Taxpayer Compliance Slips as Ire Replaces Fear of IRS

Nothing strikes fear in Americans so much as a knock on the door from a federal revenue agent. But panic was oddly absent when Internal Revenue Service Agent Louis Johnson III went to Laguna Beach last year to audit the 1992 tax return of Bruce Birkett, a financial-planning consultant who said he owed no taxes despite $40,000 in revenue.

With no hint of feeling intimidated, Birkett escorted Johnson into his unheated and dimly lighted garage, where he had placed steel chairs and a card table for the audit. By the time Johnson left four hours later, Birkett recalls, the agent was freezing.

“The thought had come to me that I would become like a fly buzzing around the IRS’ head,” Birkett said. “Not anything illegal, but obnoxious.”

That comes easily to Birkett. He is known around the IRS as “the mad faxer” because he has sent hundreds of faxes with demands to IRS officials, turning the tables on an agency that usually buries taxpayers under forms.

While most taxpayers would not spend the time or money that Birkett has invested, the IRS is growing concerned that its presence generally commands less respect and that its sometimes intimidating tactics have less effect than in years past.

“We are running the risk of undermining the credibility of the tax system and the government’s ability to do its job,” warned IRS Commissioner Margaret Milner Richardson in an interview last week. “This constant barrage has got to take its toll.

“Inevitably, it could translate into people trying to game the system, or feeling that they should not have to pay because the tax collector is so ineffectual that we can’t catch them. There is bound to be a long-term impact.”

The IRS is under political siege, hammered by an angry Congress that has cut its budget and forced it to curtail auditing. The agency’s critics say its failure to modernize its computer systems has fostered an image of a technologically inept bureaucracy. It is also under pressure to improve its “public service,” not to sharpen the hard-edged practices that nailed Al Capone.

Outside tax experts agree that the IRS’ image is not what it once was. Private tax accountants say their clients, acting on the belief that the agency is a paper tiger, are growing bolder in pressing the legal limits of the tax laws.

“Some of my clients take advantage of it,” said Bruce Hockman, a well-known Los Angeles tax attorney. “They think they can increase deductions. They come in with exaggerated notions of what they can take off. They talk about asset protection, which is a euphemism for fraud. It is generated by all this publicity.”

The IRS has always relied on a healthy dose of fear to ensure that Americans voluntarily comply with tax laws. An equally important aspect of the tax system is the public sense that the IRS operates fairly and protects their privacy. Now a number of signs suggest that the IRS is facing a long-term erosion on all three counts.

An internal 1996 IRS report showed that its employees engage in widespread snooping on taxpayer returns. Despite efforts to combat a culture of tax-return browsing, the agency has had to fire 23 employees and discipline 349 more in the last two years.

The report was not made public until Sen. John Glenn (D-Ohio) released it last week, saying such snooping has the “potential to threaten the very basis of our tax system.” The House and Senate are now rushing legislation through that would make electronic browsing a criminal act subject to a one-year prison sentence.

After putting up with such unprofessional conduct, as well as poor service and sometimes abusive behavior, many taxpayers are growing less timid about expressing their resentment.

“I do see an erosion in the respect for the IRS,” said Robert Tobias, president of the National Treasury Employees Union. “The folks I represent who are in the line of fire report a direct increase in hostility from taxpayers in direct proportion to the political attacks on the agency.”

Tax collectors are subject to more assaults than any other category of federal employee, including FBI agents, Tobias said. Even in little ways, IRS employees feel the brunt of taxpayer hostility, finding razor blades, threatening notes and dead cockroaches inside tax-return envelopes, Tobias said.

The number of Americans who don’t file any tax return now stands at 6 million and is increasing, according to the IRS. The compliance gap--the estimated amount of money that taxpayers owe but do not pay--stands at roughly $170 billion a year and is growing.

The Justice Department, alarmed at the growth of tax protest movements in which individuals refuse to file returns, launched a national campaign last year to prosecute the protesters. Criminal case referrals soared 79% from 1994 to 1996 and have jumped 18% more so far this year.

What scares federal officials is the potential for such protest to evolve from an extremist political ideology to a mainstream practice.

IRS officials complain that budget cuts have hobbled their ability to conduct audits. After a two-year hiring freeze, the agency is sharply cutting back its auditing. In some areas, including Los Angeles, the amount of tax revenue its audits raise is actually declining.

To be sure, the IRS still sometimes abuses its sweeping powers, such as its legal authority to seize homes, cars and personal property of those who owe back taxes without even having to tell them in advance that they are under audit. Such aggressive actions, known as jeopardy assessments, can be authorized by any of dozens of IRS district directors around the country.

The use of such extreme power, even infrequently, has historically created a public paranoia about the agency. People fear that the IRS can arbitrarily take away their homes, their bank accounts and even their clothes if they do not follow all the twists and turns of the labyrinthine U.S. tax code.

IRS critics say the agency is responsible for its unsavory image because it has long abused its power and badly mismanaged its operations.

“The American people do not trust the IRS,” said former IRS historian Shelley Davis. “It is more of a trust issue than a fear issue.”

Birkett, who lives atop a mountain overlooking the Pacific Ocean in Laguna Beach, neither fears nor trusts the IRS, and he has gone to extreme lengths to demonstrate it. His fax machine runs for hours at a time, inundating members of Congress, IRS Commissioner Richardson and local tax officials with anti-IRS invective.

IRS executives in Laguna Beach, buckling under the barrage, have agreed to change auditors in charge of Birkett’s case three times.

Birkett, who is gay and claims the IRS has a pattern of harassing gays, once took an IRS agent to small claims court, charging him with causing hundreds of dollars of damage to his ornate, solid-mahogany front door. The agent had pounded repeatedly on the door when Birkett refused to answer his doorbell.

Birkett quit pursuing the case only when the IRS got the Justice Department to intervene and transfer jurisdiction to U.S. District Court.

Beyond simply wasting IRS time, Birkett has scored some important points. After the IRS audited his 1992 return and slapped him with a big tax bill on his $40,000 in business revenue, Birkett filed a case in Tax Court and won a special administrative appeal, he said. Birkett has claimed substantial deductions for business use of his home, including a deduction for his kitchen because he often prepares meals for his clients. The IRS, while disputing these claims, has never charged Birkett with any criminal intent. Now it is auditing his 1993, 1994 and 1995 returns. Citing privacy concerns, agency officials declined to discuss his case.

Most taxpayers are not willing to spend this much effort fighting the tax agency. Hockman, the Los Angeles tax attorney, said he tries to warn his clients about the potential danger of messing around with the IRS.

“If the IRS pulls your card, the building is going to fall on you,” Hockman said he tells clients. “I strongly recommend you cross the T’s and dot the I’s and sleep at night. If you la-dee-da and they catch you for three or four years, the accumulated interest and penalties can bust you out. And that’s for screwing around.”

Hockman said of his clients: “A lot of them don’t listen, and they get into trouble. You can’t build a life on a porous platform.”