April, 1996

HEADLINE: Stand and deliver: the Internal Revenue Service has its own ideas on how to deal with critics.The Playboy Forum

BYLINE: Bovard, James

You have to love the Internal Revenue Service. You have no choice.

In 1992 Lawrence McCormick, a Brooklyn retiree, wrote the words "under protest" beneath his signature on his tax return. The IRS promptly slapped a $500 penalty on him for filing a "frivolous return," implying that the two words invalidated all information on McCormick's return. (The IRS did not allege any inaccuracies in the return.)

McCormick sued. Federal judge Jack Weinstein issued a rare defeat for the IRS's expansionary view of its own power. In ruling that the agency had violated McCormick's constitutional rights, the judge insisted that the First Amendment "protects the right of protest to any branch of government. A taxpayer need not suffer in silent acquiescence to a perceived injustice."

The IRS response to this ruling? It announced that the judge's decision was wrong, and that it would impose the same $500 fine on any taxpayer who adds his or her two cents to a tax return. It's called nonacquiescence--the principle that no judiciary short of the Supreme Court can interfere with the IRS.

Over the past few years, Americans have started to call for deregulation of bureaucracies from OSHA to the EPA, citing anecdote after anecdote of power abuse. But the Internal Revenue Service--the one government agency that intrudes into every taxpaying citizen's life--appears beyond reform. With a staff of 112,000 and a budget of almost $7.5 billion, the IRS champions the idea that U.S. citizens pay taxes of their own free will. Its 1992 annual report declared: "Our system of taxation is based on the willingness of citizens to assess and pay their taxes voluntarily."

But as long as taxes are seized through withholding, most citizens have little opportunity to resist. The payroll tax system (imposed in 1942 as a temporary measure) has institutionalized the principle that politicians have first dibs on a worker's paycheck. When it comes to inspiring willingness, the IRS is unmatched. The IRS can seize property and attach liens without asking the taxpayer's permission, without giving the taxpayer a chance to refuse. Since 1954, the number of different penalties that the IRS can impose on taxpayers has increased from 13 to 150. It can fine you for failing to report your income accurately, for negligence, for failing to make a reasonable attempt to comply with the tax laws (all 17,000 pages of them), for being careless, reckless or frivolous. In 1994 the IRS imposed 34 million penalties on taxpayers. The dollar amount of penalties the IRS has assessed has risen from $1.3 billion in 1978 to $13.2 billion in 1994. The average fine amounts to 20 percent of what the IRS thinks you owe, with interest compounded daily. If the IRS suspects fraud, the penalty jumps to 75 percent.

The proliferation of tax penalties enables the IRS to threaten taxpayers with severe retaliation for the slightest error. Combine that with a tax code that almost guarantees error (one IRS agent told Congress he could find mistakes or misinterpretations in 99 percent of the returns) and you have a recipe for abuse. Senator David Pryor (D-Ark.) once complained on the floor of Congress that the IRS used penalties "as a weapon, as a whip over the innocent and the guilty taxpayer's head, and as a point of leverage."

While willing to pounce on a confused citizenry, the IRS refuses to correct its own record. Using IRS data, one analyst calculated that almost half of the IRS annual penalty notices are erroneous. We are talking big bucks. In 1994 taxpayers willing to challenge the IRS forced the government to drop $5 billion in erroneous penalties. If a private bill-collection agency sent out millions of unjustified demands for payment, it would most likely be prosecuted for fraud or extortion.

Is the IRS overzealous, or malicious? Could the millions of inaccurate penalties actually be part of an exercise in mass intimidation--an effort to achieve a presence in people's personal lives?

That presence is not simply a brief audit, or a request for more information. IRS penalty notices are always presumed correct, regardless of lack of evidence. The burden rests with the taxpayer to prove otherwise. IRS officials have sweeping discretionary powers to penalize citizens and to drag them through years of legal hell.

Consider this example: In 1983 the IRS decided to investigate Melvin Powers for his 1978 and 1979 tax returns (which he had filed late). Powers was a Houston builder and owner of five office buildings. The IRS had made no effort to examine Powers' tax returns during the three years of the statute of limitations. (In most cases, the agency cannot audit returns after three years of the filing date.) Six weeks before the limitations expired on his 1978 return, an IRS agent asked Powers to sign a waiver allowing the IRS to leave the matter open for another three years. Powers willingly agreed. In 1986 Powers notified the IRS of his intention to end the extension, for the IRS had made no effort to examine his records in the years since 1983. The IRS responded by disallowing almost all of Powers' business deductions for 1978 and 1979 and by demanding more than $7 million in back taxes, interest and penalties. Shortly after the assessment, a court seized Powers' operations, caused him to vacate his office and took possession of his books and records.

In early 1991 the IRS conceded that Powers actually had large losses in both 1978 and 1979 and thus owed no taxes.

Other IRS vendettas have not ended in such benign fashion. In 1979 Alex and Kay Council invested part of a $300,000 bonus in a tax shelter that their accountant advised them was legitimate. In October 1983, after the three-year statute of limitations for their tax liability expired, the IRS sent them a statement demanding $183,021 in tax, penalties and interest for their 1979 return.

The Councils' accountant requested a copy of the official assessment from the IRS and an explanation of the alleged tax deficiency. He also pointed out that the statute of limitations had already expired for 1979. The IRS furnished no explanation of the deficiency notice until February 1985, when it claimed it had mailed a certified letter that stated the tax deficiency to the Councils in early 1983, just before the statute of limitations expired. But the agency refused to provide the Councils with a copy of its certified mailing list. The mailing list would have shown that the IRS sent the tax notice to the wrong address, yet IRS lawyers refused to back down. In 1987 the IRS imposed a $284,718 lien on the Councils' property and assets. Alex Council had borrowed money to finance his construction business, but the IRS lien destroyed his credit. After Council's business collapsed, he committed suicide.

When the Councils' dispute finally made it to the courtroom, the judge threw the case out of court, ordering the agency to revoke its deficiency assessment and to remove its liens on Kay Council's property. Judge Frank Bullock further noted that "despite the Councils' notifying the IRS as early as October 1983 that they had received no notice of deficiency, and their continued request for information from the IRS, the IRS never consulted the one piece of information that might well have settled this dispute and avoided litigation, i.e., the Postal Service records regarding the delivery of the Councils' notice of deficiency."

IRS Commissioner Margaret Richardson, appearing before a congressional committee in March 1995, declared: "Contrary to what is often, in my experience, a very distorted stereotype, the vast majority of our employees care very deeply about providing good customer service and protecting taxpayers' rights. My hope is that the overwhelming number of taxpayers who come in contact with us will come to know us as a genteel, Gulliver-like giant."


The tax level measures government's financial power over the individual. It is a precise gauge of the subjugation of the citizen to the financial demands of the state. According to the Tax Foundation, a nonprofit research organization based in Washington, D.C., the average citizen had to work from January 1 through May 2 in 1992 to pay his taxes. In high-tax states, the citizen's tax sentence was even higher: In New York, the average citizen had to work until May 19 to pay his taxes. In Connecticut, the date of liberation was May 11. If the government were to announce a program of forced labor and conscript every taxpayer for more than a third of a year without any compensation, there would likely be a national revolt. The Tax Foundation puts the tax bite in personal terms: The median two-income family spends more on taxes than it does on housing, medical care, food and clothing.

The Office of Management and Budget estimated in January 1994 that males born between 1980 and 1992 will have to surrender more than half of their lifetime earnings to tax collectors. The average man born in 1952 will be forced to pay $171,000 more in taxes than he receives from the government, and the average man born in 1967 will pay in more than $200,000 more than he receives, according to the OMB. (In making this calculation, the OMB doesn't include such things as the value of government spending on education, highways, defense or other services. Is the OMB trying to tell us something?)

The average American family head will be forced to do 20 years' labor to pay taxes in his or her lifetime.

The Tax Foundation reported that total taxes collected by government at all levels in 1992 were 85 percent higher than total taxes collected in 1982. Taxes increased 50 percent faster than the inflation rate did during the same period.

The most important development in modern political thinking may be the shift in presumption as to who has the right to a dollar: the person who earned it or the politicians who control the machinery of state. The 16th Amendment to the Constitution gave Congress unlimited power to tax. In 1943 the Supreme Court declared that "an income tax deduction is a matter of legislative grace." This statement, quoted hundreds of times in subsequent decisions in various federal courts, confirms that Congress has acquired an unlimited right to any citizen's income simply by a legislative decree. "Grace" means "favor." That you are allowed to keep some of your income is Simply a favor that politicians choose to give. Some favor.