Incredible shrinking tax collector
Taxpayer-rights laws cause plunge in audits and property seizures. A friendlier IRS may mean more tax cheats.
The Republican-led Congress has pushed to turn the Internal Revenue Service into a gentle giant. Its ideal IRS agent might tell a taxpayer: "Please sir, please ma'am, pay your taxes. And, if I may, I will help you calculate what you owe."
The reform effort - symbolized by new taxpayer rights enacted in 1996 and 1998 - has arguably improved the tax agency's image and reduced abuses of its authority.
But many tax experts, including former heads of the IRS, say the moves have gone too far, promoting kid-glove treatment of tax cheats and sapping morale at an agency vital to today's federal government.
"Is the IRS really enforcing the tax law? The answer is, 'No,' " says Donald Alexander, a former IRS commissioner. He warns: if tax revenues slip 5 percent because of weak enforcement, "there goes the budget surplus."
Worried by this threat to revenues, President Clinton is calling for a 10 percent increase in the IRS budget - to $8.8 billion - and 633 more auditors, a 5 percent rise.
His plea comes as face-to-face audits of taxpayers have been plummeting - down 40 percent since Congress passed the IRS Restructuring and Reform Act of 1998. Fewer than 1 in 300 tax returns will be audited this fiscal year, down from 1 in 67 in 1981.
Especially worrisome from a revenue standpoint, the audit rate for the high-income taxpayers, who account for more than half of income-tax revenues, has been cut by more than half since 1997.
"The IRS is operating under the theory that if it's kind to people, they will pay their taxes," says Jerome Kurtz, an IRS commissioner under President Carter. "That is an unproven theory."
In fact, it's almost certain that under a less-fearsome IRS more taxpayers will file fraudulent returns, says Mr. Kurtz, now at New York University Law School.
Though the decline in audits began before the mid-1990s, a sharp decline in hardball enforcement measures, such as levies against wages, can be traced to the 1998 law, which set forth "10 Deadly Sins" that could result in an IRS auditor being fired. Sins range from violating a taxpayer's civil rights to an auditor filing his own return late.
"They scared a lot of IRS examiners to walk on egg shells for fear of being accused of harassment of a taxpayer," says Matthew Previte, a tax accountant in Framingham, Mass. Tax-collector morale "stinks," he says, and some are now willing to settle tax debts for "pennies on the dollar."
Congress has also pressured the agency through public humiliation. Prior to the 1998 legislation, the Senate Finance Committee held hearings in which the IRS was painted as out of control and regularly abusive of taxpayers.
While many Americans welcomed the hearings as an effort to redress taxpayer grievances, Mr. Alexander calls those hearings "cheap politics" that "did great damage to the tax system."
Subsequently, much of the witness testimony was discredited, he and others say. And Congress's General Accounting Office found no evidence that taxpayers were routinely mistreated.
Aware of the morale problem, IRS Commissioner Charles Rossotti sent IRS employees a memo last August noting how few agents have actually been found guilty of "deadly sins."
After one year, with 214 cases completed, 33 claims were validated. Of those, 26 were for not filing their own returns on time.
N. Jerold Cohen, a former IRS chief counsel, says Congress should have known the law would dampen morale. "But it is really a bugaboo," says Mr. Cohen, now head of an advisory council on IRS reorganization. "You are not fired for doing your job or for making an honest mistake."
When he came in as IRS commissioner in November 1997, Mr. Rossotti tried to follow Congress's lead and make the agency more "service-oriented." Formerly a successful businessman, his references to taxpayers as "customers" have drawn snickers.
"I will become a werewolf before I change from a taxpayer to a 'customer' of the IRS," writes Michael Graetz, a Yale University law expert in a book, "The Decline (and Fall) of the Income Tax."
But while he sees the "customer" label as silly, his big concern is that Congress has burdened the agency with enforcing a complex and ever-changing code.
"To think that the IRS can become a modern financial-services institution without a major overhaul of the tax law it administers, is to believe that you can turn a Winnebago around without taking it out of the garage," Mr. Graetz holds.
Indeed, Rossotti has noted that the 1997 Taxpayer Relief Act made 801 tax changes, requiring special training for 100,000 IRS employees, including part-timers.
Meanwhile, the full-time IRS staff has declined by 16 percent, or 16,000, since 1993, even as taxpayer ranks keep growing.
Sen. William Roth Jr. (R) of Delaware, who has championed Congress's efforts to make the IRS "better, fairer, more user-friendly," has promised to "carefully review" the president's request for more IRS funding.
Rossotti has called for a meeting of 665 IRS managers in Chicago next month where, it is expected, new emphasis will be put on collecting taxes due.
(c) Copyright 2000. The Christian Science Publishing Society