Plunder Patrol
by Robert W. Lee

The alarming saga of IRS abuse

The Internal Revenue Service (IRS) is our nation's largest law enforcement agency. Armed with virtually unlimited power, it collects not only taxes, but intimate details about the personal lives of virtually every American.

Many Americans have long suspected that, despite directives to the contrary, IRS agents abuse their access to information on citizens. Those suspicions were confirmed on August 2, 1993 when Senator John Glenn (D-OH) made public an IRS report which revealed that the agency had disciplined more than 150 of its employees for using IRS computers to gain unauthorized access to the tax records of relatives, friends, and celebrities.

In one instance, an employee had altered records to enable taxpayers to receive refunds, then received kickbacks from beneficiaries of the fraud. The IRS report asserted that 369 employees of its Southeast regional branch in Atlanta had been investigated for "browsing taxpayer accounts for no clear business purpose" through the agency's internal computer system. Yet less than one-half of those involved were disciplined. The report cited evidence of computer browsing in at least two other IRS regional offices.

The disclosures came during the agency's decades-long, $23 billion effort to upgrade its computer system to give IRS workers even more access to taxpayer information. During her appearance before Senator Glenn's Government Affairs Committee on August 5, 1993, IRS Commissioner Margaret M. Richardson disagreed with the suggestion by some senators that the IRS should notify taxpayers whose records had been improperly opened.

In criminal cases the burden of proof lies with the government. In IRS cases it falls on taxpayers, who are presumed guilty until they can establish their innocence. The agency has independent authority to impose civil penalties and has no legal obligation to wait until a person has been convicted before seizing his paychecks, home, motor vehicle, and other assets. Consistent with Lord Acton's dictum that "power tends to corrupt and absolute power corrupts absolutely," instances of IRS abuse of its authority would likely fill as many pages as the burgeoning Internal Revenue Code itself.

Fear Factor

Fear has long been a hallmark of the agency charged with compelling compliance with history's most complex tax code. In 1978, the legendary comedian Red Skelton described the IRS as the "greatest gestapo we have in the U.S. right now," and partly blamed the agency for his wife's suicide. And on June 8, 1988, after years of harassment and persecution by the IRS, San Francisco resident Alex Council, his financial resources virtually exhausted, killed himself at age 49. His suicide note instructed his wife on how to use his life insurance money to continue the court case against the IRS, which she did -- and eventually won.

Chris and Palsy Rowenhorst operated a pawn shop in Fullerton, California. During the recession years of the 1980s, they missed making quarterly payroll tax payments to the IRS on a couple of occasions. With penalties and interest, the $25,000 originally owed ballooned to around $75,000, which the Rowenhorsts agreed to pay. They entered into an agreement with the IRS under which they were making regular monthly payments of about $500 to liquidate the debt. But on January 23, 1991, IRS agent Viola Mitchell and a female agency trainee visited the pawn shop and asked Rowenhorst to sign documents authorizing the IRS to seize his business assets to liquidate the tax liability without delay. Rowenhorst refused.

Since pawnshops usually have large amounts of cash on hand, Rowenhorst carried a gun in his waistband for security. He claims that at one point during his conversation with the two IRS operatives he said something to the effect, "If you want to close me up, would you want me to kill myself so you can collect my insurance?" He denies threatening the two women. Upon returning to their office, however, the agents reported that Rowenhorst had "forcibly assaulted, resisted, opposed, intimidated, and interfered with" them during the course of their official duties. They claimed that he had become emotional, raised his shirt above his waistband to display his handgun, placed his hand on the gun, and stated, "What do you want me to do, kill?" They were, they said, so frightened that they had to walk out with their backs to the door.

On the basis of those serious allegations, Rowenhorst, a veteran in has late 60s with no prior trouble with the law, was arrested, handcuffed, strip-searched, and jailed for more than 30 hours. Bail was set at $25,000. The next day, he was dragged into court, in chains, on charges of threatening a federal agent.

Fortunately for Rowenhorst, at that time his attorney produced a videotape of Rowenhorst's dispute with the IRS as captured by the pawn shop security surveillance camera. It unambiguously showed Ms. Mitchell and her associate cordially waving good-bye, and one saying "have a good day" to Rowenhorst, as they sauntered out of the shop. Their backs were not to the door, and there was no indication that they were frightened, or had any reason to be. The videotape proved that they had lied about the incident.

All charges against Rowenhorst were dropped. He subsequently sued the IRS for $5 million but was denied a heating by the U.S. Supreme Court.

In February of this year, the IRS made its largest payment ever for unjustly harassing a taxpayer when it sent a $500,000 check to Miami attorney Daniel N. Heller. In the mid-1970s, Heller was general counsel for the Miami News when the newspaper reported that an IRS team was engaged in illegal spying on the sexual and drinking habits of important local citizens, an activity the newspaper dubbed "Operation Leprechaun." The newspaper's reports led to congressional investigations and reams of bad publicity for the agency.

The IRS suspected that the newspaper had gleaned its information from within the IRS itself, and asked Heller to reveal the source. He refused on First Amendment grounds. His tax return for 1976 was subsequently scrutinized for evidence of tax evasion. One of the three agents assigned to the case was later revealed as the leader of "Operation Leprechaun." In 1982, Mr. Heller was indicted and served four months in prison. It was later proved, however, that he had done nothing wrong, and rather than a tax cheat was the victim of a vicious IRS abuse of power.

The Helmsley Affair

Forbes magazine for April 12, 1993 observed that in "spirit if not in effect," the IRS penalty-assessing technique "is like the deterrent against crime used by authorities in the Middle Ages. After hanging a culprit, they would leave the corpse dangling in the town square for a few days as a warning to others. It was their way of saying, "We may not catch you stealing, but if we do, look where you will end up."

Hotel queen Leona Helmsley ended up in prison after she was convicted in 1989 of conniving with her elderly husband (who was deemed incapable of standing trial) to avoid paying $1.7 million in taxes by under-reporting their income by $2.6 million for the years 1983-85. She was sentenced on April 12, 1989 (three days before the tax deadline) and, after exhausting her appeals, was sent to prison on April 15, 1992. She served 18 months of a four-year sentence, then spent a month in a halfway house and two months under house arrest in one of her hotels. Following her release in January of this year, she was further required to complete 250 hours of community service.

Most news accounts have portrayed Mrs. Helmsley as a spiteful, super-wealthy "Queen of Mean" who sought to avoid taxes that the "little people" have to pay. The major media played the politics of envy with a vengeance, as they focused on the $1.7 million shortfall figure while neglecting to mention that, for the years in question, the Helmsleys' had paid a whopping $53.7 million in federal taxes on their $103.6 million adjusted gross income.

But 52 percent of the Helmsleys' income was insufficient for the IRS, whose auditors subsequently claimed that the couple owed $55.4 million. Incredibly, they were branded as tax "evaders," and Mrs. Helmsley was sent to prison, despite having paid 97 percent of what the IRS claimed they owed. What happened to Mrs. Helmsley was equivalent to one of the "little people" paying, say, $970 in taxes, then being jailed because the IRS claimed he owed $30 more.

Selective Enforcement

Writing in The Freeman for March 1994, tax analyst James Payne observed that to function efficiently, a tax system needs citizen cooperation, but in "the United States, high tax rates and the impossibly complex tax code have made tax evasion and avoidance a major industry." Since the tax laws are so complex, virtually everyone can be branded a tax violator at the whim of the IRS. As an IRS memorandum quoted in the March 1980 Saturday Review explained, "Agents should be able to discover errors in 99.9 percent of all returns if they want."

In 1991, Charles Benjamin, a laid-off plumber in York, Pennsylvania, had tax exemptions for seven of his ten children disallowed simply because the IRS could not believe there were actually that many children in his family. When he complained, an IRS agent told him, "No family has ten kids these days." More than $4,000 was seized from his savings, wiping out much of the family's Christmas money (a Toys-R-Us store in York saved the day by donating ten "grab bags" of toys to the family). Although Benjamin provided birth certificates, social security cards, and notarized school records for all ten children, the IRS still refused to admit its mistake.

The agency's selective enforcement policy enables it to make life miserable for some taxpayers while going easy on others in similar circumstances, In one case summarized by Forbes for April 12, 1993, a married man forgot to mail the IRS an $800,000 tax check after quarreling with his clandestine girlfriend at her home while on his way to mail it. Two months later, after the adulterous relationship was resumed, he discovered the unmailed payment in her home. His tax accountant was able to persuade the IRS that the man made an honest mistake, the penalty was waived, and he was thus able to keep his philandering a secret from his wife,

In sharp contrast, however, there is the saga of a traveling salesman who kept all of his records in the trunk of his car, then became a victim of crime when the car was stolen. Despite a police report confirming the auto theft, Forbes reported that "the taxpayer had to reconstruct the records with copies of bank and credit card statements at enormous expense of time and money. The IRS disallowed what couldn't be proved, adding considerably to the tax bill."

War on the Self-Employed

It was once part of the American dream to become self-employed and, as it were, one's own boss. Today, however, the IRS is waging war on the selfemployed, and -- if allowed to have its way -- will compel about 3.4 million of the nation's roughly five million independent contractors to be reclassified as employees.

Writing in Insight for January 24, 1994, James Bovard explains that currently "employers must withhold payroll taxes for their employees and pay half of the employee's Social Security taxes and all of the unemployment insurance tax. If an individual is an independent contractor, however, a business need only send Form 1099 to the IRS reporting how much it paid that person, and the contractor pays his taxes directly to the IRS." The IRS detests that arrangement, since the self-employed are more difficult to monitor and the agency "just doesn't trust the self-employed to pay everything they owe." It seeks to force as many persons as possible into the "employee" classification, thereby subjecting their earnings to tax withholding. Bovard notes that the IRS, typically, "is capitalizing on the vagueness and inconsistencies of the current law in order to increase its own power over small business."

Bovard reports that "IRS agents have assessed more than $500 million in penalties and back taxes since 1988 (averaging $68,000 per company) and forced businesses to reclassify more than 400,000 independent contractors as employees. The IRS is now converting almost 2,000 independent contractors into employees each week."

Bovard claims that "IRS officials have encouraged private companies to secretly betray their competitors," citing one 1990 meeting in California where "an IRS agent distributed 'snitch sheets' to businessmen and asked them to make allegations of illegal independent contractor use by their competitors .... When asked in 1992 by the House Small Business Committee if such practices were still occurring, then-IRS Commissioner Shirley Peterson replied: 'The IRS does not refuse to accept information bearing on a tax liability from any legitimate source.'"

Bovard notes that the "IRS has lost a number of federal court decisions on this issue but generally has refused to abide by the court decisions." In effect, "the IRS has a bottomless war chest with which to attack businesses, and only businesses that can afford $50,000 or more in legal costs are able to defend themselves in federal court." Many IRS agents, he asserts, "threaten exorbitant penalties to coerce businesses to sign agreements swearing never to use independent contractors again in return for a reduction or waiver of the penalties."

Cottage Industry

At a time when the number of persons working at home is growing nearly five times as fast as the overall U.S. work force, the IRS is making it even more difficult for persons to work full- or part-time in the home by, for example, making the criteria for deducting home-office expenses more stringent than ever. Writing in the March 1994 issue of The Family in America newsletter, Dr. Bryce J. Christensen cites an Arthur D. Little Company study which concluded that if every corporate employee worked at home one or two days each week, the U.S. could eliminate 1.89 million tons of pollution, save 3.5 billion gallons of gasoline, and save $500 million in infrastructure expenses. Dr. Christensen notes that such telecommuting would also allow millions of Americans "to spend more time at home with their families," thereby strengthening the institution of the family.

Rather than promoting such laudable objectives, however, the IRS has applied pressure in the opposite direction. For example, the Los Angeles Times for February 9, 1993 reported that for years the IRS has been luring taxpayers into violating its own rules on deductibility of home-office expenses by issuing erroneous instructions in the pertinent Publication 587, then penalizing taxpayers who take deductions based on those instructions.

If "the taxpayers balked, citing Publication 587, the IRS would take them to court," because a "stricter definition is technically the law. The stricter rule is published in the Master Tax Guide -- a bible to professional tax preparers that's rarely seen by the public." The Times quoted an IRS spokesman as saying that, when you come right down to it, "these publications we put out have no standing in law," since the "only thing that means anything is the Internal Revenue Code." That Code now totals well over 2,000 pages, plus more than 10,000 pages of regulations that have the force of law. And that does not even include some 200,000 pages of IRS and court interpretations.

Counting the Cost

Tax analyst James Payne pinpoints more than 30 separate burdens which the current tax system imposes on individuals, businesses, and society as a whole, including the costs of compliance and enforcement. Compliance, explains Payne, entails "the time and energy people spend keeping records, studying tax instructions, making calculations, and filling out forms and schedules." A study by the Arthur D. Little Company revealed that, during 1985, businesses and individuals spent a staggering 5.4 billion hours on federal tax compliance activities. Payne calculates that this is the equivalent "to 2,900,000 people -- the entire work force of the state of Indiana -- working all year long on federal tax compliance activities," at a cost amounting "to 24 percent of all federal taxes collected."

Enforcement costs include such tax-collection truncheons as levies (property is seized without due process under IRS orders to such entities as banks and employers to transfer a taxpayer's money to government) and liens (freezing taxpayer assets). Payne notes that while most Americans may believe that the imposition of such penalties are rare, in fact "it is a national scandal." During 1992, for instance, "the IRS reports issuing 3,253,000 levies" affecting (when IRS clerical errors and double-counting are taken into account) about 1,600,000 individuals. And to keep money flowing into the Treasury, "the IRS also issues liens, which freeze taxpayer assets (1.5 million); sends out underreporter notices, which allege taxpayer underpayment of taxes (3.8 million), and non-filing notices, which allege a taxpayer failure to file a tax return (1.5 million); conducts personal audits and service center corrections (0.5 million); and imposes some nine million filing and payment penalties. In addition, it pursues about 6,000 criminal prosecutions, trying to jail people for failing to adhere to the tax code."

In the underreporting phase alone (where over one-half of IRS accusations turn out to be wrong), Payne estimates that "Americans spend 30 million hours yearly reacting to the worrisome brown envelopes: studying the notices, examining tax law, reviewing tax data, discussing their cases with friends and advisors, and composing letters of protest. The level of tax litigation -- the audit appeals, court cases, and tax rulings -- is running at 195,000 cases a year." He concludes that "the monetary cost to the American public of dealing with IRS enforcement actions in 1985 was over $13 billion, a figure three times the entire budgetary cost of the IRS."

When the visible and hidden costs associated with tax collection (the vast majority of which have been piled without remuneration onto the private sector) are totaled up, Payne estimates that it costs 65 cents to collect every $1.00 in taxes. For fiscal 1992, that expense would be more than $622 billion, making tax collection the most expensive of all government programs (more than double the defense budget and nearly five times the expenditures on Medicare).

The Way Out

In 1989, the IRS sent a report to tax professionals saying that, in the event of war and nuclear attack on the United States, the collection of taxes will continue. As summarized by ABC news commentator David Brinkley, "It says that within 30 days after the last nuclear blast, the IRS will be all set up to assess, collect, and record tax payments, and ready to issue, as necessary, new forms on how to keep your taxes paid during the emergency. It says in the areas of the country hardest hit, delinquent taxpayers will be given a little extra time. Otherwise, taxes will be collected as usual."

Unless, of course, legal steps are taken to abolish the income tax -- and the IRS plunder patrol it has spawned. In fiscal 1992, the federal government's net budget receipts were $1.092 trillion, of which the individual income tax accounted for $476.5 billion (44 percent). Had there been no individual income tax or IRS, the government would still have collected more than $615 billion, which exceeds federal outlays for fiscal 1980 ($579.6 billion). In other words, if spending today were limited to what it was toward the end of the "wild-spending" Carter years, the income tax could be abolished and we would still have a surplus exceeding $35 billion.

Syndicated columnist Joseph Sobran has written that in "a just system, which ours no longer is, the taxing power would be sternly limited. It would be used only for necessary, carefully defined and authorized purposes." Constitutionally authorized, that is. "If we really want freedom," Sobran suggests. "we should demand the repeal of the 16th Amendment -- which has practically served to repeal the rest of the Constitution. Abolishing the personal income tax would not only let us keep our earnings, it would give us our privacy back, sparing us the annual April 15th inquisition."

Source:    April 18, 1994 issue of The New American