Criminal Investigationís Use of Confidential Funds for Undercover Operations Is Appropriate; However, Certain Aspects of Undercover Operations Need Improvement

 

September 2002

 

Reference Number:2002-10-196

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

 

September 24, 2002

 

 

MEMORANDUM FOR ACTING CHIEF, CRIMINAL INVESTIGATION

 

FROM:††††††††††††††††††††††††††† Pamela J. Gardiner /s/ Pamela J. Gardiner

†††††††††††††††††††††††††††††††††††††††† Acting Inspector General

 

SUBJECT:†††††††††††††††††††† Final Audit Report - Criminal Investigationís Use of Confidential Funds for Undercover Operations Is Appropriate; However, Certain Aspects of Undercover Operations Need Improvement (Audit # 200110029)

 

 

This report presents the results of our review to evaluate the appropriateness of confidential expenditures relating to selected Criminal Investigation (CI) undercover operations.

In summary, we found that CIís use of the approximately $4 million in confidential expenditures in the 12 undercover operations we reviewed was appropriate.However, we identified numerous instances where the identities of undercover agents, confidential informants, or undercover entities were in jeopardy of being breached.CI management also needs to focus more attention on some categories of expenses because these expenses were unauthorized, unsupported, or unrelated to ongoing investigations.Additionally, we determined that CI management did not always effectively perform the necessary checks to ensure that informants were in compliance with federal tax laws and did not always properly document payments to informants.

We recommended CI management ensure that potential security breaches of undercover identities are minimized, provide closer scrutiny of certain higher-risk expenses, reemphasize existing procedures over payments to confidential informants, and emphasize adherence to administrative reviews and record keeping.

Managementís Response:CI management agreed with our findings and recommendations.Specifically, CI agreed that the safety and security of undercover operations must be protected at the highest standard.In addition, CI agreed that expenditures related to the undercover operations require close scrutiny, and administrative reviews of undercover operations must be conducted timely.In a continuing effort to improve the undercover program, CI implemented policy changes and increased oversight of undercover operations during the course of our review and agrees to make additional changes and improvements where necessary to address the remainder of our concerns.Managementís complete response to the draft report is included as Appendix V.

Please contact me at (202) 622-6510 if you have questions or Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.

 

Table of Contents

Background

Lax Execution Could Have Jeopardized the Identity of Undercover Operations

Recommendations 1 and 2:

Certain Categories of Expenses Require Closer Scrutiny

Recommendations 3 and 4:

Controls Over Payments to Confidential Informants Can Be Strengthened

Recommendation 5:

Recommendation 6:

Undercover Operations Can Be Strengthened Administratively

Recommendation 7:

Appendix I Ė Detailed Objective, Scope, and Methodology

Appendix II Ė Major Contributors to This Report

Appendix III Ė Report Distribution List

Appendix IV Ė Outcome Measures

Appendix V Ė Managementís Response to the Draft Report

 

Background

The Criminal Investigation (CI) function is responsible for investigating potential criminal violations of the federal internal revenue laws and related financial crimes.One of the investigative techniques used by CI to facilitate the completion of an investigation is an undercover operation.This involves an operative of the Internal Revenue Service (IRS), either an undercover agent or a confidential informant, assuming a covert identity to gain evidence or information which would not be available but for the reliance of the target of the investigation on the operativeís covert role. ††

***(b)(2),(b)(7)(E)***† There are certain risks associated with the use of confidential funds.These risks can include compromising the undercover nature of an operation through lax financial management and misuse of funds such as incurring expenses that:

         Do not directly contribute to the completion of an undercover operation.

         Were not approved for an undercover operation.

         Were not related to an undercover operation.

 ***(b)(2),(b)(7)(E)***†The CI function closed 227 Group I and Group II undercover operations during the period January 1, 1999 to May 1, 2001.As of May 2001, there were 63 Group I and Group II open undercover operations.††

We selected 12 undercover operations (5 closed and 7 open) at 7 field offices based on the level of funding and related risks.While audit work included reviewing most undercover operations over the life of the project, storefront operations were reviewed for the 3-year period prior to the closing date or the date of our review.Audit work was conducted in the Office of the Chief, CI, and the Atlanta, Chicago, Dallas, New York, Plantation (FL), San Diego, and Seattle field offices.The audit was conducted between May 2001 and April 2002, using CI criteria in effect at the beginning of our review.With the exception of the scope impairment described below, the audit was conducted in accordance with Government Auditing Standards.

We were initially denied access by CI management to information related to the selected undercover operations, which delayed the audit for almost 5 months.CI expressed concerns about access to any open undercover operation and to operations that contained grand jury information.We worked with CI and Counsels for both the IRS and the Treasury Inspector General for Tax Administration (TIGTA) to gain access.Detailed information on our audit objective, scope, and methodology is presented in Appendix I.Major contributors to the report are listed in Appendix II.

In general, CIís use of the approximately $4 million in confidential expenditures in the 12 undercover operations we reviewed was appropriate, and CI management has recognized the need to improve certain aspects of these operations.To further this improvement, CI management should ensure that potential security breaches of undercover and confidential informant identities are minimized, provide closer scrutiny of certain higher-risk expenses, reemphasize existing procedures over payments to confidential informants, and emphasize adherence to administrative reviews and record keeping.

Lax Execution Could Have Jeopardized the Identity of Undercover Operations

During our review, we identified numerous instances where the identities of undercover agents, confidential informants, or undercover entities were in jeopardy of being breached.***(b)(2),(b)(7)(E)***†

         ***(b)(3): 26 U.S.C. 6103***

         ***(b)(2),(b)(7)(E)***†

         ***(b)(3): 26 U.S.C. 6103***

         ***(b)(3): 26 U.S.C. 6103***

         ***(b)(3): 26 U.S.C. 6103***

         ***(b)(2),(b)(7)(E)***†

         ***(b)(3): 26 U.S.C. 6103***

         ***(b)(3): 26 U.S.C. 6103***

  ***(b)(2),(b)(7)(E)***

†† ***(b)(2),(b)(7)(E)***

         ***(b)(2),(b)(3): 26 U.S.C. 6103, (b)(7)(E)***

         ***(b)(2),(b)(3): 26 U.S.C. 6103, (b)(7)(E)***

       ***(b)(2),(b)(3): 26 U.S.C. 6103, (b)(7)(E)***

         ***(b)(2),(b)(3): 26 U.S.C. 6103, (b)(7)(E)***

***(b)(2),(b)(7)(E)***When security over undercover operations is not maintained at the highest possible level, the risk of detection is increased and identities can be compromised.

Technology features, such as telephone caller identification, displays of numbers dialed, and last call dialed -- features which are commonly available to the public -- increase the need for vigilance in maintaining heightened security while agents serve in an undercover capacity.

We recognize that there may be financial or operational circumstances that necessitate undercover activities be conducted a certain way.Also, we are not aware of any actual security breaches resulting from the examples listed above.However, CI management advised that there have been instances in the past where the very nature of the operation was risky, or identities were compromised, and agents were put in harmís way.For example, during 1 undercover operation, an undercover agent was kidnapped and a confidential informant disappeared with $80,000 in government funds.In another undercover operation, an estimated $50,000 has not been recovered because the targets were able to place the funds outside of government reach before CI could secure them.

Recommendations

1.      CI management should increase awareness about security issues and potential identity breaches to its agents assigned in undercover capacities.

Managementís Response:CI will conduct training and emphasize security issues. ***(b)(2), (b)(7)(E)*** will be stressed during an upcoming Continuing Professional Education conference scheduled for October 2002.In addition, the Special Investigative Techniques (SIT) Section ***(b)(2), (b)(7)(E)***

2.      CI management should develop a methodology for determining when IRS employees access tax identifying numbers that are associated with undercover identities and entities.The ability to identify when accesses occur would provide a means for alerting CI to the possibility of IRS employees compromising an undercover operation.

Managementís Response:CI will seek authorization from the responsible IRS function to monitor undercover IDRS accounts.

***(b)(2), (b)(7)(E)***

***(b)(2), (b)(7)(E)***When properly authorized, approved, and documented, these types of expenses are relatively low risk for waste and mismanagement.

However, we did identify some categories of expenses where management should focus more attention. ***(b)(2), (b)(7)(E)***We determined that approximately $44,000 of $975,000 (5 percent) reviewed in these areas were either unauthorized, unsupported, or unrelated to ongoing investigations.

***(b)(2), (b)(7)(E)***

We identified approximately $24,000 in ***(b)(2), (b)(7)(E)***.For example:

         ***(b)(3): 26 U.S.C. 6103***Police.

          ***(b)(3): 26 U.S.C. 6103***         Expenses were double-counted on at least two occasions.An expense for the purchase of an airline ticket was reimbursed once but double-counted in the accounting records.Another expense for a taxi fare was reimbursed twice and double-counted in the accounting records.

         ***(b)(2), (b)(7)(E)***

         ***(b)(2), (b)(7)(E)***

         ***(b)(2), (b)(7)(E)***

***(b)(2), (b)(7)(E)***

***(b)(2), (b)(7)(E)***

***(b)(2), (b)(7)(E)***

We identified almost $5,000 ***(b)(2), (b)(7)(E)***. ***(b)(2), (b)(7)(E)***. ***(b)(3): 26 U.S.C. 6103*** 

Capital equipment

We identified an expense for nearly $3,000 ***(b)(2), (b)(7)(E)***. ***(b)(2), (b)(7)(E)***

***(b)(2), (b)(7)(E)***. ***(b)(2),(b)(3): 26 U.S.C. 6103, (b)(7)(E)***.  ***(b)(2), (b)(7)(E)***

***(b)(2), (b)(7)(E)***

***(b)(2), (b)(7)(E)***.

Miscellaneous

***(b)(2), (b)(7)(E)***

        ***(b)(2), (b)(7)(E)***

         ***(b)(3): 26 U.S.C. 6103***

         ***(b)(3): 26 U.S.C. 6103***

Although CIís existing procedures governing expenses are adequate ***(b)(2), (b)(7)(E)***

Recommendations

3.      CI management should provide more emphasis on reviewing certain categories of expenses to determine appropriateness.In particular, expenses should be reviewed for proper authorization and documentation and to ensure they were incurred for the advancement of the undercover operation.

Managementís Response:CI has outlined guidelines governing the documentation necessary to obtain, review, and approve confidential expenditures in the SIT Reference Guide issued in June 2002 and posted on the SIT website.In addition, the Reference Guide will be disseminated to all SACs and Assistant SACs at the annual conference scheduled for October 2002. ***(b)(2), (b)(7)(E)***.

4.      ***(b)(2), (b)(7)(E)***.  CI should also consider providing additional guidance to ensure that capital equipment dollar thresholds are established and consistently applied.

Managementís Response:CI established ***(b)(2), (b)(7)(E)***Procedures and disseminated them on April 11, 2002.All ***(b)(2), (b)(7)(E)*** associated with undercover operations must comply with the new procedures.The SIT Section will reemphasize the procedures at the annual conference scheduled for October 2002.

Controls Over Payments to Confidential Informants Can Be Strengthened

We identified CIís use of 11 confidential informants associated with the ***(b)(2), (b)(7)(E)***selected for review.At our request, CI obtained 18 tax returns covering a range of 1 to 4 years for these informants, depending on the time frame of the payments.In addition, we reviewed documentation associated with the payments to the confidential informants.We determined that CI management did not always perform effective checks to ensure that informants were in compliance with federal tax laws and did not always properly document payments to informants.

Tax compliance checks can be strengthened

CI management is required to advise confidential informants that payments for information are taxable and should be reported on their tax returns.CI fulfills this requirement during a February review for the previous yearís payments.

In addition, CI is required to prepare a report certifying that it verified the informant filed a tax return and reported all payments received from CI during the previous year.CI fulfills this requirement during a December review for the same payments that were reflected in the February review.When an informant does not report all payments, CI should attempt to further advise the informant that the payments received were taxable.When the informant does not comply, CI should prepare an information item to be evaluated for civil or criminal action.CI should not use the confidential informant again.

Non-Filers

***(b)(3): 26 U.S.C. 6103***.The potential tax effect on these non-filers could be as high as $6,161 or more, depending on the taxpayerís filing status, other income or deductions, and other return characteristics.See Appendix IV for further details.

Proper returns

 ***(b)(3): 26 U.S.C. 6103***.  The potential tax effect on these taxpayers could be as high as $32,551 or more, depending on the taxpayerís filing status, other income or deductions, and other return characteristics.See Appendix IV for further details.

CIís required reviews and checks would not always be effective to identify these instances of potential non-compliance with the tax laws by confidential informants.Based on discussions with CI, the same form was being used to capture information for both the February and December reviews, which caused some confusion among field offices as to what the requirements were for the two periodic reviews.While information was captured for the February reviews reflecting information for the previous calendar yearís payments, the December review was capturing information for the current yearís payments rather than for the same previous yearís payments that were reflected in the February review.

When the reviews are not timely or effectively fulfilled, CI is at risk of continuing to make payments to confidential informants who are not in compliance with previous yearís tax obligations, which could bring discredit to the use of these informants and the value of the information they provided.CI agreed with this concern and has already begun to take actions that should improve the existing process.†††

Informant payments can be strengthened administratively

In general, the approximately 400 payments to confidential informants, totaling over $500,000, were adequately supported by required receipts.However, some payments were not always made by the special agent in the presence of a witness, as required.We determined that 4 of 11 informants received 16 payments totaling $12,350 without the required 2 signatures.

Although CIís existing procedures governing payments to informants are adequate, agents and managers did not always follow them.When making payments to informants, a receipt is required to be obtained from the informant which is to include both agentsí names and the informantís code or designation number.Without the presence of a witness, the risk is increased that unauthorized or inappropriate payments could be made.

Recommendations

5.      CI management should reemphasize existing procedures for ensuring tax compliance of confidential informants who receive payments from CI for information and aggressively pursue instances of non-compliance.Management should consider accelerating the requirement for checking compliance from December to August to more closely coincide with filing due dates, thus providing a means for limiting the amount of payments to non-compliant informants.

Managementís Response:CI has implemented new procedures for establishing informants and controlling informant payments.With these guidelines, CI established a new centralized national informant database at Headquarters.In addition, CI updated manuals and revised forms to accelerate the requirement for checking compliance from December to August.CI will also update manuals to ensure that reviews are performed of an informantís entire filing picture in any year in which he or she receives a payment.

6.      CI management should also reemphasize existing procedures regarding payments to confidential informants, including the requirement for two signatures.

Managementís Response:CI has outlined new guidelines on informant procedures and controlling informant payments in the SIT Reference Guide issued in June 2002 and posted on the SIT website.In addition, the Reference Guide will be disseminated to all SACs and Assistant SACs at the annual conference scheduled for October 2002.CI will use operational reviews to ensure the appropriate authorization and documentation of expenditures.

Undercover Operations Can Be Strengthened Administratively

CI management timely approved requests for undercover operations, extensions of time, deviations to plans, and additional funds.Pre-operational meetings were conducted and documented as required by written procedures.Closing reports were prepared and issued in accordance with the procedures.However, we did identify some administrative issues warranting managementís attention.

Operational and financial reviews

Operational and financial reviews were not always performed as frequently as required.Operational reviews are intended to provide an overview of all ongoing undercover operations and create an awareness of all undercover activities within CI.Eight of the 12 undercover operations in our sample were to have operational reviews done every 90 days in accordance with procedures.The other 4 operations were mandated to have these reviews done every 60 days.

 ***(b)(2), (b)(7)(E)***.  Eleven of the 12 undercover operations in our sample were to have***(b)(2), (b)(7)(E)***.  The other operation was mandated to have the reviews done every 45 days.

We determined that CI did not conduct 44 of the required 133 operational reviews (33 percent) and 39 of the required 132 financial reviews (30 percent) when required, even though CI has sufficient procedures to guide the timing and extent of these reviews.In many instances, CI covered the entire period of the project when reviews were done but did not conduct the reviews as frequently as required.We could not determine why reviews were not performed.

While CI management identified some similar issues in their operational and financial reviews, conducting all reviews when required will provide greater assurance that problems or concerns, such as those detailed in our report, are timely addressed.

Storefront logs

***(b)(2), (b)(7)(E)***.  We reviewed storefront logs for five of the undercover operations. ***(b)(2), (b)(7)(E)***. 

***(b)(2), (b)(7)(E)***. 

***(b)(2), (b)(7)(E)***. 

Storefront logs should enhance security and assist in demonstrating the cost benefit of the storefront.In addition, summaries from the storefront logs are to be included as the basis for continued funding of the storefront operations.When the storefront logs are not complete and consistent, information may not be available for CI management to make informed financial and investigative decisions.

Recommendation

7.      CI management should reemphasize the procedures to ensure that operational and financial reviews are timely performed as required and prescribe the level of detail to be recorded in storefront logs to enhance the usefulness of this document as a monitoring and evaluative tool.

Managementís Response:The Director, SIT Section, has implemented new procedures emphasizing the requirement to perform timely operational and financial reviews of undercover operations. ***(b)(2), (b)(7)(E)***.  CI is also implementing changes to the Internal Revenue Manual and Law Enforcement Manual to standardize storefront logs and storefront oversight.

 

Appendix I

 

 

Detailed Objective, Scope, and Methodology

 

Our audit objective was to evaluate the appropriateness of confidential expenditures relating to selected Criminal Investigation (CI) undercover operations.To accomplish this objective, we:

I.                   Identified the total number of open undercover operations and the number closed since January 1, 1999, and selected a sample of these operations with related confidential expenditures. We:

A.    Obtained listings of the 227 undercover operations that were closed between January 1, 1999, and May 1, 2001, and the 63 operations that were open at the time of our review.CI management provided these listings to us, and we did not independently validate their accuracy.

B.     Selected a judgmental sample of 12 undercover operations based on the level of confidential expenditures or approved confidential funding and the risks associated with the expenditures.We used judgmental sampling as we did not plan on projecting our results to the universe of all undercover operations.

C.     Reviewed confidential expenditures for each of the 12 undercover operations for the period reviewed.

II.                Reviewed the approvals, issues identified by CI reviews, and actual confidential expenditures for the selected 12 undercover operations.We also interviewed CI personnel and reviewed the following documentation:

A.    Requests for Undercover Operation (Form 8354) and attached narratives.

B.     Pre-Operational meeting memoranda (10 of 12 available).

C.     Results of Undercover Program Managers reviews.

D.    Results of financial reviews.

E.     Undercover Operation Closing Reports (closed operations only; 8 of 9 available).[4]

III.             Evaluated the appropriateness of the specific confidential expenditures by interviewing CI personnel and reviewing the following documentation:

A.    Daily Expense Sheets prepared by the undercover agents.

B.     Daily Memoranda of Activity prepared by the undercover agents.

C.     Leases signed by the undercover agents.

D.    Monthly Summaries of Expenses prepared by the cover agents.

E.     Monthly Balance Sheets (Form 8563) prepared by the cover agents.

F.      Claims for Reimbursement for Expenditures on Official Business (Standard
Form 1164) prepared by the cover agents.

G.    Original receipts for the confidential expenditures.

H.    Records supporting the purchase of assets.

I.       Storefront logs.

J.       Results of undercover operations including arrests, indictments, convictions, forfeitures, seizures, and additional assessments of taxes, interest, and penalties documented in the closing reports (if operation was closed).

IV.             Evaluated the appropriateness of informant expenditures by reviewing the following additional documentation where available:

A.    Document approving the use of the informant.

B.     Approved Confidential Informant -- Monthly Log (Form 9834).

C.     Memoranda of Contact (Form 9833).

D.    Receipt of Cash (Form 9832).

E.     Special Agent in Charge reviews of the use of the informants.

F.      Special Investigative Techniques Section reviews of record keeping for informant payments.

G.     Source documents that confirm the informant exists.

H.     Information related to ensuring tax compliance.

 

Appendix II

 

 

Major Contributors to This Report

 

Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)

Joe Edwards, Director

John R. Wright, Director

Daniel R. Cappiello, Audit Manager

William A. Floyd, Senior Auditor

Michael Hillenbrand, Senior Auditor

Jeff Jones, Senior Auditor

Donald McDonald, Senior Auditor

Albert M. Sleeva, Senior Auditor

Richard Viscusi, Senior Auditor

Frank I. Maletta, Auditor

 

Appendix III

 

 

Report Distribution List

 

CommissionerN:C

Deputy CommissionerN:DC

Deputy Chief Financial Officer, Department of the Treasury

Director, Operations Policy and SupportCI:OPS

Director, Special Investigative TechniquesCI:OPS:SIT

Director, Field OperationsCI:FO:C

Director, Field OperationsCI:FO:MS

Director, Field OperationsCI:FO:NA

Director, Field OperationsCI:FO:P

Director, Field OperationsCI:FO:SE

 

Appendix IV

 

Outcome Measures

 

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration.These benefits will be incorporated into our Semiannual Report to the Congress.

Type and Value of Outcome Measure:

         Increased Revenue Ė Potential; $38,712 individual income tax (see page 11).

Methodology Used to Measure the Reported Benefit:

For all taxpayers, we used a filing status of single and the standard deduction, with one exemption.† (b)(3):  26 U.S.C. 6103

Taxpayer

Year

Adjusted Gross Income

Taxable
Income

Tax

Tax As
Reported

Tax Effect

Non-Filers

 

 

 

 

 

 

***(b)(3): 26 U.S.C. 6103***
***(b)(3): 26 U.S.C. 6103***

Total

 

 

 

 

 

$6,161

Proper Returns

 

 

 

 

 

 

***(b)(3): 26 U.S.C. 6103***
***(b)(3): 26 U.S.C. 6103***
***(b)(3): 26 U.S.C. 6103***
***(b)(3): 26 U.S.C. 6103***
***(b)(3): 26 U.S.C. 6103***
***(b)(3): 26 U.S.C. 6103***

Total

 

 

 

 

 

$ 32,551

 

Appendix V

 

Managementís Response to the Draft Report

 

The response was removed due to its size.To see the response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.



[1] ***(b)(2), (b)(7)(E)***

[2] ***(b)(2), (b)(7)(E)***

[3] ***(b)(2), (b)(7)(E)***

[4] Four investigations with undercover operations were open at the time of our review, but the undercover operations associated with these investigations were closed.CI had completed three of the four closing reports at the time of our review; the fourth closing report was in draft status.