Infernal Revenue Disservice

IN THE SPARE, CLOISTERED WORLD OF THE INTERNAL Revenue Service, Ronald James lived like a prince of the church. A barrel-chested fellow given to wearing white cowboy hats and bow ties, James made what was virtually a royal progress through Oklahoma City headquarters each day, tailed by three or four aides on constant pager call. There was good reason for his confidence: from his perch on the prairie, the man known as ""King'' James ran a tax-collection division judged one of the top performers in the nation. In fiscal '97 the IRS's Arkansas-Oklahoma district ranked No. 3 among the 33 districts in the country, thanks largely to property seizures that were eight times the national average per agent. Rewarded with bonuses, James bought a red-brick ranch house in a leafy suburb of Oklahoma City and, says one of his managers, ""viewed himself as a potentate.''

But the success story of Ronald James concealed a dirty secret: many of his employees, the frontline IRS agents who carried out his orders, hated his guts. Some of it was just his personality. They hated the way he referred to himself in the third person, as ""your chief,'' that he cadged drinks and was given to grating comments like ""I'm the train, you either get on or you're gonna get run over.'' Some of it was racial: James is black, and several whites claim he was inclined to promote other African-Americans. But more than anything, IRS employees say, they hated James's never-ending push to boost his office's ""production'' numbers--mainly the seizure of people's houses, bank accounts, cars and land--and the injustice that this pressure was forcing them to wreak on American taxpayers.

According to more than a dozen Oklahoma City IRS agents interviewed by NEWSWEEK--whose charges are corroborated by documents--James's team pushed for ever more property seizures from delinquent taxpayers, even though the IRS manual says such moves should be a final resort, riding roughshod in some cases over their rights to appeal. They closed cases and sometimes slapped on levies and liens prematurely--which boosted the enforcement stats that the IRS rewards with cash awards for top officers. ""James set the tone for the whole operation,'' says Larry Lakey, a revenue officer who worked with him in the Oklahoma City headquarters, a black-windowed, 10-story box just down the street from the bombed hulk of the Alfred P. Murrah Federal Building. ""He would just come right out and tell us that our evaluations would be based on the number of seizures we did.'' Nonperformers were run out, says Lakey. Such practices may be a violation of the Taxpayer Bill of Rights, a 1988 law that bars similar measures precisely because they might lead to undue seizures. ""He didn't seem to care,'' says Lakey. James allegedly passed on this ethos to favored managers, some of whom seemed to relish their power as much as he did. ""Let's go rough up some taxpayers,'' one was overheard chortling upon leaving the elevator one day.

Now the reign of King James may be over. On Sept. 25 James was suspended, along with two subordinates, pending an IRS probe of some of these allegations. He isapparently the first top-level IRS official to face punishment since dramatic Senate hearings two weeks ago, at which a parade of IRS and taxpayer witnesses testified to many of the abuses James is accused of--unjustified seizures and liens, unbridled IRS arrogance toward taxpayers and a total lack of accountability. The IRS doesn't announce such moves, but James, in a brief interview, confirmed his suspension and declared his innocence. ""I have not breached [IRS] policy,'' he said, adding that he ""absolutely'' planned to return to work (the allegations against him would be punishable administratively, either by demotion or forced retirement). Last week eight IRS internal auditors swarmed over the Arkansas-Oklahoma district's books. Congress, meanwhile, is boiling up over IRS abuses and tax reform. Acting IRS Commissioner Michael Dolan has ordered an immediate end to the ranking of district offices on the basis of enforcement data. And late last week the Clinton administration, sensing a rising issue, proposed a citizens' watchdog group for the IRS.

Until now, the administration has resisted drastic reform. ""The IRS is functioning better today than it was five years ago,'' the president claimed limply last week, seeking to forestall congressional demands for major restructuring of the agency. But many IRS employees themselves want reform; they say Clinton is clueless. A NEWSWEEK investigation indicates that the problems in Oklahoma City are far from the exception; in fact experts and whistle-blowers say they're more the norm. Nationwide, IRS abuses are the product of a badly dysfunctional agency, a seemingly totalitarian financial regime where bullying personalities can find a place to exercise unbridled power over people's lives. As tearful witnesses testified to the Senate, that power, wielded arbitrarily, has destroyed businesses and broken up families. In other cases, taxpayers have been unjustly imprisoned (box)--and even driven to suicide.

HOW COULD THIS HAPPEN IN America? For decades IRS agents have had wide, almost astonishing powers to enforce the tax code; unlike any other law-enforcement officers, they have a free hand to peer into and lay claim to bank accounts, pursue debt even after bankruptcy and to decide, somewhat whimsically, whether you get to keep your home or not--all without going through the courts. Those powers were mostly held in check by congressional oversight and the IRS's own rigid code of ethics. But since the 1970s, a post-Watergate law ironically passed to protect taxpayers' privacy has allowed the agency to shield itself from many inquiries into its activities. So when the IRS came under pressure from Congress to show more efficiency, the agency poured its energies into boosting seizures and case closures. But top IRS managers were almost never held accountable for how they achieved these goals. And that was a recipe for abuse.

The litany of accusations aimed at James and his minions tells some of this tale. Not satisfied with seizure numbers, for example, he developed his own special form--a copy of which was obtained by NEWSWEEK--to get taxpayers to waive their legal right to a 30-day delay process before having their property seized. Under the direction of his top managers, revenue officers were sometimes ordered to seize assets of the elderly when liens would have sufficed. When a frontline officer protested, his manager retorted, ""What difference does it make how old they are?'' the officer says.

The tensions in Oklahoma reflect a critical problem that was scarcely touched on at the Senate hearings. There's a widening gulf between the IRS's collection agents, who actually have to meet and work with troubled taxpayers, and an ever more remote and arrogant management. The latter sees the same taxpayers as ciphers and their assets as numbers to beef up their year-end reports--and to feed the insatiable demands of Washington for revenue and more efficiency.

James, who has retained a lawyer, denies evaluating employees by seizure numbers. Nevertheless, a memo signed by him last August--and sent to James's boss, Arkansas-Oklahoma District Director Kenneth Sawyer--backs up the claims of Lakey and several other employees that he openly embraced the policy. The Aug. 4, 1997, memo says he holds revenue officers ""accountable for performing the full range of collection tools''--euphemism for seizures, agents say. Another internal document obtained by NEWSWEEK, backed up by whistle-blower accounts, indicates that James's office kept a secret numbered list in which employees were evaluated according to seizures made. James denies that, and calls it all a misunderstanding. ""I can't speak to what my employees thought,'' James said. ""I'm sure employees knew and know what my [evaluation] criteria were.''

In any case, complaints usually got them nowhere. That's because the IRS's internal audit and inspection systems to report and prevent such abuses have largely broken down, insiders say. So twisted is the IRS hierarchy, and so top-heavy with managers protecting fiefdoms, that even longtime employees are not sure who's reporting to whom. ""Problem resolution'' caseworkers assigned to look into complaints actual- ly fall under the authority of the managers they're supposed to be looking at.

Frontline agents despair over the way their many complaints about James disappeared down a vast institutional memory hole, despite the supposedly careful self-policing procedures in place in Washington. J. D. Quisenberry, a former IRS inspector, says his investigation of similar abuses in Oklahoma in 1990 was quashed by the IRS. The lack of accountability and management arrogance found in Oklahoma are emblematic of problems throughout the IRS organization, agents say. ""Employee anger against IRS management is pretty much universal,'' says a government official close to the Senate Finance Committee probe into taxpayer abuses. ""So many IRS employees came to us and said, "You've got to understand: ours is the most corrupt district in the country'.''

True, the vast majority of Americans will never have to deal with an abusive collection agent. Fewer than 2 percent of U.S. tax returns are even audited, and it is only the audits of about 5 million delinquent taxpayers a year--some of them victims of error, some indigent or bankrupt, some real cheaters--that get kicked over to the collections office. Yet almost anyone can get ensnared in the collection man's grip. ""Say an auditor goes back three years and disallows a deduction,'' says a congressional aide. ""Then they bring that forward as income, compounded daily. All of a sudden you owe more money than you could ever hope to pay. That doesn't make you a tax cheat.'' Most taxpayer abuse occurs in such cases, says the Senate Finance Committee.

The core problem is that a revenue officer's job is by its nature terribly inefficient. Much of it is hard detective work that, if done properly, can head off tax abuse. For instance, recouping payroll taxes from small business owners--a major source of collections revenue--is often a delicate job of investigating whether the business has employees for whom it owes taxes. A good revenue officer will do that; a bad one will just slap down a lien or take property. But if the job requires compassion and practicality, those are virtues that officers now practice at jeopardy to their careers, says one field manager. ""Say I come to you and say, "You owe $100,000 on your taxes.' You say that's a mistake. "I only owe $50,000.' If I'm a good officer, I say, OK, pay that, and I'm going to hold this other $50,000 in abeyance until I look into it. But if I do that two things happen: I don't get a case closure. And there's a good possibility my case goes overage. Then management goes nuts; they basically tell me I'm worthless.'' The stats-driven officer--the one racking up cases and getting promoted--""will just insist you write a check for $100,000, then file a claim for refund [which may take years to get]. That way he's gonna get a closure.''

AS THE ANGER AND DISMAY OF such whistle-blowers show, the agency isn't staffed entirely with tax hit men. It employs many ordinary, decent revenue agents who try to observe the rigorous IRS code of ethics. Many are enraged over the growing abuses--almost as angry, perhaps, as the taxpayers. Despite the factionalization caused by managers, IRS collection agents are a close fraternity. They're bound together by the intense pressure of their jobs, which includes a daily dose of screaming from angry taxpayers. ""There's more Prozac on our floor than in the local pharmacy,'' one officer jokes. In the wake of the Senate hearings, many IRS employees are taking their cue from rising taxpayer anger and speaking out--a startling change for an agency one agent called ""more secretive than the FBI and CIA.''

Last week, when James's boss, District Director Sawyer, sought to defend James at a staff meeting, he faced a virtual mutiny. ""Mistakes have been made across the nation, including here,'' said Sawyer, himself the winner of a $10,000 Presidential Award in part due to James's performance numbers. ""We're just going to have to suck it up, lean on one another and pull together.'' But Sawyer found himself bombarded with angry protests about the lack of recourse for ethics complaints and fears of retaliation for making them. ""Nothing happens until someone blows the whistle,'' one said. As Sawyer sought to reassure his workers that their careers would not be evaluated by how much property they seize, the crowd began to whisper, ""Liar, liar,'' according to several who were there.

For Sawyer's assurances to be true, the agency must address its badly skewed focus on gathering enforcement stats. Dolan, in an interview, strongly denied ""that there's somehow a mass of IRS employees and their managers that are out there without any accountability.'' He noted the IRS has begun to use a complex evaluation formula that includes criteria like ""quality'' of case review. But while the IRS has for decades compiled detailed data on seizures, liens, levies and other ""collection tools'' to evaluate its districts, it doesn't yet evaluate those districts on reported abuses. Such data are compiled only nationally, and IRS spokesman Steve Pyrick says it was only this year that it began keeping similar nationwide data on reports of IRS rudeness or ""excessive aggressiveness.''

Dolan seems serious about cracking down on abuse. He'll have to be--as long as Congress and the White House have decided tax reform of one kind or another is the issue of the hour. As for Ron James, he's holed up at home, waiting for the storm to pass. But many IRS whistle-blowers are convinced that his fate will be the first test of whether real reform is coming.

MOST IRS VICTIMS LOSE TIME, MONEY AND SLEEP. HELLER WENT TO prison for four months. The Miami lawyer represented a newspaper that ran a 1973 expose of an illegal IRS spying operation. After he refused agents' demands to name the paper's key source, they mounted a full-scale investigation of him. He was indicted for tax evasion in 1982 and imprisoned in 1987. He was freed when the U.S. Court of Appeals ruled that he had been framed: IRS agents pressured the main witness--Heller's own accountant--to lie under oath. After Heller's vindication, the accountant's insurer paid him $5 million. The IRS paid him $500,000 to drop a lawsuit--money he gave to charity.

CAIRO RUNS A CHICAGO COMPANY THAT PROVIDES DRIVERS FOR CARS and trucks that need to be transported across the country. Two years ago the IRS notified him that it was looking into whether he should have been paying employment taxes for his 200 ""independent contractors.'' Cairo wasn't fazed: he had been audited for the same thing in 1987 and had the records to prove that he'd won. That meant that the IRS couldn't now change its mind as long as he ran his business the same way--or so he and his lawyer thought. This time round the IRS handed him a bill for $2.4 million--now $3.5 million with interest--and threatened to seize his business and home. Cairo is suing.

DON'T MOUTH OFF TO THE IRS. THREE WEEKS AFTER SHE INSULTED A local agent who was auditing her son--she said the auditor was better suited to selling chicken-fried steak at a truck stop--the same agent, Ward says, instituted a $325,000 emergency tax claim against her and began proceedings to seize her small chain of Colorado Springs clothing stores and other property. The IRS ultimately settled its claim against Ward for $3,500. She also won $325,000 in damages from the IRS last June after a federal judge ruled that a ""grossly negligent'' agency official had discussed her tax status in a letter to a newspaper. Ward says she still hasn't collected the judgment.

The IRS has extraordinary power to collect vast amounts of money from taxpayers. But unless you think its employees do their jobs almost flawlessly, they aren't subjected to much scrutiny.

If you owe Uncle Sam money and don't have it, you can work out a payment plan with the IRS to pay on installment, pay later or pay less through an Offer in Compromise. Otherwise, the IRS may resort to the following enforcement actions:

A lien in the amount of what you owe is attached to your house or car. Without clear title, you can't sell until the debt is paid up with the IRS.

A seizure of your assets in the possession of a third party, like your wages or bank account.

As a final resort, the IRS can seize your personal property and sell it.

When taxes go unpaid the IRS bills you, calls you and may send an agent to collect.


1994 $23.5
1995  25.1
1996 29.8

About $2 billion of the delinquent collections in 1996 was collected by liens, levies or seizures.


             1994     1995     1996

Liens         813      799      750
Levies      2,935    2,722    3,109
Seizures       10       11       10

The average amount of delinquent taxes in seizure cases was about $233,700 for fiscal year 1996. Average net proceeds from the seizures was only $16,700.

ASSETS                      SEIZURES*

Vehicles                       31.2%
Other real property            26.0
Personal residence             10.4
Machinery                       8.0
Office equipment/furniture      7.5
Cash-register contents          7.4
Other business property         7.1
Other personal property         6.6
Inventory                       6.0
Licenses                        3.7
Safe-deposit boxes              1.4

* Numbers don't add to 100 because multiple types of assets may be
involved in a single seizure case.

172 employees out of a total of 102,000 were disciplined because of complaints, misuse of position or authority or rude or discourteous conduct in 1997.


Suspended, 14 days or less     23.3%
Reprimanded                    22.1
Fired                          17.4
Admonished                     15.7
Retired, resigned              15.1
Suspended, more than 14 days    5.2
Pay or grade reduced            1.2