My 1998 piece: The IRS, Now & Forever

The Foundation for Economic Education reposted this as a “timely classic” last week. A few highlights:

*In recent years, IRS agents have been indoctrinated to see taxpayers as a class enemy.

*The only Americans who have legal rights, in the IRS’s eyes, are those who can afford to hire lawyers and topnotch accountants to fight the agency.

*It is an illusion that better laws will solve the problems of an agency renowned for breaking all laws. The only truly effective reform is to shut down the IRS and get rid of the byzantine tax code designed to allow politicians and bureaucrats to micro-manage the lives of American citizens.

The Freeman, November 1998

The IRS, Now and Forever?
Will Better Laws Fix a Notoriously Abusive Agency?

Since late last year, politicians in Washington, D.C., have been promising to save Americans from the Internal Revenue Service—to fundamentally reform the agency, once and for all. The surge of anti-IRS outrage fits a dismal pattern in recent American history. On July 30, 1996, when signing a bill to provide meager additional protections to taxpayers, President Bill Clinton proclaimed: “We say to America’s taxpayers, when you deal with the IRS, you also have privileges and we respect them. You have protection and we will help provide it. You have rights and we will shield them.”
We’ve heard this before. Since the 1960s, national outrage has repeatedly erupted when news of IRS abuses hit newspaper front pages. Each time, politicians and bureaucrats swore that they would fix the problems and that such abuses would never happen again. Each time, the IRS has continued to tyrannize and terrorize innocent American citizens—with no effective redress from either federal judges or from the U.S. Congress.

We will examine some of the more brazen IRS abuses to gain insights into the futility of moderate reform.

Institutional Arbitrariness
Roughly two million Americans are audited each year. While many Americans might presume that the tax-audit process is an evenhanded pursuit of a fair tax assessment, many IRS agents see it as a chance to get a pound of flesh from an innocent taxpayer. IRS auditors are rewarded on the basis of how much additional tax they impose on people, not on whether they follow federal tax law. The IRS’s “Program Letter for Fiscal Year 1997” stated that tax examiners will be evaluated according to the total “proposed additional tax and penalties” they recommend for imposition on taxpayers, as well as “total revenue protected: Total dollars protected as a result of disallowing claims for refund.” The American Institute of Certified Public Accountants (AICPA) complained in 1997 to the IRS that “The Service’s methods of evaluating its personnel focus on . . . maximizing revenue and protecting the Treasury.” AICPA added that “the Examination Division’s performance is evaluated solely based upon factors other than determinations as to the proper amount of tax.”

When individuals appeal audit findings to the IRS Appeals Office, it sustains barely 30 cents on the dollar of additional taxes assessed during audits. In other words, almost 70 cents of each dollar of additional taxes that auditors demand is found to be unjustified. In percentage terms, the IRS apparently cheats far more often during tax audits than average Americans cheat on their tax returns. The National Commission on Restructuring the IRS found that the quality of IRS audit work has deteriorated in recent years in part because of poor training of auditors and the increasing complexity of the tax law.

The incentive system is truly bizarre: IRS auditors receive bonuses for assessing additional taxes regardless of whether appeals officers determine that citizens actually owe such taxes. Dan Pilla, author of several books on the IRS, estimates that Americans pay billions of dollars in taxes that they do not owe because few taxpayers take their audit case to the appeals level. Expense and fear deter many appeals.

IRS Culture
Why are abuses of taxpayers so common? In recent years, IRS agents have been indoctrinated to see taxpayers as a class enemy. This new attitude is epitomized by “Culture Bingo”—a game used to train agents and auditors to recognize “an IRS organizational culture regarding the audit process.” The game encourages the use of summonses to obtain third-party records, to think of fraud referrals as a path to promotion, and to believe that most taxpayers deposit unreported receipts in their bank accounts. One of the most damning lessons of the training is the doctrine: “Taxpayers seem to live better than I do.” The IRS appears to be officially seeking to maximize the resentment or hostility that agents feel toward the taxpayers they audit. The American Institute of Certified Public Accountants said of the course 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 unethically against a taxpayer’s interest.”

In 1988, Congress prohibited the IRS from evaluating its employees on the basis of the additional taxes they collected. However, the IRS has—as usual—flouted this law and used statistical evaluations that help turn IRS agents into public enemies. One confidential IRS document uncovered last fall revealed that auditors in the San Francisco region were expected to assess at least $1,012 in additional taxes for each hour they spent auditing a taxpayer’s return. Any auditor who failed to achieve that goal could lose cash bonuses or promotions. Joseph Lane of the National Association of Enrolled Agents (licensed taxpayer representatives) declared: “Whenever an enforcement agency resorts to using production statistics for evaluative purposes, be they audit yields or traffic tickets, the first casualty is citizen rights.”

There are practically no limits to the scams that the IRS can use to jack up the amount of tax citizens supposedly owe. If a taxpayer falsely reports his income, he can be sent to prison for several years for tax fraud. But if an IRS employee lies about federal tax law in order to commandeer more of a citizen’s bank account, he can get a bonus award and maybe even a promotion. IRS auditors disallow legitimate expenses—such as in the case of a California restaurant owner who was prohibited from counting food purchased for his restaurant as a business expense. In auditing the returns of self-employed salespeople, IRS agents have refused to permit as business costs the expenses for trips in which a sale did not occur.

Increasingly, IRS auditors are simply making up income—and then demanding that people pay the additional taxes. IRS agents use Bureau of Labor Statistics data to determine the average income in a certain geographical area. If they are 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 income—that the person actually has the average income in his area—and thus owes thousands of dollars of additional taxes, penalties, and interest. As Bruce Strauss, a private tax preparer who worked for IRS collections for over 30 years, recently observed: the fact that “the IRS now has the authority to assign additional income to a taxpayer at its discretion, without any basis in fact, is frightening and absolutely unacceptable.”

Property Seizures
IRS officials insisted at Senate Finance hearings last year that employees were not encouraged to seize private property merely to accumulate bonus points on the job—a practice strictly prohibited by federal law. However, subsequent audits of the IRS have shredded that defense. An audit released in December of the IRS’s Oklahoma-Arkansas district found that a third of the property seizures 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 to contact a citizen 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.”

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 Criminal Investigation Division management “encourages and emphasizes . . . 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 has had a special preference for pursuing divorced people. After a divorce, the agency has hounded both former spouses to force each of them to pay the full amount they allegedly owed as a couple. The General Accounting Office estimated that the IRS wrongfully pursues tens of thousands ex-spouses each year, demanding additional tax payments that are not legitimately owed. Senator Bill Roth 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.”

Sometimes, the first time a person knows the IRS is on his case is when he gets a call from the bank saying that his savings have been commandeered by the agency. The IRS is not required to tell people when it confiscates their bank accounts; it claims that the only “official notice” people are entitled to is a notice from the bank.

The Mirage of Taxpayer Rights
Time and again, the American people have been deceived by political promises to fix the IRS. In 1988, and again in 1996, Congress enacted so-called Taxpayer Bill of Rights legislation that was supposed to stop the IRS from tyrannizing innocent citizens. However, according to training materials the IRS uses for new agents, the main effect of the bills 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.”

An IRS collections officer with a quarter-century experience testified anonymously at the Senate hearing that the Taxpayer Bill of Rights has “had very little effect on the conduct of the IRS. The Taxpayer Bill of Rights is very positive . . . but who is going to enforce this for the taxpayer? If you’re going to sue the IRS it’ll take thirty, forty, fifty thousand dollars.” Phoenix tax lawyer Bob Kamman 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 he is supposed to oversee. In 1996, over 32,000 taxpayers requested “taxpayer assistance orders”; the Ombudsman granted them in only five cases—slightly more than one in every 10,000 requests.

The only Americans who have legal rights, in the IRS’s eyes, are those who can afford to hire lawyers and topnotch accountants to fight the agency. Congress enacted provisions to allow citizens who fight the IRS in court to have their attorneys’ fees paid in cases where the IRS’s position lacked merit. However, the IRS and the Justice Department have fought tooth and nail to prevent almost anyone from receiving reimbursement for their legal fees in any case—regardless of how egregious the government’s behavior may have been, and regardless of how often the IRS may have previously lost in court on exactly the same issue. The fact that the cost of hiring a lawyer and fighting the IRS in court is prohibitively high for the vast majority of Americans means that the IRS has carte blanche to ride roughshod over most Americans’ legal rights.

The Latest Bill of Rights
Last summer, Congress passed and President Clinton signed an IRS overhaul bill that supposedly gives taxpayers all the protection they need from federal revenue collectors. The fact that this third “bill of rights” in ten years passed Congress by overwhelming margins (402-8 in the House, 96-2 in the Senate) indicates that it is unlikely to reduce the federal government’s fundamental power over private citizens. The new law does shift the burden of proof for some tax-court cases—but only a tiny percentage of taxpayers who are wrongfully assessed for additional taxes fight all the way through IRS administrative procedures to a courtroom. The law provides some relief to divorced people whose deadbeat ex-spouses have left them tax troubles, and extends attorney-client privileges to certified public accountants. The law also creates a new oversight board—but the National Treasury Employees Union, which represents IRS workers, is guaranteed a seat on the board. Moreover, the board will only be concerned with long-term planning and budgets, not today’s abuses.

Senator Daniel Patrick Moynihan said that the purpose of the law was to give IRS agents “the respect to which they are entitled.” Yet, the IRS’s own audit reports and congressional hearings preceding the bill’s passage raised one horror story after another of IRS agents on rampages. After the Senate passed the bill, IRS Commissioner Charles O. Rossotti and Treasury Secretary Robert Rubin praised the bill. Yet Rubin had vigorously attempted to derail the first Senate hearings on IRS abuses in September 1997, and Rossotti had downplayed the extent of IRS abuses in his own testimony at later hearings. With powerful IRS friends like Rubin and Rossotti, taxpayers have no reason to presume their problems have been solved.

Congressional and administrative “fixes” of IRS abuses are a pipe dream because the agency will continue to have vast arbitrary power over ordinary Americans. Nancy Jacobs, who along with her husband was hounded by the IRS for 16 years because the IRS provided an incorrect identification number to her husband’s optometry business, declared: “When you have someone come to you from the IRS telling you they’re going to take your home, take your vehicles—everything you own, close your business—you do what they say.” The IRS has indisputably and grossly abused every bit of power that Congress has given it. A grant of power from Congress to the IRS is just the starting point; it then stretches the power to the limit. When it is accused of savaging the lives of taxpayers, it proclaims “good faith” error.

It is an illusion that better laws will solve the problems of an agency that is long notorious for breaking any and all laws. The only truly effective reform is to shut down the IRS and get rid of the byzantine tax code designed to allow politicians and bureaucrats to micro-manage the lives of American citizens.


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