered no tax benefits whatsoever.

 

[90] Over the past 2 and a half years, I have continued to keep a close eye on this industry. And from what I have seen, there are 2 main types of tax cheaters out there. There are those that cheat in small ways. I will refer to them as detailed cheaters. And then, there are those that cheat by trying to reduce their income and estate and capital gains taxes as close to zero as they possibly can. And I will refer them as big picture cheaters.

 

[91] Detailed cheaters might include someone who over inflates their home office deduction or who exaggerates the value of an automobile given to charity.

 

[92] The second group, the big picture cheaters generally fall into 3 distinct categories. There are tax protestors--they have been around for years--sham trusts and offshore ventures. And the Internet has proven to be very fertile ground for the big picture cheaters.

 

[93] Prior to the Internet, only the very wealthy were offered complicated schemes to reduce taxes. And then, they were usually charged exorbitant fees in the process.

 

[94] Now, anyone with a modem and a computer can play the games that were once limited to the wealthy. The problem is these mass market people do not have the sophisticated advisors to tell them which schemes work and which schemes do not.

 

[95] The growth rate for the online tax evasion industry is phenomenal. And unfortunately, right now, there are no dampening effects on this growth. To the average consumer, the IRS is practically invisible. And when you hear stories about friends and neighbors and e-mail correspondents who have gotten away with tax evasion for years and in some cases decades, the risk of audit begins to feel negligible.

 

[96] In the past couple of weeks, there has been a lot of talk about the IRS using matching software to compare income from various sources with tax returns. To me, it would appear that such mathematical research is hunting for detailed cheaters only.

 

[97] As long as the big picture cheaters are effectively paying zero in taxes, all this time and money spent on small tax discrepancies is relatively fruitless. Right now, the online tax evasion industry is still relatively small. Most taxpayers out there are honest and ethical. And they use common sense to determine whether the advice they are receiving is good or whether it is a scam.

 

[98] But the online tax fraud is growing so quickly, it is almost impossible to keep track of it. Now is the time to put a stop to it while it is still comparatively small. But stopping this industry in their tracks does not appear to be a goal right now of the IRS.

 

[99] The promoters are not to find. As an exercise, I put aside 2 hours of uninterrupted time to see what kinds of things I could find by browsing on the Internet. To summarize, in 2 hours, I looked at 28 websites promoting questionable tax products and information.

 

[100] I found multilevel marketing schemes offering everything from anti-snoring devices to constitutional products side by side. They guaranteed to remove all your assets and income from any future taxes.

 

[101] I found a church selling church charters for $300 so that you can "free your church, yourself, your business from undue tax burden". I found numerous forms of offshore trusts, offshore international business companies, and offshore private banks.

 

[102] And perhaps, the most disturbing item was the website from a group whose founders were investigated by the criminal investigation division and who were arrested this last February. This would actually be Mr. Bazar's ex-group. And despite the arrest, more than a month ago, the websites and therefore their businesses are still up and running.

 

[103] And this brings me to my main point. While the IRS' stated mission may be to better serve their customer, the taxpayer, it would seem to me that the customer would be best served if the IRS stopped these promoters as quickly as possible. Their undercover investigations often take more than 2 years to complete. During this time, the promoters are bringing in potentially thousands of new marks.

 

[104] And as I said earlier, the promoters are not difficult to find. They are not hiding what they are doing. Almost every website I found in my 2-hour search included the name, address, and phone number for the promoter. All but one was located in the United States.

 

[105] And they do not just exist on the Internet. They are in in-flight magazines, on radio talk shows. They take out full-page ads in USA Today and the Washington Times. There is actually an example on a chart on the side here. This ran I believe three times in major publications.

 

[106] They are practically begging the IRS to review their products. And unfortunately, the IRS' silence is being interpreted as permission to continue.

 

[107] Thank you very much.

 

[108] The Chairman. Thank you, Ms. MacNab.

 

[The prepared statement of Ms. MacNab appears here on the Senate Finance Committee website.]

 

[109] The Chairman. Now, Mr. Sommers.

 

STATEMENT OF ROBERT SOMMERS, ATTORNEY, SAN FRANCISCO, CA

 

[110] Mr. Sommers. Yes. My name is Robert Sommers. I am a tax attorney from San Francisco. Good morning, Mr. Chairman and members of the committee. I have a website called the tax prophet. And as part of my website, I runt he tax and trust scam bulletin board. I do this for one reason. It is to warn consumers about tax fraud, especially trust scams.

 

[111] To illustrate the problem, I have a little experiment for everyone in this room. The next time you are on a cross-country flight or an international flight, check out the ads for offshore banking services in the in-fight magazine.

 

[112] When you do that, you will come to one conclusion. There is a global industry with just one mission: separating Uncle Sam from his tax dollars. Take that industry now and migrate it to the web. And what you have is a global industry with an instant reach of every U.S. taxpayer who has access to a computer.

 

[113] Mr. Chairman, I am of the old style here with the tax scams. My focus is on the tax scam artists and something called a pure trust which is neither. My focus is on how they work and how to stop them.

 

[114] The pure trust, in my opinion, is the foundation for all tax scams regardless of their complexity. The pure trust has been unchanged essentially for over 4 decades. The people who promote them, these trust scam artists, are the masters of form over substance.

 

[115] Think of the pure trust as a magical black box. Taxable income pours up at the top. You pour it in. And magically, tax-free income flows from the bottom.

 

[116] There is really 2 essential elements to the pure trust. One is a persuasive sales pitch which has remained unchanged since 1958. And the other is reams of worthless paper and documents calculated to trick the buyer into thinking they are doing something real.

 

[117] There are 2 purposes for the pure trust. The first one is to hide the true ownership in income from all creditors, but especially the IRS. And then, the second purpose is, if discovered, these pure trusts have the ability to obstruct and stonewall.

 

[118] And their promoters promote this to say, look, we can stonewall the IRS and the courts. Essentially, what they are doing is throwing sand into the bureaucratic machinery of not only the IRS, but also the courts, especially the tax court.

 

[119] I would like to demonstrate how the pure trust works while we set that up. Let me just tell you the impact of the Internet. It has 4 consequences. What the Internet has really done is created what I call high-tech snake oil.

 

[120] Let me go through what the 4 consequences are of the Internet. And then, I will get to the chart. By having the Internet, what we have is the snake oil salesman now has a worldwide reach, number one. They have expanded their marketplace throughout the globe. And this is becoming a problem not only in the U.S., but other taxpaying societies, Australia, Canada, parts of Europe.

 

[121] By having so many websites out on the Internet saying the same thing, it reinforces the legitimacy of the argument. The trust scam promoter can now look someone straight in the eye and say, look, there are 60, 80, 200 websites out there saying the same thing. This is right.

 

[122] The Internet has allowed the use of e-mail. Spamming is a critical part of this. In other words, they can send out their get- rich-quick schemes to drive traffic to their website.

 

[123] The Internet also allows these people to study tax fraud. What they have is they have an Internet community there where they can look and see what other people are doing and so they can fine tune their scams to always stay one step ahead of the IRS.

 

[124] Just a quick example. The IRS for years was known not to audit trusts. That is how the pure trust operator knew that the IRS audited 1 out of 10,000 trusts or so. But then, IRS came out saying that they were going to crack down on trusts.

 

[125] So what the pure trust people said was, well, if they are going to track down on trust, we will start calling these foreign trusts in which no tax returns are filed and no income is reported. The goal there, of course, is to fly beneath the IRS radar and to always stay one step ahead.

 

[126] Let me just demonstrate just a typical 3 trusts, pure trusts scam. I have 3 trusts. I have trust 1 is a business trust. Trust 2 is what I call a siphon trust. And trust 3 is the residence trust.

 

[127] Let us assume that a business has $1,000 of income and $200 of expenses. So it would have $800 of taxable income. Well, the trust promoter forms a business trust. And now, the money flows into trust 1.

 

[128] What happens though is that out of $800, they will pay $50, that is really step 3, flowing into this residence trust, but $750 will go to what is called the siphon trust. The siphon trust will contain lots of phony deductions, inflated inventory. They may be charging outrageous rates for leases and things.

 

[129] So out of the $750 that goes into that trust, only $150 leaves that trust. What happens now is I have $200 in my residence trust.

 

[130] Well, this is the fun one. What happens is that the person setting up the trust is told, well, the trust needs a headquarters. Well, why do we not make it your residence?

 

[131] So they start depreciating the residence. Oh, you need a caretaker allowance. So what we will do is pay your medical bills, your food bills, your travel bills, your kid's education, all of that. So at the end, by the time we are finished, maybe $50 will flow out to the taxpayer's Form 1040.

 

[132] In this example, $800 of income has disappeared down to $50. That is your pure trust scam in a nutshell. The idea of flowing money around was to eliminate self-employment taxes up at the top there because they will want to avoid those too.

 

[133] Let me just summarize very quickly. IRS needs to be committed against combating tax fraud. I have 3 concrete suggestions, all of which I think can be instituted without much cost. They need to have a strike force to search down these websites and shut them down. They also need to that with spam. They need to crack down on span.

 

[134] Two, they need to fight propaganda with information. They need to develop their own separate website to educate the public regarding these scams and to have what we call a one-stop web portal for tax fraud information.

 

[135] In other words, everyone in the country needs to go to just one cite and they will find all the information necessary whether it is reporters, whether it is taxpayers, whether it is professionals.

 

[136] And then, finally, they need a PR blitz. They need to get down and dirty with these people and do advertisements, do public service announcements, put article in industry magazines, maybe even show up at trade shows and have a trade show booth. They need to do interviews and talk show appearances.

 

[137] In conclusion, as our last presidential election showed, the presidential candidates go where the voters are. They were on Oprah. They were on Larry King. They know where the voters are. In essence, the IRS has to go where the taxpayers are as well.

 

[138] Thank you.

 

[139] The Chairman. Thank you, Mr. Sommers.

 

[The prepared statement of Mr. Sommers appears here on the Senate Finance Committee website.]

 

[140] The Chairman. Now, Mr. Adkisson.

 

STATEMENT OF JAY ADKISSON, ADKISSON FINANCIAL, LLC, IRVINE, CA

 

[141] Mr. Adkisson. Thank you, Mr. Chairman and members of the committee. Our Nation is plagued by a growing industry of fraud. This is an industry with a significant and increasingly sophisticated infrastructure that has as its purpose to cheat many thousands of Americans annually out of many billions of dollars.

 

[142] This results in not only a total loss of the victim's savings, thus creating an additional burden on the social safety net, but also in disruption of the family unit and eventual disenfranchisement.

 

[143] Tax frauds are the rising star of the scam industry and increasingly pervasive. The sale of materials purporting to magically free U.S. citizens of taxation is seemingly at an all time high.

 

[144] Recent high-profile prosecutions by the Internal Revenue Service have done little to stem the ever growing tide of tax protesting or the proliferation of abusive trust schemes.

 

[145] A large, talented, and increasingly sophisticated workforce of multilevel marketers and telemarketers is increasingly making the transition from quasi-legitimate products to the much more lucrative tax fraud business which they capably market on a mass basis.

 

[146] Tax frauds, like so many other frauds often take advantage of offshore tax savings as a safe and unregulated base of operations to conceal their identities from prosecutors and to hide their ill- gotten gains.

 

[147] The scam industry is inventing new and more sophisticated scams daily, many of which prey on the paranoid belief systems of Americans who are already disenfranchised, thus creating a negative cycle which feeds upon itself.

 

[148] Financial frauds are also pervasive and include prime bank scams, advance fee fraud, and business opportunities scams. These scams cause not only direct economic harm and divert scarce law enforcement resources, but also stifle legitimate investments and risk-taking.

 

[149] Efforts of private groups, such as mine, to warn the public about scams are very valuable. Yet, such sites as ours are outnumbered on a scale of 1,000 to 1 or better by the websites of scam artists who often attack our few private websites and attempt to get them shutdown by denial of service attacks known as "joe jobs", a form of cyber terrorism.

 

[150] These attacks are made not only by the scam artists directly, but also by the myriad of businesses that richly profit by providing technical support and like services to scam artists. The latter services are the backbone of the industry of scams and provide an invaluable infrastructure of support services, including cheap and anonymous web posting, conference calling, spamming services, and the like.

 

[151] These services are richly compensated by the scam artists who often have no other overheard and though committing no crimes themselves are economically vested in the success of the scam artists committing their crimes.

 

[152] The Internet has made the industry of scams more efficient by allowing scam artists to pitch their schemes to the masses while still concealing their identities from investigators. The Internet allows scam artists to engage in campaigns of disinformation and deceit both to deter past victims from reporting their crimes to the authorities and prepare future victims for the next scam.

 

[153] A full combat against the industry of scams can be joined. Enforcement difficulties and jurisdictional disputes, federal versus State and federal agency versus federal agency must be resolved.

 

[154] Another factor is an Internal Revenue code that is indecipherable to all but highly trained tax professionals, also a culture of noncompliance fold by 9 and 10-figure corporate tax shelters based on ridiculous but often technically correct interpretations of the code.

 

[155] Policymakers must consider giving law enforcement greater authority and resources to deal with schemes at their inception, to grab the seed packet of the scam before it blossoms into a garden of defrauded victims. Likewise, those breeding grounds for scam artists, including the owners of Internet bulletin boards who profit by banner advertising, should be made responsible for their conduct to defraud victims.

 

[156] The Internal Revenue code should be simplified at least as it relates to the direct taxation of individuals. And the culture of noncompliance must be eradicated.

 

[157] That concludes my statement. Thank you.

 

[158] The Chairman. Thank you, Mr. Adkisson.

 

[The prepared statement of Mr. Adkisson appears here on the Senate Finance Committee website.]

 

[159] The Chairman. Now, Mr. Hodges.

 

STATEMENT OF JOSEPH G. HODGES, JR., ATTORNEY-AT-LAW, MEMBER AMERICAN COLLEGE OF TRUST AND ESTATE COUNSEL, DENVER, CO

 

[160] Mr. Hodges. Thank you, Mr. Chairman. I have to be sure that I disclaim any attempt here today to talk on behalf on either the American Bar Association's Real Property Section or the American College of Trust and Estate Counsel. My remarks are purely personal.

 

[161] The Chairman. Thank you.

 

[162] Mr. Hodges. I have been in private practice since 1968. And during that period of time, I have specialized primarily in estate planning and charitable gift planning.

 

[163] And back in the early 1980s, I also became very involved in the use of the Internet by practicing attorneys, particularly attorneys in my area of the profession. And as a consequence of that, I have had hands-on involvement with several websites, including the one that the real property probate and trust law section has on the ABA's main site and the site that the American College has.

 

[164] As a consequence of that, I have also had occasion to visit many of the sites that the other people here today have spoken about. And I have shared many war stories, if I can say it that way, with JJ MacNab over the last 3 or 4 years about many of these sites. And yet, today was the first time that I have ever met JJ in person. This has all been conducted by electronic mail.

 

[165] What I think this all shows is that the impact the Internet has today on the proliferation of these tax schemes, scams, and rip-offs is phenomenal. And it is a totally unregulated industry, one that is very difficult to stop unless you have the right enforcement mechanisms in place through the IRS and the various government investigative agencies to put the people who perpetuate these scams in jail.

 

[166] It is not that the John Q. Public are the ones that are the victims here, except for the fact that they lose the money. They are the ones that pay the huge fees, $10,000, $15,000 for a package of paper that is virtually worthless. And if we do not beef up the enforcement in this regard, I am afraid that tax noncompliance will become the byword of the day.

 

[167] Interestingly, at least in my profession, the American Bar Association's law practice management section did a study back in March of 2000 called "Lawyers Serving Society Through Technology". And this particular study was a commission that was set up by the president of the ABA.

 

[168] I outline in my written submission some of the highlights of that report. And I thought I would just mention a couple of them here today, one of which is that there is a distinct possibility that a large segment of the legal profession, mostly solos in small firms, and I myself am a solo practitioner now, could be displaced by competitors providing legal solutions under the category of "legal information services", as opposed to the traditional "legal services" which is what lawyers do.

 

[169] Perfect examples of this can be found on sites, such as the Nolo Press website where self help is the byword of the day. And people can find all kinds of books and materials there that allow them not only to enter these schemes and scams, but to virtually do every kind of basic legal service that they need without the assistance of proper professionals whether they be lawyers, accountants, financial planners, or whatever.

 

[170] The report goes on to indicate that legal services seem to be commoditized today and that consumers now have a price choice that is moving away from the traditional hourly rate structure that lawyers are used to and is approaching what they like to call either an option or value-added flat fee approaches, such as prepaid legal plans or websites that offer lawyers direct contacts with the public in terms of being able to search out lawyers and what services they offer.

 

[171] The report also notes that the ethical framework of legal services by the Internet is currently virtually not there. Now, there must be I think 4 or 5 commissions now in the ABA that have been set up in the last year to tackle that whole issue.

 

[172] Perhaps, most importantly for lawyers, the report indicates that we are going to face increasing competition from other professionals, including accountants and MDPs which are multiple disciplinary practice firms, many of whom are not subject to the same ethical rules, while the unauthorized practice of law statutes in most States are virtually not enforced. And in some States like Arizona, they do not even exist anymore.

 

[173] So anyone who wants to get into the business of providing financial products to people and particularly to our elderly citizens is free to do so. And yet, they have no formal training to function properly in that business.

 

[174] I have also pointed out in my written statement a variety of the living trust scams and schemes that are out there not only in terms of books, but in terms of presentations and seminars that are conducted, and how these have proliferated in trust kits and all kinds of things that are just virtually useless and people pay horrendous sums for.

 

[175] Most importantly though, I think that my 2 organizations that I belong to have finally come around to the fact that they too need to play a role in educating the public. And they are moving in this direction with deliberate speed at this point in time.

 

[176] The American Bar section that I am in will be meeting here in Washington in 3 weeks to approve the first phase of its public information part of its website. And the American College, although they have been a little slow in the development of that kind of material, does in fact have their practice committee working actively in this area.

 

[177] And to their credit, they funded a major production for PBS called Inside the Law. The particular show that they did, it was an hour-long production that was released in May of 2000 called Death and Taxes, an Inside the Law special.

 

[178] And as of our meeting 3 weeks ago, I learned that the foundation has just funded a second video production with PBS in the same Inside the Law series. And this one will target the scams and things that the elderly people have been subjected to.

 

[179] In addition, interestingly, the California Bar has a wonderful videotape that they did on scams that the elderly are subjected. And I wanted to make sure that the committee was aware of that. They use money that was obtained from a settlement of the prosecution of one of these scam artists to produce the video. So there is a way to spend the dollars wisely.

 

[180] So at least from my perspective as a lawyer, I think the bar associations and our related organizations do have a proactive role to play. And we welcome that role and look forward to doing it.

 

[The prepared statement of Mr. Hodges appears here on the Senate Finance Committee website.]

 

[181] The Chairman. We thank all of you for your testimony. We will take 5-minute turns now.

 

[182] Other than what Mr. Sommers told us, he gave us three ideas that the IRS could do, like a strike force to quickly shut down, an information front to educate people, and a PR blitz which would be buying advertising against the tax scammers, what more could the IRS be doing to stop these tax frauds?

 

[183] And I guess an extension of that, what should the IRS be doing to communicate to the public tax professionals and the press about these scams?

 

[184] Now, I do not think Mr. Sommers needs to answer that. Maybe, all of you do not need to answer, but those of you that have ideas. Mr. Hodges touched on this a little bit with what the bar is doing, but I am thinking in terms of the IRS.

 

[185] Yes, go ahead if you want to, Mr. Sommers.

 

[186] Mr. Sommers. Well, yes, my presentation really dealt with the web-base, shutting down websites and web-based scams. But what about trust scams that are in operation now? What can they do now to attack these?

 

[187] Well, every one of these scams has a weakness. They need a bank account. They need a taxpayer identification number.

 

[188] IRS needs to get control of how they issue these taxpayer identification numbers. They need to make sure that these trustees who often de-tax themselves so that they do not have a Social Security number file with Social Security numbers.

 

[189] They need to actually have a special unit to go over what trust tax identification numbers are being filed so that they can track those trusts and see if tax returns are being paid.

 

[190] Also, the other escape these people use is they always open up bank accounts that pay no interest because they do not want 1099 forms from the bank going to the IRS. It seems to me that for trust bank accounts, 1099s should be issued regardless of there is interest being paid or not.

 

[191] In short, the IRS really should follow kind of the "know your customer rules" that apply in the money laundering sense. They should know whether they are creating sham trusts or not or at least be able to track them through the taxpayer identification numbers because that is the entre. That is the ticket into the system. Once they are into the system, they disappear. But they need that access.

 

[192] The Chairman. Anybody else?

 

[193] Mr. Hodges.

 

[194] Mr. Hodges. I just would suggest that a definite possibility that our section of the American Bar Association get together with the Internal Revenue Service with highly trained professionals and explore perhaps in 3 weeks when we are here for a 4 to 5-day meting some of the ways that legally at least that we could do this and assist the IRS from our perspective.

 

[195] I think that would be a very worthwhile meeting. And I would be more than happy to suggest that to our section leaders.

 

[196] The Chairman. Maybe, Mr. Rossotti could also respond to that in the next panel.

 

[197] Ms. MacNab, I think that you wanted to respond.

 

[198] Ms. MacNab. In particular, they need to go where the promoters go. They need to beef up their own website.

 

[199] When I called the criminal investigations division about 2 years ago and asked about pure trusts, I was told that there is a .25 million of these plans already in existence. This to me seems to be a crisis.

 

[200] They do have a criminal investigation website. But when you run a search on pure trust in any of the Internet search engines, the IRS website does not pop up. It is not one of your options. I am sure the computer person here could tell you better.

 

[201] There are ways to make sure that your website comes to the top of the list. The IRS should be using the same techniques, metatags in particular, to make sure that their website is seen.

 

[202] If you go through 10 or 15 pages of different websites, all of which say pure trust works, before you get to the IRS website, how many taxpayers are going to have that kind of patience? So they need to make sure that their website gets seen by consumers.

 

[203] They also produced a wonderful brochure last year on what is a sham trust, what is an abusive trust, what are the warning signs. It was a wonderful brochure. It had lots of information. I do not know of a single taxpayer that has seen it.

 

[204] The Chairman. All right. Did you want to respond, Mr. Bazar?

 

[205] Mr. Bazar. One comment or suggestion is that the IRS in their website have an aim more towards people who do not have a law degree. I mean, simplify it a little bit.

 

[206] The Chairman. All right. That is very good advice for any government agency. [Laughter].

 

[207] Mr. Bazar. I mean, there are a few standard arguments that all the tax protestors, for example, filing your 1040 is voluntary. I mean, all you have to have is a website that says, you must file a 1040. I mean, very simple things like that, I think that would help greatly.

 

[208] The Chairman. All right. This will probably have to be my last question on this first round. To any of you, what roadblocks does the IRS face in going after these tax scams, particularly those on the Internet?

 

[209] Ms. MacNab. I will take this one. I think the biggest roadblock is going to be how easy it is to move money around on the Internet, especially on the offshore. You can move hundreds of thousands of dollars using virtual money right now. And it is totally untraceable.

 

[210] To give you an example, the con artists are smart. The IRS recently subpoenaed I believe it was American Express and Master card records to find out who had money offshore and was trying to bring it back on by spending using a debit or a Visa card or a Master card.

 

[211] The promoters have pivoted from that. And now, they issue numbered credit cards. Your name does not appear anywhere on it. It does not appear anywhere in your account statements. How does the IRS know whose card that is?

 

[212] I think the biggest impediment is going to be getting offshore. It is too easy these days to move money. I have an example in my written testimony about how you can go online and in a period of about 5 minutes, you can sign up for a numbered Swiss bank account with a minimum investment of $200.

 

[213] Another website which I actually have copies of, the front page of the website in the testimony offers, I think it is, upwards of 60 offshore tax shelters on their website. All you do is point, click, choose which ones you want to buy, put them in your shopping cart, and check out, just like you are buying books at barnesandnoble.com.

 

[214] It is very easy. This particular website is located in Cypress. It is easy, but it should not be impossible for the IRS to track these people down.

 

[215] The Chairman. Anybody else before we go to Senator Baucus?

 

[No response].

 

[216] The Chairman. Senator Baucus.

 

[217] Senator Baucus. Thank you, Mr. Chairman. And maybe, you want to work for the IRS. [Laughter]. I mean, you have passion. You want to stop this stuff.

 

[218] Ms. MacNab. We do want to stop this stuff.

 

[219] Senator Baucus. And we all do. And I appreciate the intensity of your testimony and how much this bothers you as a good, red-blooded American citizen. I deeply appreciate it. And I know Americans watching will feel the same way.

 

[220] Why has the IRS not done more, or other appropriate agencies? I mean, you said, it is a wonderful brochure. Nobody has seen it. You have made several telephone calls. Nothing seems to happen.

 

[221] Why? What is your best guess? Is this because this is all so new, because it is all so newly complicated? Is it because we need all a whole new sort of paradigm of thinking, a whole new set of laws in this Internet age, that we are not there yet? I am curious. What is the problem?

 

[222] Mr. Hodges. From the legal side, I think you have made a good point. This is a very difficult kind of business to control. The Internet is a free wheeling environment. And it is worldwide.

 

[223] And we can pass all the laws in the world, in the United States saying you cannot have sites with this, that, or the other material. And that will not do it because people just move offshore and broadcast it back to the United States.

 

[224] But you can put I think enough legal sanctions in the law for fraudulent and misrepresentation activities. And those are real. Those are consumer laws. They are in every State in the Nation.

 

[225] The hard part though is when you have a case like this and you go to your State attorney general. And so you get the answer that was alluded to earlier, that is either, we do not have the resources or the time or whatever.

 

[226] And unless the thing is so egregious that they cannot avoid it, no prosecutions ever occur and no investigation is ever made. And these things just grow and grow and grow.

 

[227] And if you do shut them down in one State, then they pick up their stacks and move next door to the next State and start up all over again. They change their name usually so that the identity is not easy to see.

 

[228] But I think the service is finally after many years of basic no action, began to enforce the most egregious cases. But as JJ alluded to earlier, it takes at least 2 years to complete those investigations before the prosecution starts.

 

[229] And in one particular case that I am familiar with where the fellow had committed the scams in the United States. It was a pyramid scheme. It made millions of dollars. He took the money down to The Bahamas islands and then was finally through the courts held in contempt and put in jail. He went through six months of jail, got out. And he is probably down in the islands again, enjoying his money.

 

[230] And the court basically told him that he had to tell his trustee to repatriate the money to the United States. And he did not even bother to even to try. And he did not have to. If he was willing to sit in jail for six months, that was his punishment, if you will, for entering a foreign trust scam like this.

 

[231] And they count on that frustration. They count on the inability of the IRS or any other treasury agency to chase that money down and get it back once it gets out of the country.

 

[232] Senator Baucus. Mr. Sommers.

 

[233] Mr. Sommers. Senator Baucus, it does require a new paradigm. Again, from my perspective, I come at this from the consumer fraud standpoint. It needs to be stopped now. People are being ripped off, paying for these.

 

[234] IRS, they may not know about it until a tax return is filed 12, 18 months after the scam has even happened and they audit. And so in some ways, it is telescoping this upfront. The Federal Trade Commission knows how to do this.

 

[235] In my perspective, what these people are doing is no different than selling phony diet pills, phony stock investment, or anything else. It happens to deal with tax.

 

[236] But it is a consumer fraud issue that they can make lots of money on and get out of town before the ramifications are felt because, again, the IRS looks at it from a revenue standpoint. They need tax returns to audit. They need things to see.

 

[237] Senator Baucus. But with the addition of the Internet, it makes is almost infinitely more difficult from an enforcement point of view.

 

[238] Mr. Sommers. Well, once they get in the system, I think it makes it very difficult. I think the problem is that maybe IRS has waited for these to filter through the system and then make a big bust somewhere, get the records, and prosecute lots of people.

 

[239] Well, by that time, we think it is too late because these guys know how to fly under their radar. And they have to get them on the front end.

 

[240] One observation I would like to make here though, I just cannot resist. We are talking about $300 billion of taxes. And all of us seem to be sole practitioners that are on the combatting side. JJ and I are doing this pro bono. Our websites are all pro bono. We do not make a nickel off of it.

 

[241] So we have a $300 billion a year loss in taxes being fought by, we have maybe, 5 solo practitioners up here who do not make a dime, but we are the ones out on the front line trying to combat these. So it seems like we are a little over matched here.

 

[242] Ms. MacNab. We need help.

 

[243] Senator Baucus. Yes. It is not fair probably to make this next comment because we have not yet heard from the next panel. But I am just going to tell you, listening to the five of you, I have the impression that this is virtually unchecked, these things of kinds, whether the pure trusts or the offshore trusts or what not. This is virtually unchecked. I mean, is that an exaggeration?

 

[244] Mr. Hodges. No. I think that is an accurate assessment, but I think it is also shows the power of education here could be so significant. And it is the ability of the public to understand going in that these are truly scams.

 

[245] And how do we get that information to them? I think we try every method we can through organizations, through the IRS websites, through the IRS criminal investigation website, and brainstorm all of the public information as we can do it.

 

[246] We have in Colorado, our attorney general, Gail Norton who is now the Secretary of Energy, produced this little, back-to-back pamphlet. It is called "Consumer Alert: Living Trust Scams".

 

[247] This was all we could get out of her department when we were trying to just go after the typical, living trust false statements. But this little pamphlet has done more in Colorado to combat this kind of thing than anything else that has ever been produced out of the State bar or the AG's office there. So it can be done. And it is not expensive.

 

[248] Senator Baucus. Go ahead.

 

[249] Mr. Sommers. I just wanted to point. There really is some excellent work being done in this area by the government. It is in pockets. I point to Sacramento where I appeared at a trial of one of these trust scam artists.

 

[250] And Ben Wagner who is the U.S. attorney there did a great job, secured a huge conviction, just did it again with a lady named Dorothy Henderson who just got 11 years in prison. And he is dedicated. He understands how this works. And the agents up there understand how this works.

 

[251] They have some excellent people that the IRS could be taping for my suggested strike force who understand this, who want to go after it, and know how to go after it. Unfortunately, these are criminal trials though. So maybe, part of the Internet is being unchecked, but there is some excellent work being done out there.

 

[252] Senator Baucus. Could you expand on your strike force idea? What would the strike be, do, etcetera?

 

[253] Mr. Sommers. Sure. I am envisioning no more than maybe 10 people, but it is a cohesive unit that can make decisions now. They need to make decisions within hours and days, not months or years.

 

[254] I envision having 2 computer programmers searching the Internet daily for new tax scams, for tax scams and things, for spam, for e-mail spam. I expect them to do that in the morning. And at mid- day, they have a meeting with somebody in that room who could make a decision.

 

[255] If the decision is made that that site should be shut down, letters of cease and desist go out immediately. And there is attorneys as part of that strike force ready to go to court in 1 or 2 days if that site does not come down.

 

[256] I also think that that site should then be listed as suspect sites on the IRS website I talked about so that the public could be alerted as well. I also think anything dealing with that site, any injunctions, anything else needs to be right on that website as well so that these people have a matter of hours after they have been exposed and they are out of business or at least the public knows about it.

 

[257] And that is in a nutshell my idea. I think when you look at it, it will not cost anything. I mean, you have to understand, these people get into the system and they clog it up. They get the IRS agents, the examiners. They sit there and they frustrate them.

 

[258] And then, they go to collections. And collections, they try to do offers and compromise it for $1 and say, gee. They do not tell them that their assets are in one of these trusts. So you have the whole IRS machinery having to deal with these.

 

[259] The Chairman. Before you answer that question, the FTC does something similar to that in the areas of their jurisdiction.

 

[260] Ms. MacNab. If I can give you an example, 2 and a half years ago, I turned over all the pure trusts materials on the website to a CID agent. The website is still up and running.

 

[261] A few months ago, I ran across another fraud on the Internet. It was not tax fraud. It was a sale. And I turned over the materials to the Federal Trade Commission. I went onto their website. I filled out the online form. I sent in all the materials that I had collected. I got a call within a week. Two weeks later, they had written testimony for me to sign. Within a month of that, I got a phone call saying, thank you very much. My testimony was most effective. They had shut down the promoter.

 

[262] Senator Baucus. Mr. Sommers, in your strike force, you had rattled off a list of very seemingly effective actions that the government could take. Is that available under current law? Can the government do that under current law?

 

[263] Mr. Sommers. I guess you would look at the FTC model. I do not understand how the Federal Trade Commission can fight consumer fraud the way they do. I understand they are so aggressive, they put up phony websites. And then, when people click on them, they say, can you not tell this is a fraud? [Laughter].

 

[264] And so I do not know if it needs to be moved to the FTC or not because, again, my perspective is that it is a consumer fraud issue. Whether or not the IRS wants to not collect the tax dollars, I mean, that is a concern obviously to you and to others. But my perspective is the poor person being swindled.

 

[265] Senator Baucus. Have any sites been shut down very quickly?

 

[266] Mr. Sommers. No.

 

[267] The Chairman. It might be appropriate for me to ask at this point that there are concerns about 1st amendment rights and the fact that the Internet operates overseas, that this would handcuff the IRS. Do any of you have views on that?

 

[268] Ms. MacNab. My understanding is that the FTC has been successful with some overseas websites. Perhaps, the IRS can work with them or learn from them.

 

[269] The Chairman. What about any other 1st amendment issues here that come?

 

[270] Ms. MacNab. I will leave that to the attorneys.

 

[271] Mr. Sommers. Well, again, I would like to fight the 1st amendment with the 1st amendment and have a website of information that people can find. I see that there should be no problem whatsoever with that.

 

[272] To the extent that they are advocating illegal activity, there should not be a 1st amendment right. And again, I look at what the FTC is doing. And what is the difference?

 

[273] The Chairman. But you are not saying that there is a 1st amendment right to do a sham trust?

 

[274] Mr. Sommers. Unfortunately, I think that is what I am saying, yes.

 

[275] The Chairman. There is a 1st amendment right?

 

[276] Mr. Sommers. No, there is not a 1st amendment right to do a sham trust, no.

 

[277] What I am saying is that this is no different than selling, as I said, phony diet pills, phony stock, whatever. This is consumer fraud. There is no 1st amendment right to go out and commit consumer fraud in any form. This just happens to be consumer fraud dealing with taxes versus any other kind of scam, a pyramid scheme or anything else in my view.

 

[278] Mr. Hodges. I will second that. I think there is -- no, it is just an easy answer. There is no protection in the constitution for not only fraud, but egregious misrepresentation when it comes to the consumer.

 

[279] And what is interesting is when we built the website for the American College about 5 or 6 years ago, we put a little part of our public side of that site. There is a quite an extensive private side. And ever since that site went up, there is one piece of material, one page on that site called "Do I Need a Will?" It is an American Bar Association pamphlet. And it has been consistently week after week after week since that site opened the most hit page on the site.

 

[280] What that tells me, because we do not really advertise the existence of the site, is that the public is smart enough to find good information and to decipher the good from the bad if you just give it to them to read. And that is what I would like to see the American Bar do with its website, tell the truth and help people find the right professional help.

 

[281] Mr. Bazar. Can I respond?

 

[282] Senator Baucus. Yes, go ahead.

 

[283] Mr. Bazar. I just have one comment. The FBI and the Justice Department set up a website called the IFCC. It is called the Internet Fraud Complaint Center. This is where consumers can go to make complaints about online fraud.

 

[284] My experience though with them was I sent in my complaints, the information. And what they did was they just sent it back to the State attorney generals and actually my local police, of all people. And it seems that this, the IFCC was set up to deal with complaints on the Internet. However, they do not really -- from my impression, they do not have any sort of meat behind. They are just sort of a clearinghouse.

 

[285] Senator Baucus. Getting at the question I was going to ask, namely, how often have you tried to persuade the IRS or FTC or any other agency to do something about all this? Have you talked to them, contacted them personally? Have you called up Commissioner Rossotti and said, hey, Chuck, we have to do something about this?

 

[286] I am just curious as to what efforts you have made in dealing with the IRS.

 

[287] Mr. Bazar. I have called a few.

 

[288] Senator Baucus. You have called a few.

 

[289] Mr. Bazar. I called as I mentioned in the speech. But I have called attorney generals. I have called the IRS. I have written to the FTC, the FBI.

 

[290] Senator Baucus. All right.

 

[291] Mr. Bazar. I mean, I have done it all. And maybe, they have an investigation going on so they do not want to come out and do something.

 

[292] Senator Baucus. Yes.

 

[293] Mr. Bazar. But my impression is that nothing is being done.

 

[294] Senator Baucus. Ms. MacNab.

 

[295] Ms. MacNab. I contacted the criminal investigations division. All they said was give us what you have and we will take care of it.

 

[296] Senator Baucus. Do you have any idea whether anything was done?

 

[297] Ms. MacNab. The website is still running.

 

[298] Mr. Sommers. My experience is a little more passive. When people send me e-mails saying somebody is cheating out there, what should I do, I just refer them to the CID website.

 

[299] Unfortunately, for some reason, you cannot e-mail the CID, the criminal investigations division. They want you to call them on a toll-free number. And I do not understand what that is about. People want to sort of communicate through e-mail and send them information.

 

[300] You commented on how passionate we are. You should see some of the e-mail that we have received from these folks. And then, you would know what we are up against.

 

[301] Mr. Adkisson. If I could address that, Senator?

 

[302] Senator Baucus. Yes.

 

[303] Mr. Adkisson. It seems that enforcement effectiveness and what they are doing varies by region. In the California region that Mr. Sommers and I are at, for instance, they have asked us to come and speak to IRS agents. And they have gotten publicity on some of the things they have done. In that region, they seem to have done very well.

 

[304] In other regions, it does not seem that there is much activity going on. The agents that I have spoken with, it seems that this is a problem that they feel that the Internal Revenue Service is not really asked for, that although this is involves an issue of taxation, that it is really a consumer fraud issue.

 

[305] And although they feel that they have some responsibility over it, it is really not within their learning curve or the learning curve of their agents as to how to deal with this. It really is a very unique problem.

 

[306] The Chairman. We have concentrated on 2 or 3 people involved in this, the tax scammer, the IRS, but there is a taxpayer. None of you have touched very much on the taxpayer and the impact upon the person that has been caught in this web.

 

[307] And maybe, it is not fair to say that everybody has been caught because there is probably some of them that went into it with an open eye that maybe this really was playing the tax lottery in the sense of getting by without paying your taxes.

 

[308] Any comments on kind of the innocent person that gets hit by this, maybe that went into it really feeling that they say this is legal, so why should I not be doing it?

 

[309] Ms. MacNab. Most of the taxpayers out there truly believe that what they are doing works. They do not think they are cheating. They do not think they are evading. They think, hey, this is the way it is. This is the law. And I am doing the right thing.

 

[310] It is heartbreaking when you talk to some of these clients. And, for example, in the Institute of Global Prosperity arrests, they had a big show on it on CBS. When they were made public, people started coming out of the woodwork.

 

[311] They are afraid. They do not know how to deal with this. They have somehow cheated the system. And they are going to get caught. And they do not know what to do. Do they hide and hope that the IRS does not catch them? What do they do?

 

[312] I mean, I would love to see some kind of, if not amnesty program, but then direct eduction program. Let these people know that you screwed up. All right. Let us fix it. Let us bring you back into the system. We are not going to bite your heads off. We are not going to put you in jail if what you did was unintentional. How about we get you back in the system and get your back taxes and interest due? And if you work with us on this, we will waive penalties.

 

[313] Come up with something to be friendly about bringing these people back in. There is an awful lot of them.

 

[314] Senator Baucus. So what you are saying is that most of the taxpayers then were gullible in the first place?

 

[315] Ms. MacNab. Yes. Many of the promoters are also gullible.

 

[316] The Chairman. Some of these innocent, gullible taxpayers I presume have gone to jail for fraud, have they, or at least they have a big penalty?

 

[317] Ms. MacNab. The IRS seems to be going after the very, very big ones, the big fish. And I guess they are hoping that sends a message to the little ones.

 

[318] I have no idea how many people have gone through the system and not gone to jail. I know there have been a significant number of arrests, I think 164 in the last couple of years.

 

[319] The Chairman. My point was about the individual taxpayers. Is that what you are responding to?

 

[320] Ms. MacNab. Right. Right now, they are going after promoters.

 

[321] The Chairman. Yes.

 

[322] Ms. MacNab. I do not know how many individual taxpayers have gone through the system yet. I do not think it is priority for the IRS right now. I can only say that from an outsider's point of view. But I think they are assuming that they are going to bring in these big guys. And then, they will go after the little ones.

 

[323] Senator Baucus. Well, does that not make some sense, I mean, just off the top of my head?

 

[324] Ms. MacNab. Sure.

 

[325] Senator Baucus. Because after all, there is no criminal intent I would guess.

 

[326] Ms. MacNab. Well, why not go after the big ones and shut them down quickly?

 

[327] Senator Baucus. Right. It is the promoters we are after I would guess.

 

[328] Ms. MacNab. In the multilevel marketing schemes, it is difficult. You have the top promoters who probably have a pretty good idea of what they are doing. They recruit, say, a dozen people. They recruit a dozen people. They recruit a dozen people.

 

[329] The people that are in that middle area that are now recruiting underlings truly believe what they are doing, it works. Maybe, the top level people knew that was a scam. The second, third, fourth, fifth, sixth, 1,200 levels do not necessarily know it.

 

[330] The Chairman. These are not the people that say that income taxes are not unconstitutional.

 

[331] Ms. MacNab. Sure.

 

[332] The Chairman. These are people -- well, that is what you are talking about as opposed to people that are saying, you do not have pay all your taxes. This is how you can avoid some tax.

 

[333] Ms. MacNab. It is both.

 

[334] The Chairman. Both.

 

[335] Senator Baucus. And that is why I think this massive publicity to educate people would help a little bit.

 

[336] Ms. MacNab. Very much.

 

[337] Senator Baucus. It would theoretically reduce some of the gullibility.

 

[338] Mr. Sommers. You want to shine that light on the problem. We need a path for remedial treatment. And the IRS has to say, look, if you follow this path, you do these, you amend your returns for so many years, you do whatever you have to do to get back into the system.

 

[339] Right now, there is no path. When people come to us, we say, well, maybe the best we can do is get you a theft deduction for the fee you paid the promoter if you file your taxes voluntarily.

 

[340] The problem is compounded when there is money overseas and there is money laundering implications and other things that professionals try to help them get their money back into the system to pay taxes.

 

[341] What we really need is a clear path to say, all right, we are going to shut these guys down, but everyone who wants to come forward and clean up their taxes, this is exactly how you do it and this is what we will expect of you so there is a clear direction.

 

[342] The Chairman. Let me touch on one thing that we have not discussed yet. And maybe, I referred to it in my opening comments. And maybe, it is not as big of a problem that we think it is.

 

[343] But we have a new situation where employers are saying that they are not going to withhold their employee's income and payroll taxes. And obviously, that is unacceptable. But the problem is we have employees choosing between their jobs and their tax man.

 

[344] What is the panel's thoughts on this matter? Is it a problem? Is it growing? And what about the IRS's response?

 

[345] Mr. Hodges. If I may say so, I would take as an example the notice 9724 that the IRS put out back in 1997 on sham trusts. For a long time, all these sites were out there. Our clients would come and say, what do you think about this pure trust scheme or whatever?

 

[346] And we could talk until we were blue in the face. And these organizations tell them, do not believe what your tax lawyer tells you because they are going to try to talk you out of this. And they do not know what they are talking about.

 

[347] This notice did more for my clients to convince them that the IRS knew about these things and the truth than anything else. Why not do a similar notice tomorrow in this area of the withholding? These kinds of things from the service are very effective.

 

[348] The Chairman. Ms. MacNab.

 

[349] Ms. MacNab. Your question actually is very good. This is very fairly new industry. If we can nip it in the bud, you can stop this from blossoming like the pure trust schemes. These people, they are not hiding, as I showed earlier, the USA Today, the full-page ad.

 

[350] They have concerns that they truly believe they have a right to address them. They have asked on numerous opportunities for the IRS to review their materials and tell them they were wrong. Let the IRS do that. If they are trying so hard to get attention, give it to them.

 

[351] The Chairman. You have another?

 

[352] Ms. MacNab. And this was a full-page ad in which they show 3 IRS agents who have endorsed their program, 3 ex-IRS agents.

 

[353] The Chairman. One last thing, you may get questions in writing from either of us, but also more importantly because of the bill on the floor, a lot of the members could not come. They are at other committee hearings.

 

[354] So if you do, and some of you who have not dealt with the congressional process of a written response, make sure that my staff or Senator Baucus' staff would help you through that process. We would like to have answers in a couple of weeks if we could. Thank you all very much.

 

[355] Senator Baucus. If I might, Mr. Chairman, on this very important subject?

 

[356] The Chairman. Yes.

 

[357] Senator Baucus. Did anyone want to say something that has not been asked yet? Or did someone say something so outrageous that it deserves a response? [Laughter]. Here is your chance.

 

[358] Mr. Bazar. I just want to comment. You are talking about the average taxpayers getting arrested. And I think that is a big problem. While the IRS probably has limited resources to go out and try to get the promoters, it is still the, hey, my neighbor has not been paying taxes for 3 years, it must be okay. The IRS is not doing anything about it.

 

[359] And these people who are starting into it, getting into it mainly over the past few years, they are many, many examples for them to see, for people to talk to that are not paying their taxes and are getting away with it.

 

[360] And I think maybe there should be some, at least a few arrests. You can put them on the website. People can see, hey, you really cannot do this. I am not a lawyer. I do not know the details of the law. As far as I can tell, there are no examples of people getting arrested.

 

[361] The Chairman. Well, maybe, there has been more than one Iowan, but I can only think of one Iowan that for the last 20 years has been bothering me about the income tax being unconstitutional. Now, I suppose there is a lot.

 

[362] Senator Baucus. There are a lot in my State, Mr. Chairman. [Laughter].

 

[363] Mr. Hodges. I think also, Mr. Chairman, it would be very important in this whole process as the public becomes more aware if people are caught in these schemes as taxpayers, they need to be treated gently. And, yes, it is a slap on the hand, but let them file the returns and pay the taxes they should have paid, but do not throw them in jail. The people you need to go after are the promoters.

 

[364] And I think if you have an amnesty program, as was suggested earlier, you might finally find these people coming out of the closet, if you will, and being willing to testify as to how they have been duped. But most of my clients that I know that get into these things are so embarrassed, they do not even want their neighbors to know that they were suckers.

 

[365] The Chairman. Would that be a general amnesty program? Or would you direct it towards people that we assume are out there involved in these tax scams?

 

[366] Mr. Hodges. I would take the narrower approach first and see how well it works. And maybe, you might want to broaden it. There is probably a lot of tax avoidance things that people do because their neighbors do it. And therefore, they think it is legal. And why not?

 

[367] You look at these websites. They will convince you that this is perfectly legitimate and that the IRS has blessed it. And it is as false as false can be.

 

[368] Senator Baucus. Just one question, Mr. Chairman. The laws, again, are our current laws adequate? Or do we need new laws?

 

[369] Mr. Hodges. I would not say the current laws are adequate. It is the enforcement of those laws that is important. I do not think we need another whole proliferation of laws. And we have excellent agencies like the service and the FTC who have the powers to do this. They just need to find the resources to pay attention to it.

 

[370] Senator Baucus. Mr. Sommers.

 

[371] Mr. Sommers. Yes. I would agree with that. I think the IRS does have the right to go in and get injunctions. They have started to use that on some of these things. It is too bad it takes so long to build the evidence, maybe as they get used to going in and filing for injunctions.

 

[372] Again, if we had that strike force concept, you really would want those people to be able to go to court with not a lot of red tape.

 

[373] Ms. MacNab. As a non-lawyer, if I can add, there are also certain details that can be done. For example, under current law, you have to disclose whether or not you have any interest, either beneficiary or ownership interest, in foreign trusts.

 

[374] The promoters say, all right, we are not going to call them trusts anymore. We are going to call them special interest partnerships where they set up foundations offshore. Now, you do not have to disclose it because it is not a trust.

 

[375] The IRS has to pay attention to such things and adjust as needed.

 

[376] Senator Baucus. What about resources? I mean, we often hear the IRS does not have adequate resources to go after a lot of this.

 

[377] And I will even step into another old territory. I talked to some accountants who were telling me that the qualify of agents at the IRS is probably to what it could and should be. And it probably is because of pay. Whereas, the bright people are on the outside.

 

[378] And this is hard thing to say, but you hear it. Maybe, there are others in the IRS are maybe not quite as swift as some others. And I know that is a gross, broad statement. But is there any truth to either of those claims that you sometimes hear?

 

[379] Mr. Adkisson. I would like to answer that. The IRS is trained. And their agents are trained to do a very specific thing which is to review tax returns, check deductions, things like that.

 

[380] This is fraud. Although it is tax fraud, it is really fraud, fraud. And to take people that are trained to do more accounting and tax return sort of work and to send them out, chasing people that are hardened, usually have very long criminal records or hardened scam artists in my opinion, is asking the IRS to do something that it is just tasked for. And I think that has been a very significant problem.

 

[381] Senator Baucus. Thank you.

 

[382] Mr. Hodges. I would just add as a supplement in terms of resources. Follow the example in California where they went after this group. They got a judgement against them. And they took the money from that settlement and have done very positive things with it.

 

[383] Maybe, that is the way you can finance a lot of this investigation. It is a little bit after the fact, but it is better than nothing.

 

[384] Mr. Sommers. I think the problem with resources I have is you cannot calculate the amount of money being wasted now through the audit system, the collection system, and all the IRS personnel when these guys get into the woodwork.

 

[385] I mean, they are dedicated to just grinding that machinery to a halt. And that has to cost enormous sums of money. Every document needs to be subpoenaed. You need to go to court all the time. They are selling stonewalling the IRS. And they will get away with it because the IRS will give up.

 

[386] And also, just the educational aspects of trying to train all these agents to find it. That is why if you treat it as a narrow specialty and attack it from Washington, it just seems to make a lot more sense to me. And I think you would save. It will not cost money. It will save money.

 

[387] Senator Baucus. Thank you.

 

[388] The Chairman. Thank you all very much. Senator Baucus and I appreciate this grassroots information we get from people that are specializing in it. And more importantly, thank you for your altruism of trying to help the innocent taxpayer. Thank you all very much.

 

[389] And I will call the second panel now. First, we have Charles Rossotti, Commissioner of the Internal Revenue Service. Next, Hugh Stevenson, Associate Director for Planning and Information, Bureau of Consumer Protection, the Federal Trade Commission. And then, Michael Brostek, Director of Tax Administration and Justice Issues at the U.S. General Accounting Office.

 

[390] And we will start with the Honorable Charles Rossotti.

 

STATEMENT OF CHARLES ROSSOTTI, COMMISSIONER, INTERNAL REVENUE SERVICE, WASHINGTON, DC

 

[391] Mr. Rossotti. Thank you, Mr. Chairman and Senator Baucus. I appreciate the opportunity to be here. And I especially am pleased that you decided to hold this hearing on this very important topic. I think of this as what I call organized tax evasion.

 

[392] I think it is very essential for the majority of taxpayers who are honest and pay what they owe under the law, that they have confidence that their neighbors and competitors are playing by the same rules. And I think that is what this is all about.

 

[393] As the earlier panel noted, today, in a wide range of guises, there are individuals and organized groups attempting to mislead or entice taxpayers into believing that there is a way out of paying taxes.

 

[394] Some of these groups use the Internet to promote or advertise their schemes. And these range from complex and prepared packages of documentation involving trusts and offshore bank accounts to more simple, but false arguments claiming that businesses do not have to pay their employment and withholding taxes.

 

[395] So far this year, the IRS has issued 2 nationwide alerts warning taxpayers not to fall victim to a number of these scams. And some of the things that were mentioned in these alerts include such items as tax credits or refunds related to reparations for slavery to illegal ways to "un-tax yourself".

 

[396] One of the schemes that I think that you just noted, Mr. Chairman, that has received a considerable amount of publicity recently is aimed at telling employers that they do not have to withhold federal income tax or employment taxes from the wages paid to their employees. We have made some publicity efforts around this topic. And taxpayers, I will just note, can get more information about this particular bogus scheme by simply going onto our website at www.irs.gov.

 

[397] In terms of practical impact, and they were some numbers thrown out earlier about revenue loss, but I think in terms of practical impact, major impact, the most important of these various tax schemes are those that try to sell packages to upper income taxpayers which claim to permit income taxes to be reduced or eliminated.

 

[398] And essentially, these packages use a flurry of paper work involving domestic and offshore trusts and foreign bank accounts in most cases to appear to move income into tax-free countries or legal vehicles, while still allowing the taxpayers to maintain effective control over their funds.

 

[399] And we have a chart that we are going to put up here that just shows you. I am not going to run through it. It was another one of your witnesses that showed something similar.

 

[400] But it shows the kind of flurry of paper work involving various entities and offshore bank accounts in most cases that are used to give the appearance that this money is being put in such way that will not be taxable. And yet, the taxpayers actually maintain control of it.

 

[401] For these particular kinds of schemes, most of the people that buy into them are upper income taxpayers, professionals and business persons with at least 6-figure incomes.

 

[402] The promoters run a wide gamut from bankers, to convicted con men that are just going into their latest con, to crooked return preparers, to actually Americans living overseas who make a living selling services in connection with these schemes.

 

[403] The IRS first became aware of the emerging magnitude of this particular problem in 1996 by an individual named John Mathison who was an owner of a bank in the Grand Cayman Islands. He began cooperating with federal authorities in providing extensive financial information on hundreds of individual who appeared to be engaging in ongoing tax fraud.

 

[404] In April, 1997, as was noted by an earlier witness, the IRS issued an official notice publicly cautioning taxpayers to be wary of trust arrangements that were promising benefits that are not allowable under the tax laws.

 

[405] Although we have no really accurate measure of the size of this problem, we do have enough information to know that it is a major problem. One respected expert on offshore tax havens and money laundering, Mr. Jack Blum, has made estimates that there are $3 trillion of assets in tax haven banks and that the annual revenue loss to the Treasury is at least $70 billion a year.

 

[406] As another indicator, on October 27, 2000, as part of our enforcement efforts, we went to U.S. District Court in the Southern District of Maryland and got authorization for the IRS to examine banking records of tens of thousands of U.S. persons who had offshore accounts in the Caribbean, most of whom had not disclosed these accounts to us as required on their tax returns.

 

[407] With our new organization and our strategic plan in place, we are now able to be much more effective in combating this threat with a coordinated strategy that involves a full range of tools ranging from public education--it is very important letting the taxpayers know and warning taxpayers--to on the other end both civil and criminal enforcement against both promoters and participants in these schemes.

 

[408] In terms of public education, just to summarize some recent activities, we have issued a number of press releases and alerts to the public and to practitioners who can use them as legitimate practitioners in educating their clients. These include the "The Too Good to be True" trust brochure.

 

[409] We also constantly post educational material on our website which is now receiving over 2 billion hits per year. It is a very popular website. And we are now flagging and noting, as is noted here on some of the charts that are up to your right, highlighting some of these schemes.

 

[410] In terms of going where the taxpayers are, we also recently opened up a specialized part of our website for small business and self-employed taxpayers. And this provides one-stop information for them to assist them in complying with the particular obligations that they have.

 

[411] But we are also using this since it is a draw for these kinds of taxpayers to include warnings and examples of what to be wary of. And this is shown on the first page of that on the chart in front of you.

 

[412] Another important new initiative to identify these particular kinds of schemes is our new K1 matching program. Beginning in 2002, we will begin processing matching K1s reporting over $700 million of income and also importantly reported losses on trusts and pass-throughs. This will help us to find problem cases and, of course, to follow up on audits when necessary.

 

[413] We have also developed in the last year some specialized training program for our agents on these trust-related topics and begun active investigations, especially focused on promoters. We are currently auditing 17 promoters and 161 different abusive schemes for not only investigation, but possible injunctive action.

 

[414] Earlier this year, we received one permanent injunction against some promoters. This was granted by the court. And also, a $1.25 million penalty was assessed in this case. Another 2 injunction requests are currently pending before district court.

 

[415] On the criminal side, the IRS investigations unit has already obtained 117 convictions of individuals on illegal trusts and has another 135 open investigations involving about 65 promoters.

 

[416] And most recently, on February 28, 2001, our criminal investigation unit conduced the largest and most extensive enforcement action in the history of the IRS, including 3 dozen search warrants, involving suspected promoters of fraudulent trust schemes.

 

[417] I also want to note for the benefit of those taxpayers and potential promoters who might be listening to this that the penalties for engaging in these activities for promoters and also investors can be very stiff. Civil fraud can include a penalty of up to 75 percent of the underpayment of tax that is attributed to the fraud in addition to the taxes owed.

 

[418] And for those who really promote these schemes, the penalties can be quite lengthy. We recently had 1 prison sentence of 11 years imposed against an individual that was promoting these schemes.

 

[419] So Mr. Chairman, in conclusion, I want to assure you that we are very much aware of this problem. We have identified it as a key time in our plan to combat basically all these forms of what I call organized tax evasion.

 

[420] We are definitely focused on this from both the point of view of public education and enforcement. I will say that the whole idea of public education as a key tool for the IRS is not one in the past was given as much attention as we feel it needed to be.

 

[421] If you have read any of the things that I have said and we put in our plan, this is a key area of expansion for us. In listening to the earlier witnesses, I think we already got some ideas even from this hearing of some things that we can do more effectively on this front. And we will certainly use that to help us improve what we are doing.

 

[422] I also want to note, as you noted in your opening, Mr. Chairman, that we are focused on both effectiveness and fairness. These are the twin watch words.

 

[423] We do not want to fall into the traps that perhaps could be fallen into where we get so focused on just action without making sure we respect the rights of taxpayers that are required by law. We are not going to forget about that part of it either.

 

[424] So we are basically aiming at using all the tools at our disposal to warn the public to try to prevent these problems and to use our enforcement tools effectively in a focused way for those that are actually promoting these kinds of schemes.

 

[425] Thank you, Mr. Chairman.

 

[426] The Chairman. Thank you, Mr. Rossotti.

 

[The prepared statement of Mr. Rossotti is unavailable at this time.]

 

[427] The Chairman. Now, to Mr. Stevenson.

 

STATEMENT OF HUGH G. STEVENSON, ASSOCIATE DIRECTOR FOR PLANNING AND INFORMATION, BUREAU OF CONSUMER PROTECTION, FEDERAL TRADE COMMISSION, WASHINGTON, DC

 

[428] Mr. Stevenson. Thank you, Mr. Chairman. And we very much appreciate this opportunity to talk about the FTC's approach to consumer fraud on the Internet. The commission has submitted written testimony. I would be glad to answer questions about that. And I also would just like to hit the highlights here.

 

[429] As we have heard already, what the Internet provides hucksters is this instantaneous, global reach, and the ability to inflict large scale consumer damage very quickly.

 

[430] And to respond effectively as law enforcers and especially one of the smaller law enforcement agencies, what we need to do is to be able to move at a quick-step pace and to be able, as we have heard from some of the earlier comments, to work across borders in what is a global marketplace.

 

[431] To do this, at the FTC, we have developed a systematic approach that involves both teamwork and technology. And let me highlight 4 components of that. One is a system to handle consumer complaints. A second is a system or strategy to monitor the marketplace for the claims being made. A third is strategy for aggressive and cooperative enforcement. And finally, there is the strategy for consumer education.

 

[432] On consumer complaints, what we did first was get organized about handling the information that consumers were giving us about consumer fraud. We set up a consumer response center. In the first couple of weeks, we handled a couple of hundred calls. We are now up to about 50,000 consumer contacts of various sorts every month.

 

[433] We set up a toll-free line. We set up and developed a computer system to handle the evidence that consumers were giving us about the frauds they were experiencing. We set up a web page for filing complaints right online.

 

[434] And then, what we have done is once we get the information that we have, we combine that with the complaints that other folks collect. And in this, we have a number of partners, the Postal Inspection Service, the Better Business Bureau, the National Consumers League, a project in Canada called Project Phone Busters, Social Security's IG's office.

 

[435] We combine all of those complaints in a project we call Consumer Sentinel. And then, what we do is we work that data. Internally, we have staff doing preliminary investigative reports and trends analysis. We have attorneys and investigators ready to do what we call rapid response cases.

 

[436] And we have a couple of examples. One example in our paper is a verity case, an example of what this permits us to do when we use this systematic approach. What happened there is got a spike of about 600 complaints that just came in all in a bunch. The data analysts spotted it. The attorneys and investigators started working the case, getting declarations. And we were in court within a week or two.

 

[437] And not all of our examples are that dramatic. But I think what we have seen quieter ways is an improvement in the speed at which we can respond which is one of the key elements in dealing with the Internet pace of fraud.

 

[438] That case involved, I should say, people were visiting particular websites and unbeknownst to them got their modem connections switched and as a result found that they had a long distance charge for a call to Madagascar which is sort of an illustration of the international component of this too.

 

[439] Externally what we have done with this consumer sentinel system is to share the information out to the other consumer cops on the beat, so to speak, to support the cases that they are bringing. And we have 300 organizations in the United States and Canada and now Australia that have signed up for this data sharing project, including the IRS CID folks, data available through a restricted access law enforcement website.

 

[440] We had built on this technology to include identity theft complaint information. We have a project with the Department of Defense called Soldier Sentinel to collect information in that way as well.

 

[441] Now, the second component of our systematic approach is to use the technology and teamwork to monitor the market claims. We have done surf days, I think someone refereed to earlier. I think we have done 26 of these and now with domestic and foreign agencies.

 

[442] What we are doing is we are looking for particular kinds of suspect claims in a systematic way. Then, we follow up with e-mail warnings. And then, we follow up after that with possible law enforcement action.

 

[443] We set up an Internet lab so that we can see the consumer's eye view of the market and also so we can turn what we are seeing into evidence so we can use in court. We have done Internet training in the United States and abroad. We trained 800 people from various agencies. I know that IRS folks have participated in a number of those trainings.

 

[444] On the enforcement front, the FTC has brought approximately 170 cases involving Internet fraud of some sort against more than 500 defendants and recovered and redressed more than $50 million, and a lot of that involving pyramid schemes which are one of the things that has proliferated in the new medium.

 

[445] We have also used the web for consumer education. We have set up I think what we call the teaser sites where the websites are mimicking come of the suspect claims that we are seeing out there on the web. And it leads the consumer into the consumer education that they need to get in that scenario.

 

[446] Finally, I would mention that we are also working on the international front. What we have seen that an increasing number of cases we are bringing has some international component, money offshore, defends offshore, some international participation in some way.

 

[447] And what we have done to address that is efforts on the litigation front. And I know we have consulted with the S folks on some of their experiences in offshore asset issues.

 

[448] We have also worked on cooperation. We have done bilateral cooperation agreements with our counterpart agencies in Canada, Australia, the U.K. We are working on a multilateral coordination as well through various venues, including what we call the international market provision network in attempt to address this part of the problem.

 

[449] So that is our start on enforcement for the Internet age. I would be glad to answer any questions. Thank you.

 

[450] The Chairman. Thank you.

 

[The prepared statement of Mr. Stevenson appears here on the Senate Finance Committee website.]

 

[451] The Chairman. Now, Mr. Brostek.

 

STATEMENT OF MICHAEL BROSTEK, DIRECTOR, TAX ADMINISTRATION AND JUSTICE ISSUES, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON, DC

 

[452] Mr. Brostek. Chairman Grassley and Senator Baucus, I am pleased to be here to join the committee as you address a number of issues related to the role of IRS in enforcing the tax laws. As requested, I will discuss 2 topics, the relationship between IRS' audits of taxpayers and other programs they use to ensure that tax returns are filed and they are filed accurately and how IRS is managing the increased workload in 2 of its programs, offers and compromise and innocent spouse claims.

 

[453] IRS' audit rate has declined substantially in the past few years. And this has received a lot of public coverage which raises a question of whether those declines in the audit rate are in some sense encouraging more noncompliance. The fiscal year 2000 audit rate was about .5 percent. And that was more than 70 percent below the 1995 rate and 45 percent below the rate for 1999.

 

[454] Audits, however, are not the only tool that IRS uses to enforce the law. And as the table on the easel shows--and it is table 1 on page 4 of the testimony, it would show up better there--IRS performed about 238,000 field audits, face-to-face audits last year and about 380,000 audits through the mail, for a total of around 618,000. However, there were in contrast over 8.3 million total contacts with taxpayers and under the other major programs that IRS has to enforce the law.

 

[455] Also, as the first line of the table shows, 100 percent of taxpayers' returns are actually screened by IRS in some sense to identify those that should be followed up on.

 

[456] Although these statistics demonstrate IRS' presence in enforcing the code and ensuring that taxpayers file accurate returns, it is much broader than is reflected just in the audit rate. The other programs that are here cannot actually substitute for audits.

 

[457] These programs are reliant on information reported to the IRS by the taxpayers themselves and by third parties, such as employers, banks, and other financial institutions. Consequently, audits remain the primary tool for IRS to use in ensuring the accuracy of returns filed by taxpayers whose income or other characteristics are not subject to computerized checking.

 

[458] In part because audits are such an important tool, the decline in the rate raises this legitimate concern about possible adverse effects on the compliance levels in our system. Unfortunately, neither IRS nor anyone else knows the effect of these declining rates on voluntary compliance because we have not had a measurement of voluntary compliance since 1988.

 

[459] Such a measure is key not only to determining whether compliance is declining, but in determining where it may be declining, such as in the areas we are talking about today, as well as how IRS may be able to address those declines.

 

[460] For example, in its earlier studies of voluntary compliance, IRS reports that that information was useful in better targeting its audit and enforcement efforts in identifying areas in which forms and instructions might be changed and even cases where statutes might need to be changed or clarified.

 

[461] Two programs that are using resources that are devoted to audits in collection activities are the innocent spouse and the offers and compromise programs. Both of these programs have experienced a very large increase in their workload since the passage of the IRS Restructuring and Reform Act in 1998.

 

[462] A significant part of IRS' response to that increase has been to shift staff to these programs from its other auditing and tax collection functions. These shifts are cited by IRS as part of the reason for the decline in the audit rate and in such things as liens and levies use.

 

[463] In addition to shifting staff, however, IRS has taken a number of steps to deal with the workload that has arisen in these programs. Regarding innocent spouse claims, IRS is essentially processing many of those claims and has implemented a new case processing system that standardizes the questions that are asked of taxpayers and the documentation that is maintained for that case.

 

[464] In addition, for innocent spouse, the workload seems to have become fairly stabilized. And therefore, IRS may have an opportunity to begin working down the caseload in this area and to freed-up staff could be shifted back into auditing activities.

 

[465] The offer and compromise program is far less along in gaining control over its workload. The offer workload has increased by 83 percent in the past 3 years. And IRS is just beginning to take steps, such as centralizing case processing into centers.

 

[466] If IRS is successful in improving its handling of the cases in these 2 programs, it may be able to redirect some of its resources to the kinds of things that are being talked about today to better enforce the law. However, given how recently these changes have occurred in the programs, it is not clear at this time whether IRS will be successful in working down those case inventories.

 

[467] That concludes my statement. I will be happy to answer questions.

 

[The prepared statement of Mr. Brostek is unavailable at this time.]

 

[468] The Chairman. Well, we thank all of you. Before I start with questions, we have a person who was appointed by President Clinton to the IRS oversight board in the audience. And I want to thank Mr. Steve Nichols for attending this hearing and for his good work on the IRS oversight.

 

[469] Would you stand, Mr. Nichols, so you can be recognized? Thank you very much. I appreciate that.

 

[470] Mr. Rossotti, we have heard some very strong testimony. The IRS, of course, is kind of caught in the middle in some respects. It enforces the law, but the IRS also has to protect honest citizens from tax scam artists.

 

[471] And no words are more true than where the employers are being told that they are not going to have to withhold taxes. We have hard today some of the things that the IRS is doing. And I should commend the IRS for those efforts and for the fine work of many dedicated IRS employees. And so rhetorically, I am going to ask, is that enough?

 

[472] But then, let me go on to ask the real question. Does the IRS need to be out there sooner and faster? Should the IRS be actively finding scam artists as quickly as possible before the scam artists in a sense find and fleece the honest taxpayer of thousands of dollars?

 

[473] Mr. Rossotti. Yes, Mr. Chairman. I think that the answer to that is certainly, yes, we need to be aggressive and faster on the draw in a lot of things that we do.

 

[474] But I think that specifically with the Internet and some of the scams that proliferate, I think some of your earlier witnesses mentioned this and came up with some good suggestions on how we could improve that. I think the first step here is to be active ourselves on informing the public, warning the public, and using a channel, such as our website and other channels to do that.

 

[475] On the employment tax schemes that you mentioned that have begun to get a lot of publicity, we have been doing that. I mean, this is a notice that we just put out specifically on employment tax schemes. And there has been a number of TV programs this week, a TV program that I was on that was specifically on this subject.

 

[476] And so I think using those public education vehicles more aggressively is one of the things that we can do better. And it is one of the major strategies that we have. It was not a high priority at the IRS historically.

 

[477] And in the last year, the last 2 years, we have added some more resources to it. I think even though it takes a little more resources, it is the most efficient thing we can do, warn the public.

 

[478] I think one good thing about the American taxpayer is that they do have common sense. They are pretty smart most of the time. When they see something that is too good to be true, with a little help from us, they will figure it out. So that is step 1.

 

[479] Then, on the other side, of course, we do have to use our enforcement powers to find the promoters especially who promote these things. And I think it is important to note that with respect to the Internet, there are some aspects about taxes that we have to remember. And that is that taxes are a political subject, as well as an item that could be thought of in the same context as a consumer issue.

 

[480] In other words, there are many people around the Internet that have strong opinions about taxes. They are allowed to express those opinions. They are even allowed to say that they think the tax system is unconstitutional

 

[481] Congress recognized that point as a matter of fact explicitly in the restructuring act with section 3707 which made it illegal for us to designate anyone as a tax protestor. So we do not even use that term anymore.

 

[482] So people are allowed to protest. I mean, Congress has recognized that. If all they do is advise people or claim their opinions, no matter how wrong they might be, they are allowed to do that.

 

[483] Where our authority comes in and where we are focusing is when they go beyond just expressing an opinion and trying to actually sell something to a taxpayer. And there are sections of the code that give us the authority even to get an injunction if somebody goes out beyond putting something out and making an opinion and goes and tries to actually, for example, help assist someone in preparing a return or sells a product that is aimed at enticing people into an illegal kind of a scheme.

 

[484] And that is what we call our promoters. And we have most of our efforts, a lot of our efforts on both the civil side and the criminal side directed towards finding those promoters. It really is more going after the promoters on the website because anyone can come up and shut down one website and put up another website. That does not take anything very much.

 

[485] But we can actually go after promoters and either get an injunction against the promoters in some cases or put them in jail which is what we are actually doing in a number of these cases. I mentioned statistics, 117 I believe I said that have gone to jail. Then, we have a more permanent effect we think.

 

[486] So what we are trying to do is to be more effective, much more effective on the public education side. There are certainly things we can do to improve our website, although it already gets 2 billion hits. In fact, a few of your witnesses came up with some ideas that we were writing down. We are going to follow up on, on that score.

 

[487] But that is one half. And then, the other half is really going after the promoters and using all the tools that are at disposal to do what we can to shut them down.

 

[488] The Chairman. Is it possible that the IRS could adopt some of the successful strategies that agencies, such as the FTC and the FDC have had in quickly shutting down Internet websites?

 

[489] Mr. Rossotti. I think that we have recently begun to consult with these agencies to find out more about these. And I think Mr. Stevenson had some comments here about how effective he has been with getting consumer complaints in.

 

[490] We have an ability to complaints. We have a hotline, but it is a telephone line right now. And we could certainly enhance that to take that kind of information over the website.

 

[491] The precise authority to actually shut down schemes may be somewhat different in the tax area than it is in other consumer areas. But I think there is some very worthwhile things that we can do, like consulting with our colleagues here and finding out more about their techniques.

 

[492] The Chairman. Well, let me ask you, do you need more authority or you do not know yet?

 

[493] Mr. Rossotti. Well, I do not think we know yet. I think we need to -- we do have authority to shut down through the tax shelter regulations and the injunctive authority. And we have used it, as I mentioned. And we got about 17 more of those that we are looking at.

 

[494] I am not sure if there is anything more that we would need to do to cover specifically websites. We need to work on that a little more before I can say.

 

[495] The Chairman. Two suggestions and then I will go to Senator Baucus. Number one, I think it was Mr. Sommers or maybe it was not him, but one of the witnessed. And I think he referred to it this way, you spend a lot of time going through hour after hour stuff on the website to find the information. If it were possible, and I think the implication was that it is possible, for the IRS to make sure that their information pops up first. Is that something that can be done? Or is that something that is costly?

 

[496] Mr. Rossotti. That is one suggestion that I think we need to look into and see if we can do something with that.

 

[497] The Chairman. All right.

 

[498] Mr. Rossotti. I think there is good potential there.

 

[499] The Chairman. Yes. And then, what about the other offer from the 2 lawyers that were on the first panel that they and maybe some other people would sit down from a legal standpoint and work with you as a practitioner or people that are in this area? And they referred to an opportunity to do that maybe in a couple of months when they were going to be in town for some professional meeting.

 

[500] Mr. Rossotti. And also, another good suggestion. We also work closely with the bar association on many things, as well as other practitioner groups. By the way, 55 percent of the taxpayers in this country do have their returns prepared by a preparer and even over 80 percent for those in the upper income brackets.

 

[501] So that is one of the really important strengths of the tax system in this country. And to the extent that we can work with those preparer groups more effectively on this particular issue, that is definitely a positive thing. And I did hear that suggestion. And we will take them up on that.

 

[502] The Chairman. Senator Baucus.

 

[503] Senator Baucus. Thank you, Mr. Chairman.

 

[504] Earlier, you mention, Commissioner, about K1s and other important techniques to try to get a match and so forth. But is it not true, at least according to the earlier panel, that a lot of these people are not going to get caught with K1s? That is just pretty garden variety stuff, K1, compared with the sophistication of what a lot of these people are doing.

 

[505] Mr. Rossotti. There is no question. But if you end up with one of these trust schemes like this for at least many of the people, especially the upper income people, they do file a 1040. And what they do is they through these various flurry of paper work come up with something that offsets the income or moves the income.

 

[506] And they may file in fact a K1 if they actually have a trust. And so that gives us a clue. I mean, it is not going to enable us to do anything directly, but it may help us and we think it will help us to identify some of the cases that we can then follow up on more specifically. It is just one technique. It is not a solution.

 

[507] Senator Baucus. I understand.

 

[508] Mr. Rossotti. But it is a technique to potentially find --

 

[509] Senator Baucus. I understand. How many people do you think are out there in the category of promoters or maybe sub-promoters who are essentially perpetrating these schemes and basically ripping off the American legitimate honest taxpayer? How many do you think there are, just a rough guess?

 

[510] Mr. Rossotti. I really do not know. I do not know how many promoters there are. I mean, I will say though that we think that -- and some of them are informal networks of promoters.

 

[511] Senator Baucus. Well, you can give me a definition if you want. Just what is your sense of the magnitude of the problem?

 

[512] Mr. Rossotti. In terms of the number of promoters, I really do not think I can give you a reliable estimate.

 

[513] Senator Baucus. I am not going to hold you to it, just a guess.

 

[514] Mr. Rossotti. Yes.

 

[515] Senator Baucus. Are you talking about 10?

 

[516] Mr. Rossotti. Oh, no.

 

[517] Senator Baucus. Are we talking about 1,000?

 

[518] Mr. Rossotti. There are definitely hundreds if not thousands of serious promoters. All right. There is a lot more than that that are fringe elements if I can call them that that are just --

 

[519] Senator Baucus. Let us just take the 1,000.

 

[520] Mr. Rossotti. Yes.

 

[521] Senator Baucus. All right. What are you doing about those 1,000?

 

[522] Mr. Rossotti. Well, that is where we are putting most of our investigative resources on.

 

[523] Senator Baucus. How many of those 1,000 have you actually arrested?

 

[524] Mr. Rossotti. Well, we had, let me see, 117 convictions over the last few years. And we have 135 investigations.

 

[525] Senator Baucus. All right. Over how many years?

 

[526] Mr. Rossotti. This is over about the last 2 and a half years since we have been really --

 

[527] Senator Baucus. Those 117 were for what?

 

[528] Mr. Rossotti. These were illegal trust schemes. They were mostly promoters touting illegal trust schemes. We have 135 open investigations right now.

 

[529] Senator Baucus. I do not mean to give you a hard time, but do you think nevertheless that it is still a significant problem or not?

 

[530] Mr. Rossotti. It is absolutely a significant problem. And I think that one of the issues that is murky, I mean, as I say, we do not have a good handle on how significant it is. But I think part of it is identifying the people. And then, the other is actually doing something about it.

 

[531] Senator Baucus. Do you have a plan as to when you think you will have a handle on this and get it under control? I mean, is it 1-year plan? Is it a 5-year plan? You must have some kind of a plan so there is a beginning and an ending to try to get a hold of this thing, do you not?

 

[532] Mr. Rossotti. Well, I think when you say a plan with an ending, that is where I would be --

 

[533] Senator Baucus. With benchmarks.

 

[534] Mr. Rossotti. Yes.

 

[535] Senator Baucus. I mean, first, you want to get a plan to figure out how many characters are out there.

 

[536] Mr. Rossotti. Right.

 

[537] Senator Baucus. And then, by what date you are going to begin to get so many brought to justice so that you get that number down and so that the fraud, the amount of dollars that the American taxpayer is defrauded is down to an acceptable level.

 

[538] Mr. Rossotti. Yes.

 

[539] Senator Baucus. But you have to have some plan, do you not?

 

[540] Mr. Rossotti. We definitely have a plan to attack this, but I think where I might have to be a little more cautious is saying that there is an end point. Many of these kinds of schemes, as I think one of your earlier witnesses stated, has been going on for years. I mean, they come up and go.

 

[541] I mean, as long as there is a tax system, as long as there is a complex tax system, there is going to be different varieties. I do not think we will ever get to "end point". I think we will be perhaps more or less effective at shutting down some of these.

 

[542] Senator Baucus. There are estimates between $70 and $300 billion a year. What is an acceptable level for you?

 

[543] Mr. Rossotti. Well, I do not think there is anything that is acceptable.

 

[544] Senator Baucus. Well, I will be honest with you, Commissioner. In listening to you, it kind of sounds like, well, you know, there is a problem. We will deal with it. There is always going to be a problem. It sounds to me like there is always going to be $70 to $300 billion in listening to you.

 

[545] Mr. Rossotti. Well --

 

[546] Senator Baucus. All right. How are we going to get a hold of this thing?

 

[547] Mr. Rossotti. All I can really do to respond to you is to say that what we have done is we have identified this as one of the key priority areas for our whole enforcement program, this area of illegal trust and these illegal schemes.

 

[548] We are putting resources into it to learn more about the magnitude of it and shut people down as fast as we can go and also warn the public about it. Those are the 3 things.

 

[549] Senator Baucus. All right.

 

[550] Mr. Rossotti. As we learn more about it, I think we will be able to be more responsive to your question about how we can get this down. I just do not want to make unrealistic promises.

 

[551] Senator Baucus. I understand. But I am a little concerned when I hear, for instance, like, well, gee, that is a good idea. That is a good suggestion the FTC gave. Or that is a good suggestion that the earlier panel made.

 

[552] My thought is, well, why have you not thought of that beforehand? These are pretty basic suggestions that they had here today. It just sounds like, to be honest, we are a little behind here.

 

[553] Mr. Rossotti. Well, what I would say is that we started on this program, as I noted, in a serious way probably almost 3 years ago. We put the first notices out. We had these things up on our website. We have had these convictions of these promoters. We have had just recently the largest law enforcement action in the history of the IRS.

 

[554] So I do not think that we have been failing to be aggressive about it. But I would also have to acknowledge that we can learn more. We can do better.

 

[555] Senator Baucus. But this hearing is being televised. There is probably millions of people watching. What can you tell them to ensure them that they cannot get away with this stuff?

 

[556] Mr. Rossotti. Well, I think that the one point that I think is very important to get across as far as the general public is concerned is notwithstanding the fact that there are these proliferations, I mean we have heard all this testimony, is it is still not a good bet for the average taxpayer.

 

[557] And notwithstanding whatever problems we may have and the speed with which we may get certain cases which is always going to be somewhat limited, it still is not a good deal for the average taxpayer to take a chance on thinking that they are going to get away with one of these things.

 

[558] As the other witness said, there are many different vehicles that we find to find or identify problems. Sometimes, it may take a little while, but we often get around to them. And the penalties are very, very stiff. I mean, the down side for this for both taxpayers and especially promoters is pretty serious in terms of civil fines, as well as criminal penalties.

 

[559] So I have often said, if you want to gamble, you are better off to go to the casinos and take your chances there than taking your chances in one of these schemes.

 

[560] Senator Baucus. Is it for IRS to enforce the problem? Or is it more FTC? I mean, it sounds like, according to the earlier testimony, it is kind of mixed here. Maybe, things got to fall through the cracks. I do not know. And one witness thought that the IRS is not really geared very well towards enforcement against these kinds of problems or the agents are just trained to do certain things a little bit different.

 

[561] Mr. Rossotti. Well, I think I would disagree with that. I think we have different kinds of agents. They are trained to do different things. In terms of finding these promoters in these deliberate schemes, we do have a criminal investigation division which is trained precisely to find these kinds of folks and put them in jail. And that is what we have been doing.

 

[562] We are focusing more of their attention on these kinds of schemes. So I think they are very effective as a matter of fact. They are really pretty well recognized throughout the Federal Government in finding people who propose financially frauds.

 

[563] Where historically I think the attention of the IRS has been less significant has been on the public education side. That has not been as heavy a priority as it should be.

 

[564] And we have taken some significant steps to upgrade that, to improve that. The web is one of the positive vehicles for a website, 2 billion hits here, that we can use.

 

[565] Senator Baucus. Of the 2 billion, how many of those 2 billion were aimed at your fraud subsection?

 

[566] Mr. Rossotti. I do not have that number. I would think that we could try to get that for you.

 

[567] Senator Baucus. And one of the earlier witnesses suggested that she searched the web a couple, 3 times a day. Do you do that?

 

[568] Mr. Rossotti. Well, I think the problem that we have is that just searching the web and finding schemes in identifying the problem is a relatively small percentage of our problem. Our problem is much more. We have a lot of information from a lot of sources on where these schemes are.

 

[569] I do not think that is our bottleneck. I think our bottleneck, if you want to call it that, is reacting and doing the investigative work to actually find enough evidence to deal with the schemes. So we could certainly do more.

 

[570] And we have done a significant amount of monitoring every day. We do a significant amount of monitoring. We could do more of it. But I have to honestly say that I do not think that is where our bottleneck is. I do not think that is our limiting factor, the identification.

 

[571] Senator Baucus. I am sorry. The bottleneck, you think is where?

 

[572] Mr. Rossotti. It is the investigative and follow-up. That is the time consuming part.

 

[573] Senator Baucus. Do I have to turn it over here?

 

[574] The Chairman. Go ahead.

 

[575] Senator Baucus. Why is that a bottleneck? What could be done to widen the neck of the bottle?

 

[576] Mr. Rossotti. Well, I think that the point is that when we find -- just finding somebody who is making some claims over the Internet is not something that we can do anything about. We do not have any -- I mean, people can put up things on the website. They can do that no matter how much we disagree with it.

 

[577] We have to get to the point where we find that they are actually following through with tangible action, such as helping people prepare returns or actually selling information. Most of the time -- sometimes, they are doing that directly over the web. But oftentimes, they are doing that, they are just advertising on the web.

 

[578] Senator Baucus. Let me just read -- we have a copy of a site here. I cannot mention the name. But it is pretty stunning, the claims here. It is not just saying, hey, we will lower your taxes.

 

[579] It says, "We offer complete eradication of probate, gift, estate tax, inheritance, transfer taxes, reduction to near zero rates of federal income taxes and State income taxes regardless of the country of origin, complete escape from Social Security taxes, capital gain taxes, Medicaid taxes, escape VAT, escape the ravages of loss", etcetera. "In our entire history, we have never had a member suffer losses tax wise, legal wise, otherwise, money wise, or otherwise as a consequence for using our techniques. Privacy policy, WE HAVE NEVER PROVIDED THE CLIENT MEMBER INFORMATION TO ANYONE AND WE NEVER WILL."

 

[580] Now, that is going to raise a red flag.

 

[581] Mr. Rossotti. Yes.

 

[582] Senator Baucus. Now, that is the kind of site, hey, we are going to go and track those guys down.

 

[583] Mr. Rossotti. Yes.

 

[584] Senator Baucus. What do you do when you see a site like this?

 

[585] Mr. Rossotti. Well, I think again I have to go back to the basic point though. I mean, anyone is entitled under the law to make any kind of false claim, unless we can establish that they have actually sold something to somebody that caused them to file false tax returns.

 

[586] There is a significant amount of fact gathering and investigation that is required before you can to go to court which is what you would have to do and convince a judge to give you an injunction. We cannot simply go in and say, we think these people are misleading the public and therefore we are going to shut them down. There is many websites that mislead the public, but we do not go in and shut them down.

 

[587] Senator Baucus. If you would see this in your search, what would you do when you see this site?

 

[588] The Chairman. We would like to have if the same question was asked to you about an issue, a website that was not a tax area. Now, there may be a law that -- I hope there is not a law that applies to this information of taxes versus a non-tax area.

 

[589] But how would you respond to that, the very same question that Mr. Rossotti got?

 

[590] Mr. Stevenson. What we have done in some of these surf days where we are looking possibly suspect claims in a particular areas --

 

[591] Senator Baucus. How many --

 

[592] Mr. Stevenson. I think we have done 26. And we have done these in cooperation with various agencies depending on the topic and whether their jurisdiction covers it on various issues, credit repair, get rich quick, multilevel marketing and the like.

 

[593] And what we have done in general terms is we have surfed with partners, looked at using sort of the certain terms that may come up in those kinds of cites, identify the sites that seem to be problematic, and then depending on the subject again, send them a warning notice or even a message telling them about the relevant law and saying that you may need to determine whether this is in compliance with that law.

 

[594] And what we have done after that is gone back and checked to see, well, what happens to those sites. And we find that a certain percentage of them then go down either because they the people who may just not have appreciated what they are getting into or the notice may have been enough.

 

[595] And then, we go back after that with an eye to what cases might be brought out of those. And different subject matters do pose obviously different challenges here, but that is sort of our general approach that we use.

 

[596] Senator Baucus. All right.

 

[597] The Chairman. Let me follow up then with Mr. Rossotti. We have an example up here. This is Anderson Arc and the Institute of Global Prosperity. Let us give you the benefit of the doubt, those who walk up to the line and do not cross the line. But here, we have somebody that is -- are they in jail? They have been raided I suppose, but they are still operating.

 

[598] Well, let us put it this way, the website is still up. Are you saying you cannot do anything?

 

[599] Mr. Rossotti. No. We can go in. And we can go in. And we have on occasion gone in and requested the court to give us an injunction to shut down a promotion scheme which could include their website. But obviously, going into to court to get an injunction requires investigation. It requires evidence gathering.

 

[600] There is also a question of whether the first thing you want to do is to go in. There is some definite tradeoffs between getting an injunction and prosecuting the people for actually criminal activities. So there is that issue that needs to be considered.

 

[601] So I think what one of your earlier witnesses pointed out is that if you really want to go after somebody that is a serious promoter, there is a period of 1 to 2 years potentially of investigation and then bringing the case to the U.S. attorney and to court.

 

[602] And during that period of time, they may continue to do certain things that we do not like. That is true of any criminal activity. So it is really not just as simple as us knowing that there is a website and then just making a decision that we want to shut it down. We cannot have the authority to do that.

 

[603] The Chairman. Well, I do not think that Mr. Stevenson said that in every instance they can do that.

 

[604] Mr. Rossotti. Yes.

 

[605] The Chairman. But making inquiries have had the impact, let us put this way, a chilling impact.

 

[606] Mr. Rossotti. Yes.

 

[607] The Chairman. And maybe, the IRS without violating laws or the constitution, raising questions might have that same chilling impact.

 

[608] Mr. Rossotti. Perhaps.

 

[609] The Chairman. I do not know if that makes me sound like I am suggesting a police state because do not interpret it that way.

 

[610] Mr. Rossotti. Yes.

 

[611] The Chairman. But the extent to which you are really asking, inquiries and somebody is afraid to answer those inquiries because they might be exposing themselves as somebody violating the law, it seems to me to be if you are just asking for information, and as my staff just said, that is what the FTC does.

 

[612] Well, let us move on. I have a couple more questions that I want to ask orally, but for Mr. Rossotti, I will have some questions in writing.

 

[The questions appear in the appendix.]

 

[613] The Chairman. And then, now for you orally, in the 1998 act, the IRS was required to prepare a report on noncompliance, particularly willful noncompliance of taxpayers.

 

[614] As I understand the requirement for the report was included in the statute at your request. Where is the report? And when could we expect to see it?

 

[615] Mr. Rossotti. I have to honestly say that, first, it is true that I was one of the people that suggested putting that in. We worked on preparing that report. And it was supposed to be done jointly with the Treasury.

 

[616] At the time that we were getting the draft finished, the Treasury of the previous administration was basically -- the election was occurring. And there was a change in administration. And that basically just put it into limbo very honestly. The new administration obviously is just getting cranked up. So in all honesty, that is what happened.

 

[617] The Chairman. All right.

 

[618] Mr. Rossotti. It got caught during that period. And I think it is a very important report. We have the limitations in terms of data because I think as your GAO witness noticed, we have very, very old data in terms of measuring compliance. So the effectiveness of what we can say in this report is limited by that.

 

[619] But we do have to work with Treasury now, with the new Treasury Department in order to get that report done.

 

[620] The Chairman. And has there at least been a step taken in that direction?

 

[621] Mr. Rossotti. There has been. We worked on some drafts. And we have --

 

[622] The Chairman. I mean with the new administration.

 

[623] Mr. Rossotti. With the new administration, frankly, they have been focused on the tax bill.

 

[624] The Chairman. All right.

 

[625] Mr. Rossotti. We have not really gotten -- they do not even have their whole staff in place yet. So I think it would not be fair to them to really focus on this.

 

[626] The Chairman. Yes.

 

[627] Mr. Rossotti. I think we have to wait until they get their staff in place a little bit more.

 

[628] The Chairman. It might be possible that people that would be more of the professional staff would be involved in it.

 

[629] Mr. Rossotti. Right.

 

[630] The Chairman. Maybe, you could make some inquiry with them.

 

[631] Mr. Rossotti. Sure.

 

[632] The Chairman. And then, it could move at that level.

 

[633] Mr. Rossotti. Yes, sir. We will. I agree that that is something that we should do. And we will.

 

[634] The Chairman. All right. Now, I want to refer to the Webster report and ask of Mr. Rossotti, it revealed that criminal investigation had been drifting away from its primary mission of investigating tax code violations into a broader array of financial offenses that had not very obvious direct connection with tax compliance.

 

[635] And I know some of these were probably meant to be well intentioned in the areas of narcotic trafficking and stuff like that. But the investigations did not bring in the revenue that was anticipated.

 

[636] Further, tax-related statutes were used in only a very limited number of these narcotics cases that criminal investigation participated. So one question. What steps are you taking to ensure that your manpower resources are being utilized in a manner that does not detract from the primary goal of tax compliance?

 

[637] Mr. Rossotti. Well, that is true. That is the principal finding of the Webster commission. And we have really taken that very seriously. That has been a major priority for our whole criminal investigation operation.

 

[638] And a part of that, as was recommended by Webster, was to reorganize the whole criminal investigation function and reestablish that their mission was primarily tax compliance. We have a new leadership team in criminal investigation that is completely dedicated to that. And we have developed a strategic plan that develops cooperation between them and our civil functions, focused on these keys.

 

[639] And as a matter of fact, illegal trusts is one of their number one priorities. As was noted, we just did the biggest criminal investigation action in the history of that organization. And it was focused specifically on this area.

 

[640] So we have moved that organization very aggressively in that direction. I will say that because of the length of time that it takes to actually get cases out, you will not see the statistics showing that immediately. It takes a bit of time because there is an inventory of cases. And they have to work their way through the system.

 

[641] The other thing that we have done though is try to reestablish a better and more effective relationship between the civil side of the IRS and the criminal side. This had gotten very, very distant because of the points that you made.

 

[642] It used to be that most of the cases that got into the criminal investigation chain came as referrals from the civil side of the IRS. That had been going down for decades. And it had gotten to the point where there was very, very low level of referrals.

 

[643] We have taken some steps, although again it takes time for this to play out, to provide better support, better training within our civil side so that when there are cases that are identified that have criminal potential that those are in fact referred. That really should be our best source. And it had gotten very, very weak over the years.

 

[644] So those are the 2 principal things that we have done.

 

[645] The Chairman. if I may, again, going back to one of the suggestions on the first panel. And I am assuming in past discussions of amnesty, if I recall, there is a philosophical objection within IRS to any amnesty. And I do not think the Federal Government has ever had one. Is that right?

 

[646] Mr. Rossotti. Not that I am aware of.

 

[647] The Chairman. All right. Now, they were suggesting that in a very narrow area of this to hopefully invite these people out. Is that also philosophically opposed by the IRS?

 

[648] And I do not just blame you for the philosophical objection.

 

[649] Mr. Rossotti. Yes.

 

[650] The Chairman. That is kind of maybe a culture disease that it has. And I am not convinced that amnesty is always the right thing, but some States have used it effectively.

 

[651] Mr. Rossotti. Yes. I think that we would be a long way to actually going to the route of an actual amnesty. I think, first of all, that would be a Treasury policy issue that we would have to consult with.

 

[652] The Chairman. All right.

 

[653] Mr. Rossotti. I myself would have to say I would have a lot of reservations about really an amnesty. I think that one thing that is true is that if somebody comes in voluntarily that has engaged in a tax avoidance scheme and does it completely on their own, we can work with them oftentimes to avoid any criminal penalties.

 

[654] But if we identify it, then we are very reluctant to give people in effect what could be viewed as a free pass for everybody else. So we have to be very careful here about the signals that we send to taxpayers about the ability to try it out. And then, if you get caught, you can sort of get out of it in some way.

 

[655] The Chairman. Well, I assume you would put a time limit on it.

 

[656] Mr. Rossotti. Yes.

 

[657] The Chairman. I mean, you would be in amnesty forever. You would say, in the next six months if you report, you will get the benefit of amnesty.

 

[658] Let me follow up on my last question. And this is unrelated somewhat to what we are talking about. And this is just kind of to get an update on the innocent spouse and the offer and compromise and installment agreements.

 

[659] These 3 programs serve a very important purpose of getting taxpayers back into the tax system, having the government recover some or all of the money that is owed, allowing these people to get on with their lives without the constant worry and strain of that the IRS will be calling.

 

[660] And I do not think that we here in Washington appreciate that these people probably have enormous heartaches and anxiety over their unpaid taxes. The 3 programs were meant to give people a fresh start.

 

[661] Unfortunately, we have heard that these programs have been bogged down with people having to wait very long periods of time to reach an agreement or get a resolution of their problem.

 

[662] So where are we with these 3 programs? Is there a problem? Do you see the problem getting better or worse? And finally, is there anything that we in Congress need to do to help the service solve these problems?

 

[663] Mr. Rossotti. Thank you very much. They are. With respect to installment agreements, I think that those are probably the most successful and widely available.

 

[664] The Chairman. Yes.

 

[665] Mr. Rossotti. I do not have numbers, but I can get them for you in terms of the increase in installment agreements. And we have made steps to make them easily available at least at the lower end of the debt scale so that people can really have a right to an installment agreement almost automatically for certain kinds of debt. I think that part I would say is going the fastest or the best and is I think working reasonably well.

 

[666] With respect to the other two, they are complicated, as the GAO witness noted. We have gotten a tremendous upsurge in business in volume in these areas since the passage of the Restructuring Act.

 

[667] With respect to innocent spouse, I think there is a very big difference between where we are today, in my opinion, in the innocent spouse program versus the offer and compromise program. I think we have made very significant progress in the innocent spouse program.

 

[668] I wrote a letter after the joint hearing last year to Chairman Archer and laid out, because he asked me to, where we were going to be on that. And I indicated that I thought that by the end of this fiscal year, we would get our -- really, the important thing from the taxpayer's standpoint is getting an answer, getting what we call a determination.

 

[669] And we said that we would get down to we thought about 40,000 in inventory by the end of this fiscal year that had not gotten an answer yet. There is a minimum number that you could ever get to because there is a certain amount of time that it takes to process.

 

[670] We said that we would try to get down. We have already gotten to that level. And I think we may get down even further by the end of this fiscal year.

 

[671] We have taken some significant steps at both automation, centralization, training, and other things. And I will not say that we have that one completely under control. We still need to reduce the lag time some, but we are well on our path there.

 

[672] I cannot say the same with respect to the offer and compromise program. That has been a very difficult program. And it has consumed a very large quantity of resources of our collection staff. And we still have too large an inventory of claims of offer and compromise requests that are in the pipeline. And they are taking too long.

 

[673] We have some very aggressive steps that we are taking on that score. Probably the most important of which we hope to have really in place to a significant step by the end of this fiscal year is to set up 2 centralized sites with specialized resources to process most of those offers on a much more expedited basis.

 

[674] And more than that, we do have a team that is headed by I think a very outstanding individual on our team who is studying not only the processing of these claims, but really how we go about evaluating them. And I think we do not have the answers to that task force yet.

 

[675] But we want to look at how much time we are spending and how much of the taxpayer's time we are spending versus how much we really need to spend to evaluate these. And we may some discussions I think with you and your staff as we get down a few months down the road because we really need to take another look at that.

 

[676] I cannot say that any of us are satisfied with how that particular part of our program is operating. So we need to do better there, both processing wise and in terms of thinking how we actually do them.

 

[677] And I think that is essentially a quick summary of where we stand on both of them.

 

[678] The Chairman. All right. That is my last question.

 

[679] But perhaps, since the General Accounting Office has been observing this to some extent, I ought to ask your comment so we would have that in the record.

 

[680] Mr. Brostek. Well, a couple of things I would concur with Mr. Rossotti's assessment on the innocent spouse and the offers and compromise program. Between the two of those, the innocent spouse program does seem to be much closer under control.

 

[681] The incoming workload seems to have stabilized. It is not rising rampantly any longer. And they have taken a number of steps. They do seem to be starting to process those cases more rapidly. Their centralization in the innocent spouse program has been underway and seems to be working.

 

[682] The offer and compromise program, the workload is still increasing very rapidly. And the steps to try to centralize this processing and get more specialization in the staff is just getting underway now. So there is less optimism in terms of having that under control.

 

[683] One thing I had mentioned in terms of the general topic here, the tools I was alluding to over here do have some potential to help out with the kind of situations that we are talking about today in that they can help identify taxpayers whose tax returns change dramatically from year to year and it might be involved in these kind of situations.

 

[684] And to the extent that the auditors then can investigate those situations, it may provide some deterrent effect in terms of if their neighbor sees that they have actually been audited by the IRS and the approach that they have taken to eliminate their taxes is not working any longer, that would certainly spread among their neighbors. And it also provides potential opportunity for the referrals to the criminal division that Mr. Rossotti spoke about.

 

[685] The Chairman. Thank you. I am going to close by saying that I think this hearing is very educational, both for us, more importantly the taxpayer, maybe from the standpoint of suggestions that have come to the IRS from the first panel and from the practice of the FTC, very educational maybe even for the IRS.

 

[686] I think that we have heard many good ideas then and good commitments from your agency, Mr. Rossotti, or from you, Mr. Rossotti. And I thank you for that.

 

[687] I think we shed light on a very new and very serious problem. Senator Baucus and I will work together to oversee the IRS' response to this problem of Internet tax fraud and to ensure that IRS is finding these hucksters quickly and stopping them even faster.

 

[688] And obviously, we have a responsibility to listen to Mr. Rossotti from a couple of standpoints, resources and from the standpoint of the law.

 

[689] You might have even other things to suggest. Mr. Rossotti, we thank you for your cooperation for this hearing, for your future cooperation.

 

[690] And thanks to the entire panel for your participation.

 

[691] Our hearing is adjourned.

 

[Whereupon, at 12:52 p.m., the hearing was concluded.]