T.S. Eliot did not have income taxes in mind when he labeled April “the cruelest month,” though he easily might have been talking about the yearly April 15 ritual wherein millions of Americans grudgingly render unto Caesar that which they very much doubt is Caesar’s. But soon, a controversial new “taxpayers’ Bill of Rights” may come to the aid of taxpayers who find themselves caught in the grinding gears of the bureaucracy:
●This past February, a Houston couple chose a murder-suicide pact as the only way out of paying almost $91,000 in delinquent taxes. The Infernal Revenue Service had seized their home and was preparing to put it up for auction.
●Last summer, armed IRS agents wearing bulletproof vests swooped down on W.W. Rodgers & Son Produce Inc. near the Farmers’ Market. Suspecting the owner of tax evasion, the agents seized two truckloads of business records. The search warrant was granted by a federal judge after a confiden tial informant accused Rodgers of keeping bogus books in order to avoid taxes.
●A local businessman fell behind on pay ing his employees’ withholding tax-one of the easiest ways to get crosswise with the IRS. Unbeknownst to the man’s wife, the agency filed a lien against their home. Before the man could catch up on the taxes, he died of a heart attack. The woman was shocked when IRS agents showed up to inform her she no longer had a home.
●Operating in the Dallas area, as in most large cities, is the Internal Revenue Service’s “Business Opportunity Project,” according to several tax attorneys who declined to be named, fearing that criticism of the IRS would jeopardize their cases. In this ongo ing sting operation, agents pose as business men searching!for new properties. They are particularly interested in restaurants and nightclubs, where a mostly cash business makes it relatively easy to conceal profits. After the owner gives his potential “buyers” the inside scoop, the agents return with a search warrant. Hello, tax evasion.
Some of these stories make headlines; others are divulged by gun-shy tax attorneys and CPAs who insist on anonymity before talking about the extraordinary powers of the IRS and the agency’s increasing use of search warrants, sting operations, salary levies, and other aggressive tactics.
Since 1982, says a veteran Dallas tax attorney, the number of search warrants issued has risen by more than 100 percent a year. (The IRS does not officially record such statistics.) The number is still small relative to the population, but about a third are now “general enforcement” warrants-issued not against suspected criminals or drug dealers, but against ordinary people. “The things we used to think were just for criminals are now being used against doctors, businessmen, little guys,” says the attorney.
Most of the attorneys and accountants contacted for this story agree that the IRS has severe internal problems that will not be easy to solve. And since the service combines inefficiency and inaccuracy with an awesome power to create misery, the horror stories continue. “The price of freedom is diligence,” says Dallas CPA Joe Brophy. “If we let the IRS go wild, we’re in trouble. Someone who lacks judgment and training could go power mad.”
Those who work closely with the IRS see its problems as deep-seated, ingrained in the agency’s structure. Bob Davis, a Dallas tax attorney for thirty years, sums up the agency’s problems this way: “You have a huge, incredibly difficult tax code with thousands of pages of interpretive materials. Second, Congress will not leave it (the tax code] the hell alone. And third, the IRS personnel quality is declining. They have a lot of fine people, but Congress will not pay them adequately. They can’t pay personnel at a level commensurate with the complexity of their jobs.” As a result, says Dennis Greer, a CPA and former IRS program analyst, the private sector constantly lures away talented IRS personnel. A regional analyst with ten years of experience with the IRS draws a maximum salary in the $50,000 range; a regional commissioner, charged with supervising some 10,000 people, tops out in the upper seventies. “On the outside,” says Greer, “he could easily triple that salary.”
Troubles for taxpayers also arise because the IRS and the Congress often work at cross-purposes, adds Greer, who can rattle off a mind-numbing list of major alterations in the tax code since 1974. The Congress determines the tax laws and the IRS must write regulations to fit the laws. But the changes come so frequently that the IRS habitually lags behind, often as much as five to seven years, in writing “regs” for the public to follow. And as with Oliver North and the infamous Boland Amendment, accountants often must rack their brains to determine just which mutation of the tax law applied during a particular month of a certain year. That gap between congressional intent and IRS regulation provides plenty of work for attorneys and accountants seeking “wiggle room” for their clients. As an example, Greer points to the changes in the law governing transfer of earned income between divorcing spouses, for which official regulations have not appeared. “Basically, you have the statute and a blurb from the Senate Finance Committee,” he says. “Maybe the IRS is reading it differently.”
The increase in strong-arm tactics over the past few years has another political cause, experts say. The IRS estimates that taxpayers “underreport,” whether deliberately or accidentally, about $100 billion a year. Add to that the billions in delinquent accounts un-collected due to personnel shortages, and you’re talking real money. Real enough for the Congress to say to the IRS, in the Revenue Act of l987, “We need that money to help close the deficit. Get it.” The current crackdown is designed to bring in an extra $2.5 billion in 1989 and $3.6 billion in 1990. “It’s a mandate to the service to become more hard-nosed,” says Joe Brophy. “They should nail anyone who’s deliberately trying to defraud the government, but this can put clerks in the position of levying on someone’s bank account when there may not be grounds.” Such actions can be especially devastating to taxpayers of modest income. “When the IRS levies four thousand out of an account, that may be all some people have,” Brophy says.
Another cause of tension between the IRS and the public lies in the sheer inconsistency of the agency’s actions. Everyone has heard the stories of the poor schlemiel who is hounded for months over $85 while his brother-in-law plays fast and loose with every deduction, doesn’t even file for a year or two, and never gets so much as a postcard from the IRS. The reason? Differing levels of zeal and intelligence in the agents who are assigned different cases, says Bob Davis. In addition, the system has nowhere near the personnel to force strict compliance on the more than 100 million people who file returns. Estimates vary, but on the average, no more than .5 percent to 1.5 percent of taxpayers are audited each year. The IRS prosecutes only about 5,000 people each year, and half of those are bona fide organized crime cases. To illustrate the lack of manpower, Bob Davis points to the approximately 50,000 tax protesters who send kiss-off greetings to the service every year, refusing on philosophical or other grounds to pay any taxes and making no secret of it. Only about 400 of these open scofflaws are prosecuted, Davis says.
Finally, the perpetual antagonism between tax collector and taxpayer is fueled by what CPA Dennis Chamberlain calls “the human factor. Take a guy who’s making $20,000 a year with the IRS,” says Chamberlain. “He’s doing an audit on a marketing consultant who’s making $300,000 or more a year. The guy has $55,000 in entertainment writeoffs. Consider the reaction. Who can the IRS guy take to lunch? He can’t write anything off.”
The howls from the growing ranks of put-upon taxpayers have reached the Congress, which, having created so many of our tax-related problems, has now undertaken to solve them. Sen. David Pryor, D-Arkansas, has introduced the Omnibus Taxpayers’ Bill of Rights, a legislative effort to level the playing field on which taxpayer and collector meet. The measure has some twenty-eight co-sponsors in the Senate-including supporters as diverse as Phil Gramm and Paul Simon-and more than 150 in the House of Representatives, including Democratic Reps. John Bryant and Martin Frost of Dallas.
The many provisions of the Taxpayers’ Bill of Rights include a Miranda-style warning to taxpayers informing them of their rights and the procedures for appealing decisions. The IRS would be required to send this information with those ominous brown envelopes taxpayers receive. The bill would also lengthen, from ten to thirty days, the period that the IRS must wait to seize property after giving notice to the taxpayer. In addition, the bill provides for “taxpayer assistance orders” to protect citizens who face “unusual, unnecessary, or irreparable loss due to the administration of the tax laws or some violation thereof.” Most controversial is the bill’s shifting of the burden of proof to the IRS to prove that its claim is “substantially justified.” If the agency fails to do so, the taxpayer could sue for any professional costs incurred in fighting the IRS. And the bill would forbid supervisors from evaluating IRS employees on the basis of money squeezed from taxpayers. Pryor’s committee heard testimony from former IRS agents who claim the practice is widespread. One witness presented a memo from a Baltimore branch chief who chastised his revenue officers for low collection rates; the branch had recorded only seven seizures of assets during the month of January 1987. IRS Commissioner Lawrence Gibbs says that IRS policy already prohibits using tax enforcement results to evaluate personnel; needless to say, the IRS opposes the Omnibus Taxpayers’ Bill of Rights.
Given the myriad horror stories that circulate each April, perhaps the surprising thing is that more politicians haven’t gone in for bashing the revenuers. “It’s like with prisons,” says Bob Davis. “Everyone knows they’re awful, but they only affect a tiny percentage of people. Most of us don’t like the Internal Revenue Service, but our taxes are withheld from our checks and we don’t get angry until we’re examined.”
The Taxpayers’ Bill of Rights, which is endorsed by the National Taxpayers’ Union, the U.S. Chamber of Commerce (with reservations on the burden of proof clause), and more than a hundred business and professional organizations, is moving through the Congress. In the meantime, some unfortunate citizens will continue to learn that, as Justice John Marshall put it, “the power to tax involves the power to destroy.”