**CONGRESSIONAL SUBMISSION**

**FY 2008 PERFORMANCE BUDGET**

**TAX DIVISION**

# Table of Contents {#table-of-contents .unnumbered}

Page No.

**I. Overview** 1

**II. Summary of Program Changes** 6

**III**. **Appropriations Language and Analysis of Appropriations
Language** 7

**IV**. **Decision Unit Justification** 8

A. General Tax Matters

1\. Program Description 9

2\. Performance Tables 23

3\. Performance, Resources, and Strategies 23

a\. Resources by Strategic Goal/Objective 25

b\. Strategies to Achieve Goal 29

c\. Results of Program Assessment Rating Tool (PART) Review 31

**V. Exhibits**

> A. Organizational Chart

B. Summary of Requirements

> C Program Increases/Offsets by Decision Unit
>
> D. Resources by DOJ Strategic Goal/Objective

D.  Justification for Base Adjustments

E.  Crosswalk of 2006 Availability

F.  Crosswalk of 2007 Availability

G.  Summary of Reimbursable Resources

H.  Detail of Permanent Positions by Category

I.  Financial Analysis of Program Changes

J.  Summary of Requirements by Grade

K.  Summary of Requirements by Object Class

L.  Not Applicable

# I. Overview  {#i.-overview .unnumbered}

## Mission and Critical Functions

The Tax Division requests a total of 666 permanent positions, 583
full-time equivalent (FTE) work years, and \$94,678,000 for FY 2008.
This request represents an increase for the Tax Division of \$12,057,000
over the President's FY 2007 budget request. As discussed in Section IV
-- Decision Unit Justification, the Division seeks this additional
funding to support the priority placed by the President on increased and
more effective tax law enforcement.

The indispensable role it plays in the federal tax system makes the Tax
Division unique among Department of Justice components. Its primary
mission is to enforce the nation's tax laws fully, fairly, and
consistently. The Division's activities help close the Tax Gap -- the
difference between taxes owed and taxes collected - estimated to be more
than \$345 billion every year. Both the President and the Congress have
recognized the enormous importance of closing the Tax Gap, and added
\$442 million in new funding for Internal Revenue Service (IRS) tax
enforcement efforts in FY 2006 and have requested \$137 million for FY
2007. The work of the Division is directly related to, and lags about
two years behind, the increased level of IRS enforcement activity:

-   The Tax Division represents the United States in all civil trial and
    appellate litigation arising from the internal revenue laws, in all
    state and federal courts, except the United States Tax Court.

-   The Tax Division enforces the nation's criminal tax laws. It
    authorizes all grand jury investigations and prosecutions involving
    violations of the Internal Revenue Code and, in conjunction with the
    United States Attorneys Offices (USAOs), prosecutes criminal tax
    cases in the federal courts, and represents the United States in
    criminal appeals.

The Tax Division's work on this mission has an immediate payoff: the
Division saves the government from [paying]{.underline} unjustified
claims; it defeated \$729.6 million in such claims in FY 2006, \$1.02
billion in FY 2005, and \$659 million in FY 2004. In addition, the
Division [collected]{.underline} an annual average of \$231.6 million
during the last three fiscal years. In FY 2005 alone, the Division
collected \$477 million. In FY 2006, the Tax Division collected \$148.4
million.

Significant as these dollars are, they are but a fraction of taxes
taxpayers voluntarily pay because of the precedents the Division's cases
set, and because of the resulting trust in the integrity of the tax
system. Thus, the effects of the Division's litigation on tax
administration extend well beyond the cases that it handles. Decisions
in the Division's cases settle questions of law that frequently govern
millions of taxpayers. One favorable decision can resonate far beyond
the parties directly involved and lead to billions of dollars in
additional tax collections. Similarly, as discussed in more detail
later, criminal prosecutions authorized by the Division deter many
taxpayers who might consider evading taxes in ways large and small.

Additionally, the Division's independent review of the merits of tax
cases to be brought or defended provides the necessary consistency of
the government's position with applicable law and policy. The Division's
combination of independent judgment and determined litigation encourages
people and businesses to pay the taxes the law requires.

In order to achieve the Department's performance goals, the Tax Division
is heavily dependent on having a solid infrastructure. Specifically,
this includes office automation support operations, Justice Consolidated
Office Network (JCONIIA) system within the Division, access to adequate
litigation support, including courtroom presentation technologies, and
the organizational and technical infrastructure to support the use of
emerging technologies and automated tools for trial preparation,
electronic filing, and courtroom presentation. No IT enhancements are
requested for FY 2008.

The Tax Division, along with the Department's other litigating
components, underwent a Program Assessment Rating (PART) review by the
Office of Management and Budget (OMB) in FY 2005. The Division received
a score of 85, which is deemed "effective" and is the highest level
awarded by OMB (see page 31 for details).

## Cross-Cutting Activities

The Tax Division's expertise in complex civil trials and in the
prosecution of sophisticated financial crimes makes it a valuable
contributor to important government initiatives that cut across
organizational lines. More fundamentally, though, all Tax Division
activities are cross-cutting in that the activities of the Tax Division
follow through on activities initiated by the Internal Revenue Service
and others to administer and enforce the federal tax laws.

**Criminal Law Enforcement**

Generally speaking, crime does pay, at least in the short run. Criminals
usually do not report illegal source income on their tax returns. The
crime of tax evasion is often easier to prove in a court of law than the
crime that gave rise to the illegal source income. For this reason, Tax
Division prosecutors are valuable members of teams investigating and
developing prosecution strategies for other financial crimes, giving the
Division a particularly vital role in the following cross-cutting
activities:

**Fighting Terrorism**

Tax Division prosecutors, experts in following the money, trace the flow
of money to investigate and prosecute people who funnel money to
terrorists and organizations that fund terrorist activities.

**Punishing Corporate Fraud**

As part of the President's Corporate Fraud Task Force, the Tax Division
works with the U.S. Attorneys' Offices, the FBI, and the Criminal
Division to investigate and prosecute tax evasion, money-laundering, or
bank fraud committed by corporate executives. The Division played an
important role in securing the convictions of former ENRON CFO Andrew S.
Fastow and his wife, Lea Fastow, on tax and related charges and
continues to provide key support for other ongoing corporate-fraud
prosecutions.

**Stopping Drug Trafficking**

Together with other members of the Organized Crime and Drug Enforcement
Task Force (OCDETF), as well as the Washington Agency Representative
Group that sets OCDETF policy, and regional task forces, Tax Division
prosecutors investigate and prosecute, and have recently scored
important successes in drug cases.

**Public Corruption**

Tax Division attorneys work on prosecution teams with attorneys from
various United States Attorney's Offices and the Criminal Division to
combat public corruption. The Division played an important role in
securing the conviction of Jack Abramoff, a high-profile Washington,
D.C. lobbyist, and continues to conduct and provide support for other
ongoing public corruption investigations and prosecutions.

**Civil Tax Enforcement**

The Tax Division's civil trial and appellate attorneys follow through on
the work the IRS begins in areas critical to tax administration and
enforcement. For example:

**Combating Abusive Tax Shelters**

Tax Division civil trial and appellate attorneys bring and defend the
court actions that are necessary to back up the IRS's efforts to
challenge complex and abusive tax shelters that cost the Treasury an
estimated \$10 billion annually. Using information obtained by the Tax
Division from suits to enforce IRS summonses against tax shelter
promoters, the IRS was able to identify tax shelters and their users,
resulting in the collection of billions in tax revenues that would
otherwise have been lost.

**Tracking Down Tax Cheats Who Use Offshore Accounts**

The Division has investigated offshore tax evasion through suits to
enforce summonses against credit card issuers and other information
sources, yielding hundreds of thousands of documents and identifying
thousands of people the IRS is now investigating for unreported and
unpaid federal income taxes. Tax Division civil and criminal attorneys
work with the IRS through its steering committee for the offshore tax
enforcement initiative to target U.S. persons who commit tax evasion
using offshore tax havens.

**Shutting Down Tax Scams**

Through injunction suits the Tax Division has shut down more than
215 promoters (including preparers) of tax scams involving in the
aggregate hundreds of thousands of customers and over \$2.5 billion
dollars in taxes. The efforts have been amplified by criminal
prosecution of the scam promoters and sometimes their customers.

**Civil and Criminal Tax Enforcement Law and Regulations**

The Tax Division brings its unique civil trial and criminal prosecution
perspectives to bear in the assistance it provides the Internal Revenue
Service, the Treasury Department, and other federal agencies on proposed
legislation, administrative regulations, or other guidance that will
affect substantive tax laws and tax administration and enforcement. The
Division's independence frequently enables it to identify problem areas
and propose changes that can forestall future litigation. In addition to
this advisory role, the Division cooperates with other agencies and DOJ
components to pursue key Government initiatives through litigation.

## Program Performance/Goals and Objectives

[Strategic Objectives:]{.underline} The Division's work---both civil and
criminal, and at trial and on appeal---supports Department of Justice
Strategic Objective 2.5 (Enforce federal statutes, uphold the rule of
law, and vigorously represent the interests of the United States in all
matters for which the Department has jurisdiction).

Each year, noncompliance with the federal tax laws costs the government
hundreds of billions of dollars. The Division, either on its own or in
concert with the U.S. Attorneys Offices (USAOs), prosecutes a wide
variety of tax crimes, often committed through ever evolving schemes and
methods. These tax crimes include: tax evasion on income earned through
legal sources; the use of domestic trusts and other abusive tax shelters
to hide income and assets; promotion and use of frivolous "tax protest"
theories and abusive tactics to defraud and impede the IRS; secreting
assets in foreign countries to evade tax liability; and tax violations
with respect to proceeds of drug violations or other kinds of fraud.

The Division's criminal enforcement objective is to vigorously and
consistently enforce the criminal tax laws in order to punish offenders,
deter future violations and reassure honest taxpayers that they will not
bear an undue share of the federal tax burden. The Division accomplishes
this by authorizing criminal tax prosecutions and by assisting the USAOs
and the IRS in the investigation and prosecution of alleged violations
of federal tax laws. The Division also provides assistance in treaty
negotiations and foreign evidence gathering in criminal tax matters.

The Tax Division's civil enforcement objectives are two-fold. First, the
Division defends the United States in lawsuits, including: tax refund
suits seeking to recover payments made toward contested federal tax
liabilities, such as liabilities resulting from misuse of tax shelters;
suits filed in bankruptcy courts challenging the validity,
dischargeability and priority of federal tax claims, and the feasibility
of business reorganizations; "collection due process" suits challenging
IRS assessment and collection determinations; and damage suits alleging
improper investigatory, assessment or collection activity by IRS and
other government officials. Defensive litigation has averaged, since FY
2001, 73% (by hours) and 80% (by cases received), respectively, of the
Tax Division's civil caseload.

Second, the Division prosecutes a broad range of affirmative litigation
aimed at solving specific law-enforcement problems or collecting
revenue. For example, some suits pursue the assets of tax cheats who
have fraudulently conveyed property to sham entities or family members;
others seek to stop tax-scam promoters from selling scams on the
Internet; yet others force taxpayers to turn over documents the IRS
needs for its investigations. All of this litigation, both defensive and
affirmative, promotes compliance with the nation's tax laws and protects
the Treasury.

[Monitoring Performance:]{.underline} In recent years, the Tax
Division's conviction rate has been 95% or higher. The virtual certainty
that a tax cheat, if caught and prosecuted, will be convicted and face
jail time, deters others who might be inclined to cheat. While the
Division=s overriding purpose in civil tax enforcement is the uniform
and fair enforcement of the tax laws, the Division usually collects more
revenue for the Treasury through direct collection lawsuits than it
receives in budget appropriations. The Division reports its actual
results and statistics at the end of each fiscal year as part of the
Department's Performance Plan and Report.

The criminal, appellate, and civil functions of the Tax Division have
the following broad goals:

#### Criminal Prosecution and Appeals {#criminal-prosecution-and-appeals .unnumbered}

[Goal:]{.underline} The Tax Division promotes voluntary compliance with
the tax code, imposes uniform enforcement of the criminal tax laws by
the Department of Justice, and deters tax evasion and punishes those who
defraud other honest citizens. The Division supervises all federal
criminal tax prosecutions and, through its review, analysis, and
commentary on proposed prosecutions, helps the IRS focus its
investigative resources on appropriate cases. Tax Division prosecutors
evaluate the evidence and legal theories supporting proposed tax grand
jury investigations and prosecutions and using their experience with tax
prosecutions across the country, they make recommendations concerning
the best charges to bring based on the evidence presented, on additional
evidence that should be gathered to support the charges, methods by
which that evidence might be gathered, the best combination of charges
given the facts and circumstances, and more. They also work with IRS
agents and Assistant United States Attorneys to conduct grand jury
investigations, prosecute accused tax criminals, litigate appeals in
criminal tax cases, gather evidence from foreign countries, and develop
criminal tax enforcement policies. In FY 2006, the Tax Division
prosecutors authorized 664 grand jury investigations of 1,123 targets,
authorized 906 prosecutions involving 1,180 individual defendants, and
personally prosecuted dozens of defendants in the federal district
courts.

#### Appeals in Civil Tax Matters {#appeals-in-civil-tax-matters .unnumbered}

[Goal:]{.underline} The Tax Division protects the federal Treasury and
achieves fair results through just and effective advocacy in the
appellate courts. Attorneys in the Division=s civil appellate section
represent the federal government in all civil tax cases in federal and
state appellate courts. About 770 civil appeals are in process at any
time, with about 500 new ones received annually. The precedents created
in cases decided in various federal courts of appeals provide important
guidance for taxpayers and result in enhanced revenue collection.

#### Civil Litigation {#civil-litigation .unnumbered}

[Goal:]{.underline} The Tax Division protects and collects tax revenues
while ensuring the fair and consistent treatment of taxpayers
nationwide. Through its civil litigation, the Tax Division brings in
substantial revenue for the Treasury, wards off unjustified claims that
would otherwise deplete the Treasury, creates precedent affecting tax
administration, and deters illegal tax activity. The civil trial
sections have approximately 7,000 cases in process at any time, and
about 4,000 new cases are received each year. In FY 2006, the Tax
Division's success rates in the civil trial courts, taxpayer appeals and
government appeals were 96%, 97% and 78%, respectively. Tax Division
civil trial attorneys also work closely with the IRS to coordinate civil
tax litigation with IRS activities and enforcement policies to optimize
the results.

# Summary of Program Changes

  ---------------- ----------------------------- ---------- --------- ------------- ----------
  **Item Name**    **Description**               **Pos.**   **FTE**   **Dollars**   **Page**

  General Tax      Operation Continued           71         36        \$5,187,000   33
  Matters          Follow-Through                                                   
  ---------------- ----------------------------- ---------- --------- ------------- ----------

# Appropriations Language and Analysis of Appropriations Language

#  Not applicable (Part of General Litigating Activities).  {#not-applicable-part-of-general-litigating-activities. .unnumbered}

# IV. Decision Unit Justification {#iv.-decision-unit-justification .unnumbered}

## General Tax Matters

  ------------------------------------------- --------- --------- ------------
  **General Tax Matters - Total**             **Perm.   **FTE**   **Amount**
                                              Pos.**              

  2006 Enacted with Rescissions and           566       518       80,507
  Supplementals                                                   

  2007 Estimate                               595       531       82,621

  Adjustments to Base and Technical           \....     16        6,870
  Adjustments                                                     

  2008 Current Services                       595       547       89,491

  2008 Program Increases                      71        36        5,187

  2008 Offsets                                \....     \....     \....

  2008 Request                                666       583       94,678

  **Total Change 2007 - 2008**                71        52        12,057
  ------------------------------------------- --------- --------- ------------

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####  {#section-10 .unnumbered}

### Program Description

#### CIVIL TAX LITIGATION

The Tax Division=s civil trial work covers a broad spectrum of
litigation in the United States district courts, the United States Court
of Federal Claims, United States bankruptcy courts, and state courts.
The Division=s civil litigation has both a direct and an indirect impact
on federal tax laws. In cases the Tax Division handles, billions of
dollars are directly at stake, either defending against unjustified
refund claims taxpayers have filed against the United States Treasury or
through affirmative litigation that seeks to collect revenue to satisfy
unpaid tax debts. Equally important, the Tax Division's civil trial and
appellate litigation results in precedents that control the disposition
of thousands of cases pending administratively with the IRS, thus giving
the Division's work an even more significant, indirect impact on tax
administration.

**SIGNIFICANT LAW ENFORCEMENT EFFORTS**

The Tax Division's litigation is helping to reduce the Tax Gap. The Tax
Gap is the difference between the amount of tax owed by taxpayers for a
given year and the amount that is paid voluntarily and timely. The IRS
estimates (based on most recent data available) that the annual Tax Gap,
before enforcement activity, is at least **\$345 billion.**

Both the President and the Congress have recognized the huge importance
of closing the Tax Gap, adding \$442 million in new funding for IRS tax
enforcement efforts in FY 2006, and requesting \$137 million for FY
2007. The work of the Tax Division has been and will continue to be,
directly and significantly impacted by the increased level of IRS
enforcement activity.

Revenue from audits of corporations and individuals was \$17.2 billion
in 2006 compared to \$10.7 billion in 2003. In all, from 2004 to 2006,
collection from heightened enforcement efforts rose 13%, from \$43.1
billion to \$48.7 billion. \[From "IRS FY 2006 Enforcement and Service
Results", November 20, 2006.\]

Because the Tax Division represents the United States in all state and
federal courts (except the Tax Court) on matters arising under the
internal revenue laws, the Division is a key player in efforts to close
the Tax Gap. In addition to its work collecting taxes for the
government, a significant portion of the Division's time and resources
is directed to stopping the spread of abusive tax shelters, shutting
down promoters of tax schemes and scams, and assisting the IRS in
collecting the information necessary to identify persons marketing and
using tax avoidance packages.

**Stopping the Spread of Tax Shelters**

Abusive tax shelters for large corporations and high-income individuals
cost the government at least \$10 billion annually, according to
Treasury Department estimates. But Treasury Department officials believe
that this estimate "is just the tip of the iceberg" and that the actual
amount may be many times larger. The IRS says that tax shelter
proliferation is one of the most significant problems confronting our
tax system. A February 2005 GAO report concluded that 207 Fortune 500
companies engaged in tax shelter transactions, costing the Federal
Treasury as much as \$56 billion. Sophisticated tax professionals
promote these complicated transactions to corporations and wealthy
individuals. Tax shelters typically involve multiple, complex, and
sometimes well disguised transactions that have been structured to
provide substantial tax benefits that were not intended by Congress, or
that otherwise lack economic substance independent of those tax
benefits. Because these cases involve enormous sums of money and often
attract significant media attention, a coordinated and effective effort
is essential to prevent substantial losses to the Treasury and to deter
future use of such tax shelters by other taxpayers.

The Tax Division plays a critical role in the government=s efforts to
combat abusive tax shelters by defending in the federal district and
appellate courts the IRS's denial of the tax benefits supposedly created
by the tax shelter. The cases the Division defends involve millions of
dollars in tax revenue, and affect potentially billions of dollars of
tax revenue owed by other taxpayers.

![](media/image1.png){width="5.8125in" height="3.9472222222222224in"}

Halfway through the fiscal year, the Division projected that it would
have a total of 76 groups of tax shelter cases by the end of the fiscal
year. As of the end of FY 2006, however, it had 85 groups of cases, 12%
higher than projected. Despite victories in significant cases, the
number of tax shelter cases being handled by the Tax Division continues
to increase substantially. The IRS' activities are a multi-year effort,
and our litigation activity lags about 2 years behind the IRS activity.
With the influx of resources provided to the IRS in FY 2006, the IRS'
front-line enforcement efforts have already begun to increase, and will
continue to increase into FY 2008.

The Tax Division anticipates that over the next several years, tax
shelters will continue to be hotly contested in the federal district
courts and in the Court of Federal Claims. The IRS has estimated that at
least 25 other tax shelter cases are headed for litigation in the near
future (some of these abusive transactions coming to the Tax Division
involve complex leasing arrangements, known as "LILO" and "SILO"
transactions, and were addressed in part on a prospective basis by
Congress in 2004). The 10- year revenue estimate provided for the
legislative amendments was \$26.56 billion \[Staff of the Joint
Committee on Taxation, "Estimated Budget Effects Of The Conference
Agreement For H.R. 4520, The 'American Jobs Creation Act Of 2004,'"
October 7, 2004\].

Stopping the Promoters of Schemes and Scams

In addition to the complex and technical abusive tax shelters used by
corporations and wealthy persons, there are a multitude of less
sophisticated tax schemes and scams. Other recent schemes have included:

1\. Claims that people are not required to pay taxes for frivolous
reasons, such as that Section 861 of the Internal Revenue Code exempts
U.S. citizens from paying taxes on income received in the U.S.; or that
one can expatriate oneself from the tax system without leaving the U.S.

2\. Filing large refund requests through the amended returns process to
avoid extensive scrutiny.

3\. Schemes setting up sham trusts to allow taxpayers to deduct personal
expenses.

4\. "Warehouse banks" to commingle and conceal assets.

5\. Schemes advocating filing tax returns falsely reporting "zero"
income.

6\. Urging employers to fail to withhold, report or pay payroll and
income taxes.

Typically marketed by persons who purport to be tax experts, these scams
in reality are nothing more than false and fraudulent "do-it-yourself"
tax-relief packages sold to individuals who are uninformed or willfully
naïve. Schemes the Tax Division have enjoined cost the Federal Treasury
almost two billion dollars and place an enormous burden on the IRS.
Substantial audit, collection, and administrative resources must be
devoted to detect, correct, and collect unpaid taxes that result from
improper filings by purchasers of these illicit arrangements. The
schemes undermine public confidence in the integrity of our tax system
if honest taxpayers see tax fraud scams being aggressively marketed and
going unchallenged.

The Division has encouraged the Internal Revenue Service to target these
schemes at their source, *i.e.*, the promoters, so they can be shut down
before they result in the need for more IRS examination and collection
activity. The Tax Division has developed an expedited referral process
so that the cases are quickly and properly investigated. Division
employees have helped to train hundreds of Internal Revenue Service
agents and lawyers about developing injunction and penalty cases against
tax scam promoters.

Since FY 2001, the Division's efforts have resulted in injunctions
against over 215 promoters and tax return preparers connected to
tax-fraud schemes, barring these defendants from continuing to market
their products and services. The following chart shows the increasing
number of successful injunction suits brought by the Division. The
Division has recently obtained several notable victories in this area.
In April 2006, a federal judge granted the Division's request to
permanently enjoin a large organization, ostensibly a charitable one,
from falsely advising that its program of providing down payment
assistance by home sellers gave rise to a charitable deduction. The IRS
estimated that tens of millions of dollars in improper deductions had
been claimed by taxpayers based on this erroneous advice. In September
2005, a court in Florida ordered an individual to stop promoting a
variety of tax fraud schemes that had cost the Treasury nearly \$18
million, and ordered the production of the addresses of hundreds of
customers who were involved in filing these false returns. Another
example is an injunction obtained in May 2005 against a New York man who
was promoting a tax plan that allegedly permitted employers to deduct
contributions to certain employee benefit plans. The court found that
the ![](media/image2.png){width="4.372222222222222in"
height="2.9166666666666665in"}plans were schemes designed to enable
employers to deduct non-deducible deferred compensation for select
high-high level employees by disguising the deferred compensation as
employee benefits.

The Division expects the increase in injunction cases to continue. For
FY 2006 the Division filed suit against 78 promoters and preparers, and
there are many more suits being prepared. The IRS has nearly 1,100
promoters under examination, and each of those examinations can
potentially result in a lawsuit.

**Assisting with IRS Information Collection and Examinations**

Individual or business taxpayers sometimes do not comply with IRS
requests for information. In some cases, the summoned party may simply
be reluctant to turn over information without a court order. As IRS
summonses are not self-executing, the IRS will refer the matter to the
Tax Division and ask that we bring suit to enforce the summons. These
judicial proceedings not only afford the government the ability to
obtain the information in appropriate cases, but also afford important
procedural and substantive rights to those affected by the summons.

The IRS identified thousands of tax shelter participants only after the
Tax Division brought numerous suits to enforce IRS summonses against
those who promoted tax shelters. When prominent law firms and public
accounting firms began marketing tax shelters to corporations and
wealthy individuals, the IRS asked for information the firms were
required by law to maintain and provide, and the requests were rebuffed.
Subsequently, through suits it brought against some of the nation's
largest accounting and law firms, the Division obtained judicial
enforcement of IRS summonses issued to Jenkens & Gilchrist, Sidley
Austin Brown & Wood, KPMG, BDO Seidman, and Arthur Andersen. The
government's victories in these highly-publicized cases will help to
stem the promotion of abusive tax shelters and will help avert the
continued erosion of public confidence in the integrity of our tax
system.

The Division is also helping the IRS investigate taxpayers who may be
using accounts in offshore financial institutions to avoid their tax
liabilities. The IRS estimates that the government has lost billions of
dollars of revenue through the use of offshore accounts. To learn the
identities of individuals illegally hiding assets and income in offshore
accounts, the Tax Division sought and won judicial approval to gather
information from credit card companies, credit card processors, and
merchants where the cards were used. With this information, the IRS is
identifying thousands of persons with credit cards or debit cards issued
by or paid through banks in various foreign tax haven countries,
including Antigua and Barbados, the Bahamas, and the Cayman Islands.
Just recently, the Tax Division obtained approval for the IRS to seek
such information from PayPal, a large Internet purchase payment company.
Through these summonses, the IRS expects to obtain information
concerning hundreds, if not thousands, of taxpayers who are attempting
to hide assets in offshore tax havens.

So far, the IRS has opened investigations of more than 2,200 taxpayers
as a result of these information gathering efforts, and over 1,650 have
settled their resulting tax liabilities with the IRS. The Division has
been called upon to enforce compliance with administrative summonses
issued in furtherance of some of these taxpayer examinations, and
expects to bring many more of these actions.

**Collection of Unpaid Taxes**

The Division initiates litigation to collect taxes that would otherwise
remain unpaid. This litigation includes: (1) seeking judgments to
enforce IRS assessments against taxpayers, (2) dealing with fraudulent
transfers made by delinquent taxpayers attempting to place their assets
out of the reach of the IRS, and (3) the enforcement and foreclosure of
federal tax liens.

The focus and goal of this litigation is to enforce the tax laws, and
collection suits have a direct, and positive, effect on the Treasury.
The Division typically collects more each year than its entire budget,
as the following chart illustrates.

![](media/image3.png){width="5.730555555555555in"
height="4.502083333333333in"}

The Division's defense of federal tax claims in bankruptcy proceedings
also has a direct impact on the Treasury. The tax issues in the
Division's bankruptcy docket are complex, and many cases also have
significant collection potential. In ***G-I Holdings, Inc.*** (Bankr
D.N.J.) for example, the Tax Division is defending IRS claims for more
than one-half billion dollars in federal taxes.

**Defending the United States**

Suits brought against the United States comprise the majority of the
Division's caseload (73% by hours and 80% by cases received). The
Division defends these lawsuits, which include requests for refund of
taxes, challenges to federal tax liens, and allegations of wrongdoing by
IRS agents. The Division's representation of the government in refund
litigation saves the Treasury many hundreds of millions of dollars
annually. The direct savings to the government totaled \$1.02 billion in
FY 2005 and \$*729.6 million in FY 2006*.

The Treasury also realizes enormous additional savings through the
*indirect* effect these cases have on other tax years of the same
taxpayer and on other taxpayers. The Tax Division litigates many cases
that have **significant impact on the taxation of whole industries and
otherwise have an enormous impact on federal tax revenues. Generally,
the Division's successes in these cases will generate billions of
dollars in additional revenue for the Federal Treasury.**

#### CRIMINAL PROSECUTIONS AND APPEALS

The Tax Division's criminal trial attorneys investigate and prosecute
individuals and corporations that attempt to evade taxes, willfully fail
to file returns, submit false tax forms, or otherwise violate the
federal tax laws. Criminal trial attorneys investigate and prosecute tax
violations committed with other criminal conduct, such as narcotics
trafficking, securities fraud, bankruptcy fraud, healthcare fraud,
organized crime, and public corruption. In addition, Tax Division
attorneys investigate and prosecute domestic tax crimes involving
international conduct, such as the illegal use of offshore trusts and
foreign bank accounts to conceal taxable income and evade taxes. They
also conduct Organized Crime and Drug Enforcement Task Force (OCDETF)
and terrorism-related criminal investigations, and prosecute organizers
of Internet scams.

The Tax Division authorizes, and either conducts or supervises, all
prosecutions under the federal tax laws. The Division's two-pronged
mission is to: prosecute criminal tax violations; and promote a uniform
nationwide approach to criminal tax enforcement. In many cases, the Tax
Division receives requests from the IRS to prosecute tax violations
after the IRS has investigated them administratively. In other cases,
the IRS asks the Tax Division to open grand jury investigations to
determine whether prosecutable tax crimes have occurred. Tax Division
lawyers review these referrals to assure that uniform standards of
prosecution are employed and that criminal tax violations warranting
prosecution are prosecuted. After the Division authorizes tax charges,
the cases are handled either by the respective United States Attorney's
Office or, in complex cases or cases in which the USAO is recused or
requests assistance, by the Tax Division's own experienced prosecutors.
Tax Division prosecutors conduct training seminars for IRS criminal
investigators and Assistant U.S. Attorneys, and often provide advice to
other federal law enforcement personnel, including the DEA and FBI.

The Tax Division's Criminal Appeals and Tax Enforcement Policy Section
(CATEPS) conducts appeals in criminal tax cases prosecuted by Division
attorneys, and supervises appeals in matters tried by the USAOs around
the country. Similar to the initial review of tax cases by criminal
trial attorneys, the appellate review plays a vital role in promoting
the fair, correct and uniform enforcement of the internal revenue laws.
CATEPS also assists in the negotiation of international tax assistance
treaties and policy issues, such as the application of the sentencing
guidelines.

**Prosecutions of "Pure Tax Crimes"**

Many of the cases reviewed, investigated and prosecuted by the Tax
Division involve so-called "legal source income." As the name implies,
these cases encompass tax crimes involving unpaid taxes on income earned
legally (*e.g.*, a restauranteur who skims cash receipts or a dentist
who inflates deductible expenses.) The Division also prosecutes many
return preparers who fraudulently inflate deductions or underreport
income to obtain unwarranted refunds for their customers. The
predominant share of the Division's criminal docket includes cases that
involve only criminal tax violations. The defendants frequently include
return preparers, non-filers and individuals engaging in illegal protest
activities.

Evasion of taxes on income from legal sources significantly erodes the
federal tax base. The Division's enforcement activities are a strong
counter to that erosion, providing a significant deterrent to those who
contemplate shirking their tax responsibilities. Failure of the
government to vigorously prosecute such cases would undermine the
confidence of law-abiding taxpayers and jeopardize the government's
ability to operate a revenue collection system that depends upon
voluntary compliance.

Legal source income tax cases are the core of the Tax Division's
criminal work. When these cases involve difficult issues of tax law or
complex methods of proof, USAOs often call upon the special skills that
Tax Division prosecutors bring to the Justice Department's goal of
reducing white-collar crime. These prosecutions often receive
substantial local press and media coverage, and assure law abiding
citizens who pay their taxes, that those who don't are not getting away
with it. During the past year, Division attorneys investigated and/or
prosecuted cases involving tax crimes committed by individuals from all
walks of life, including corporate executives, business owners,
attorneys, doctors, dentists, an artist and others. A few examples:

On August 11, 2006, in ***United States v. Roy Albert Lewis*** (N.D.
Cal.), a jury convicted the defendant, a dentist, of conspiring to
defraud the United States and evading his income taxes for 1998 through
2001. Lewis used a tax evasion scheme promoted by a Denver-based
organization called Tower Executive Resources that involved the use of
false invoices to generate bogus deductions for his medical practice.
Over a ten year period, the defendant sent \$300,000 to an offshore bank
account in the guise of business deductions. Lewis will be sentenced in
February 2007.

On September 8, 2006, in ***United States v. Walter Anderson***
(D.D.C.), the defendant, a telecommunications entrepreneur, pleaded
guilty to two counts of federal income tax evasion and one count of
defrauding the District of Columbia for failing to report approximately
\$365 million in income he earned from various business ventures between
1995 and 1999. Anderson crafted an elaborate scheme using offshore
corporations and bank accounts in tax haven jurisdictions to conceal his
income. Anderson faces a maximum of ten years in prison. Anderson is in
custody pending sentencing, which is set for March 2007.

On September 25, 2006, in ***United States v. Denny Patridge*** (C.D.
Ill.), a federal judge sentenced an insurance businessman to 60 months
in prison and ordered him to pay a fine of \$100,000 for attempting to
evade approximately \$260,000 in income tax. In 2005, a jury found
Patridge guilty of tax evasion. The evidence at trial showed that
Patridge attempted to conceal his assets from the IRS by transferring
them to a trust, filing a false lien on his home, using nominee bank
accounts, and transferring funds to offshore accounts in Antigua and
Belize.

On October 25, 2006, in ***United States v. Robert W. Hallock*** (N.D.
Ill.), a federal judge convicted a former Kirkland & Ellis, LLP partner
of tax evasion. Hallock attempted to evade income tax on more than \$1
million he received when he sold fraudulent certificates of deposit in
1997. Hallock used the funds for personal expenditures, which included
\$150,000 in checks payable to his girlfriend and her parents, and a
\$100,000 honeymoon aboard a private yacht. The court will sentence
Hallock in February 2007.

**Return-Preparer Fraud**

Corrupt accountants and unscrupulous tax return preparers are pin-hole
leaks in the flow of revenues to the Federal Treasury. They are a law
enforcement concern to the Tax Division and to the IRS. Some accountants
and return preparers financially benefit by duping unwitting clients
into filing fraudulent returns and then take a significant portion of
the unwarranted refund as a fee. Other corrupt accountants and
unscrupulous return preparers serve as willing "enablers," providing a
veneer of legitimacy for clients predisposed to cheat. In either kind of
case, the professionals often commit a large number of frauds, and their
status, as "professionals," may be perceived as legitimizing tax evasion
thereby promoting disrespect for the rule of law. Tax Division attorneys
continue to investigate aggressively and prosecute such cases,
including:

On September 13, 2006, in ***United States v. Karen Berry, et al.***
(C.D. Cal.), a federal grand jury in Los Angeles indicted five people
for orchestrating a \$14 million tax fraud scheme. The indictment
alleges that the defendants operated the scheme simultaneously on three
tracks by: preparing thousands of fraudulent tax returns, creating false
documents to use in IRS audits, and failing to report to the IRS more
than \$1.5 million earned from promoting the scheme. According to the
indictment, the defendants prepared more than 6,000 fraudulent income
tax returns in 2003. Trial is scheduled to begin in June 2007.

On October 5, 2006, in ***United States v. Susan O'Brien, et al.***
(S.D. Cal.), a federal judge sentenced professional tax return preparer,
Susan O'Brien, to 125 months in prison, and her two associates, Robert
Richard Evans and William Dean Cook, to 78 months and 24 months in
prison, respectively, for tax fraud. In May 2006, a federal jury
convicted the defendants in connection with promoting a \$1 million tax
evasion scheme involving sham trusts and the preparation of false income
tax returns. Five other defendants pleaded guilty to felony tax charges
before the trial of these defendants.

In ***United States v. Michael Craig Cooper, et al.*** (D. Kan.), three
individuals and the organization, "Renaissance, the Tax People, Inc.,"
are charged with conspiracy to defraud the United States, mail fraud and
wire fraud in connection with an \$84 million tax scheme. From June 1997
though April 2002, the defendants marketed a fraudulent home-based "tax
relief system," which purportedly offered legitimate tax return
preparation, tax advice and audit protections. On October 10, 2006,
co-defendant Daniel Joel Gleason pleaded guilty to a conspiracy charge
and to preparing 56 false tax returns. Trial of the remaining defendants
is scheduled to begin in April 2007.

**Illegal Tax Protest**

Another Tax Division initiative focuses on illegal tax protest
activities. Tax schemes in this category include among other claims,
that an individual is a "sovereign citizen" not subject to U.S. laws,
and the U.S. income tax is unconstitutional. Other related conduct may
include taxpayers taking sham "vows of poverty" and harassing government
employees and judges.

On October 17, 2006, in ***United States v. Wesley Trent Snipes, et
al.*** (M.D. Fla.), the court unsealed an indictment charging movie
actor Wesley Trent Snipes with six counts of failing to file income tax
returns for 1999 through 2004. Snipes and two other defendants are also
charged with conspiracy to defraud the United States and presenting
false claims for refund. Eddie Ray Kahn and Douglas Rosile, a former
CPA, operated a tax scheme through American Rights Litigators, a tax
protestor organization. The scheme is based on a specious interpretation
of Section 861 of the Internal Revenue Code, claiming that domestically
earned income is not taxable. As part of the scheme, the defendants
prepared and filed two amended federal income tax returns for Snipes,
fraudulently claiming refunds of almost \$12 million in income taxes.

On December 15, 2006, in ***United States v. Charles Thomas Clayton***
(W.D. Tex.), a federal judge sentenced the defendant, a radiologist and
proponent of the so-called 861 argument, to 60 months in prison for
filing false tax returns and failing to file tax returns. The court also
fined Clayton \$50,000. In August, a jury convicted Clayton of filing
fraudulent claims for refund of more than \$160,000 in taxes. Clayton
also failed to file federal income tax returns for five years, despite
receiving at least \$1.3 million in gross income during the period.

On December 18, 2006, in ***United States v. Thomas Miller, et al.***
(C.D. Cal.), a federal judge sentenced Thomas Miller to 44 months in
prison for conspiring to defraud the United States in connection with a
"pure trust" tax fraud scheme. Miller operated Freedom Education Center,
a business that sold anti-tax literature and helped people create bogus
trusts. In September 2006, Miller pleaded guilty to conspiring with four
First Mountain Bank employees to defraud the United States. The bank
employees allowed customers of Freedom Education Center to open trust
bank accounts without providing tax identification numbers. The court
will sentence the remaining defendants in late January 2007.

**Abusive Promotions**

The Division also prosecutes persons who promote or use fraudulent tax
shelters and other schemes to evade taxes and hide assets. The number of
taxpayers who use these schemes to improperly reduce, or totally evade,
their federal income tax liabilities has increased significantly in
recent years. One type of scheme involves the use of domestic or foreign
trusts to evade taxes. Promoters of these schemes, often using the
Internet, aggressively market trusts by employing strained, if not
demonstrably false, interpretations of the tax laws. Employing what they
often call "asset protection trusts" (ostensibly designed to guard an
individual's assets from creditors, including the IRS), these promoters
are in fact helping taxpayers to fraudulently assign income and conceal
their ownership of income-producing assets in order to evade paying
taxes.

In ***United States v. Jeffrey Stein, et al.*** (S.D.N.Y.), eighteen
former officers and associates of the Big-Four accounting firm KPMG and
a former tax partner of a national law firm are charged with conspiracy
to defraud the United States, tax evasion and obstruction of the
internal revenue laws arising out of illegal tax shelters that KPMG and
others designed, marketed and implemented. The shelters allegedly
generated at least \$11 billion in fraudulent tax losses and resulted in
at least \$2.5 billion in tax evaded by wealthy individuals. In late
March 2006, former KPMG partner David Rivkin pleaded guilty to
conspiracy and tax evasion charges. On December 21, 2006, Utah
businessman Chandler S. Moisen pleaded guilty to conspiracy and wire
fraud charges in connection with this case. Trial is scheduled to begin
in September 2007.

In ***United States v. Michael A. Vallone, et al.*** (N.D. Ill.), nine
defendants are charged with participating in a nearly decade long
conspiracy to market and sell sham domestic and foreign trusts through
"The Aegis Company." The defendants marketed the scheme to more than 600
wealthy taxpayer clients throughout the United States to hide hundreds
of millions of dollars in income, resulting in a tax loss to the United
States of at least \$68 million. Trial is scheduled to begin in February
2007.

In ***United States v. Mitchell R. Graham, et al.*** (S.D. Ohio), six
defendants are charged with promoting sham Aegis Company trusts to 220
clients that resulted in a \$20 million tax loss to the federal
Treasury. During the course of the scheme, the defendants prepared
fraudulent tax returns that concealed clients' income from the IRS.
Trial is expected to begin in late 2007.

**Tax Charges Arising from Illegal Source Income**

Tax Division attorneys also play significant roles in investigating and
prosecuting tax violations committed in the course of other criminal
conduct. Where the tax charges arise from the evasion of taxes on income
from illegal sources, tax charges provide a valuable complement to
charges for the underlying criminal activity. One area where this
frequently occurs is narcotics trafficking cases generated by the
Organized Crime and Drug Enforcement Task Force (OCDETF) program, which
the Tax Division continues to actively support. Tax Division attorneys
also fight against international terrorism, and actively litigate tax
charges related to health care fraud, securities fraud, public
corruption and money laundering.

In ***United States v. Frank Aaron Adams, et al.*** (N.D. Ohio), a
federal judge sentenced seven defendants in a massive narcotics
distribution ring to prison terms ranging from 36 months to 324 months.
Earlier, the government secured a 42-count indictment and guilty pleas
from the defendants who participated in a large-scale drug conspiracy
that involved the distribution of more than 150 kilograms of powder
cocaine in the Cleveland area.

In ***United States v. Ira W. Gentry, Jr., et al.*** (D. Ariz.), a
federal grand jury in Phoenix returned a 59-count indictment charging
Ira W. Gentry, Jr. and Randy W. Jenkins with conspiracy, securities
fraud, tax evasion, wire fraud and money laundering. The charges stem
from an elaborate scheme to defraud UniDyn Corporation's investors, the
Securities and Exchange Commission and the IRS that took place from
December 1997 through April 2003. Gentry is the former CEO of UniDyn and
Jenkins is a disbarred attorney. Together, the defendants conspired to
secretly acquire approximately 20 million shares of UniDyn stock and
then artificially inflated the value of the stock through false SEC
filings, the filing of false corporate income tax returns, and issuing
false and misleading press releases. The defendants allegedly sold stock
for over \$8 million. Trial is scheduled to begin in June 2007.

In ***United States v. John Lipton, et al.*** (C.D. Cal.), nine people
are charged with conspiracy, fraud, money-laundering and tax charges in
connection with an \$80 million offshore investment scheme. The
defendants promoted a Ponzi scheme inducing hundreds of victims to
invest millions of dollars in a fraudulent offshore fund that claimed to
invest money in highly profitable foreign currency trading. Trial is
scheduled to begin in June 2007.

**Enforcing the United States' Tax Laws in Today's Global Economy**

Americans' abuse of foreign tax havens is on the rise. Increased
technical sophistication of financial instruments and the widespread use
of the Internet have made it easy to instantly move money in and out of
the United States, around the world, irrespective of national borders.
Usage of tax havens facilitates evasion of U.S. taxes and the commission
of related financial crimes.

Offshore tax schemes are often difficult to detect and prosecute. The
countries whose banks are used in such schemes usually have strict bank
secrecy laws and will not, or cannot, provide assistance to
investigators for the United States. Sophisticated criminals may also
use non-traditional tax haven countries, such as Latvia or Germany,
attempting to confuse the U.S. government and hide their crimes.

On December 14, 2006, in ***United States v. Robert Bedford*** (D.
Colo.), a jury convicted the defendant for conspiring to defraud the
United States in connection with a tax fraud scheme he promoted with
Paul Harris and Lester Retherford through an organization they called
Tower Executive Resources. In 2005, a federal jury convicted Harris and
Retherford of conspiring to defraud the United States, but deadlocked as
to Bedford. The evidence at the re-trial showed that Bedford provided
legal and tax advice to his co-conspirators on how to circumvent IRS
regulations and how to create false documents designed to conceal the
transfer of approximately \$4 million of unreported income into secret
offshore accounts. Harris and Retherford are currently serving prison
terms of 66 months and 48 months, respectively.

In ***United States v. Daniel P. Andersen, et al.*** (W.D. Wash.), five
defendants are charged with operating a multi-level marketing program
through an entity named "The Institute for Global Prosperity" that
promoted tax evasion schemes to thousands of customers through audio
tapes and offshore seminars. The defendants concealed more than \$40
million in revenue from the scheme using offshore nominee entities and
offshore bank accounts. Four defendants have pleaded guilty to felony
tax charges, including the two co-founders of Global Prosperity. The
remaining defendant in this case, Global Prosperity co-founder David
Struckman, fled to Panama. In early 2006, after months of searching,
Panamanian officials arrested Struckman, expelled him from Panama, and
accompanied him to the United States. Struckman is being detained
pending trial, which is scheduled to begin in March 2007.

In ***United States v. Evanson, et al.*** (D. Utah), six professionals
(two attorneys, two CPAs, an accountant and an investment broker) are
charged with conspiracy, fraud and tax charges in connection with
promoting a tax fraud scheme that cost the federal Treasury over \$20
million in taxes. The defendants' scheme used, among other things,
offshore entities, offshore bank accounts and the services of offshore
nominees to create bogus expense and capital loss deductions for their
clients. Trial is scheduled to begin in April 2007.

**International Cooperation to Investigate Evasion of U.S. Taxes**

The Tax Division provides advice and assistance to United States
attorneys and IRS agents seeking information and assistance from other
countries for both civil and criminal investigations and cases.
Recently, the Division provided advice and assistance to attorneys and
agents seeking information from numerous countries, including Finland,
Sweden, Germany, Israel, Canada, the Cayman Islands, the Netherlands
Antilles, Brazil, Panama, Venezuela, the United Kingdom, Ireland, and
Switzerland.

The Tax Division also works to increase cooperation with foreign
nations, recognizing that reciprocal engagements ultimately further the
Division's mission. For example, the Division recently met with
representatives of the Australian Federal Police to respond to their
request for advice and assistance in conducting multi-agency
investigations into numerous tax avoidance and money-laundering schemes,
some of which may prove of interest to U.S. law enforcement. The
Division has also responded to inquiries from the Embassy of Japan
concerning various aspects of our income tax laws.

The Division is assisting the Treasury Department to set its priorities
with regard to Tax Information Exchange Agreements (TIEA) and Double
Taxation Conventions. The Division assisted the Treasury Department with
the negotiation of a TIEA with Brazil. The Division also helped the
Treasury Department in its negotiations on tax treaties with Malta,
Belgium, and Bulgaria and will soon assist Treasury in its negotiations
on a tax treaty with Poland. The Division is assisting the Internal
Revenue Service and the Treasury Department in developing a new model
TIEA. The Division also participated in informal discussions about a
TIEA with Liechtenstein and a tax treaty with Singapore. Notably, after
years of negotiations in which the Tax Division assisted, important
TIEAs with tax haven countries finally went into effect in the Cayman
Islands, Jersey, Guernsey, the Isle of Man, and the British Virgin
Islands. The Division helped the Internal Revenue Service with the
drafting of an administrative agreement to implement the terms of the
TIEA that recently went into effect with the Cayman Islands.

The Division also provides active assistance to the Financial Action
Task Force (FATF) and the Forum on Harmful Tax Practices sponsored by
the Organization for Economic Cooperation and Development (OECD) to
combat money laundering, the financing of terrorism, and international
tax evasion. The Division provided significant assistance to the
interagency group tasked with responding to the FATF evaluation of the
United States' anti-money laundering and counter terrorist financing
regime. The Division is currently participating in an interagency task
force created to address the issues raised by the increased use of
Limited Liability Companies (LLCs) formed in the United States to commit
serious financial crimes. The Tax Division also helps teach
international training programs to improve other countries' tax
administration and enforcement programs, and seeks to foster
international cooperation in tax, money laundering, and counter
terrorist financing matters. For example, the Division participated in
the recent Symposium on International Economic Crime at Cambridge
University and has become a regular participant in the International Law
Enforcement Academy for Latin America.

#### CIVIL TAX APPEALS

Number range CHAPTERThe Tax Division represents the United States in all
appeals involving federal tax statutes in the United States circuit
courts and their state government equivalents (except for appeals from
the Southern District of New York). The Division's appellate section
attorneys also assist the Solicitor General of the United States by
preparing initial drafts of pleadings and briefs in tax cases filed in
the Supreme Court, and by preparing drafts of *amicus curiae* briefs
when the Supreme Court has called for the Government's views in
tax-related cases in which the United States is not a party. The
Division also closely reviews all adverse decisions entered by the lower
courts in tax cases to determine whether the government should appeal,
and prepares a recommendation to the Solicitor General. The appellate
section generally recommends appeal only in those cases where there is a
substantial likelihood the government will ultimately prevail or where
an important principle is at stake. Vigorous review of these cases not
only ensures that Department resources are spent wisely on only the most
meritorious appeals, but also advances the Tax Division's mission of
promoting the fair and correct development, and uniform enforcement of,
the federal tax laws.

The Tax Division has established an impressive record in the appellate
courts. For FY 2006, the Tax Division prevailed, in whole or in part, in
97% of the appeals in which it was defending a favorable lower court
decision, and in 78% of the appeals in which it was urging reversal.

The following cases illustrate the Division's recent appellate work:

**Court rejects tax shelter involving foreign banks -- TIFD III-E, Inc.
(Castle Harbour) v. United States (Second Circuit)**

Reversing an adverse district court judgment, the Second Circuit held
that the IRS properly imposed \$62 million in additional income taxes
against a subsidiary of General Electric Capital Corporation, which had
entered into a questionable partnership agreement with two Dutch banks.
The court determined that the foreign banks were lenders, rather than
equity partners, and that the partnership's income should be allocated
to the U.S. taxpayer.

**Adverse judgment reversed in significant "contingent liability" tax
shelter case -- *Coltec Industries, Inc. v. United States* (Federal
Circuit)**

The Federal Circuit rejected the taxpayer's attempt to create a \$375
million tax loss via a property-for-stock exchange with one of its
subsidiaries. Reaffirming the principle that transactions that lack
economic substance will be disregarded for tax purposes, the court of
appeals held that the taxpayer's transaction with its subsidiary served
no useful economic purpose other than tax avoidance.

**Adverse judgment reversed in "corporate owned life insurance" tax
shelter case -- *Dow Chemical Co. v. United States*** **(Sixth
Circuit)**

Dow Chemical purchased life insurance policies on the lives of many of
its employees, and it paid for the premiums, to a large extent, by
borrowing from the insurers and using the cash value of the policies as
collateral. For the years 1989 to 1991, Dow Chemical claimed tax
deductions of more than \$33 million for interest on the loans. The
Sixth Circuit disallowed the deductions, determining that the life
insurance plans were economic shams because without the benefit of the
claimed interest deductions the plans would generate negative cash
flows.

**Courts affirm injunctions and enforce summonses against tax-scam
promoters --*U.S. v. Saladino* (Ninth Circuit); *Schulz v. United
States* (Second Circuit)**

The Ninth Circuit affirmed a lower court injunction against tax
avoidance scheme promoter Joseph Saladino, who had his clients drop out
of the tax system by becoming private churches or by invoking fictitious
constitutional and common-law rights to exclude their compensation from
income. The Second Circuit affirmed a decision dismissing the petition
by tax scam promoter Robert Schulz to quash IRS summonses issued to
gather information about Schulz and his organization, We the People.
Among other things, Schulz promotes a "de-taxation package" that
promises to "remove individuals from the Federal tax system."

**Government wins significant accounting method case -- *JP Morgan Chase
& Co. v. Commissioner* (Seventh Circuit)**

In the first appellate decision concerning the "mark-to-market" rules of
§ 475 of the Internal Revenue Code, the Seventh Circuit held that the
Tax Court had properly rejected the taxpayer's valuation of its
financial derivatives, but remanded the case because the Tax Court had
failed to give sufficient deference to the Commissioner's valuation.

**Family Limited Partnership cannot be established merely to reduce
estate tax -- *Korby v. Commissioner* (Eighth Circuit)**

The Eighth Circuit held that a family limited partnership that served no
substantial non-tax purpose did reduce the value of an estate for tax
purposes.

**Taxpayer recognized gain when he exercised high-tech stock options in
1999, not when stock was later sold at much lower price --** *United
States v. Tuff* (Ninth Circuit)

Tuff, an employee of a high-tech company, exercised several stock
options during 1999 using funds borrowed from his stockbroker, who
ultimately sold the stock at a lower price. The Ninth Circuit rejected
Tuff's argument that because he had exercised the options using borrowed
funds, he should recognize income when the stock was sold (at a low
price), rather than when the option was exercised (at a much higher
price).

### 2. Performance Tables {#performance-tables .unnumbered}

![](media/image4.png){width="9.567361111111111in" height="6.33125in"}

### Performance Tables {#performance-tables-1 .unnumbered}

![](media/image5.png){width="9.364583333333334in"
height="3.7680555555555557in"}

**3. Performance, Resources, and Strategies**

**[Resources by Strategic Goal/Objective]{.underline}**

**Background/Program Objectives**

The Department strives to enforce the federal tax laws consistently and
impartially, and to assure that taxpayers are treated fairly. The
Department's Tax Division works closely with the Internal Revenue
Service, which is responsible for 95% of the revenue collected by the
federal government annually. In one way or another, almost all of the
Tax Division's activities are designed to help close the yearly Tax
Gap---the difference between tax owed and tax collected, estimated at
over \$345 billion per year. Those activities consist principally of:
enforcement of the nation's criminal tax laws; representation of the
United States in federal civil tax litigation in all state and federal
trial courts (except the United States Tax Court); and representation of
the United States in all federal civil tax litigation in the federal
circuit courts of appeals and in the state appellate courts.

The Tax Division's criminal enforcement objective is to vigorously and
consistently enforce the criminal tax laws in order to punish offenders,
deter future violations and reassure honest taxpayers that they will not
bear an undue share of the federal tax burden. Each year, noncompliance
with the federal tax laws costs the government hundreds of billions of
dollars. The Tax Division, either on its own or in concert with USAOs,
prosecutes a wide variety of tax crimes, including: tax evasion on
income earned through legal sources; tax evasion using domestic trusts
and other abusive tax shelters; defrauding the IRS by promoting
frivolous "tax protest" theories; secreting assets in foreign countries
to evade tax liability; and tax violations with respect to proceeds of
drug violations or fraud. The Tax Division accomplishes this goal by
evaluating the evidence and legal theories of proposed criminal tax
prosecutions and by assisting the USAOs and the IRS in the investigation
and prosecution of criminal tax cases. In addition, the Tax Division
provides assistance in treaty negotiations and foreign evidence
gathering in criminal tax matters.

The Tax Division's evaluation of the evidence and legal theories of
criminal prosecution referrals ensures that they comply with federal
criminal tax enforcement standards, and that those standards are
enforced uniformly across the country. The Division reviews criminal
charges found in the Internal Revenue Code as well as applicable
offenses found in Titles 18, 21, and 31 of the United States Code.
Additionally, the examination enables the Division to provide critical
guidance to the USAOs about complex substantive and procedural federal
tax issues, challenges presented by the use of indirect methods of
proof, and unique evidentiary and sentencing issues that arise in
criminal tax cases. The number of prosecutions authorized by the Tax
Division continues to rise after a decade of decline, and the rate of
convictions in criminal tax trials remains high, advancing the Tax
Division's goal of fostering general deterrence.

The Tax Division also takes primary responsibility for a substantial
number of criminal tax investigations and prosecutions, generally at the
request of USAOs. The USAOs request assistance for a variety of reasons
including lack of expertise required to prosecute a particular case. The
Tax

![](media/image6.wmf)Division also directly litigates cases with
significant regional or national significance. The cases range from
illegal tax scams to complex white collar fraud cases. Some cases
involve illegal international business transactions, complex tax issues,
and foreign evidence-gathering problems. The Tax Division focuses its
efforts on the prosecution of legal source income cases, wherein the
violation involves income that is legally earned, as opposed to income
derived from illegal conduct. Legal source income prosecutions have a
significant deterrent impact, because most taxpayers earn their income
from legal sources. Tax charges also may be used in prosecutions related
to corporate fraud, terrorist financing, drug enforcement, and public
corruption.

The Tax Division's civil trial work covers a broad spectrum of
litigation in the federal district and bankruptcy courts, the United
States Court of Federal Claims, and the state courts. This work has
profound effects on tax administration. Decisions in the Tax Division's
civil cases create precedents that can govern millions of taxpayers. One
favorable decision can resonate far beyond the parties directly
involved, and lead to billions of dollars in additional tax collections.

Much of the Division's civil caseload involves defending the United
States in litigation brought by others, including: tax refund suits
challenging the IRS's determination of federal tax liabilities;
bankruptcy litigation raising issues concerning the validity,
dischargeability, and priority of federal tax claims and the feasibility
of business reorganizations; damages suits stemming from tax assessment
or collection activity by IRS and other Government officials; and suits
against the IRS under the Freedom of Information and Privacy Acts.

The Tax Division also represents the United States as plaintiff in a
panoply of actions vital to efficient tax administration and effective
tax enforcement, including: suits to collect unpaid taxes; suits to
enforce IRS administrative summonses seeking information essential to
determine and collect federal tax liabilities; suits to enforce tax
liens and IRS levies, including suits to set aside fraudulent
conveyances and to enforce tax liens on assets held by nominees or alter
egos; and suits to establish the immunity of the federal government and
its instrumentalities from state and local taxes.

***Performance Measure:*** Percentage of Cases Favorably Resolved

***FY 2006 Target:*** 90% for Civil Trial and 95% for Criminal.

![](media/image2.wmf)***FY 2006 Actual:*** 97% for Civil Trial and 97%
for Criminal.

**Discussion of Accomplishments:**

As illustrated in the Performance and Resources Table (page 23), the
overarching performance measure for this decision unit is favorable
resolution of all cases. The Department of Justice strategic plan sets
goals for the litigating components: 90% of criminal cases favorably
resolved Department-wide and 80% of civil cases favorably resolved
Department-wide. As illustrated in the chart "Cases Favorably Resolved
(TAX)," the Tax Division has exceeded the Department's goal for the last
several years. In FY 2006, the Tax Division won favorable outcomes in
96% of all civil and 97% of all criminal cases litigated by the Tax
Division, including non-tax cases.

The Tax Division also measures the number of authorized investigation
and prosecution referrals in criminal cases; and the collection and
retention of tax moneys. The Department did not establish a target level
in FY 2006 for the number of authorized investigations and prosecution
referrals in criminal cases. However, in FY 2006, the Division
authorized 664 grand jury investigations and 1,180 prosecutions of
individual defendants. Changes in the number of authorized
investigations are largely proportional to the number of investigations
initiated by the Internal Revenue Service. Consistent with Department
guidance, there is no FY 2007 or FY 2008 performance goal for authorized
investigations and prosecutions.

As noted above, the Tax Division assumes responsibility for some cases
at the request of the USAOs, multi-jurisdictional investigations and
prosecutions, and cases with significant regional or national
importance. Although many such cases are difficult to prosecute, the
Division has maintained a conviction rate at or greater than 95%. In FY
2006, the Division's conviction rate was 97% in tax cases.

During FY 2006, the conviction rate was 97%. For FY 2007 and FY 2008,
the Tax Division has established a goal of 95%. While the Tax Division
is very proud of its conviction rate, the emphasis is on uniform and
fair enforcement of the tax laws.

![](media/image3.wmf)

For civil cases, the Tax Division measures cases successfully litigated,
in total or in part, by the resolution of a claim through judgment or
other court order. In FY 2006, the Division won the following
percentages of cases decided:

Trial Courts -- 96%

Taxpayer Appeals -- 97%

Government and Cross Appeals - 78%

We anticipate that maintaining this level of success will result in
legal precedent that provides taxpayers, including individuals,
businesses and industries, with guidance regarding their tax
obligations; the collection of significant tax revenues; and the
protection of the government against unfounded taxpayer claims.

For FY 2007 and FY 2008, the Tax Division anticipates successful
outcomes in the following percentages of cases handled:

Trial Courts -- 90%

Taxpayer Appeals -- 85%

Government and Cross Appeals -- 60%

The Tax Division collects substantial amounts for the federal government
in affirmative litigation and retains even more substantial amounts in
defensive tax refund and other litigation. For FY 2006, the Division
collected \$148.4 million and retained \$729.7 million. In addition, its
litigation affects the revenue at issue in many cases being handled
administratively by the IRS. This substantial financial impact is a
consequence of the Division's consistent and impartial enforcement of
the tax laws. In accordance with Department guidance, targeted levels of
performance are not projected for this indicator. The Department does
not measure the revenue effect of its litigation on IRS cases or its
effect on fostering overall compliance with the tax laws.

**Strategies to Achieve the FY 2007/FY 2008 Goal:**

In addition to its continuing work enforcing civil tax laws and
prosecuting a wide variety of tax crimes, the Division has launched a
series of new initiatives to deter noncompliance and reassure
law-abiding taxpayers who pay the taxes the law requires of them. With
its existing resources and the new resources requested for FY 2007 and
FY 2008, the Division will concentrate on curtailing the activity of
promoters, enablers and tax professionals (including return preparers,
accountants and lawyers) who help others to avoid taxes illegally by (1)
promoting tax fraud schemes; (2) devising and promoting abusive tax
shelters for corporations and wealthy individuals; and/or (3) publicly
advocating defiance of the tax laws on frivolous or false grounds.

**[Civil Litigation]{.underline}**

The Tax Division's primary civil strategy to reduce the Tax Gap is to
litigate, both defensively and affirmatively, federal civil tax cases
filed by and against taxpayers in the federal courts. Through this
litigation, the Division sees that the tax laws are properly enforced,
often targeting particularly acute tax enforcement problems that
threaten to seriously undermine tax administration.

The Tax Division defends the Federal Treasury against tax refund claims
arising from the complex and abusive corporate and individual tax
shelters that are estimated to cost the Treasury \$10 billion or more
annually. Each of these cases generally involve millions of dollars, and
their outcomes affect similarly situated taxpayers with amounts at issue
totaling billions of dollars.

The IRS received significant additional funding for enforcement efforts
in FY 2005 and FY 2006, a large portion of which is dedicated to
challenging abusive tax shelters. In addition to stepping up audits and
investigations, the IRS is increasing its use of "settlement
initiatives," under which the IRS publicly states the terms to which it
would agree to resolve disputes concerning the taxes (and penalties and
interest) owing as a result of specific abusive transactions. Tax
Division litigation directly supports the effectiveness of IRS
settlement initiatives. Its summons enforcement litigation has required
shelter promoters to turn over customer lists and transaction documents,
permitting the IRS to identify shelter participants who otherwise might
evade detection. In addition, the Division's litigation challenging the
merits of abusive tax shelters allows the IRS to assert the credible
threat that shelter participants will lose in court, which encourages
them to settle.

The Division also has renewed efforts to target fraudulent tax schemes
and those who create and promote them. The Division has obtained
numerous injunctions against promoters of such schemes and has obtained
enforcement of IRS administrative summonses seeking information and
documents about the schemes, their promoters and participants. During
the last several years, the Division sued to enjoin dozens of tax-scheme
promoters---who cost the Treasury billions of dollars each year by
pushing bogus tax advice (*e.g.*, tax credits for slavery reparations;
claims that income earned within the United States was not subject to
federal taxation) over the Internet and in the media---and has obtained
court orders shutting down several multimillion-dollar schemes.

The Tax Division also deals with the fallout from abusive promotions,
defending the Government in the hundreds of new cases brought each year
that involve frivolous tax-protest claims---many of them the same claims
targeted through the Division's injunction suits. Vigorous and
successful defense of these cases is essential to preserve public
confidence in the tax system and to assure that honest taxpayers are not
discouraged from voluntarily paying their taxes by the perception that
those who engage in illegal tax-protest activity have "gotten away with
it." The Division works closely with the IRS to identify holders of bank
accounts in offshore, tax haven countries that are used to evade taxes,
thus facilitating the prosecution of account-holders who have committed
U.S. tax law violations. As part of an IRS initiative, the Tax Division
has obtained court orders allowing the IRS to identify U.S. taxpayers
who use credit cards issued by offshore banks in tax haven countries by
obtaining data from major credit card companies, companies that process
credit card transactions and merchants and retailers where the credit
cards were used. The Division is also handling collection and other
enforcement actions against taxpayers identified through the initiative.

The Tax Division frequently files suits to collect revenue, deter
illegal activity, and address systematic non-compliance with the tax
laws, including suits: (1) to reduce to judgment tax, penalty, and
interest assessments made by the IRS; (2) to void fraudulent transfers
made by delinquent taxpayers to place their assets out of the reach of
the IRS; and (3) to enforce federal tax liens on these and other assets.
The Division also represents the Government in more complex, tax-related
bankruptcy matters, many of which have significant collection potential.

The Tax Division also conducts defensive litigation vital to the
protection of the IRS agents and officers engaged in tax assessment and
collection activity. Specifically, the Division vigorously defends these
agents and officers, and the government itself, against spurious damages
suits arising out of that activity. Absent representation of the quality
provided by the Division, these suits could cripple or seriously impair
effective tax collection and enforcement.

As part of its representation of the government in the courts, the Tax
Division conducts in each civil tax case an independent review of the
IRS's views and administrative determinations to help ensure that the
Government's position is consistent with applicable law and policy. This
independence, backed by a willingness to engage in aggressive litigation
where appropriate, promotes the effective collection of taxes owed,
while also serving as a check against potential abuses in tax
administration.

**[Criminal Enforcement]{.underline}**

The Division's criminal prosecution activity has matched the vigor of
its civil litigation efforts, with a similar increased focus on abusive
tax schemes and their promoters. The Division has obtained numerous
convictions of promoters of large and complex schemes that were widely
marketed. Several recent indictments of promoters illustrate the
continuing commitment to resolving this growing problem. The schemes
identified in these cases involve a variety of illegal practices,
including the use of offshore accounts to evade taxes, the refusal by
employers to pay withholding taxes on employee wages, bogus trust
arrangements, and abusive tax shelters. Additionally, the Tax Division
has redoubled its efforts to prosecute tax crime involving income from a
legal source---such as the consultant who reports only part of his
income, the restaurant owner who skims from the cash register, or the
doctor who keeps two sets of bookkeeping records. The IRS estimates that
hundreds of millions in tax revenue is lost yearly through the evasion
of taxes on income from legal sources.

The Division also concentrates on several other areas of noncompliance.
Every year, the Division prosecutes a number of illegal tax protestors
who engage in tax evasion schemes and who harass IRS employees. It also
investigates and prosecutes tax violations occurring in the course of
other criminal conduct, such as narcotics trafficking (supporting the
Organized Crime and Drug Enforcement Task Force (OCDETF)), corporate
fraud, securities fraud, bankruptcy fraud, health care fraud, organized
crime, public corruption and terrorism. Representatives of the Tax
Division are also liaison attorneys with the various regions of OCDETF,
and are formal members of its policy-formation body.

**[Inter-Agency Cooperation]{.underline}**

The Tax Division contributes to the war on terrorism as a member of
several task forces in conjunction with the Criminal Division and other
Department components. In addition, through the President's Corporate
Fraud Task Force chaired by the Deputy Attorney General, the Tax
Division investigates and prosecutes corporate fraud. The Division also
helps formulate national policies, programs, strategies and procedures
in cooperation with other law enforcement components in a coordinated
attack on financial crime.

In addition to providing tax advice to other Divisions and agencies, the
Tax Division and IRS frequently consult on new and sensitive tax issues
and litigation. For example, Tax Division attorneys regularly give
training presentations to IRS revenue agents and other IRS personnel
across the country to educate them on how to develop evidence that will
support a suit to shut down a promotion at its source---the promoters
and salesmen. These presentations have led to an increase in injunction
suits filed by the Department to halt fraudulent tax promotions.

Finally, as part of its effort to stop abusive tax scheme promotions,
the Division uses parallel civil and criminal proceedings. Select Tax
Division personnel, through a joint IRS/DOJ task force, have explored
the coordinated use of both civil and criminal tools to stop tax fraud.
The task force prepared an extensive report and recommendation on this
topic for the Tax Division's Assistant Attorney General and the
Commissioner of Internal Revenue; the Division has already employed many
of the techniques recommended.

**Program Assessment Rating Tool (PART)**

The Division received a FY 2005 PART score of 85, which is deemed
"effective" and is the highest level awarded by OMB. The Tax Division
and other litigating components are taking three follow-up actions:

\(1\) In FY 2006, the Department's Justice Management Division (JMD)
offered a proposal to the Management and Planning Staff (MPS) and Office
of the Inspector General (OIG) to perform an independent evaluation of
the GLA components (GLAs). The proposal recommended that MPS perform
initial background interviews in a manner consistent with OIG yellow
book regulations. MPS would later hand off their preliminary research to
OIG to review and offer their findings and recommendations. However, OIG
was unable to include the GLA evaluation in its FY 2007 docket, and as a
result, JMD and the GLAs are currently exploring other options to meet
the PART follow-up action of "Performing an independent evaluation of
the GLAs."

\(2\) They are establishing leadership training and a mentoring program
to continue improving the quality of program management. The Tax
Division provides mentoring support to all new attorneys. Five Division
employees participated in the Department\'s SES Career Development
Program, which involved extensive training and mentoring by current SES
employees. Of the five candidates, four completed the program and were
certified in May 2006 as SES eligible (the fifth was selected for an SES
position while in the program). The Division assessed leadership
competencies of all Division managers (through the 2006 skills
assessment survey) and will be using that data to assess developmental
needs and means of closing any skill gaps in those leadership
competencies.

\(3\) They are working jointly on a project led by JMD to develop a Case
Management System with the objective of providing an efficient/effective
means to track litigation handled by the Department. A contract was
awarded in June 2006 and the project is in the planning and design
phase. The Tax Division is actively participating in the requirements
definition system design, and build phases for the Consolidated Debt
Collection System, for which it is scheduled to be a pilot in the summer
of 2007.

## Item Name: Operation Continued Follow-Through {#item-name-operation-continued-follow-through .unnumbered}

Budget Decision Unit: Tax Division

Strategic Goal & Objective: 2.5 Enforce federal statutes, uphold the
rule of law, and vigorously represent the interests of the United States
in all matters for which the Department has jurisdiction

Organizational Program: Tax Division

Program Increase: Positions - **71** FTE - **36** Dollars -
**\$5,187,000**

**[Description]{.underline}**

The Tax Division is requesting additional resources in support of
"Operation Continued Follow-Through," which seeks to carry on the tax
enforcement efforts described in last year's budget initiative termed
"Operation Follow-Through." The goal of Operation Continued
Follow-Through is to provide additional resources for increased and more
effective tax law enforcement, an established priority of this
Administration and the Congress.

The Division's activities help close the gap between taxes owed and
taxes collected, estimated to be more than \$345 billion every year.
Both the President and the Congress have recognized the huge importance
of closing the Tax Gap by requesting and enacting, respectively, \$442
million in new funding for IRS tax enforcement efforts in FY 2006 and
requesting \$137 million for FY 2007. These increases are producing and
will continue to produce, significantly increased workload for the Tax
Division. The accompanying charts and graphs were originally developed
in the FY 2007 budget, and were intended to demonstrate that the
Division was already feeling the workload pressure from the increased
IRS enforcement efforts. The updated numbers in those charts and graphs
one year later demonstrate their accuracy, and provide additional
support and justification for the resources being requested in FY 2008.

The Division can provide justification for 103 attorneys and 39 support
staff in support of this additional workload. Due to competing
priorities within the Department, however, the Division is asking only
for 52 attorneys and 19 support staff in FY 2008 to continue to follow
through on the Administration's priority commitment to increased tax
enforcement and to help ensure that taxpayers pay the taxes the law
requires.

Operation Continued Follow-Through seeks to handle the large influx of
litigation resulting from the IRS's significant expansion of enforcement
activity and its efforts focusing on tax kingpins---those who promote or
enable the illegal tax avoidance of others, including scam artists and
unscrupulous accountants, lawyers and tax preparers.

The Division also seeks to advance the Administration's goal of closing
the Tax Gap. The Tax Gap is the difference between the amount of tax
imposed on taxpayers for a given year and the amount that is paid
voluntarily and timely. The IRS estimates (based on most recent data
available), that the annual Tax Gap, before enforcement activity is at
least **\$345 billion.**

![](media/image3.wmf)

Part of the reason the Tax Gap exists is a decline during the 1990's in
voluntary compliance with the tax laws. The IRS collects over \$2
trillion annually; only \$47 billion of this comes from enforcement
activity. The balance, over \$1.96 trillion (or 98% of total
collections) results from taxpayers' voluntary compliance with the tax
law. Efforts of the IRS and the Tax Division over the last four years
are beginning to have an effect on voluntary compliance. According to an
annual survey commissioned by the IRS Oversight Board, nearly nine out
of ten Americans (88%) feel that it is "not at all" acceptable to cheat
on your income taxes, the highest level recorded since tracking began in
1999 and up two points from 2004. *See*, IRS Oversight Board, February
21, 2006, http://www.treas.gov/irsob/releases/index.shtml .

This renewed willingness to adhere to the tax laws results in part from
the President's renewed focus on tax enforcement and additional
resources already provided by Congress. In FY 2006, the IRS received an
additional \$442 million for enforcement efforts. President Bush's FY
2007 budget request sought an additional \$137.3 million for IRS
enforcement activities. A significant portion (\$264.6 million and 1,672
FTE) of the FY 2006 increase sought by the IRS was devoted to closing
the Tax Gap through targeted enforcement efforts:

  ------------------------------------------------------------------------------------------------
  **IRS' Enforcement   **FY 2006                 **FY 2007         **Total Resources     
  Budget               Enacted \***              Requested\*\***   Enacted/Requested**   
  Enhancements**                                                                         
  -------------------- --------------- --------- ----------------- --------------------- ---------
                       **\$(000's)**   **FTE**   **\$(000's)**     **\$(000's)**         **FTE**

  Corrosive            \$148,211       920       \-\--             \$148,211             920
  Non-Compliance                                                                         
  Driving the Tax Gap                                                                    

  Increase Individual  \$37,523        417       \-\--             \$37,523              417
  Tax Payer Compliance                                                                   

  Corrosive Corporate  \$51,285        236       \-\--             \$51,285              236
  Non-Compliance                                                                         

  Abusive Transactions \$14,316        77        \-\--             \$14,316              77

  Fraudulent Refund    \$10,665        22        \-\--             \$10,665              22
  Crimes                                                                                 

  Pay & Non-Pay        \$180,000       \-\--     \$137,275         \$317,275             \-\--
  Inflationary Costs                                                                     

  Total Enhancements   \$442,000       1,672     \$137,275         \$579,275             1,672
  Enacted/Requested                                                                      
  ------------------------------------------------------------------------------------------------

\* Source: IRS web-site - FY06 data was taken from the FY06 Budget in
Brief. \*\* FY07 Enforcement Request is proposed by the Administration
as a "Program Integrity Cap Adjustment"...IRS' tax enforcement program
is one of four eligible programs under the cap adjustment exemption.

Commissioner Mark Everson, in testimony before the House Appropriations
Committee's Subcommittee on Transportation, Treasury, and Housing and
Urban Development, and the District of Columbia on March 29, 2006, spoke
about how the IRS has made significant progress towards achieving its
enforcement-related goals in FY 2005, demonstrating increases in every
major area. The IRS has:

-   Audited nearly 220,000 high income taxpayers, more than double the
    number audited in FY 2000;

-   Audited 1.2 million individuals, a 20% increase over FY 2004;

-   Audited nearly 5,000 businesses with assets over \$250 million, an
    increase of 11% over FY 2004.

The first chart (below) depicts the IRS's workload growth through FY
2006. The IRS received full funding support of its FY 2006 budget
request, which focuses primarily on enforcement initiatives. The Tax
Division is an integral part of the Administration's increased tax
enforcement initiatives, resulting in ever-increasing workloads for the
Division's attorneys. However, the additional resources in the IRS's FY
2006 and FY 2007 budget will have a direct impact on the Tax Division's
workload in FY 2008 and thereafter, as additional cases and
investigations are identified and readied for civil and criminal
litigation and then referred to the Division. To handle this expected
influx and properly support the Administration's priority on enhanced
tax enforcement, funding the Tax Division's FY 2008 budget request is
imperative. The second chart (below) depicts the climbing caseloads that
the Tax Division must be prepared to handle.

![](media/image4.wmf)

![](media/image5.wmf)

**...driving Tax Division caseloads higher**

![](media/image6.wmf){width="6.873611111111111in"
height="4.011111111111111in"}

The Administration and Congress strongly supported the IRS's
enforcement-based resource requests for FY 2006 and FY 2007. The Tax
Division is the final piece of the equation to reduce the Tax Gap,
enforce the nation's tax laws, and decrease fraud and abuse. If no
additional resources are provided to the Tax Division to continue the
IRS's enforcement strategies, the results would be devastating to the
Treasury. Inevitably, the influx of cases would result in decreased
effectiveness on the litigation front because the cases would not be
given the attention they warrant; less revenue would be collected on
behalf of the United States Treasury; fewer litigation victories in
large corporate tax shelter cases and refund suits would set the wrong
precedent, causing a flood of filings from undeserved claimants; delayed
authorization of criminal prosecutions would undermine the IRS's
enforcement efforts; and ultimately, there would be further erosion in
the general public's compliance with the tax laws.

The Tax Division received the highest score given by OMB on the PART,
and has consistently demonstrated that it is a solid return on
investment. By providing minimal resources to the Tax Division, the
Department of Justice will be advancing the goals of the Administration
and the honest taxpayer, while returning money to the Treasury at a
higher rate than the initial investment.

**Calculation of FTE Needed**

***Civil Trial***

![](media/image7.wmf){width="5.405555555555556in"
height="4.070138888888889in"}

As the graph illustrates and as discussed below, the Tax Division is
experiencing the flood of complex civil litigation it anticipated, and
the number of attorneys available to handle that caseload is not keeping
pace with the workload. The Division similarly expects to face
significant increases in complex criminal litigation as the IRS expands
its criminal enforcement activities.

The Division calculates its FTE request based on projected caseload for
FY 2008 and the average hours per case needed to handle that caseload,
calculated separately for civil matters and criminal matters.

The Division projects having 11,049 civil trial matters (adjusted for
the complexity of tax shelter cases, as described at pages 46-47), and
therefore requiring 112 attorneys more than the number expected to be on
board as a result of the President's Budget Request for FY 2007. The
Division calculates that it spends an average of 43.9 hours per case per
year in civil matters. Accordingly, the total hours needed (and the
corresponding attorney FTE needed, assuming 1,800 case hours per
attorney FTE) for the projected caseload is calculated:

  ------- ------------- ------------ ----------- ------------ ---------- ------------
          Average       FY 2008      Projected   FTE Needed   Baseline   FTE
          Hours/Case    Caseload     Caseload in (@1800       FY 2008    Difference
                        Projection   Hours       hours/FTE)   FTE        

                                                                         

  Civil   43.9          11,049       485,051.1   269.47       157        112.47

                                                                         
  ------- ------------- ------------ ----------- ------------ ---------- ------------

***[Criminal Prosecution]{.underline}***

For criminal matters, the Division projects receiving 1,226 criminal
case referrals involving 2,208 targets (see page 46). The Tax Division
decides which referrals are approved for prosecution. Following Division
evaluation and authorization, cases are either tried by Division
prosecutors or by U.S. Attorneys' Offices. Those litigated by the
Division generally require tax expertise not available in the districts.
Litigated matters require far more Division time and resources. For the
last five years, the average number of hours worked, per case, per year
is 372.7 hours for tried cases and 28.2 hours for non-litigated cases.

  -------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- ------------------------
                             **Average Hours Per                                                                                      
                             Case Per Year\***                                                                                        

                             [2002]{.underline}   [2003]{.underline}   [2004]{.underline}   [2005]{.underline}   [2006]{.underline}   [Average]{.underline} 

  Litigated Cases            350                  358                  410                  308                  438                  372.7

  Non-Litigated Cases        32                   28                   29                   28                   24                   28.2
  -------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- ------------------------

\*Litigated cases are assumed to be handled over 2 years

A recent analysis suggests that the criminal cases the IRS is referring
are getting more complex, and the Division has been accepting more
prosecution assignments over the last few years, as the U.S. Attorneys'
Offices reallocate their resources to other criminal priorities. During
FY 2006, Tax Division criminal prosecutors undertook 128 cases, compared
to 79 in FY 2005. The Division anticipates the percentage of cases tried
by Tax Division prosecutors instead of by Assistant United States
Attorneys eventually doubling, from 10% in FY 2005 to 20% by FY 2008.

![](media/image8.wmf){width="5.841666666666667in" height="2.91875in"}

In addition, complex litigated matters take almost three times as many
attorney hours per year than other cases. As a result, the Division
calculates a separate average for complex litigated criminal matters.
For example, the average hours per case per year, over the last several
years, for the most complex litigated cases being handled by the
Division is 1,286 hours.

Applying these averages to the expected number of general and complex
litigated cases (including those which would otherwise be handled by the
US Attorneys' Offices) and other prosecution reviews in FY 2008 yields
the caseload in hours and the FTE needed (assuming 1,800 case hours/FTE)
[^1]:

![](media/image9.wmf)

![](media/image10.wmf){width="5.46875in" height="3.7708333333333335in"}

**Total Staffing Request**

Although these analyses show that the caseload facing the Division
justifies a position/FTE increase of 125 attorneys (108 civil, 17
criminal), the Tax Division is only requesting a modest program
enhancement of 51 attorney positions and associated support at this time
for "Operation Continued Follow Through."

**Return on Investment**

Not only are additional resources for tax litigation imperative to
support the President's and Congress's priorities, they are also an
excellent investment. Over the last five years, Tax Division attorneys
on average have returned 24 dollars to the Treasury for every dollar
they cost to employ:

  ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
  **Return on                                                                                             
  Investment for Tax                                                                                      
  Division                                                                                                
  Attorneys**                                                                                             

                      [2002]{.underline}   [2003]{.underline}   [2004]{.underline}   [2005]{.underline}   [2006]{.underline}

  Collections in      \$90                 \$72                 \$69                 \$477                \$148
  millions                                                                                                

  Refund Suit Savings \$1,246              \$794                \$659                \$1,023              \$730
  in millions\*                                                                                           

  Total in millions   \$1,336              \$866                \$728                \$1,500              \$878

                                                                                                           

  Attorney FTE        326                  322                  314                  298                  294

                                                                                                           

  Dollars collected,  \$ 4,098,160         \$ 2,689,441         \$ 2,318,471         \$ 5,033557          \$ 2,986,395
  refunds saved per                                                                                       
  attorney                                                                                                

                                                                                                           

  Modular cost per    \$ 134,280           \$ 137,340           \$ 141,000           \$ 154,054           \$ 157,498
  attorney                                                                                                

  **Return on         **31:1**             **20:1**             **16:1**             **33:1**             **19:1**
  Investment per                                                                                          
  Attorney**                                                                                              

  **Average**                                                                                             **24:1**

  \*Includes only                                                                                         
  amounts involved in                                                                                     
  litigation                                                                                              
  completed during                                                                                        
  each fiscal year                                                                                        
  ------------------- -------------------- -------------------- -------------------- -------------------- --------------------

In addition, these returns on investment are based on only the *direct*
effect of the Tax Division's work. The cases the Division brings and
wins, the precedents that the Division establishes, and the convictions
that the Division obtains profoundly affect taxpayer behavior, making
the *indirect* effect of the Tax Division's work many billions of
dollars more. Accordingly, the resources given to the Tax Division are
returned many times over in enhancement to collected revenues to the
Federal Treasury.

**[Justification for Operation Continued Follow-Through]{.underline}**

The Tax Division proposes "Operation Continued Follow-Through" to enable
it to handle the increased litigation resulting from the IRS's
additional enforcement efforts. Unlike many program initiatives, the
additional work covered by this proposal is not discretionary. If the
Tax Division is not able to bring the suits requested by the IRS, or
defend the refund and other tax suits brought against the United States,
cases will go undefended or priority enforcement initiatives will be
thwarted. The Division has prioritized and can prioritize its work, in
tandem with the IRS, to focus on cases that return maximum enforcement
effect for each dollar spent. Accordingly, the Division has focused, and
will continue to focus, a large share of its resources on curtailing the
activity of promoters, enablers and tax professionals (including return
preparers, accountants and lawyers) who help others to avoid taxes
illegally---the tax-avoidance kingpins.

Tax kingpins enable illegal tax avoidance by:

-   **Promoting tax fraud schemes**

-   **Devising and promoting abusive tax shelters for corporations and
    > wealthy individuals**

-   **Publicly advocating defiance of the tax laws on frivolous or false
    > grounds**

Some tax kingpins make considerable sums charging clients for advice or
tax-avoidance packages. Others are motivated by ideological resistance
to taxes or to legitimate governmental authority in general.

Like drug kingpins, tax kingpins are the vector of illegal activity,
enabling and encouraging their customers---hundreds and sometimes
thousands of them---to break the law, usually for their own enrichment.
Those who are tempted to avoid taxes through illegal means rely on them
for assistance. And honest taxpayers can be led astray and engage in
improper transactions or file fraudulent tax returns based upon the
advice of the tax kingpins.

Focusing our finite resources on tax kingpins gives each dollar of
enforcement effort a multiplier, or a "ripple effect," extending the
power of enforcement resources to hundreds of thousands of people. By
taking tax kingpins out of the equation, tax evaders lose the help of
willing accomplices.

Moreover, public enforcement efforts against tax kingpins reinforce an
ethic of respect for law, showing the taxpaying public that the tax laws
are being fairly enforced, reassuring honest taxpayers that they are not
"chumps" for paying their taxes, and encouraging honest businesses that
they do not face a competitive disadvantage when they meet their tax
obligations.

**Main Components of Operation Continued Follow-Through**

##### Challenging and closing down abusive tax shelters for corporations and the wealthy {#challenging-and-closing-down-abusive-tax-shelters-for-corporations-and-the-wealthy .unnumbered}

A prime feature of Operation Continued Follow-Through is litigation
seeking to shut down complex tax shelters. In these cases, the Division
challenges, on the merits, the legitimacy of sophisticated financial
transactions that the IRS believes are engaged in solely or primarily to
avoid taxes rather than for any business purpose. The transactions at
issue often are devised, packaged and sold by large accounting firms or
law firms. Shelter cases typically require extensive discovery,
briefing, depositions, expert witness preparation and trial time,
consuming thousands of hours of attorney time. The Tax Division must
devote an increasingly large portion of its resources to complex tax
shelter litigation to handle the cases successfully.

##### Opening the books and customer lists of tax shelter promoters to IRS inspection, through enforcement of IRS summonses {#opening-the-books-and-customer-lists-of-tax-shelter-promoters-to-irs-inspection-through-enforcement-of-irs-summonses .unnumbered}

Tax kingpins instruct their clients on how to evade detection on their
tax returns. Consequently, the IRS is frequently unable to identify,
based on returns alone, which taxpayers have used sophisticated
transactions to manipulate their income and deductions to reduce tax.
One of the main tools provided by statute to assist the IRS with
investigation of suspected illegal tax avoidance is the administrative
summons, which the IRS can issue to taxpayers or third parties to obtain
documents and other records. Since IRS summonses can only be enforced by
court order, the Tax Division plays an integral role in obtaining
judicial enforcement of summonses. Successful enforcement often involves
overcoming defenses to disclosure such as attorney-client privilege. The
documents and customer lists produced allow the IRS to focus its
investigations and identify potentially abusive transactions.

##### Obtaining injunctions that shut down the promotion of fraudulent tax schemes  {#obtaining-injunctions-that-shut-down-the-promotion-of-fraudulent-tax-schemes .unnumbered}

Promoters of tax scams are the ultimate "tax kingpins." Like drug
dealers, they sell false hope to individuals, who are often in difficult
circumstances. They prey on taxpayers on the low end of the
tax-avoidance spectrum, seeking to sell "do-it-yourself" tax-relief
packages to individuals (some who know better, some who are misled into
illegal tax avoidance), using schemes and scams that are false and
fraudulent. Many of these promotions grew to involve huge numbers of
taxpayers, using the Internet to market their schemes to large audiences
who were previously unreachable or using sophisticated "boiler-room"
telemarketing techniques. The Tax Division has met head-on the onslaught
of tax-scam promotions. Prior to or along with any criminal
investigation, the Division uses civil enforcement remedies, primarily
civil injunctions, to halt the promotion of fraud and to require
production of customer lists and documents. Division attorneys spend
many hours preparing cases and collecting evidence, since obtaining an
injunction virtually always requires proving the merits of the
government's case at a preliminary stage, in advance of discovery.

##### Winning criminal sanctions against illegal tax protesters, public tax scofflaws and prominent tax evaders {#winning-criminal-sanctions-against-illegal-tax-protesters-public-tax-scofflaws-and-prominent-tax-evaders .unnumbered}

Along with its other criminal enforcement work, the Tax Division
concentrates its resources on high-profile tax criminals who illegally
encourage others to evade taxes. This includes those who advocate
disobedience of the tax laws, those who publicize their refusal to
comply with the law, and those who seek to garner a competitive
advantage through tax evasion or who otherwise violate the law with
impunity.

##### Finding and bringing to justice those who promote or use offshore bank accounts for illegal tax avoidance {#finding-and-bringing-to-justice-those-who-promote-or-use-offshore-bank-accounts-for-illegal-tax-avoidance .unnumbered}

As the Department's Strategic Plan acknowledges, "In a society that has
become globalized and more technologically advanced, the opportunities
for criminals to exploit have grown exponentially."[^2] One of these
opportunities has been the increased use of accounts in offshore "tax
haven" countries, made more accessible through advances in the financial
industry and the Internet. The Tax Division is working closely with the
IRS to identify holders of offshore accounts through civil actions
seeking records from financial institutions and credit-card companies
and to prosecute those account-holders who have committed U.S. tax
violations.

#### Successes Related to Operation Follow-Through {#successes-related-to-operation-follow-through .unnumbered}

##### Tax Shelter Litigation {#tax-shelter-litigation .unnumbered}

Tax Division victories in United States Courts of Appeals have
established precedent that effectively shut down technical tax shelters
estimated to have cost the Federal Treasury \$11 billion. For example,
in September 2005 the Second Circuit affirmed a \$16 million penalty
against Long Term Capital Holdings, a once-prominent hedge fund, which
engaged in a series of abusive transactions designed to inflate the tax
basis of certain stock to one hundred times its fair market value. The
court upheld the district court's use of the "economic substance" and
"step transaction" doctrines to disregard the abusive transactions for
tax purposes. Similarly, the Court of Appeals for the Federal Circuit,
in July 2006, rejected Coltec Industries, Inc.'s claims that it lost
\$375 million in a so-called contingent liability tax shelter, adopting
the Tax Division's arguments that the transactions in issue lacked
economic substance. These results provide the government with strong
weapons in the battle against abusive tax shelters. In February, 2006,
the 4^th^ Circuit remanded a \$230 million tax shelter case involving an
attempt by Black & Decker to deduct a contingent liability as a business
loss. The court stated that the Tax Division had introduced "ample
evidence" from which a reasonable trier of fact could conclude that the
deductions were not authorized. In March, 2006, the 6^th^ Circuit
reversed an unfavorable district court ruling and directed judgment for
the United States in a \$22 million tax shelter case involving Dow
Chemical. In August, the Tax Division achieved a tax shelter victory in
the Second Circuit, when that court ruled that a subsidiary of General
Electric Capital Corporation was not entitled to the \$62 million tax
refund it claimed in connection with a popular tax shelter. At the trial
level a District Court in Texas found in favor of the government in a
\$4.1 million tax shelter case involving the improper deduction of
expenses connected with leases.

##### Summons Enforcement Litigation {#summons-enforcement-litigation .unnumbered}

Tax Division victories in summons enforcement litigation---in which
courts uniformly have rejected claims of privilege as unfounded---have
required accounting firms, law firms, and financial institutions
involved in the promotion of tax shelters to turn their tax shelter
files and customer lists over to the IRS.

##### Tax Scam Injunctions {#tax-scam-injunctions .unnumbered}

The Tax Division has obtained more than 215 injunctions against tax scam
promoters and fraudulent tax return preparers, shutting down scams
involving over 500,000 taxpayers and over 2.5 billion dollars.

##### Tax Convictions {#tax-convictions .unnumbered}

Tax prosecutions have resulted in convictions of those who engage in or
promote tax fraud:

-   **Walter Anderson** -- Anderson pleaded guilty to tax evasion and
    defrauding the District of Columbia government, by failing to pay
    well in excess of \$200 million in taxes. He awaits sentencing.

-   **Irwin Schiff (sentenced to more than 12 years)** -- nationally
    recognized tax protest organizer who was convicted of promoting a
    scheme that encouraged taxpayers to file tax returns with zeroes on
    each income and expense line, resulting in fraudulent claims for
    refunds of taxes paid. As a result of the heavily-marketed scheme,
    taxpayers filed nearly 5,000 fraudulent "zero returns" with the IRS.

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-   **David Stephenson and Michael Shanahan (Stephenson sentenced to 8
    years) --** defendants promoted a "pure trust" tax fraud scheme
    through a Tacoma, Washington-based organization they called American
    Business Estate and Tax Planning. The defendants falsely advised
    more than 400 clients that they could avoid paying income tax if the
    clients placed their income and assets in "pure equity trusts,"
    despite the clients continuing to maintain control over such income
    and assets.

-   **Anderson's Ark defendants (sentences of up to 20 years)** --
    long-running promotion that facilitated, through offshore accounts,
    evasion of taxes on more than \$120 million in taxable income.

-   **David J**. **Orr (Edward Woodger sentenced to 5 years)** -- the
    investigation has resulted in eleven convictions, which include four
    attorneys, a CPA, and a former IRS agent, for promoting a trust
    scheme that defrauded the Treasury of \$5 million in tax revenue.
    Orr and two other remaining defendants are scheduled for sentencing
    in late January 2007.

-   **Paul Harris (sentenced to over six years)** -- the defendants
    operated Tower Executive Resources which aided the preparation of
    false income tax returns and the concealment of income with the use
    of abusive trusts, offshore debit cards, false documents, and
    offshore accounts. A co-defendant, Lester Retherford, was sentenced
    to four years in prison.

##### Tax Prosecutions {#tax-prosecutions .unnumbered}

The Tax Division, as co-counsel with the United States Attorneys'
Offices, has also secured indictments against the following defendants:

-   **KPMG defendants --** eighteen former officers and associates of
    the Big-Four accounting firm KPMG and a former tax partner of a
    national law firm were charged with conspiracy to defraud the IRS,
    tax evasion and obstruction of the internal revenue laws arising out
    of allegedly illegal tax shelters that KPMG and others designed,
    marketed and implemented. The shelters allegedly generated at least
    \$11 billion in fraudulent tax losses and resulted in at least \$2.5
    billion in tax evaded by wealthy individuals.

-   **The Aegis Company defendants** -- Indictment charges nine
    defendants with a nearly decade-long conspiracy to market and sell
    sham domestic and foreign trusts through The Aegis Company to some
    650 wealthy taxpayer clients throughout the United States in order
    to hide hundreds of millions of dollars in income, causing a tax
    loss to the United States of at least \$68 million. Additional
    indictments in multiple jurisdictions charged certified public
    accountants and others with conspiracy and aiding and assisting the
    preparation and filing of false tax returns by Aegis trust clients.

##### Offshore Accounts {#offshore-accounts .unnumbered}

The Division's use of civil and criminal remedies to attack abuse of
offshore accounts has resulted in the production of hundreds of
thousands of bank records, identification of hundreds of potential
violators and convictions of many users of offshore entities and bank
accounts.

**Growth in Division's Workload**

#### Litigation targeting tax kingpins is growing significantly {#litigation-targeting-tax-kingpins-is-growing-significantly .unnumbered}

From FY 2001 to FY 2004, tax shelter cases handled in the Division grew
from 13 to 27, a 208% increase. The number of shelter cases skyrocketed
in fiscal years 2005 and 2006, and as of the end of the FY 2006 stood at
85, a 654% increase from FY 2001.

![](media/image11.png){width="3.70625in" height="2.638888888888889in"}

Tax Division prosecutors evaluate the evidence and legal theories
supporting proposed tax grand jury investigations and prosecutions to
determine whether the Department of Justice should pursue the
prosecution of subject taxpayers. As demonstrated below, the number of
case referrals -- like the number of criminal referrals (targets) -- is
growing dramatically, as a result of an increased number of IRS agents.
Based on current trends, the Division predicts receiving 2,208 criminal
matter referrals (targets) in FY 2008.

![](media/image12.wmf){width="5.125in" height="3.53125in"}

#### The Division's workload is growing in other ways beyond an increasing number of cases\--  {#the-divisions-workload-is-growing-in-other-ways-beyond-an-increasing-number-of-cases-- .unnumbered}

##### As measured by increases in complex civil litigation and trials {#as-measured-by-increases-in-complex-civil-litigation-and-trials .unnumbered}

Tax shelter litigation constitutes perhaps the most complex civil
litigation and trials in courts today. The cases involve sophisticated,
complex transactions devised by financial experts (a couple have been
Nobel laureates in economics), executed in elaborate structures that
seek to take advantage of perceived loopholes in the tax code. The
litigation frequently entails hundreds of thousands of documents,
multiple parties and witnesses, multiple jurisdictions, novel issues and
well-financed opposition.

As illustrated by the chart on page 45, the number of tax shelter cases
being litigated by the Tax Division has grown rapidly. Moreover, the
number of hours that must be devoted to tax shelter cases far outstrips
the hours devoted to other kinds of civil cases handled by the Division.
Analysis of 19 tax shelter cases handled to closure by the Division in
recent years, or whose activity is substantially complete, shows that on
average a tax shelter case consumes between 5,000 and 6,000 attorney
hours to completion, over a span of 4 to 5 years. Assuming an average
case takes 5,000 hours over a four-year period, the average annual
attorney time needed for each shelter case is 1,250 hours. This is 30
times the average hours per case for other kinds of cases (44.2 hours
per case), handled over that time period:

  ------------- ------------ ------------ ------------ ------------ ------------ ------------
  Hours Charged                                                                  
  to All Types                                                                   
  of Civil Tax                                                                   
  Cases                                                                          
  (excludes                                                                      
  Immigration                                                                    
  Appeals)                                                                       

                2001         2002         2003         2004         2005         2006

  Pending Suits 6,900.00     6,690.00     6,758.00     6,663.00     6,808.00     6,965.00

  Total Hours   312,574.00   312,991.00   308,952.00   257,018.00   293,448.00   305,945.50

  Hours/Suit    45.30        46.80        45.70        38.60        43.10        43.93

                                                                    Average      43.90
  ------------- ------------ ------------ ------------ ------------ ------------ ------------

Accordingly, each new shelter case is the equivalent of 30 new
non-shelter cases handled by the Division. Because the number of new
shelter cases is growing substantially, it is appropriate to analyze the
current and projected civil workload of the Division in terms of number
of shelter cases and number of non-shelter cases, and to treat the
shelter cases as counting as 30 non-shelter cases, due to the additional
time they take and the additional resource demands they create. This
yields an "effective civil caseload" that provides a more accurate
picture of resource demands than treating all cases as being equal. The
chart below indicates that the Division's effective civil caseload has
been growing. IRS enforcement activity suggests that current trends will
continue, and the Division's effective caseload in FY 2008 will be more
than 50% larger than its FY 2002 nadir.

![](media/image13.wmf){width="5.333333333333333in"
height="4.145833333333333in"}

  ----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
  **Pending**       **2001**   **2002**   **2003**   **2004**   **2005**   **2006**   **2007     **2008
                                                                                      (proj)**   (proj)**

  **All Cases**     6,900      6,690      6,758      6,663      6,808      6,965      6,849      6,865

  **Shelter**       13         18         22         27         59         85         113        133

  **Non-shelter**   6,887      6,672      6,736      6,636      6,749      6,880      6,736      6,732

  **Shelter x 30**  390        540        660        810        1770       2550       3390       3990

  **Effective       7,277      7,212      7,396      7,446      8,519      9,430      10,126     10,722
  Caseload**                                                                                     
  ----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

**Criminal Caseloads**

The USAOs prosecute the vast majority of cases authorized for
prosecution by the Tax Division. Given the redirection of United States
Attorneys' resources to other criminal matters, however, the Tax
Division's criminal prosecutors are increasingly called upon to
investigate and prosecute tax crimes that, until recently, United States
Attorneys would have prosecuted. It takes an average of 12 times more
manpower to prosecute a case than to evaluate and authorize its
prosecution. Without additional resources in the Tax Division to
prosecute the tax crimes USAOs are unable to, more tax crimes will go
unpunished.

There are several reasons that Division attorneys are being asked to
assume litigation of criminal tax cases:

-   United States Attorney's Offices are increasingly called upon to
    dedicate their resources to prosecute counter-terrorism, illegal
    narcotics, and other non-tax crimes.

-   Number range CHAPTERAs global business has become commonplace, tax
    cheats have learned to use offshore accounts and transactions to
    conceal their domestic tax evasion schemes. Previously, these
    elaborate concealment plans were utilized by only a few wealthy and
    sophisticated businessmen. Today, such schemes have become widely
    marketed through use of the Internet and seminars and, more
    frequently than ever before, average businessmen and tax protestors
    alike find such avenues of concealment open to them. Unless quickly
    detected and successfully prosecuted, these offshore concealment
    plans present a potential for a serious erosion of the nation's
    voluntary tax system. As these offshore evasion schemes become
    common forms of tax cheating, the work of both IRS criminal
    investigators and federal prosecutors will become far more demanding
    and resource intensive.

-   Litigation assignments often require investigative work and
    potentially consecutive trials in numerous judicial venues. USAOs
    find such multi-jurisdictional litigation difficult to staff as they
    generally are not budgeted for frequent and lengthy travel by AUSAs.
    Accordingly, the Tax Division's assistance is regularly sought to
    handle various aspects of the case even though the USAO may remain
    involved in the prosecution of any targets in its home jurisdiction.

-   Many cases that Tax Division attorneys litigate are becoming
    increasingly complex, and require the expertise of attorneys who are
    familiar with the tax laws and understand the complexities of the
    charges in a specific case. One explanation for that trend can be
    found within the IRS, where Criminal Investigation Division (CID)
    agents hired pursuant to increased enforcement budgets and who
    initially pursued simpler cases have become more experienced, and
    have as a consequence begun to refer a greater percentage of more
    complex tax cases to the Division. Since FY 2004, the Tax Division
    has seen an increase in case referrals which require more attorney
    involvement because they involve taxpayers who have filed fraudulent
    returns which are very detailed and intricate.  The complex
    structure of the return is designed only to obscure the false claims
    contained within the return.

As the case evaluation workload has increased, so, too, has the trial
workload, but to an even greater degree. From FY 2004 to FY 2006, the
average number of trial assignments per attorney increased by almost 17
percent. For FY 2006, the combined workload, which consists of case
evaluations and cases litigated by the Division's prosecutors, averaged
2,066 hours (not including time attributable to leave, federal holidays,
training, etc.). This is well in excess of the standard 1,800 hours,
which is the average number of hours attorneys are able to work on
cases, based upon 2,080 hours being the total available hours in one
year, less official holidays (10 holidays), vacation (2 weeks), annual
leave (5 days), sick leave (5 days), and work devoted to non-case
activity (training, administrative tasks, etc.). Eighteen hundred hours
is also the standard figure used by the legal profession as an
attorney's full-time schedule available for work.

***Tax Division Attorney Workload***

##### ![](media/image14.wmf){width="4.072916666666667in" height="2.7895833333333333in"}As measured by significant trial activities per civil attorney FTE  {#as-measured-by-significant-trial-activities-per-civil-attorney-fte .unnumbered}

The Division tracks the number of significant trial activities performed
by each attorney, both by the number of briefs, pleadings or other court
documents prepared and by the number of trials or court hearings
attended. As the Division's workload has increased, Division attorneys
have been working harder to complete more significant trial activities
per year, as the graph illustrates.

#####  {#section-11 .unnumbered}

##### As measured by criminal referrals and authorized prosecutions per criminal attorney FTE {#as-measured-by-criminal-referrals-and-authorized-prosecutions-per-criminal-attorney-fte .unnumbered}

![](media/image15.png){width="4.074305555555555in"
height="3.0388888888888888in"}

Similarly, on the criminal side, the Division tracks the number of
criminal referrals (targets) made to the Division, per attorney FTE, and
the number of prosecutions authorized. The number of criminal referrals
received per attorney FTE in FY 2006 was 85% higher than that received
in FY 2001. As workload has increased, Division attorneys have become
more efficient, doubling the number of prosecutions authorized per
attorney FTE by FY 2004. Further efficiency gains are not possible.

#### The capacity of attorneys to absorb additional growth is at its limit --  {#the-capacity-of-attorneys-to-absorb-additional-growth-is-at-its-limit .unnumbered}

![](media/image16.wmf){width="6.05625in" height="3.8986111111111112in"}

Division attorneys worked an annual average of 1,988 hours in FY 2006.
This average yearly schedule is the equivalent of working more than a
whole extra month per year above a full-time schedule of 1,800 hours.
The chart above shows the average hours worked in FY 2006 per each of
the Division's sections.

Many attorneys put in many more hours than the average, working more
than 2,500 to 3,000 hours per year (3,120 hours per year is the
equivalent of 10 hours per day, 6 days per week, 52 weeks per year).

![](media/image17.wmf){width="6.327083333333333in"
height="3.3645833333333335in"}

Tax Division attorneys are working to capacity, and can absorb no
additional workload. The Division is losing many talented attorneys to
the private sector and other government offices.  Because of the high
quality of its work, service in the Tax Division is perceived by many as
a valuable training experience.  Tax Division attorneys are in high
demand in the private sector and in other government offices.  Tax
Division attorneys entering private practice can more than double their
government salaries.  At present, approximately 73 former Tax Division
attorneys are now serving as AUSAs around the country.  Since the
beginning of FY 2001, the Division has lost nearly 216 trial attorneys
to law firms, U.S. Attorneys' offices and other agencies.  However,
budget and other constraints have permitted the Division to replace only
186 of these departures through law school recruitment and lateral
hiring.

Of the attorneys lost since the beginning of FY 2001, 30
prosecutors from the Division's criminal enforcement sections  and five
civil attorneys  have transferred to 19 U.S. Attorney's Offices.  In
addition, in FY 2004, prior to their entry on duty, the Department
reassigned to U.S. Attorney's Offices three Honors Program hires
designated for the Tax Division.  While these 38 transfers have enhanced
the strength of U.S. Attorney's Offices, they have severely diminished
the strength of the Tax Division.  Overall, Tax Division attorney staff
has declined over 13% since FY 2001.

The following graphs depict the percentage reduction in civil and
criminal trial attorney FTE to the percentage growth in the respective
civil and criminal trial effective caseloads, compared with FY 2001
levels:

![](media/image18.wmf){width="6.691666666666666in"
height="4.569444444444445in"}

**Projected New Cases**

In addition to the caseload the Division is attempting to manage with
declining resources, the Division has already begun to receive dozens of
new complex cases, the first of a significant number it anticipates
receiving for the next several years, requiring additional attorney and
support staff.

#### IRS's enhanced enforcement activity is spawning hundreds of new cases {#irss-enhanced-enforcement-activity-is-spawning-hundreds-of-new-cases .unnumbered}

The IRS has made a priority of combating corrosive activity by
corporations, high-income individuals and other contributors to the Tax
Gap. In addition to stepping up audits, the IRS is making increasing use
of "settlement initiatives," under which the IRS publicly states the
terms to which it would agree to resolve disputes concerning the taxes
(and penalties and interest) owing as a result of specific abusive
transactions. Settlement initiatives are a useful enforcement tool,
bringing in billions of dollars of unpaid taxes, interest and penalties
and resolving hundreds of cases. The terms of recent IRS settlement
initiatives have been very tough, requiring settling taxpayers to
concede 100% of the taxes owing plus a portion of applicable penalties
and interest. Nonetheless, thousands of taxpayers are accepting the
terms proposed and paying billions of dollars.

Tax Division litigation directly supports the effectiveness of IRS
settlement initiatives. Its summons enforcement litigation has required
shelter promoters to turn over customer lists and transaction documents,
permitting the IRS to identify shelter participants who otherwise might
evade detection. Further, the Division's litigation challenging the
merits of abusive tax shelters allows the IRS to assert the credible
threat that shelter participants will lose in court, which encourages
them to settle.

For example, in May 2004, the IRS made a settlement offer regarding the
Son of Boss tax shelter, which wealthy individuals had used to avoid
taxes on billions of dollars in taxable income. As a condition of
participating in the settlement program, the IRS required a total
concession by the taxpayer of artificial losses claimed. The IRS also
required the payment of penalties in most cases. Over 1,100 taxpayers
(of the over 1,800 believed to have employed the Son of Boss technique)
participated in the settlement initiative, yielding more than \$3.2
billion in taxes, interest, and penalties to date.

Significantly, however, more than 600 of the 1,800 identified
Son-of-Boss users did *not* participate in the settlement initiative. 
The IRS estimates that cases involving as many as 250 taxpayers may be
litigated, and more than half of these are likely to be handled by the
Tax Division (as taxpayers will be more likely to file suit in district
court or the Court of Federal Claims, courts in which the Tax Division
represents the United States, than in the Tax Court).    In FY 2006, 17
cases were filed in addition to the 28 cases filed in FY 2005 -all of
which are being litigated by the Tax Division.  There are currently 46
Son of Boss cases being litigated by the Tax Division, involving over
100 taxpayers.

The IRS has offered additional settlement initiatives. In February 2005,
the IRS implemented a new settlement initiative relating to an illegal
tax shelter transaction under which taxpayers transferred executive
stock options or restricted stock to family-controlled entities,
sometimes at the expense of public shareholders. The settlement offer
required full payment of taxes owed plus a penalty. It also announced an
omnibus settlement initiative in FY 2005, covering many types of
transactions it had listed as abusive. The IRS is still tallying the
results of these initiatives -- i.e., the number of taxpayers, shelters,
and tax dollars involved -- and estimates that at least 25 other tax
shelter cases were headed for trial, along with 33 other large cases
that are important to tax administration.

#### New injunction cases {#new-injunction-cases .unnumbered}

As of the end of FY 2005, the number of tax scam promoters being
investigated by the IRS Lead Development Center had climbed to 1,072, up
significantly from the beginning of the fiscal year and nearly double
the number pending at the beginning of FY 2004. Significant numbers of
these cases are likely to be referred to the Division for civil
injunction and/or prosecution. These new cases would come on top of the
significant injunction work the Division is already handling.

#### Outgrowth of offshore work {#outgrowth-of-offshore-work .unnumbered}

As summarized below, as of the end of FY 2006, the IRS estimated that
thousands of taxpayers identified through the Tax Division's offshore
enforcement litigation (seeking permission to serve, and then enforcing
IRS summonses on credit-card issuers and processors to obtain
information regarding U.S. holders of accounts in tax-haven countries)
were in examination, or would be shortly. Hundreds of these cases are
likely to be referred to the Division for litigation or prosecution.

-   1,803 returns are currently under examination, or are in a
    post-examination, pre-assessment status.

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-   724 cases have been selected for examination, but are waiting to be
    classified before they are sent to the field.

-   658 cases have been selected for examination and sent to the field,
    but have not been assigned to an agent.

-   Of the cases under examination, nearly half have either been
    referred to IRS Criminal Investigation Division (CI) or CI has
    accepted the case. This is an exceptionally high percentage of
    referrals.

Without a substantially fortified attorney workforce, the Tax Division
will be unable to properly represent the United States in cases
currently pending, much less the hundreds of new cases expected to be
filed in FY 2007 and FY 2008.

**[Impact on Performance (Relationship of Increase to Strategic
Goals)]{.underline}**

Tax Division's enhancement will directly support the ability of the
Department to "get to green" on Strategic Goal 2.5 (Enforce federal
statutes, uphold the rule of law, and vigorously represent the interests
of the United States in all matters for which the Department has
jurisdiction). The foregoing justification makes clear that without
additional attorney and support staff to handle the increasing caseload
that is already inundating the Division, by FY 2008 the Division will
fall well below target levels to successfully enforce federal laws,
leaving important Administration tax enforcement initiatives unsupported
and adversely affecting the Federal Treasury's tax receipts. Without
additional resources for Tax Division litigation, hundreds of millions
of dollars in additional resources already appropriated and to be
appropriated for enhanced IRS enforcement activity will be wasted.

The Tax Division will continue to shift resources internally to cover
the highest priorities, but it could be at the expense of affirmative
litigation - suits the IRS asks us to bring. If the Division has
insufficient funding to defend cases that should be defended, the
Division could be forced into settlements that are more favorable to the
opposing party, thereby costing the Treasury in unjustified payouts, and
setting the stage for additional suits by those who want to take
advantage of the Tax Division's weakened ability to defend against
unjustified refund claims or to bring collection or other affirmative
suits. If the Tax Division failed to aggressively defend refund actions,
taxpayers would quickly learn to file a lawsuit (frivolous as it may be)
to defeat legitimate administrative collection by the IRS. Failure on
the part of the Tax Division to keep up with the external demands (from
the IRS and the U.S. Attorneys' Offices seeking policy guidance) would
also result in a reduction of the overall tax revenues, and an increase
in the Tax Gap despite the budgetary increase provided in FY 2006 and
requested for FY 2007.

#  {#section-12 .unnumbered}

##  {#section-13 .unnumbered}

##   {#section-14 .unnumbered}

[^1]: As explained earlier, the Division reviews all IRS requests to
    initiate grand jury investigations and prosecution recommendations.
    The reviews frequently result in changes to the type and number of
    charges or the number of defendants. In some instances, the cases
    are returned to the IRS for additional investigation, referred to
    the United States Attorneys' offices for investigation, or
    prosecution is declined.

[^2]: Strategic Plan, Section 1.6.