The IRS Mess

By From the June 1998 issue

On February 26, the IRS released a GAO report that it claimed gave the agency a "clean bill of health." In a press release entitled, "IRS Financial Audit Scores Clean Opinion From GAO," Rossotti announced that he was "pleased that GAO has assured Congress and the American people that our reports on $1.6 trillion in revenue collected and $28 billion in accounts receivable are reliable." (Going into the GAO audit, the IRS had claimed $236 billion in accounts receivable.) The "clean" claim was subsequently repeated in comments by various Treasury Department and White House officials—all as part of a concerted effort to derail sentiment for radical reform of the agency. On April 15, Assistant GAO Comptroller General Gene Dodaro testified before the House Committee on Government Reform and Oversight; his statement had the rosy title: "Remaining Challenges to Achieve Lasting Financial Management Improvements." This was the first time the GAO was able to offer an "unqualified opinion" on the IRS's financial records. This was widely sold by the agency and Hill Democrats as proof that the records were in good order.

Yet the details of GAO testimony— which received no attention from the media—completely contradict the "clean bill of health" rigmarole. Dodaro testified: "During our fiscal year 1997 audit, we found IRS' internal controls remain plagued by weaknesses that affect its ability to timely report reliable financial information throughout the year, safeguard assets from loss, and assure full compliance with laws and regulations."

Acting Director Dolan told the Senate Finance Committee last September 25 that, as of the start of fiscal year 1997, "the cumulative unpaid taxes owed which we record as accounts receivable exceeded $216 billion." The $216 billion number was invoked by National Public Radio in a report purporting to show "the tax collector's point of view" on taxpayer-abuse hearings. IRS, Treasury, and White House officials routinely cite enormous estimates of what citizens owe, apparently to give politicians the sense that there's a huge pot of gold out there for them to spend— if only it can be collected. (The IRS further inflated its collectibles figure from $216 billion to $236 billion before the start of a GAO audit.) However, the GAO found that $76 billion of the $236 billion consisted of write-offs owed by bankrupt or defunct businesses going back to the 1960's, including many failed savings-and-loans long since closed by the Resolution Trust Corporation. Another $48 billion consists of compliance assessments that have not been agreed to by either taxpayers or courts—which, the GAO noted, "have significantly less potential for future collection than those unpaid assessments that are considered federal taxes receivable." Of the remaining $90 billion, 70 percent ($62 billion) is estimated to be uncollectible because the taxpayers are unemployed or otherwise financially bereft.

Over 60 percent of the accounts receivable consists not of the money that taxpayers allegedly owe the IRS, but of interest and penalties which the IRS piles on year after year, regardless of the merits or plausibility of the debt. (Acting IRS Director Dolan testified before a Senate committee on April 10, 1997, that only 30 percent of the accounts receivable reflected accrued interest and penalties.) Thus, the more penalties the IRS piles onto long-since defunct corporations, the more that the agency can make today's average taxpayer appear to be a deadbeat whom it must whip into line. The GAO concluded that only "about $28 billion of federal taxes receivable is estimated to be collectible." The IRS's official number was only 743 percent higher than what its agents had a chance of collecting. If a corporation tried to take a loss on its tax return for bad debts, calculated the same way that the IRS calculates its own outstanding liabilities, corporate officers would likely be prosecuted for criminal tax fraud.

Some of the most abusive IRS prosecutions in recent years have involved people who actually paid their taxes but who were cast into purgatory by poor IRS record-keeping. The GAO reported that in 64 percent of cases "involving multiple individuals and companies, we found that payments were not accurately recorded to reflect the reduction in the tax liability of each responsible party. For example, in one case we reviewed, three individuals had multimillion dollar tax liability balances, as well as liens placed against their property, even though the tax had been fully paid by the company."

The GAO found the IRS's books to be in such poor shape that the agency cannot even separate the amount it receives each year in income taxes and in FICA/Social Security taxes—even though every taxpayer must separate those amounts on his own tax return. Moreover, reported the GAO, the IRS continues to have little control over its computer security—which effectively guarantees new scandals, as IRS employees or others gain unauthorized access to private citizens' tax returns.

Time and again, the American people have been deceived by political promises to fix the IRS. Since the 1960's, national outrage has repeatedly erupted when news of IRS abuses hits newspaper front pages. In 1988, and again in 1996, Congress enacted so-called Taxpayer Bills of Rights that were supposed to put an end to IRS tyrannizing of innocent citizens. However, according to training materials the IRS uses for new agents, the main effect of a Taxpayer Bill of Rights is to increase the agency's power over taxpayers. The American Institute for Certified Public Accountants recently complained: "In turning the Taxpayer Bill of Rights on its head, [IRS] examiners come away believing that, with no legal opposition, they will be free to...interrogate taxpayers and invade taxpayers' rights of privacy by interviewing 'spouses, relatives, employees, friends, competitors' and a host of others." AICPA said of IRS training materials: "Every ethical issue presented finds the ethical result to be pro-IRS and anti-taxpayer. There is not one scenario where an IRS agent might act unethically against a taxpayer's interest." Phoenix lawyer and National Taxpayer Union counsel Bob Kamman has observed: "The taxpayer rights provisions of the Internal Revenue Code are like the civil rights provisions of the former Soviet Union's constitution. On paper, they tell a wonderful story. In practice, for many taxpayers there is no effective protection against government abuse."

For instance, the 1988 Taxpayer Bill of Rights created a Taxpayer Ombudsman with the power to issue a Taxpayer Assistance Order to provide immediate relief in cases where taxpayers were being wronged by the IRS. However, as usual in Washington, this appointee has become a lapdog of the agency that he is supposed to oversee. In 1996, over 32,000 taxpayers requested "Taxpayer Assistance Orders"; the Ombudsman granted such orders in only five cases—roughly one out of every 6000 requests.


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