IRS - a taxing question of ethics

PUBLISHED : Sunday, 28 September, 1997, 12:00am
UPDATED : Sunday, 28 September, 1997, 12:00am

TO the vast majority of Americans, it is the acronym most likely to induce cold sweats and naked fear.

It is the IRS - the Internal Revenue Service. The taxman.

Katherine Hicks, whose life was turned into misery by the unwanted and undeserved attentions of the most disliked federal department, said: 'The IRS is judge, jury and executioner, answerable to none.' But while most US citizens have little to fear from the IRS and only complain about it every April - when dreaded tax returns are due - the lid has been taken off the darkest secrets of the agency, and cast it in the Orwellian light of the most heartless totalitarian regimes. This picture of the IRS - as an agency which preys on the small man to meet unpaid tax quotas, and then lies when it has made a mistake - has been the talk of taxpayers everywhere because of a series of Senate hearings in which victims like Ms Hicks have exposed the body's worst excesses.

The hearings uncovered tales of businessmen and priests alike driven to bankruptcy after the IRS refused to settle back taxes cases, seized bank accounts and property, withheld pay cheques, and then declined to apologise when finally it was convinced of having made such persons targets unfairly or in error.

Although IRS acting commissioner Michael Dolan apologised to the committee hearings for the actions of a few bad apples in the agency's ranks, the revelations are certain to add to the momentum building in Congress for an overhaul of the country's tax collection system.

No-one disputes the need for enforcement. In its own defence, the IRS estimated tax dodgers cost the Treasury about US$90 billion a year - enough to wipe out the country's deficit. But while members of Congress are increasingly driven by a distrust of the IRS itself, and have even introduced bills which would abolish it completely, others are simply riding the wave of discontent to call for changes to the ultra-complicated tax law which helps create the climate of fear and misunderstanding.

Prominent in this movement are Steve Forbes, the millionaire publisher who wants the tax code torn up and a simple flat-rate tax (similar to that of Hong Kong's) introduced, and Jack Kemp, a former professional footballer and Reagan administration official who used his platform as running-mate of presidential candidate Bob Dole to call for a new tax code last year.

The labyrinthine nature of the tax code - it runs into several hundred pages - is what is driving a wedge between the taxman and the public, who increasingly have to resort to lawyers and accountants to fill in even the simplest tax forms.

'The law is a mess - even the IRS has trouble understanding it,' former IRS commissioner Mort Kaplin said.

And Republican Senator Phil Gramm, another ex-presidential candidate, told the hearings: 'We're all afraid of the IRS - everybody is. We need to pass legislation aimed at changing the structure of the system.' While such sentiments have bipartisan support, the unfortunate fact is that it is legislators themselves who make the tax code ever more complicated year after year. Even the recent tax deal signed between the White House and Congress, which lowered capital gains taxes and offered tax breaks for the middle-class, was roundly criticised for adding hundreds of clauses of unintelligible new language to the statutes.

All this is blamed for playing into the hands of the IRS, whose agents are now seen to have been gunning for the poor and uneducated - anyone, indeed, who cannot afford to fight back with an expensive lawyer.

Even Mr Dolan was unable to justify the abuses which, one by one, tearful taxpayers exposed at the hearings - as did former and current IRS employees, who so feared the wrath of Big Brother that they testified behind a screen with their voiced digitally disguised.

Not only have IRS audit rates on the lowest earners doubled, while those on $100,000-plus taxpayers have been slashed by a quarter, but the amount of audits carried out on large corporations runs to only a tiny 0.2 per cent of the total - even though these businesses owe nearly 60 per cent of the unpaid taxes.

'Management does not believe that anyone in this country can possibly live on less than $20,000 a year, insisting that anyone below that level must be cheating,' one IRS agent testified.

The real villain appears to have been the IRS' system of rewarding tax inspectors who recovered the most back taxes and imposed the highest penalties. The hearing heard how local IRS managers would set performance targets for their agents - effectively encouraging them to step over the line to crack down on potential targets.

Mr Dolan said he would order a stop to the system of ranking the IRS' 33 district offices by how much money they collect, and would also axe the collection quota system.

Treasury Secretary Robert Rubin also said he 'deeply regretted' alleged IRS abuses, and had requested a report from the agency on what it would do to answer the complaints raised at the hearings.

Some legislative reform of the agency now seems inevitable - but as with so many other issues, whether Congress' zeal will truly match its rhetoric remains to be seen.