Global Policy Forum

By David Cay Johnston

The Internal Revenue Service is reducing its efforts to find cheating by businesses and high-income individuals, and stepping up investigations into two forms of cheating that are more likely to involve the working poor than the affluent. Under pressure from Congress to stress customer service, the I.R.S. is also reassigning employees who audit companies and high-income individuals to work counters at walk-in centers, answer telephones around the clock and resolve the tax disputes of estranged couples.

But some I.R.S. agents say that many of the changes will tie their hands and in effect shift the focus of audits to those without professional advisers or political connections. The principal sponsor of the I.R.S. overhaul legislation, Senator William V. Roth Jr., the Delaware Republican, said in a statement that the changes taking place were the kind of transitory issues that should be expected when an agency is undergoing a major transformation.

The number of audits in the fiscal year that began this autumn will be cut by 30 percent to 40 percent from the record low number of two years ago, the latest for which data are available, the I.R.S. commissioner, Charles O. Rossotti, said. Fewer than one in 300 tax returns will be audited this fiscal year, down from one in 217 two years ago and one in 63 in 1981. For wealthy individuals with gross income of $100,000 or more, fewer than an estimated one in 150 returns will be audited this year compared to one in 33 in 1992.

The I.R.S. plans to continue giving its highest priority to auditing the 1,600 largest corporations. But it will sharply reduce audits of the other 16 million businesses in America, the vast majority of them privately owned, and of the rapidly increasing ranks of high-income Americans, who tend to file complex returns. The percentage of corporate returns that are audited is expected to fall to just above 1 percent for the current fiscal year from just under 3 percent in 1992.

The effort to find tax cheating is being reduced even more than these numbers suggest, according to more than four dozen I.R.S. employees. In interviews they described pressure from managers to avoid upsetting taxpayers, to overlook complex issues and to close audits quickly. Some agents have coined a term for these once-over-lightly examinations of tax returns: audit lite.

Despite these sharp cuts in personnel to enforce the tax laws, the tax agency is planning a new assault on abuse of the Earned Income Tax Credit, in which the working poor can collect up to $323 for single people and up to $3,556 for a family of four. The credit was created to offset the sharp rise in Social Security tax rates that began two decades ago. Some people make false claims to increase their payment from the government. The credit has been a target of Republican Congressional leaders for the last five years.

The I.R.S. also plans a major new hunt for people who failed to file tax returns. Tax workers said the last such search, early in this decade, focused on people of modest means, and they expect the same this time. The I.R.S. says it intends to focus this search on people who owe substantial amounts.

More than one-fifth of I.R.S. employees, the equivalent of nearly 21,000 people working full time, will be assigned to customer service, up from 12,000 four years ago by one measure and nearly 18,000 by another. By either measure there are thousands fewer workers available to conduct audits and collect overdue taxes.

The tax agency plans one new initiative aimed squarely at the wealthy, an attack on the creation of improper trusts to avoid estate taxes, but this program will not begin until 2001. Except for the crackdown on abusive trusts, these changes all grow out of a series of new tax laws sponsored by the Republicans who control Congress. The most significant of these laws, the I.R.S. Reform and Restructuring Act of 1998, was passed after Senate Finance Committee hearings in which the I.R.S. was described as out of control and routinely abusive of taxpayers. Much of the most explosive testimony has since been discredited and a subsequent General Accounting Office report found no evidence of systematic mistreatment of taxpayers.

The hearings, the new laws and Rossotti's policies together have had a profound effect on the agency's employees, especially the low-level managers whose daily decisions determine how the tax laws are administered. Many of these managers have concluded that they are supposed to wilt before the rich and powerful, especially those who can get a politician on the telephone.

"Don't aggravate taxpayers -- that's what our managers are telling us," said one longtime revenue agent in New York. As he spoke six colleagues nodded in agreement and offered similar comments from their bosses. A revenue agent in Florida said his manager told him: "Don't probe deeply. Just find three or four obvious items and close the case." An I.R.S. worker in Nashville said anyone there could get a tax case resolved favorably if the taxpayer had enough influence to get a senator or congressman to complain to the I.R.S. "We just collapse," the 14-year veteran said. "Please don't call us tax collectors in the newspaper," one longtime revenue officer in New York said. "We don't collect taxes anymore. We aren't allowed to."
The chief of I.R.S. operations, John Dalrymple, said "none of these comments shock me." He was given a synopsis of comments from interviews with I.R.S. workers in California, Connecticut, Florida, Georgia, Illinois, Michigan, New York, Tennessee, Texas and Washington, nearly all of whom spoke on condition that they not be identified.

"I also am hearing things that have the same general tone," Mr. Dalrymple said. He added that he would characterize their comments this way: "Hey, what is the service's policy going to be around compliance and enforcement? And how are we going to balance the need for good customer service on an individual basis with our responsibility to make sure that people are paying their fair share?"

Dalrymple said he and other leading agency executives had traveled the country telling I.R.S. workers that enforcement was important and that all taxpayers were to be treated alike, without regard to their economic or social standing. He said that this message was not getting through and that efforts had failed to stamp out the mistaken belief that policy favored the wealthy.
"Charles and I have been talking about this for quite some time," he said, adding that Rossotti agreed with him that the only way to change such a widely held belief was for the commissioner to personally make repeated, clear and forceful corrective statements, which he said Rossotti began doing in May. "Managers and employees are looking for some definitive statements from Charles about what to do in certain circumstances that are fairly egregious in terms of not complying with the law," Dalrymple said.
Representative Bill Archer, Republican of Texas, who is chairman of the House Ways and Means Committee, said in a statement responding to questions about the changes: "Without question, it will take time for I.R.S. agents who have done things one way for the past 40 years to learn the new approach, which is built on better serving taxpayers."

The emphasis on serving customers, as taxpayers are now called, comes not only from Congress but also from Commissioner Rossotti, a management and computer systems expert who was brought in two years ago to modernize the agency. Rossotti has said that for decades the I.R.S. has relied too heavily on audits and on pursuing tax cheats and that the key to increasing tax revenues and maintaining popular support is to help taxpayers meet their obligations through better service delivered by a better-trained staff and improved technology.

In his first and so far only mission statement for the agency, which focused on helping people pay their taxes, Rossotti made no mention of enforcing the law or collecting taxes, omissions that have been viewed widely within the agency as reflecting a decreased emphasis on enforcement. But now even Rossotti is worried that enforcement has slipped too far. He told a Senate subcommittee in October that such a low audit rate "poses the risk of increased unfairness in administration of the law, and ultimately, undermining our entire system of voluntary tax compliance."

Rossotti has had to strip down audit units to obey Congressional dictates to expand customer service and resolve a deluge of so-called innocent spouse cases, most of which involve divorced women who say their former husbands cheated on their taxes and left them holding the tax bill. Whole audit teams in Brooklyn, Seattle and elsewhere have been reassigned to innocent spouse cases, and corporate audit teams across the country that once had as many as 12 highly trained examiners have shrunk to as few as 4 people, tax workers said.

Highly trained I.R.S. auditors who are paid up to $77,000 annually to examine corporate tax returns have been detailed to answer telephones and greet people at I.R.S. offices, even though their years of specialized work have left them ill equipped to handle mundane questions from the public. One I.R.S. customer service clerk said it took these auditors so much time to research answers to questions that when she was away, it took five of them to do her job.

Across the country, revenue officers, whose job is to collect taxes past due, said they were having difficulty getting supervisors to approve enforcement actions, like foreclosing on property, because of a perception by managers that they were not to upset customers, even if they are major tax cheats. In the year ended Sept. 30, the I.R.S. seized property 161 times, down from 10,000 two years earlier. Levies on bank accounts and paychecks fell to 504,000 from 3.1 million two years earlier.

Two revenue officers outlined cases they had built against individuals who each cheated the Government out of millions of dollars in taxes, only to be frustrated by the refusal of their superiors to back them up. These officers described elaborate schemes to place assets in the names of relatives to thwart tax collection and, presumably, hide money from creditors. "Every badge of fraud was there, but Criminal Investigation Division told me the U.S. Attorney was not interested," one of these revenue officers said.

The revenue officer said that because the case was rejected for prosecution, requests for permission to force the taxpayer to pay, which Congress now requires be approved by high-level managers, have been ignored. "No one will do anything" to collect the taxes, the officer said. Dalrymple said he had heard, fourth or fifth hand, similar tales of inaction and was troubled by them. He said he would like to hear directly from revenue officers who think their superiors are failing in their duty to enforce collection.

The effect of the cuts in audits is amplified by other factors, including a steady rise in the number of tax returns and a very sharp increase in returns filed by high-income Americans, who are the most likely to have income and deductions from businesses and investments, which can involve complex audit issues.

The number of returns reporting an income of $1 million or more jumped to 142,500 in 1997 from 87,000 two years earlier. These returns often include income from businesses the taxpayer controls, capital gains and other sources not subject to the mandatory reporting systems that apply to the forms of income reported by most people, like wages, interest on savings and dividends.

But under tight budgets set by Congress, the full-time I.R.S. staff has shrunk to about 82,000 people, down 14 percent from 1995. When the growing number of tax returns, the increased volume of money and the 1,260 tax code changes that Congress enacted in 1997 and 1998 are taken into account, Rossotti calculates, the I.R.S. has had its resources cut nearly 29 percent.