IRS IN THE SPOTLIGHT : IRS Procedures Are by the Book, Experts Claim

A controversial procedure under which tax cheats could pay back taxes and avoid criminal prosecution is a long-established part of Internal Revenue Service practice nationwide and is well known among attorneys specializing in tax disputes, legal experts familiar with the practice said Wednesday.

The practice is described in official IRS manuals--and thus is sanctioned by the agency nationwide--and not made available only to those with close relationships with IRS officials, the experts said.

These views contrast sharply with characterizations made by congressional investigators this week probing allegations of misconduct at IRS offices in Los Angeles and elsewhere. Investigators contended that these arrangements were the result of favoritism and were not approved by national headquarters.

“It’s legal, there’s no question about it,” said Roger Olsen, a Los Angeles tax attorney and former assistant U.S. Attorney general in charge of all federal tax prosecutions between 1981 and 1987.

Doesn’t Preclude Prosecution

“If you go to tax seminars, the subject is widely disseminated. It’s not a secret,” said Eugene D. Silverman, a Los Angeles tax attorney and former attorney with the IRS and Justice Department. He added: “It’s available to those who want to research it.”

The practice only allows delinquent taxpayers to avoid prosecution for failing to file tax returns or other tax violations, experts said. It does not preclude criminal prosecution if the taxpayer obtained income illegally or committed other non-tax violations.

Investigators described how Sherman Oaks attorney Richard J. Trattner would offer a check for partial payments of a client’s taxes and the key to a safe deposit box containing the client’s unfiled tax returns. If the IRS indicated that it was unlikely that the client would be investigated, Trattner would disclose the client’s name and the location of the safe deposit box. Trattner said in an interview Wednesday that this occured “frequently.”

The arrangement for Trattner, a former special agent in the IRS criminal investigation division and assistant U.S. attorney, was never officially approved by anyone at the IRS Washington office, one investigator said. That implied that it was offered as a special favor to him because of his close ties to the agency.

Legal experts interviewed Wednesday noted that the safe deposit box method used by Trattner was novel. But they said that grants of immunity to tax evaders are part of an informal “voluntary disclosure” policy maintained at the IRS for years and used by several attorneys.

The IRS in about 1945 established a formal policy that granted immunity to tax evaders who voluntarily revealed and paid their tax liabilities, as long as the government was not yet aware of their violations.

The service abolished the formal policy in 1952 due in part to concerns that the IRS was still prosecuting anyway. But the agency has since maintained an informal policy, modified somewhat in 1974, leaving discretion to IRS district offices to offer immunity on a case-by-case basis.

The informal policy is discussed in numerous tax guides and journals and is endorsed by the American Bar Assn. tax section, Olsen said.

It also is discussed in the IRS special agents’ handbook. The handbook, Silverman said, stipulates that the IRS “will carefully consider and weigh the voluntary disclosure, along with all other facts and circumstances, in deciding whether or not to recommend prosecution.”

Under the policy, attorneys representing tax cheats may approach the IRS with offers to pay taxes owed by clients. The IRS in turn will require that, to get immunity, clients must not be under current IRS investigation, must not have obtained income from illegal sources and must not currently be engaged in illegal activity, among other things. Such terms may be specified in letters written by IRS district chiefs.

Also, under a little-known 1974 revision, the client must not have reason to believe that the IRS may soon discover their violations. That could occur if, for example, a wife negotiating a divorce settlement threatens to report her husband’s tax violations if she is not given a more favorable settlement.

“What you basically do is describe the facts of your client without revealing the identity of your client and ask, on the basis of that, would they accept this as a voluntary disclosure and not prosecute,” Olsen said.

If authorities later discovered that clients obtained income through criminal activities, clients could still be prosecuted. And the practice does not exempt delinquent taxpayers from liability for interest and penalties owed.

“I strongly feel it should be encouraged,” Silverman said of the informal program, noting that the IRS has received millions of dollars in tax revenues that it may not otherwise have recovered.

“It is a perfectly legal method of assisting taxpayers,” said Mark D. Pastor, an Encino tax attorney and former law partner of Trattner’s.

Some attorneys not aware of the practice said they would consider using it. Thomas E. Holliday, a Los Angeles attorney representing white-collar defendants, said he was not aware of the practice but contended that deals are frequently made under the discretion of local IRS offices without formal approval from Washington. “If I could work it out to resolve a problem for a client, and there was a legitimate way to do it, I’d do it in a second,” he said.

Trattner, in an interview, said that about 30 to 40 of his clients have paid about $2 million in back taxes over the past 11 years through the informal program. Some of those clients may have derived income from illegal activities--and thus technically don’t qualify for the program, he said. Nonetheless, they are still paying back taxes anonymously, as well as filing current returns under their real identities, Trattner said.

“The fact that they made voluntary disclosures would not bar prosecution for (illegal activities in) the old years,” Trattner said. “But for sympathy purposes, it is not likely that a judge would get terribly angry if they attempted to straighten out their act in good faith and come forward.”

Trattner called the congressional investigations a “kangaroo court charade” for implying that his arrangements were illegal, underhanded and the result of special favors.

Times staff writer William K. Knoedelseder Jr. contributed to this story.