June, 1998

SECTION: FEATURE

LENGTH: 4174 words

HEADLINE: The IRS Mess
Despite the hearings and the hype, The IRS isn't about to reform--except to find
new ways to track "cheaters." Which is Okay by Congress.

BYLINE: James Bovard. ;
James Bovard is the author of Shakedown: How Government Screws You From A to Z
(Viking) and Lost Rights (St. Martin's).

BODY:

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
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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?

y 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.

y The IRS canceled plans to reduce its staff by 500 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.

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

y 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
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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
3." 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
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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
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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 regulations 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 "
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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."
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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."
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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
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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
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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,
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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
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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."
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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
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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. the amount of money that it has 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."
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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
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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
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retroactive changes, 114 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 tax-dodgers. 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
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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."
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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?