Feature

The IRS Mess

By From the June 1998 issue

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In recent years, the IRS has greatly increased its audit rate for low-income families, at the same time that the audit rate for wealthy Americans has fallen. One IRS criminal investigator told the Senate last September that the management of the Criminal Investigation Division "encourages and emphasizes opening and closing traditional tax cases, what they referred to as mom and pop cases, which are easy hits and can be opened and closed quickly...rather than investing time in the large cases which require more time and resources to prove."

The IRS, like many stalkers, has a special affinity for unattached women. The vast majority of married couples sign joint returns; and after a divorce, the agency often hounds both former spouses, demanding that each pay the full amount they allegedly owed as a couple. The General Accounting Office has estimated that the IRS wrongfully pursues 50,000 ex-spouses each year, demanding additional taxes they do not owe. Sen. Roth has observed that "the agency is all too often electing to go after those who would be considered innocent spouses because they are easier to locate, as well as less inclined and able to fight." The vast majority of innocent victims are women, according to tax experts. Yet the Clinton administration is resisting fundamental changes in the law that would protect innocent ex-spouses. Instead, it claims that the problem can be solved by "public education."

Citizens can be caught in the IRS crosshairs thanks to the screwups of other federal agencies. Eight years after her shoe store went bankrupt, Carolyn Eifert of Hobbs, New Mexico, received four Forms 1099-G from the Federal Deposit Insurance Corporation, each stating that she had received $251,203 discharge-of-indebtedness income for 1993. The IRS received copies of the erroneous forms and decided that Eifert had a million dollars in unreported income. For six months the agency hounded her for $562,450 in additional taxes, penalties, and interest. Only after she filed a petition in U.S. Tax Court did the IRS back down and admit that its demand was completely unfounded. Even then, it petitioned the court to deny Eifert any compensation for her legal fees because it insisted that the IRS's position was "substantially justified." In May 1997 the court awarded Eifert $4,600 in attorney's fees—only a small percentage of her actual costs in the case.

How did the IRS respond to reports of such outrages last fall? Acting Commissioner Michael Dolan had a simple explanation: he blamed the agency's outdated computer system. In other words, the fact that the agency had ridden roughshod over so many people's rights only proved that the agency needed to receive even more tax dollars to upgrade its technology. IRS Chief Counsel Stuart Brown asserted that "there is relatively little controversy between the IRS and taxpayers, and almost all of this controversy is resolved without litigation." But the fact that few people can afford to hire lawyers to fight the government does not prove that the government is not abusing vast numbers of non-affluent citizens.

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