Tax Evasion

Tax Evasion

Tax Evasion

Politics and policy.
Oct. 19 1997 3:30 AM

Tax Evasion

Auditing the attacks on the IRS.

Kicking off the fall season of IRS-bashing was a report on 60 Minutes last month. It featured the story of Johnnie Johnson, a Galveston, Texas, insurance executive who described his nightmarish battle with the agency in this way:

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This agent came in my office one morning. ... He said, "Mr. Johnson, you have to realize that the only good advertising the Internal Revenue Service gets is when they bring a big one down. And your name is a household word to hundreds of people." I said, "Do you mean to tell me you can take me to a court of law and convict me of some wrongdoing on the basis of what you had?" He said, "No, I don't believe I can do that." He said, "I can get your name in the paper. That's what I'm after."

Jacob Weisberg Jacob Weisberg

Jacob Weisberg is chairman and editor-in-chief of The Slate Group and author of The Bush Tragedy. Follow him on Twitter.

Now an IRS agent might have said these things, but I doubt it. Even power-drunk bullies tend not to declare their own maliciousness. Nor does the victim's account of his own actions ring true. Why would a powerful businessman succumb to extortion, plead guilty to a criminal charge of tax evasion, and pay a fine he did not owe? Johnson also claims that he agreed to plead guilty on the condition that his identity be kept secret. But criminal charges can't be filed in secret. And if the IRS told him it was only interested in a big PR score, why would it then make a promise of confidentiality, and why would Johnson believe it? On 60 Minutes, however, Johnson's version was presented as indisputable fact. The reporter, Steve Kroft, stated that the IRS had declined requests for an interview.

What Kroft did not explain is that the IRS was not allowed to respond. To do so, the agency would need a waiver from Johnson giving it permission to discuss his case. According to a producer, CBS did not request a waiver. Nor did 60 Minutes explain that the $11-million judgment Johnson won against the IRS--subsequently reversed on appeal--was based on the IRS's disclosure of confidential information without such a waiver. (The program deceptively implied that the judgment was based on wrongful prosecution.) I asked Johnson's lawyer whether his client would be willing to grant a waiver so that I could hear the IRS's side of the story as well. No way, the lawyer said.

The lopsided 60 Minutes report was but one episode in a wide-ranging suspension of skepticism about IRS misdeeds. The Senate Finance Committee, which fed CBS its story, followed with hearings that were more show trial than oversight investigation. Disgruntled current and former agents testified anonymously from behind a screen. There was no real effort to ascertain their motives or the truth of the generalizations they offered. Republican senators seeking a quick populist fix have spent the past several weeks vilifying the agency. Congressional Democrats and the Clinton administration, sensing a political hazard, have piled on with their own expressions of outrage and calls for reform. But is the IRS really a rogue agency? Consider the weakness of the main charges.

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1 The IRS commonly abuses taxpayers: The finance committee heard testimony from four victims. These people were culled, according to a spokeswoman, from approximately 1,500 who have contacted the committee. There is no way of knowing how many of them have legitimate gripes. But even if all 1,500 were genuine victims, it would not remotely approach the kind of systematic sadism alleged by Finance Chairman William Roth Jr. and his fellow Republicans. There are more than 200 million tax returns filed each year. There are approximately 20,000 auditors and collection agents who audit about 2 million of them. Fifteen hundred abject failures would mean an error rate of .00075 percent. And that's not even per year--it's per ever.

It's also worth noting that the bipartisan Kerrey-Portman IRS commission recently concluded that there was no systematic abuse of taxpayers. "The agency spends significant resources educating personnel to treat taxpayers fairly, and the commission found very few examples of the IRS personnel abusing power," the report noted. This statement was signed by Sen. Charles Grassley, R-Iowa, among others. In the hearings, Grassley changed his tune. "It is the management culture, mindless of the fact that they are servants of the people," he said. "If allowed to persist, such a mind-set often leads to arrogance, unresponsiveness, disregard of one's rights, and the very kinds of things that we have been hearing from our constituents."

2 The IRS uses revenue quotas: To the extent this happened, it happened in response to pressure from Congress. In 1993, Sen. Roth was one of the supporters of a statute that demanded "performance measures" from all agencies of government. In 1995, the newly elected Republican Congress passed a budget bill that included a "compliance initiative" authorizing the hiring of 1,200 new IRS agents. The House Appropriations report stated, "The IRS is further instructed to report back to the Committee ... with data on ... a categorical accounting of revenue received as a result of these investigations."

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3 The IRS persecutes the poor: One of the disguised IRS agents said on 60 Minutes that the agency focuses on the poor and ignores wealthy people "because those people can bring in an accountant or a tax attorney and fight this system." According to the IRS's own statistics, there has been a sharp decline in audits of taxpayers with incomes of more than $100,000, from 11.4 percent in 1988 to 2.8 percent in 1996. For those earning less than $25,000, the figure rose from 1 percent to 1.8 percent over the same period. Sounds ominous. But this accusation contradicts the previous one--that agents are trying to meet quotas. If the IRS, as Newsweek put it in a ridiculous cover story last week, needs "to feed the insatiable demands of Washington for revenue and more efficiency," it would be crazy to look to the poor as cash cows.

In fact, there are more innocent--and more plausible--explanations for the changes in audit rates. The number of low-income audits also nearly doubled after 1990, when the IRS began categorizing nonfilers about whom it lacked information in the $25,000-and-under category. It jumped again after Congress demanded that the IRS prevent cheating on the Earned Income Tax Credit. (Only people who earn less than $25,000 qualify for the EITC.) The IRS also points out that upper-income audits dropped in response to the closing down of tax shelters in the 1986 Tax Reform Act.

It's pretty obvious what conservative politicians are trying to do here: develop a winning issue for the 1998 election. In one recent memo, the pollster Frank Luntz wrote: "Rather than investigating Bill Clinton, which no one in America wants, we should be focusing our attention on a Government agency that has a negative impact on our day-to-day lives. Consider the benefit of public hearings that highlight Americans who have been victims of the IRS." That's what they've done. Luntz is now advising Republicans to decry the IRS at every opportunity. Voters may have come to doubt tax-cut rhetoric, but they still don't like the people who collect taxes.

GOP leaders have been running with the theme. "If you file a paper tax return, the odds are better than one in 10 that you will be told you are wrong when you are right," Newt Gingrich warned in a speech playing off the hearings. This is, of course, nonsense. Only 1 percent of returns get audited at all. Trent Lott recently called the agency "intrusive, abusive, and out of control." Not a bad sound bite. But the IRS isn't out of control. Its critics are.