Behind The Irs Curtain

IT WAS, AS THEATER, REMINISCENT OF those great old mob trials--back when the mob really meant something. Wearing black cotton hoods, six witnesses filed into a Senate chamber last week to tell an astonishing tale of corruption and abuse of power. But this wasn't about the Mafia; this was about mainstream America. It was all the more frightening that the witnesses weren't colorful thugs like Jimmy the Weasel or Sammy the Bull, but solid citizens who, acting as Internal Revenue Service agents across the nation, had wives, kids, well-tended yards. And, it seems, scruples. Seated behind a screen, their voices altered electronically--most sounded like Munchkins with Deep South accents--the whistle-blowers heaped dirt on their employer. They told of an IRS that is a virtual police state within a democracy, a Borgia-like fiefdom of tax terror at the heart of the U.S. economy.

The IRS, witnesses said, is almost never held accountable for its many errors and sins. It is an agency that audits people on a supervisor's whim, frames taxpayers with false claims, seizes property and places liens illegally, and retaliates against anyone it pleases, including tax protesters--in one case even auditing a critic who wrote a letter to the editor. ""These tactics,'' testified Jennifer Long, the only IRS employee willing to reveal her name, ""are used to extract unfairly assessed taxes from taxpayers, literally ruining families, lives and businesses.''

Then there were the ruined. In three days of hearings on IRS abuses, the Senate Finance Committee also heard from citizens whose lives had been forever changed by Kafkaesque torments that began, typically, as minor notices in the mail. There was Tom Savage, a Delaware builder who told of being falsely held accountable for the delinquent taxes of a subcontractor, even though he had no legal tie to him. His IRS officer, apparently eager to boost his case stats, illegally placed a lien on Savage's property, ignoring even a Justice Department advisory that he had no case. Over time it cost Savage $700,000 in IRS debt, legal fees and lost business. ""They didn't give a damn!'' he almost shouted at the committee, his voice tremulous. Katherine Hicks, a California housewife, broke into tears as she described how the IRS had, through a simple error in her master file, dogged her for 14 years, charging her thousands in interest for its own mistakes, impoverishing her and prompting her to divorce her husband. ""It was physically exhausting,'' she said. ""We almost never slept. There were the visits to the attorneys and the accountants, their bills and their depressing advice: "Pay it; it's cheaper than fighting'.'' Hicks said she had nowhere to appeal; the chief problem, she and other witnesses declared, was that no one in the U.S. government had the wits or wherewithal to stand up to the IRS. ""My credit is completely destroyed,'' she said. ""The IRS is judge, jury and executioner--answerable to no one.''

No one was about to challenge her last week--not even Michael Dolan, the acting IRS commissioner. Only three years ago Dolan, a beefy career IRS man, had shrugged off a similar critique of abuses by the U.S. General Accounting Office, Congress's investigating arm. Now he faced the powerful Finance Committee, which has direct jurisdiction over the IRS but was holding its first-ever oversight hearing. He absorbed a tongue-lashing from the chairman, Delaware Republican William Roth, then abjectly apologized before the committee. Vowing no retaliation against the witnesses, Dolan promised reforms. ""We handled [these cases] very badly, and for that I am extraordinarily sorry,'' he said. He quickly put through a nationwide conference call with managers, telling them to crack down on abuse.

NEWSWEEK has learned that the agency also suspended several district-level managers on Thursday, the day the hearings ended. Dolan, in an interview, would say only that ""a number of allegations'' had been made unrelated to the hearings. But an Aug. 4 memorandum signed by one of the suspended officials, Arkansas-Oklahoma district collection chief Ronald James, and obtained by NEWSWEEK, details how IRS managers evaluate agents by the number of seizures, liens and levies they're responsible for, in apparent defiance of the Taxpayer Bill of Rights, which bars the practice. ""That's a flagrant violation,'' says Jerry Quisenberry, a former IRS inspector in Oklahoma City. (James did not return phone calls.) Dolan's first order in response to the hearings, in fact, was to stop using such data to rank the IRS's 33 districts nationwide--a competition for managerial cash awards that is a chief cause of abuse, witnesses said.

All well and good. But if the IRS hearings were high drama, they failed to shed much light on how widespread such abuses are, where they occur or who's really responsible. The GAO concluded last week that it is impossible to know, because the IRS doesn't keep such records. And over the summer, a probe by the National Commission on Restructuring the IRS, a bipartisan group that interviewed more than 300 IRS agents, found few examples of taxpayer abuse. Even several whistle-blowers said most IRS front-line agents were decent, ethical people. Americans, after all, have been running from the tax man since the Whisky Rebellion--last year alone, $200 billion in owed taxes went unpaid.

Still, by the end of last week, more than 2,000 calls, faxes and e-mails had poured into the committee, most from taxpayers alleging wrongs. Many sobbed into the phone. ""People are just venting,'' said Finance Committee spokesman Christina Pearson. ""All the lines are lit up.'' And some of the more chilling testimony suggested that the problems run deep. ""If the true number of incidences of taxpayer abuse were ever known, the public would be appalled,'' said one witness, a former IRS collection agent. ""If the public also ever knew [how much is] covered up bythe IRS, there could be a tax revolt.''

That's what some in Congress hope to see. It's no accident that the IRS hearings were convened in an atmosphere of escalating antitax fever on Capitol Hill. Republicans especially are gearing up to make tax reform a key issue--perhaps the issue--leading up to the 1998 election. Even as the hearings were ending, House Majority Leader Dick Armey and Rep. Billy Tauzin were kicking off a ""national tax-reform tour,'' which they conveniently announced at the hearings. Flat-taxer Steve Forbes had swung back into view as a presidential hopeful. On the Democratic side, Sen. Bob Kerrey, who may be looking to 2000 as well, pushed hard at the hearings for an IRS restructuring bill he's cosponsoring. ""There isn't much anger left in American politics. It's been replaced by frustration. This is one issue where anger remains,'' says GOP pollster Frank Luntz, who has urged Republicans to hit IRS issues like the agency's useless $4 billion computer system in fund-raising letters. ""Everybody knows someone who's been audited. The stories always read like a Stephen King novel. The ending is always bad.''

Few doubt that the IRS is a troubled agency. But last week's hearings also offered powerful proof that much of the blame lies with those sitting in judgment. Many experts argue that the IRS is less a rogue agency than Congress's wayward creature, eagerly if awkwardly trying to fulfill its wishes. ""It's the bosses--the Congress and the president--who write the tax laws,'' says Fred Goldberg, a former IRS commissioner. It was only a few years ago that Congress was giving the IRS heat for not being aggressive enough--The Washington Post called it a ""sitting duck for cheating tax-payers''--and extracted a promise to get$11 billion more in collections. ""Over the years there was so much pressure from Congress to do more and more,'' says Norma Woodard, an IRS collection agent who agreed to speak on the record.

Take one of the most distressing claims to emerge in testimony last week: that the IRS targets low-income citizens. Why? Because they're easy targets and can't afford much legal and accounting help. But Republicans have helped to encourage that policy by harping for years on ""tax cheats'' who take advantage of the Earned Income Tax Credit for low earners. Such open-and-shut cases also reduce an agent's hours per caseload, increasing efficiency--and that's a congressional mandate too. The agency's ""original mission of collecting tax revenues has now become incidental to the pro-duction of statistics,'' said one witness, a manager with the IRS since 1962, who told how no one cared any longer how many accounts were uncollectible, as long as an agent's total case tally was high.

Then there's the tax code itself, which has grown vastly more complicated and harder to enforce even as Congress has cut IRS resources and staff. Only a month ago House Ways and Means chairman Bill Archer, who is now campaigning to tear up the tax code, oversaw one of the most complex tax laws in U.S. history, one that gives the IRS even more power to catch lower-income people in a maze of mistakes. ""The hypocrisy's unbelievable,'' says a Senate Finance Committee staffer who notes that members of the committee are no less guilty; many reap campaign donations from trade groups that wouldn't normally be constituents by granting taxfavors. Special-interest tax perks, of course, leave the IRS under terrific pressure to collect from ordinary Americans who don't have pals in Congress.

All of which suggests that, despite Roth's wrath and Dolan's contrition, the hearings will do little to change things. ""It's deja vu all over again,'' says Douglas Barnard, a former Georgia Democrat who in 1989 led similar hearings in the House, with little result. ""What irritates me,'' he says, ""is that we found as much evidence then as they're finding now.'' Even so, others had a sense that the issue is ripe, and that the perception of a riled public will spur the influential Senate Finance Committee, which has delayed scheduling hearings on reform.

Reform, if it comes, will have to be radical to be real. At its heart, what ails the IRS is that, unlike other government agencies, it wields vast power with wide discretion in every American's life, yet it endures no regular oversight. That's a classic recipe forcorruption. ""Members of Congress themselves are afraid of being audited,'' says Peter Barash, a former House tax expert. The Treasury Department, which has formal oversight, tends to leave the IRS to its own devices. At the same time, the agency's never-waning unpopularity has created an inbred ""us vs. them'' bunker mentality. Those who complain are run out of the service; indeed, the IRS witnesses seemed far more cowed last week than the taxpayers. The fear factor is exacerbated by a privacy law that the IRS uses as a broad shield against inquiries by taxpayers or oversight agencies--another post-Watergate reform that, like the ban on campaign soft money, has backfired.

Politicizing the issue, in the end, may actually do some good--if it doesn't wreak chaos in tax collections first by inciting widespread defiance of the IRS. Most experts say the system needs to give taxpayers far more recourse in tax courts and grant more prior notice--as well as a hearing before assets are seized. But the crucial reform, most agree, is an effective overseer independent of the IRS. The Treasury Department itself wants to set up a new advisory board and require regular testimony on IRS actions. ""The prospect of that green-felt congressional table concentrates the mind,'' says Deputy Treasury Secretary Larry Summers. Acting Commissioner Dolan refuses to say whether any independent oversight board will help. ""There are no silver bullets,'' he says. True, but in coming months there will be a lot of verbal ones, most of them aimed at the IRS.

The IRS is collecting more taxes and penalties in audits, and increasing the heat on smaller taxpayers. An overview of the agency's practices:

Take It To Court

If you go to court ot settle your beef with the IRS, you could end
up paying half the amount the agency assessed you for-or less.

DISPUTED AMOUNT AND PERCENT PAID BY TAXPAYER OF ORIGINAL
RECOMMENDATION BY IRS, IN TAX-COURT CASES, FY 1996*

     Less than $10,000     51%
      $10,000-$100,000     48
   $100,000-$1,000,000     44
$1,000,000-$10,000,000     35
 More than $10,000,000     12

Finding More Money in Audits
INDIVIDUAL INCOME-TAX RETURNS                       
                                                    IRS-Recommended
                           Total     Percentage     Additional Tax
Year    Returns Files*     Audits     Audited       and Penalties

1988    103,251,000       1,620,668     1.57%         6,038,857,000
1989    107,029,000       1,384,995     1.29          4,736,884,000
1990    109,868,400       1,144,960     1.04          5,336,063,000
1991    112,304,900       1,313,168     1.17          6,892,527,000
1992    113,829,200       1,205,919     1.06          6,308,424,000
1993    114,718,900       1,058,966     0.92          5,653,094,000
1994    113,754,400       1,225,707     1.08          6,167,026,000
1995    114,683,400       1,919,437     1.67          7,756,954,000

1 - Of the more than 100 million individual returns filed, 10% are selected by the DIF (Discriminant Function) computer program the IRS runs. Ratios of itemized deductions to income flag these returns.

2 - IRS employees review the actual returns chosen by the computer and select 10% of them to be audited. Those chosen for audit include returns that lack adequate explanation or documentation for deductions, ones that don't seem to make sense or returns that aren't neatly typed or have crossed-our material.

3 - Tips from individuals to the IRS can also result in an audit. Occasionally the IRS does an industry review (say, food-service workers in the Northeast or doctors in the Midwest), and those produce audits.

Taxpayers in the top brackets are still the most likely targets for IRS scrutiny, though their odds of being audited are way down. Meanwhile, short-form filers making less than $25,000 are twice as likely to get called on the IRS carpet.

PERCENT OF INDIVIDUAL TAX RETURNS AUDITED BY INCOME LEVEL, FISCAL
YEARS

                       1988          1995
Less than $25,000**     1.0           2.0
Less than $25,000       1.0           1.3
$25,000-$50,000         1.7           0.9
$50,000-$100,000        1.5           1.1
$100,000 and more      11.4           2.8

*EXCLUDES TAX-SHELTER CASES, +DURING PERVIOUS CALENDAR YEARS.
**SHORT FORM, SOURCES; DR. AMIR D. ACZEL; TRAC, SYRACUSE UNIVERSITY
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