Tax Administration:

IRS Experience Using Undercover Operations' Proceeds to Offset Operational Expenses

GGD-91-106: Published: Jul 3, 1991. Publicly Released: Jul 3, 1991.

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Jennie S. Stathis
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Pursuant to a legislative requirement, GAO evaluated the: (1) Internal Revenue Service's (IRS) use of proceeds from undercover investigative operations; (2) results of such operations; and (3) financial audits conducted by IRS.

GAO found that: (1) the undercover operation offset provision allows IRS to use income earned from an individual undercover operation to offset expenses and expand the range of activities for that particular operation; (2) the 19 undercover operations using the offset provision have produced about $545,000 in income and, as of May 1, 1991, IRS applied about $121,000 of it to operational expenses and returned $155,000 to the General Fund; (3) as of May 1, 1991, undercover operations using the offset provision resulted in the seizure of over $207 million in cash and significant amounts of drugs, and in 75 convictions; (4) none of the IRS undercover operations met the criteria requiring a detailed financial audit; (5) IRS conducts internal audits only of those undercover operations involving offsetting in which proceeds exceed $50,000 or expenditures exceed $150,000, and conducts detailed audits on only about one-third of the undercover operations using the offset authority; and (6) requiring IRS to report on the results of its detailed financial audits when the undercover operation's covert phase is completed, instead of waiting until the criminal proceedings are over, could enhance Congress' ability to oversee the offset authority.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Legislation to extend the offset authority and revise the reporting requirements along lines GAO recommended was included in the Administration's 1994 crime bill. The provision was subsequently deleted and is not contained in the crime legislation passed late in 1994.

    Matter: Should Congress decide to extend the offset authority, it may also wish to revise the current IRS reporting requirements. Expanding the information IRS is required to include in its annual reports to Congress and requiring IRS to report the results of its detailed financial audits after the covert phase, instead of when the operation is closed, could provide Congress with more timely and complete information on undercover operations involving offsetting. Such reporting should not jeopardize undercover agents' safety or the success of criminal proceedings.

Recommendation for Executive Action

  1. Status: Closed - Not Implemented

    Comments: IRS does not intend to implement this recommendation.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Inspector to ensure that Internal Audit expands its financial audits to include all undercover operations involving offsetting, regardless of the amount of expenditures or proceeds.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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