The IRS Mess
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In hearings last September, senators lashed out at the Internal Revenue Service, IRS agents testified anonymously behind screens, and TV cameras recorded the plight of citizens cruelly abused by the agency. People who take Congress seriously might have thought that the IRS was on the verge of extinction—or at least that the agency had finally gotten the message that it had no license to tyrannize the American people.

What has happened to the IRS since those heavily hyped hearings?

• The IRS made it much easier for informants to share in the money collected from people they accuse. Such payments were already on the upswing, doubling between 1995 and 1996, according to the Wall Street Journal. Informants will now collect 15 percent of the windfall, instead of 10 percent.

• The IRS canceled plans to reduce its staff by 800 job slots. According to the agency’s chief of management David Mader: “We recognized with the additional commitments for customer service…we are going to need additional staff years to accomplish all of that.” However, the problems highlighted in the hearings were due not to staffing shortages but to malicious policies and personnel.

• In February the Clinton administration called for a $534-million (6.4-percent) increase in the IRS budget.

• In late April, the Senate Finance Committee held more hearings in which both victims and agents of the IRS described how the agency violates the law. In dramatic testimony, former Sen. Howard Baker described how an IRS agent fabricated evidence against him. New IRS Commissioner Charles Rossotti showed up on the final day to argue that the IRS’s estimate of its total losses from taxpayer noncompliance has doubled in recent years—the implication being that he and his agency are not about to surrender.

Last November 5, the House voted 426-4 to enact the “Taxpayer Bill of Rights.” This bill offers some useful changes, yet the mere fact that almost all the House members supported it suggests that it does not fundamentally decrease the government’s power. Republican congressional leaders weakened key provisions of the legislation to gain the Clinton administration’s endorsement of it.

Some provisions of the “reform” bill are ludicrous. For instance, taxpayers may now make out their checks to the Treasury Department instead of the IRS. Former IRS Commissioner Margaret Richardson says the change “could have a very positive psychological impact and help lessen the antagonism” between citizens and the IRS. Perhaps if Congress allowed citizens to make out their tax payments to “Uncle Sam,” public approval of the IRS would reach 100 percent.

The legislation also creates an oversight board, with a seat at the table guaranteed for a representative of the IRS employees union. (Needless to say, the union is supporting the House reform version, which speaks volumes about the bill’s lack of seriousness.) And the legislation imposes new, costly mandates on taxpayers — calling for 80 percent of all tax returns to be filed electronically within ten years. Is it now an IRS rule that every taxpayer must own a computer? Will the cost be deductible?

The Senate IRS reform bill, written and championed by Delaware Sen. William Roth, goes much further to limit IRS power, but even its provisions can boggle the imagination. For instance, Roth wants the law to “require the IRS to provide an accounting and receipt to the taxpayer (including the amount credited to the taxpayer’s account) when the IRS seizes and sells the taxpayer’s property.” That such a stipulation should be necessary suggests how contemptuously the IRS has been treating the average citizen. The Senate bill would also ban the IRS from confiscating people’s homes if their tax liability is less than $5,000 — not exactly a radical limit on the agency’s power. Finally, the Senate bill also authorizes healthy pay increases for top IRS officials.

Earlier this year, seeking to force the next two Congresses to be more resolute than the present assembly, House leaders hailed a bill to dismantle the current tax code by the year 2002. Yet even this expression of wishful thinking is apparently too controversial: The House is now expected to vote merely for a nonbinding resolution calling for phasing out the tax code. As Republican resolve on tax reform withers, shocking new details of abuses and deceit by the tax collectors continue to emerge.

WHAT’S YOURS IS MINE

At last September’s hearings IRS officials denied that employees could earn bonus points by seizing private property. Subsequent IRS audit reports have shredded that denial. An audit released in December on the IRS’s Oklahoma-Arkansas district found that a third of the property seizures carried out violated federal law or IRS regulations. The report concluded: “District management’s goals and performance expectations are focused heavily on specific statistical targets, including dollar targets” per employee. IRS revenue officers ignored regulalions and guidelines before seizing property; in one case, the only effort an IRS agent made before confiscating two cars “consisted of driving to the taxpayer’s house, honking his car horn, and noting that no one came out of the house in response.” The confidential history of the IRS’s Criminal Investigations Division bluntly states that the division has “concentrated on investigating high impact, high visibility cases, to achieve greater media attention, maximize deterrent effect and generate support” for the Internal Revenue Service.

Another IRS audit report in mid-January provided similarly damning results for IRS regions around the country. Though the Taxpayer Bill of Rights “prohibits setting of enforcement goals such as dollars collected at the group levels…group enforcement goals were set by upper management in 33 of 77 groups reviewed.” The April hearings provided new details about how the screws are put to taxpayers. One IRS revenue officer testified, “It appears to many of us that aggression, coupled with an accumulation of high, arbitrary tax adjustments, is the gateway to promotion.” Former Tennessee Rep. James Quillen described how, after he introduced a bill to require the government to cover the legal fees of taxpayers whom the IRS had wrongfully sued, he was himself targeted for an audit by a team of IRS agents—one of whom would frequent the bars of Quillen’s district to announce, “We’re going to get that crook, Congressman Quillen.”

There are practically no limits to the scams that the IRS can use to jack up the amount of taxes citizens supposedly owe. IRS agents use Bureau of Labor Statistics data for the average income in a certain geographical area. Then, if not satisfied with the additional taxes they have been able to gin up for someone they are auditing, they announce that the person is hiding his income and thus owes thousands of dollars of additional taxes and penalties and interest. Bruce Strauss, a private tax preparer who worked for the IRS for more than thirty years, argues that “the IRS now has the authority to assign additional income to a taxpayer at its discretion, without any basis in fact.” He calls the practice “frightening and absolutely unacceptable.”

PREYING ON THE WEAK

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.

THE CLINTON PR COUNTERATTACK

Once the furor over the Senate hearings last fall made it clear that some IRS reform was inevitable, Clinton administration officials moved to claim credit for the parade—and the charades continue. On March 18, Vice President Gore announced a 200-step reform to make the IRS the friend of the American people. The Clinton-Gore IRS Reinvention report is full of platitudinous recommendations such as “upgrade technology to improve customer service” — “promote one-stop service on a world class web site on the Internet” (the site is slower than a snail race) — “treat taxpayers as customers” —”build a system that focuses on Customers” —”develop a new Mission Statement” —”measure performance on the Right Things” —”foster a family-friendly workplace” and “Create an Ideas Advocate!’ Some of these reforms have already been implemented, while others are the same reforms every administration promises in response to bad publicity about IRS abuses.

Reform Action #C103.6 should inspire civil servants everywhere: “Ensure an adequate supply of forms and materials are available to allow employees to do their jobs.” The Gore Reinvention folks may as well have proposed to make sure that employees turn on the lights when they come to work each day.

The Gore Reinvention package is important only because it is a key wedge in the Clinton administration’s strategy to derail any reform that would actually decrease the IRS’s power over American citizens.

The IRS’s image is also rebounding thanks to the PR skills of its new commissioner, Charles O. Rossotti, once a McNamara whiz kid during the Pentagon’s body-count glory days. (In his radio address on May 2, President Clinton falsely claimed that Rossotti had spent his entire career in the private sector.) A management consultant before becoming IRS boss, Rossotti is expected to lift the the agency’s modernization out of chaos. (IRS officials admitted in testimony last year that the $4 billion spent on modernization in the last decade has been largely squandered.) However, the GAO reported in late February that the IRS’s modernization blueprint “does not provide sufficient detail and precision for building or acquiring new systems…. Information that is critical to effective and efficient systems modernization is not yet known, essential decisions have not yet been made, and needed actions have not yet been taken.” Rossotti is launching another internal reorganization of the IRS—the 30th the agency has enjoyed since 1952. Tax Notes‘s George Guttman observes: “Using the past 15 years as a guide, one could conclude that IRS reorganizations are a wonderful way to create the illusion of progress while producing confusion, inefficiency, and demoralization…. Overall, there is no sense at the agency that those changes have produced positive benefits.”

Some in the Washington press corps are rallying to the IRS’s side. After Sen. Roth announced plans for a second round of IRS-horror-story hearings, the Washington bureau of the Wall Street Journal weighed in on March 31 with an article headlined: “New Round of Senate Hearings On Taxpayers, IRS Risks Overkill.” That same week in the Washington Post, reporter Albert Crenshaw pointed out: “Although Roth says his office has received thousands of complaints from taxpayers who say they have been mistreated, it would take a million taxpayers before even one percent had complained.” Apparently, anything less than a million complaints does not count. The Post, disdaining proposals to rein in IRS power, declared: “In the long run, more taxpayers will probably benefit from the envisioned management improvements than from the new taxpayer rights.” After Rossotti testified on May 1, Crenshaw filed a story overflowing with frets from unnamed critics that the reform legislation could dangerously weaken the IRS.

GOOD ENOUGH FOR GOVERNMENT WORK

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.

OVER THE HILL

Some of the IRS reform provisions currently circulating on the Hill have about as much credibility as a Clinton vow of chastity. The House’s reform legislation would require an analysis of the complexity-impact of any new tax legislation. This is not a bad idea, but it is ironic to see it overwhelmingly supported by the same Congress that greatly increased the complexity of the tax code with the so-called Taxpayer Relief Act of 1997. That law contains “36 retroactive changes, 14 changes effective August 5, 1997, 69 changes effective January 1, 1998 and 5 changes effective thereafter, and 285 new sections and 824 Internal Revenue Code amendments.”

The Senate hearings have at least smoked out the Democrats as unabashed champions of the tax collectors. The nine Democrats on the Senate Finance Committee implored Roth last March to spend half of the April hearings documenting “serious problems associated with taxpayer compliance”—focusing especially on the problem of tax evasion and the day-to-day job difficulties of IRS agents. Senate Minority Leader Daschle whined: “We’re sending the wrong message about law enforcement by this incessant concentration on the abuse and not the enforcement.” But congressmen are responsible for the injustices that the federal government commits against taxpayers—not for the connivings of private taxdodgers. Besides, there has been no “incessant concentration” on abuses, since the Senate Finance Committee hearings are the first serious oversight hearings on IRS abuses in almost ten years.

Republicans seem spooked by some polls released at tax time showing that most Americans do not favor razing all IRS buildings within the continental United States. At least one of the polls used slanted question to minimize the number of people who claim to have been treated unfairly by the IRS. In any case, the GOP congressional majority seems to have a new standard for action: Any federal agency that is not publicly recognized to be directly violating the rights of at least 50.1 percent of American citizens does not need to be reformed.

Nor is it clear how committed some Republican leaders are to fundamental IRS reform. House Speaker Newt Gingrich seized the issue after last fall’s Senate hearings proved to be a public relations success. Yet in an interview with the Washington Times a few weeks after the hearings, Gingrich proposed to “solve” the problem of the excessive 110,000-person IRS bureaucracy by transferring “about 70,000 of those IRS employees to the Border Patrol and drug enforcement.” Some politicians see IRS reform as a way, not to decrease the number of government officials with power over other Americans, but simply to redistribute the power among different government agencies.

The Clinton spin-machine is in high gear. Rossotti told the Senate on May 1 that “it is critical that the public have confidence in IRS’s ability to fight tax evasion” and promised “quality service to taxpayers.” After another week of devastating hearings about IRS practices, Clinton responded in his May 2 radio address by bragging that “now you can call the IRS and get telephone service six days a week, 18 hours a day. Soon it will be 24 hours a day.”

Senator Phil Gramm was of a different mood. He told Rossotti at the end of the hearings, “I have no confidence in the Internal Revenue of this country…. I am still totally convinced that the problem is this agency has too much unchecked power.” As for the Senate IRS reform bill, he later said, “I am convinced that [it] is inadequate.” Is the Republican Congress listening?

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