Undercover Operations

GAO reviewed an Internal Revenue Service (IRS) undercover operation, known as Project Layoff, carried out in 1984 and 1985. As a result of congressional concerns about operational breakdowns and the potential for misuse of funds associated with Project Layoff, during which IRS agents set up a bookmaking business in an attempt to identify unreported gambling income, this report provides information on (1) how IRS planned and carried out the operation, (2) costs and results of the operation, (3) problems GAO noted with Project Layoff, and (4) changes IRS has made since the operation to prevent similar problems in future operations.

GAO found that: (1) IRS initiated the project because of concerns about tax evasion, particularly evasion of the wagering excise tax; (2) Project Layoff was intended to gather intelligence about the extent of illegal bookmaking in Las Vegas, Nevada, and to develop investigative leads about illegal bookmaking operations and their ties to organized crime in other cites; (3) the project produced tangible results, but was costly to IRS credibility due to allegations of misconduct; (4) it could not substantiate allegations of misconduct, but IRS was not fully prepared to carry out or manage an illegal bookmaking operation of the magnitude of Project Layoff; (5) IRS did not develop or use an adequate recordkeeping system or controls to keep track of the approximately $22 million in wages and $2.5 million in cash that flowed through the operation; (6) it could not determine if funds were embezzled from the operation; and (7) IRS acknowledged that Project Layoff suffered from control and management weaknesses and has taken steps to strengthen its management of undercover operations.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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