Taypayers Get Hard Line From IRS Software

A federal judge in San Francisco has ruled against the Internal Revenue Service, a decision that could help taxpayers improperly snared by computerized actions of the agency.

But beyond giving taxpayers a new way to fight the sometimes arbitrary IRS, last month’s decision by Judge Stanley A. Weigel could also force the nation’s largest and most powerful enforcement agency to rethink certain aspects of its headlong rush into the computer age.

“What this decision means is that in some critical circumstances the IRS may have to go back to dealing with people on a face-to-face basis,” said Montie S. Day, the Oakland lawyer who successfully argued the case. “The ruling puts new pressure on the IRS to have a real person check and make sure the facts in the case are right before one of its giant computers starts sending out notices tying up all the assets of a taxpayer.”

The potentially significant case involves Gina Husby, a senior vice president with the Bank of America in San Francisco and her husband, Paul, a retired San Francisco police officer.

On March 11, 1986, the IRS mailed the Husbys a notice that they owed back taxes. The couple disagreed and on June 9 asked the United States Tax Court for a hearing. Under federal law and the regulations of the IRS, when a taxpayer files such a petition the agency must halt all collection actions until the dispute has been resolved.

Several weeks after the Husbys informed the court that they wanted a hearing, the IRS Automated Collection Service office in Ogden, Utah, sent the couple an assessment demanding payment for their alleged debt.

As noted in Weigel’s opinion and as admitted by the IRS, the Husbys’ lawyer immediately protested in writing to the tax agency. He informed the IRS that since the Husbys had already filed a petition with the tax court, the agency’s demand was illegal and that any liens and levies issued would violate a section of the law prohibiting the knowing or negligent disclosure of return information.

On Nov. 10 of last year, the IRS sent a second dunning notice and Day filed his second protest. Shortly thereafter the attorney for the IRS, Debra K. Estrem, acknowledged the mistake, promising that no further collection action would occur.

But the IRS computer in Utah didn’t pay attention and on Dec. 15, 1986 and Jan. 19, 1987--despite further protests from Day--it dispatched two more warning notices.

The ax was about to fall. On March 23, the Automated Collection Service sent a notice of levy to the San Francisco police credit union, seizing $3,789.53 held in that account by the Husbys. On April 3, a second levy notice was served on the couple’s stockbroker.

Frustrated, the Husbys and their lawyer turned to the federal court and Weigel issued an injunction forbidding the IRS from placing any further levies or liens on their holdings.

Yet on April 13, the IRS ignored the injunction and placed a notice of lien in the official records of Marin County. The lien on the Husbys’ house was immediately picked up by a number of credit reporting companies.

Spokesmen for the IRS in Washington and San Francisco declined to comment. But in arguing the case before Weigel, Jay R. Weill, the assistant U.S. attorney representing the government, admitted there was no question that the IRS had made a mistake. He contended, however, that the mere existence of a mistake did not entitle the Husbys to damages.

With apparent pride, the government’s lawyer described the Automated Collection System designed by the IRS as “very effective and efficient in finding sources of assets from which to collect tax liability.” He added, however, that the system “sometimes was very difficult to stop.”

Weill and the IRS thus claimed responsibility for devising what they describe as a useful computerized system to collect taxes. But accepting responsibility for its errors was a different matter. “There is no IRS agent here who has purposely and with bad faith improperly disclosed return information about the plaintiffs,” Weill argued in court.

During a later interview, the government lawyer asserted that “we’re talking here about a computer glitch, not a purposeful error. This is a system that is spitting out tens of thousands of notices a day and I don’t think Congress intended that the agency be penalized every time there is a little mistake.”

Because the IRS’s collection of taxes is absolutely essential to the government, both Congress and the courts have been wary of giving taxpayers the right to sue the IRS for improper activities, but in this case Weigel rejected the government’s defense and held the IRS liable for damages. The exact amount will be decided later through negotiations or a trial. Although the penalty established in law is $1,000 for each disclosure, the question of exactly what constitutes a disclosure is subject to dispute.

Weigel’s ruling puts significant pressure on the IRS to modify its ways. No one knows, however, exactly how many other taxpayers have been similarly victimized. While there have been repeated stories about similar mix-ups in the press, the evidence is anecdotal and the IRS does not publish statistics on the problem.

But the potential pool of victims is so massive that even if the IRS had an error rate of only one-half of 1%, thousands of taxpayers a year could be damaged. According to the most recent annual IRS report, the agency in 1986 informed 2.7 million taxpayers that they owed back taxes. As an outgrowth of these cases, 1.6 million levies were served on third parties such as employers, banks, credit unions and stockbrokers. The effect is to give the government control of the assets in the levied accounts. During the same year, the agency filed 767,000 tax liens on the property of targeted taxpayers. The effect of a lien is to inform creditors that the IRS has claimed the property. If a taxpayer later sold his property, the IRS could satisfy its tax claim from the results of the sale.

According to the agency’s annual report, two-thirds of all the millions of taxpayer delinquency assessments, warnings, levies and liens that the agency sent out in 1986 were processed on the computers of automated collection centers located throughout the country--without the involvement of field agents.

But processing the cases of taxpayers who have filed disputed returns is not the only assignment of the automated centers. Just recently, they have been given a whole new task: track down individuals who don’t pay any taxes at all and automatically calculate what they owe the government. For the 12 months preceding Oct. 31, the computers identified 169,274 individuals who allegedly had failed to file tax returns, calculated their liabilities and then mailed the “non-filers” completed returns assessing them for a total of $1.6 billion.

Because the new automated assessment procedure is aimed at what has always been considered a loathsome class, genus Tax cheat , its launching by the IRS received almost no notice. But calculating returns for non-filers may be just a first step in a broader effort. As far back as 1953, the IRS has dreamed of a tax system empowering the agency to calculate the returns of most Americans--and then just send them a bill.

Three years ago, the IRS tried to float this plan under the banner of what it called “the return-free system.” In 1984 and 1985, for example, former IRS Commissioner Roscoe L. Egger was claiming that by 1990 under this system, if adopted, two out of every three taxpayers “would never have to wrestle with a tax return again.” Congress did not buy the return-free proposal, in part because of an underlying uncertainty about the ability of the IRS and its computers to handle such a mass of data. The Husby case is the latest example of just how challenging that task can be.