Oversight: Why the Watchdogs Seldom Bark
On March 12, 1924, Senator James Couzens, in a speech before the Senate, charged that widespread corruption and secret deal making in the federal tax agency were destroying its ability to collect taxes. Shortly thereafter, the Senate voted to create a special committee to undertake a thorough investigation of the Bureau of Internal Revenue. Couzens was named chairman.
The choice of Couzens to head the special committee was not surprising. Eight years earlier, the wealthy Republican industrialist had earned his spurs as a tough-minded reformer by cleaning up the notoriously corrupt Detroit Police Department after his appointment as its commissioner. He was then elected the city’s mayor and led a battle to build a municipal rail system that put pressure on the private transit companies to lower their unusually high fares. These successes led to his election to the U.S. Senate.1
By the time the committee’s investigators had completed their work two years after Couzens’s 1924 speech to the Senate, the reputations of the Revenue Bureau, the Revenue commissioner, and Treasury Secretary Andrew W. Mellon would be seriously tarnished.
From the very beginning of Couzens’s inquiry, Mellon and many of the other Republicans then running the federal government were worried about the political problems that might be created by the Michigan senator’s intense investigation of the tax agency. Their concern was heightened when they learned that one of Couzens’s first targets was William Boyce Thompson, a New York millionaire and leading fundraiser for the Republican National Committee. Thompson was targeted because of reports that he had been saved almost $500,000 in federal taxes when top officials in the bureau granted him a favorable tax ruling over the objections of the agency’s auditing and engineering experts. What made the ruling even worse was that it had been arranged even though Thompson had refused to provide the tax agency with any documents to support his claimed deductions.
On the morning of March 7, 1925, just one year after the special committee was created, Secretary Mellon was shocked to read a front-page story in the New York World—then one of the nation’s leading newspapers—about Thompson’s tawdry tax ruling. The story was based on evidence filed with the Senate by Senator Couzens.
Something had to be done to head off the investigation. That very afternoon, Internal Revenue Commissioner David H. Blair and one of his assistants personally went to the U.S. Senate and asked for the senator. When Couzens came off the Senate floor, Blair handed him a letter stating that he owed $10,861,131.50 in back taxes.2
The senator was furious. He said the tax charge was an act of retaliation triggered by his investigation of the improper administration of the tax laws. Because he had displayed the “temerity to dare criticize a Republican Administration or Republican Cabinet officer,” Couzens said, “they proposed immediately to penalize that senator to the extent of ten to eleven million dollars.”
Mellon’s crude attempt to intimidate Couzens failed.
The awkwardly named Select Committee on Investigation of the Bureau of Internal Revenue had held weeks of tumultuous hearings before the counterattack. The pace certainly did not slacken after it. With the help of a large staff of lawyers, accountants, and other experts, it heard scores of witnesses and examined thousands of pages of documents, memos, and reports concerning hundreds of questionable tax cases.
On January 7, 1926, almost two years after the investigation began, the special committee issued its final, severely critical report. Although the language was somewhat stilted, Senator Couzens and his staff flayed the bureau for the discriminatory way it was collecting federal income and estate taxes. A special target was the large mining, oil, and manufacturing companies and how they “were escaping taxation through tremendous deductions for depletion and amortization of war facilities.”
The report was on occasion astonishingly outspoken. It found, for example, that S. M. Greenidge, head of the bureau’s Engineering Division, “appears to be ill informed as to the work under his jurisdiction, incompetent and generally unsuited for any position in government service requiring the exercise of engineering ability and sound discretion.”
The report also said that there was a “growing tendency” among senior agency officials to set aside the technical findings of the working-level engineers and then to increase the deductions that corporations were allowed to claim. “In the valuation of oil properties there appears to be no systematic adherence to principle and a total absence of competent supervision.”
The committee concluded that it “has been the consistent policy of the Commissioner of Internal Revenue to exceed the authority delegated [to him by Congress] to compromise taxes.” The evidence gathered during the hearings, the committee said, showed that the bureau established taxes “by bargain rather than principle. The best and most persistent trader gets the lowest tax and gross discrimination is the inevitable result.”
The committee report then presented a number of case studies. It said the depletion allowance granted to the New England Lime Company “violates every provision of the law and regulations and every principle governing depletion allowance.”
The most sensitive matters uncovered during the Couzens investigation concerned Mellon himself, the Pittsburgh tycoon who had been treasury secretary since 1921 and would continue to hold the post until 1931. One revelation was a memo written to B. L. Wheeler, the agency’s chief of engineers, about a tax dispute concerning the Standard Steel Car Company of Butler, Pennsylvania. It suggested that the hidden hand of the secretary might be pulling the levers within the tax agency. “Secretary Mellon is interested in the above company and has requested that the information be compiled as quickly as possible,” the memo said.
Then there was the matter of the Gulf Oil Corporation. This was especially nettlesome because of Andrew Mellon’s direct conflict of interest in regard to Gulf. Since Mellon was treasury secretary, of course, the Revenue Bureau was under his overall command. And as the founder and principal owner of Gulf, Mellon stood to gain the most from favorable rulings given the company. The report charged that Gulf had received “exorbitant allowances which can not be justified upon any basis.” This was long before even the semipermeable “blind trusts” of today’s Washington.
The committee said that the bureau had granted excessive oil depletion allowances to the entire oil industry. “But the allowances to the Gulf Oil Corporation are so excessive as to constitute gross discrimination against even the oil industry.”
Mellon was imperturbable in the face of accusations that he secretly used his position as secretary to force the bureau to award him and his companies about $7 million in refunds. “The right hand knew not what the left hand did in the Treasury Department,” wrote Harvey O’Connor, Mellon’s biographer, in a summary statement of the secretary’s defense. “The refunds, as a matter of fact, were as much a surprise to him [Mellon], when brought to his attention, as the outside world. As for the mysterious notations which appeared on the files regarding so-called Mellon companies,” O’Connor continued, “they were blamed on over-zealous employees who deluded themselves that they could ingratiate themselves with their superior by favoring cases in which he had an interest.” So much for the charges of crass corruption.
It is almost always impossible to develop absolute proof about the motives of any person, let alone a gigantic bureaucracy, even in situations as brazen as the counterattack mounted against Couzens. But several historians have no doubt that Treasury Secretary Mellon and Commissioner David H. Blair were engaged in a blatant retaliatory act that they hoped would bully the senator into abandoning his investigation of the agency and the corrupt deals it was cutting.3
The conclusion that the tax charges against Couzens were hokum is based in part upon the senator’s reputation for absolute integrity and is strongly supported by the final decision of the Board of Tax Appeals.
The tax board did more than reject the government’s assertion that Couzens owed millions of dollars in back taxes. It found that the senator had been so responsible about his potential tax liabilities that he had substantially overestimated what he owed the government. The court ordered the Treasury to return to Couzens a grand total of $989,883.
By itself, this first known example of official IRS retaliation against someone who dared to criticize the way it was administering the national tax laws is disturbing. Over the years, however, many other critics both in and out of Congress have found themselves the target of an improper counterattack.
The numerous acts of retaliation by the IRS might be shrugged off as isolated aberrations of little general importance. But because they have often been aimed at individuals who have a constitutional obligation to supervise the agency or to examine its overall performance, the events have discouraged responsible criticism and have thus undermined one of the basic principles of the U.S. Constitution: the theory of checks and balances. To prevent government from becoming too powerful, the founding fathers divided it into three parts, each having the authority to question the actions of the others.
The attempt to force Couzens to back away from his investigation occurred a long time ago. But as recently as the early 1980s, the IRS appears to have brought tax charges against government officials or former officials whose lawful activities or decisions had irritated the agency.
A few years ago, for example, a White House staff official with supervisory authority over one aspect of the administration of the tax laws found himself in a policy dispute with the IRS. After a heated internal debate, the official won his point and the new policy was adopted despite the strong objections of the agency.
A few months later, President Reagan asked this particular official to take on a more important federal job outside the White House. Sometime after his nomination to this new post was announced, the official received an IRS notice informing him that he owed nearly $10,000 in back taxes.
The official immediately called his accountant and was advised that the IRS was wrong and that he did not owe any additional taxes. “But I was about to go into a confirmation hearing in the Senate and the last thing I wanted was a tax dispute that would become public if I took the agency to court. So I decided to cave in and give them the money,” the official said.
“There is no way you or I will ever be able to prove what triggered that tax charge, but I am absolutely certain that the claim against me was out-and-out harassment, somebody getting even.”
Shortly after this Reagan administration figure told me about his run-in with the IRS, I visited another man who had been a special assistant to an IRS commissioner in a previous administration. During the time that he had held this noncareer job, he too had occasionally tangled with the agency’s senior civil servants. He had made some enemies.
Upon leaving the agency, the man became a partner of an established law firm in a major southern city. Then, just a few years ago, the lawyer was asked to join the legal team defending an unpopular organization against which the IRS had brought tax charges.
“Shortly after taking the case, I received an official warning that I was under investigation by the IRS for serious criminal tax violations,” the lawyer said. “The whole business was baloney, an attempt to scare me off the case. But before the matter was dropped, the client and my law firm had to spend an awful lot of money preparing my defense. It was a truly shocking display of misused power.”
People who have held important positions rarely will publicly discuss incidents of apparent harassment. It must be remembered that, once a civil tax charge is challenged in court, all the details of the matter become a part of the court’s public record. And despite the false charges brought against Senator Couzens and a good number of other taxpayers, too many of us assume that where there is smoke there must be fire. Because the government has so much credibility, individuals like the Reagan administration official or the lawyer in the southern city rightfully fear that openly challenging the IRS may well damage their reputations and future earning power.
Very few congressmen doubt that the IRS will strike back in an illegal or improper way if sufficiently provoked. This fear does not rest on the Couzens case alone. In fact, there have been two additional fairly well documented situations in which information leaked by the IRS appears to have short-circuited the careers of senators who headed committees that had dared to criticize the agency.
SENATOR ED LONG GOES DOWN
On the evening of August 6, 1968, Joseph Rosapepe, public affairs director of the IRS, dialed the number of William Lambert, then considered one of the nation’s leading investigative reporters. Lambert was an associate editor of Life magazine.4
After Rosapepe got Lambert on the line, the public affairs officer handed the phone to Sheldon Cohen, who at that time was IRS commissioner. Lambert remembers that Cohen was ecstatic.
“He told me that at the commissioner’s meeting that morning everyone agreed that maybe the IRS should give me a ten-year pass on audits,” Lambert recalled. “But then the commissioner added that, because that would not be legal, he just wanted to offer me the IRS’s congratulations.”
Lambert said that the occasion of the congratulatory call from the commissioner was the defeat in a Democratic primary of a now-forgotten senator named Edward V. Long.
There were two reasons why Cohen called to congratulate Lambert on the political demise of Long. First, Long had been a noisy and difficult critic of the IRS and his defeat would remove a thorn from the side of the agency. Second, Long’s defeat was the result of a Life magazine article written by Lambert that linked the Missouri senator to Teamster President Jimmy Hoffa.
But several questions remain. Who arranged for the embarrassing information about Long’s connections with Hoffa to be given to Lambert? Why was it provided? What was the significance of Commissioner Cohen’s congratulatory call to the reporter on the day after Long’s defeat?
Long had first come to Washington on March 26, 1963, when the wealthy banker, lawyer, and Missouri lieutenant governor was appointed the state’s junior senator after the sudden death of the incumbent, Thomas Hennings. Shortly after coming to Washington, Long was named chairman of the Senate Judiciary Subcommittee on Administrative Practice and Procedure, which his predecessor had led. The broad mandate of the subcommittee allowed it to investigate almost any subject that caught its fancy. Long and the subcommittee’s chief counsel, Bernard Fensterwald, decided to hold hearings on how several federal enforcement agencies were improperly invading the privacy of American citizens.
Long’s hearings during the early and mid-1960s on the use of mail covers, wiretaps, bugs, and peeping devices by a handful of agencies, including the IRS, were given considerable coverage in the press. (One measure of Long’s political savvy is that J. Edgar Hoover’s FBI—still a formidable power in those pre-Watergate days—was never called before the subcommittee.) In February 1967, Long published The Intruders, a short book that mounted a free-swinging attack on government snooping. The disclosures that federal agents had been routinely ignoring government rules in their secret surveillance activities generated concern in the liberal community, including such stalwarts as Hubert H. Humphrey. Humphrey, by that time Lyndon Johnson’s vice president, wrote the foreword to Long’s book.
But a number of Washington officials were outraged by Long’s hearings, especially by the disclosure of the IRS’s widespread and improper use of secret wiretaps and bugs. Chief among the outraged were the IRS and Justice Department bureaucrats involved in the bugging.
Although most of the taps and bugs occurred during the Kennedy administration, when Robert Kennedy and Mortimer Caplin were in charge of tax enforcement, it fell upon Sheldon Cohen, the next commissioner, to defend the IRS. The attacks on the agency were sufficiently serious that even President Johnson was drawn into the discussion of how to handle the evidence of electronic eavesdropping presented during the Long hearings.
At 6:52 P.M. on November 30, 1965, Marvin Watson, then chief of the president’s White House staff, dictated a short note to Johnson about Cohen’s plan for pacifying Long.
Watson said that Cohen was proposing a two-step strategy. First, Cohen would visit Long and report the “actions taken by IRS to correct the things that have been done by the IRS in the past. Second, that you [Johnson] invite Senator Long to the White House to publicly thank him for drawing attention to IRS errors.”
Watson’s memo then asked the president whether he approved or disapproved the Cohen plan. Directly under Watson’s typed question to LBJ were places where the president could check either yes or no. Johnson checked the negative box and added a brief handwritten response for Watson to pass on to Cohen. “Tell him to discuss with [Treasury Secretary] Fowler and [Assistant Secretary] Davis but don’t pull us in—L.” The “L” in this case of course stood for Lyndon.
The pesky Long would be dealt with in a different way. One year after Cohen’s plan was put to LBJ, according to Life reporter Lambert, an official in the Justice Department who worked closely with the IRS provided him with a juicy lead about Long. The official, who Lambert said was an old friend, told the newsman he should investigate the connections between Long and Jimmy Hoffa. The bridge between the two men, the informant said, was Morris Shenker, a famous Missouri criminal lawyer with ties to the Teamsters Union.
“I went to St. Louis, talked with people, and did a lot of other reporting,” Lambert remembered. “I sort of camped out there for a while. Denny Walsh, an investigative reporter in St. Louis, gave me a lot of help. Then I came back to Washington and began pumping people I knew in the Justice Department.”
That’s when the Life reporter was given the final tip that quickly would lead to the publication of his story: Shenker had once made a $48,000 payment to Long.
Lambert said that, although this second bit of information also came from “someone in Justice,” the original source had to be the IRS. Lambert added that he was confident of the source because the agency and the Justice Department then were conducting a joint investigation of the ties of the Teamsters Union to organized crime and because the information about the size of the payment was so exact that it almost certainly had been drawn from a tax file. He emphasized, however, that he was not actually shown a copy of the tax return of either Long or Shenker. (The reporter said that there were later cases in which the IRS provided him information about politicians and he was actually shown their tax returns.)
Lambert’s carefully researched article ran in the May 26, 1967, issue of Life. There were three main charges. First, Senator Long was strongly influenced to take up the investigation of federal snooping by his friends in the Teamsters Union. Second, Senator Long’s hearings on the IRS’s improper wiretapping had blunted the government’s war against organized crime. Third, although the B word never appeared in the article, Lambert implied that the senator may have been bribed. “Senator Long, who says he has not been in active law practice since the mid-1950’s, was paid $48,000 for legal services by a close personal friend, the chief counsel for Jimmy Hoffa, during 1963 and 1964. These were the years immediately preceding the opening of the subcommittee hearings.”
Long denied any impropriety. He said that Morris Shenker was a distinguished Missouri criminal lawyer with many clients. He indicated that the $48,000 payment was nothing but a legal finder’s fee. There was never an allegation that the IRS had found any tax problem regarding the payment. The senator said that he found it strange that the only time innuendos had been raised about his business and legal associations was after he had exposed unlawful activities on the part of government agencies.
The Senate’s Select Committee on Standards and Conduct, always loath to criticize fellow senators, later investigated Lambert’s charges against Long and found no impropriety. But it is unlikely that the questions raised by the Life article will ever be conclusively decided one way or the other. Long, who is now deceased, was a wealthy country banker and lawyer. Would a $48,000 payment spread over two years be a credible bribe for a millionaire? Morris Shenker did indeed have intimate connections with the Teamsters Union. But he was also a leading criminal lawyer and a longtime figure in the state’s Democratic party. On the other hand, Long had been an open booster of Hoffa, whom he once described as a dynamic and fighting union president, a man he was proud to support.
Whatever the truth of the association among Long, Hoffa, and Shenker, the Life magazine article had a devastating effect on the Missouri senator’s career. Fifteen months after its publication, an ambitious young politician named Thomas Eagleton defeated Long in the 1968 Democratic primary and went on to win the general election. Long retired to his 1,600-acre farm.
Commissioner Cohen, who acknowledged congratulating Lambert on the day after Long’s primary defeat, denied that the IRS was the instrument of the senator’s destruction. His denial, however, was carefully qualified. “As far as I know, we didn’t leak the story,” he said. “But that doesn’t mean that someone in the organization wasn’t the leaker.”
SENATOR JOE MONTOYA IS KNOCKED OUT OF THE RING
In December 1972, the director of the IRS district in New Mexico began a search of the agency’s files for information about U.S. Senator Joseph M. Montoya, the amiable old-line Democrat who had begun his career as a state legislator almost four decades earlier.5
The unannounced IRS record search was launched shortly after Montoya had issued a press release announcing that he planned to hold a series of hearings on the agency’s performance. Montoya’s release had said that he was particularly interested in the quality of services the agency was providing and called upon any taxpayer with a legitimate grievance to contact his office. As was the case with Couzens in 1924 and Long in 1968, the Senate Finance Committee, the Senate committee with primary responsibility for keeping track of the agency’s performance, was not involved. Because Montoya was chairman of the appropriations subcommittee that passed on the IRS’s funding, however, the New Mexican senator had a legitimate jurisdictional claim for conducting the proposed oversight hearings.
At about the same time that Montoya announced his forthcoming hearings and the IRS office in New Mexico began rummaging through its old files on the senator, a secret memorandum began circulating in the IRS that purported to be a list of individuals who had been identified as having connections with “various tax protest groups.” The memo, a copy of which was obtained by the Senate Select Committee on Intelligence a few years later, said “some members of these groups are capable of violence against IRS personnel.” Among the names included in the list of potentially dangerous tax protestors was one “Montoya, Joseph (Sen), New Mexico.”
Adding the name of a senator who had just announced oversight hearings to the list of potentially dangerous tax protestors probably was considered a good little bureaucratic joke within the IRS. But the view of Montoya as an enemy appears to have been quite widespread. There is no reason to believe, for example, that IRS officials were pleased to learn that Montoya’s original invitation for citizen complaints had led more than thirteen hundred taxpayers to volunteer negative information about problems they had experienced with the agency.
To an agency that had largely escaped any regular congressional oversight, Montoya’s words about his investigation may well have sounded like an open declaration of war. And it was, in fact, one of the most difficult moments in the history of the IRS. The staff of the Montoya subcommittee had lined up a number of powerful witnesses who were prepared to present embarrassing evidence that the agency’s managers were inept. Other witnesses had been located who denounced the IRS’s quota system. Although this was bad enough, the first embarrassing stories about how the Nixon administration had misused the IRS were also just beginning to surface.
By the time the Montoya hearings got under way in Washington, the IRS investigation was rolling along. Agency investigators in New Mexico, for example, had already pulled copies of Montoya’s tax returns and had initiated a “source and application of funds” survey to see how the senator earned and spent his money.
Given Montoya’s twin roles—chairman of a Senate subcommittee that set the annual funding for the IRS and member of the Senate Watergate Committee—the IRS investigation of the senator raised three extremely sensitive and contradictory political problems. Had the IRS agents in New Mexico kicked off the Montoya investigation in an effort to block the hearings? Should Washington halt it? If the investigation was halted, might that decision later be interpreted as an improper political cave-in?
At one point, Donald C. Alexander, the new IRS commissioner, was reported as being delighted by the Montoya investigation. “Well, you’ve made my day,” Alexander was quoted as saying when first told about it. A few months later, however, Alexander ordered the Southwest regional commissioner to drop the investigation.
In October 1975, Bob Woodward, the Washington Post’s leading investigative reporter, published a front-page story in which several officials of the IRS accused Alexander of halting the highly sensitive investigation. The article quoted agency officials as saying they believed Alexander had halted the audit of Montoya because of the senator’s influence over the IRS. Because of high sensitivity during the late Nixon years to all questions of secret deals, Alexander’s decision was later examined by both the Treasury and the Justice departments. The verdict: Alexander had violated no laws, but his handling of the case left much to be desired.
Unanswered, however, was the more interesting and complicated question that once again illustrates the unusual power of tax information and those who control it. What were the motives of the IRS officials who leaked the story about Alexander’s decision to the Washington Post? Who actually was the target?
Woodward, in an interview, said he believes “the original tip was innocent. I do not recall picking up an indication that those who talked to me were out to get either Alexander or Montoya. I think the prime motive was that some people in the system were upset by a violation of proper procedure.”
Alexander himself believes a key underlying motive was the ethnic hostility some IRS supervisors in the Southwest felt toward Montoya, a leading Hispanic politician.
Yet another possible motive was related to Commissioner Alexander’s contentious dispute with the criminal investigators of the IRS who opposed his enforcement policies. During the period when the Montoya case was being pursued, Alexander had embarked on an intense effort to curb the investigative abuses of the Criminal Investigation Division. These efforts had so enraged the division that some agents had begun trying to force Alexander to resign by anonymously passing embarrassing information about the IRS to a small cadre of Washington reporters.
Montoya, however, believed that he, and not Alexander, was the central target of the IRS officials who had talked to Woodward. The senator said that they were upset because of his many hearings on “the way in which IRS agents and employees handle their job.”
In a speech on the Senate floor on November 20, 1975, Montoya insisted that his hearings on the IRS were fair. “We sincerely tried to listen to all sides and … our goal was to improve taxpayer services, protect taxpayer rights and also to protect necessary and sensible procedures of the IRS. I do not consider myself to be an enemy of the IRS and I do not believe that the subcommittee has given any IRS employee reason to be fearful of our power.”
But some IRS employees were fearful, he said, and it appeared that they had decided to strike. “The matter of possible political misuse of the IRS is serious. The matter of ‘leaking’ IRS tax information by employees of our tax system is serious. It is not only one Senator, or one Senate subcommittee or one individual IRS commissioner which is under attack. It is our tax system, and the confidence of the public which is most seriously affected by unsupported allegations and political misuse of tax information.”
Although Woodward’s original story had noted that there was no evidence that Montoya had illegally evaded taxes or was aware of or sought special treatment from the IRS, the mere existence of even a preliminary tax investigation was politically damaging. One year later, Harrison H. (Jack) Schmitt, a conservative Republican and former astronaut, unseated Montoya after twelve years in the U.S. Senate.
THE HARVEST OF FEAR, THE POLITICS OF TAX COLLECTION
The fear of retaliation has had a pernicious effect: Members of Congress have been discouraged from supporting legislative efforts to improve the administration of tax laws that, for one reason or another, are opposed by the IRS.
Senator David Pryor is an Arkansas Democrat with more than a touch of the old-time populist. In 1988, Pryor astonished most Washington insiders by winning approval of the Taxpayers’ Bill of Rights, true tax-reform legislation that the IRS opposed as unnecessary. At a breakfast held in the U.S. Capitol to celebrate his unexpected success, Pryor acknowledged that at the beginning of his campaign it had been very hard to find members of Congress who would cosponsor his bill. “I saw real fear of the possible IRS retaliation among many members of the Senate and the House of Representatives,” he explained.6
Paradoxically, however, while Congress is extremely cautious about altering the basic powers of the IRS, it has become more and more enthusiastic about changing the tax code. Since 1976, for example, Congress has passed 138 bills modifying the federal tax laws. The increasing congressional interest in adding new wrinkles to the tax law and the effect this interest has on the House and Senate tax committees require examination.
The classic explanation for changing the tax laws is that alterations are made necessary by shifts in the financing of public programs. The public finance theory treats taxes as a necessary evil, increased only to finance essential government programs such as national defense. Because government’s greatest needs arise in times of war, and because the most tumultuous period of tax change has occurred in the last decade, when the United States was at peace, the public finance theory does not seem to work.
Richard L. Doernberg and Fred S. McChesney, both law professors at Emory University in Atlanta, have developed an alternative theory. They contend that individual members of Congress, especially those assigned to the House Ways and Means Committee and the Senate Finance Committee, sell tax changes to heavily financed special interest groups.
“If tax legislation is a contracting process,” Doernberg asked in a recent research paper, “how do legislators get compensated for obtaining favorable legislation or avoiding unfavorable legislation?”* In answering this question, Doernberg noted that in one recent year campaign contributions from political action committees (PACs) to House tax committee members were 31 percent higher than the average received by all House members. Expressed in a different way, members of the tax-writing committees, who made up only 10 percent of Congress in a recent year, garnered about 25 percent of PAC contributions.
One more factor must be considered. The political action committees that give the members of the House and Senate tax committees so much money were mostly established by small groups with narrowly focused interests. Wall Street brokers have PACs. Chicago commodity dealers have PACs. Groups of corporations engaged in the same business have PACs. Doctors and lawyers have PACs. All these PACs share one general interest: They are each seeking to make specific changes in the federal tax law that either give them new tax benefits or protect their existing ones.
One very large and amorphous group of Americans, however, has no PAC to support the political ambitions of members of Congress: the millions and millions of taxpayers who, in one way or another, have been abused by the IRS.
Thus, the dynamic forces working against genuine oversight are powerful. On the one hand, it is essential to Congress as a whole that nothing interfere with the money machine. On the other hand, because the organized PACs have made changes in the tax code so lucrative, the House Ways and Means Committee and the Senate Finance Committee must hold constant hearings to negotiate yet another tax law that inevitably is described as an important new reform.
One other set of forces pushing Congress to adopt more and more complicated tax laws grows from the current rules guiding the budget and tax process. The current budget rules require that any new federal expenditure be balanced with a budget saving. The current tax rules require the indexing of the tax code, a procedure that has had the effect of denying Congress an almost invisible annual increase in federal revenues. The result: Because there is very little room to maneuver, Congress increasingly looks to intricate tax laws to meet program demands that cannot be denied.
It is thus not at all surprising that Representative Dan Rostenkowski and Senator Lloyd Bentsen find little time and have precious little interest in conducting detailed oversight of the actual operations of the IRS. It should also surprise no one that Rostenkowski and most of the other members of the Ways and Means Committee initially opposed Senator Pryor’s Taxpayers’ Bill of Rights to provide modest legal protections to middle-class taxpayers. (The tax establishment’s strong opposition to the bill ultimately collapsed after Pryor conducted an almost unprecedented series of hearings featuring a variety of IRS horror stories and at the same time somewhat scaled back his proposals for giving the taxpayer better protection against arbitrary IRS actions.) Finally, it is also completely logical that Rostenkowski and the staff of his committee would lead an active behind-the-scenes campaign to head off an investigation by the House Government Operations Committee of corruption problems in the IRS.
The net effect of these three dynamic forces—the fear of retaliation, the concern about upsetting the money machine, and the demands for special services by the well-financed PACs—is clear. The single most powerful agency in the federal government has been mostly free of tough, informed congressional oversight. Although the two tax committees have for a few brief periods been jarred into undertaking an essential part of their constitutionally mandated mission, most of the time they have not.
“Looking back, I think we should have spent a lot more time investigating the operations of the IRS such as the actual processing of returns,” said William A. Kirk, now a Washington lawyer in private practice. “But there are always a lot of competing concerns.”
From 1982 through 1985, Kirk was the staff director of the congressional subcommittee that in theory had the single most pressing responsibility to keep track of the IRS. Kirk ran the Oversight Subcommittee of the House Ways and Means Committee.
“The Ways and Means Committee, our parent, always seemed to end up concentrating on what were regarded as the ‘big issues’ like the trade bill, catastrophic health care, or tax reform. It’s not easy to get members to sit down and look at the impact of computerization on individual taxpayers. But if you had a hearing on racial discrimination in tax-exempt schools, or something like that, they’d be hot to trot.”
Kirk said that the subcommittee’s semipermanent ties to the IRS also contributed to the failure of oversight. “Almost all of the time, we relied on information given to us by the IRS, hardly an unbiased source. Then, as the months go by, you get used to working with the agency’s congressional liaison people and you begin to develop institutional and personal ties with them.”
Congress is not alone in its routine failure to scrutinize and correct the conduct of this powerful agency. The private institutions of oversight also tend to avert their eyes from the IRS.
For example, the major newspapers of the nation assign reporters to cover the Justice Department and the FBI on a full-time basis, but routinely ignore the massive and occasionally abusive process of tax collection. The handful of Washington reporters with some knowledge of the agency are required to focus almost all of their reporting time on the writing of tax laws by Congress, rather than on how these laws actually are administered. If The New York Times tried to cover the functioning of the criminal justice system in New York City by simply analyzing the changes that the state legislature made in the New York criminal code, it would be considered derelict. If The New York Times did not assign reporters to examine police department procedures and crime statistics and to investigate the occasional allegations of police brutality and corruption, it would be viewed as seriously failing the citizens of New York. But that is precisely what all the major papers, television networks, and magazines do when it comes to the IRS. There are thousands of stories about all the endless negotiations leading to the adoption of a new tax law, especially when self-serving congressmen give the law a “reform” label, but virtually no interest in the day-to-day operation of the tax collectors.
Even when a member of Congress introduces legislation aimed at curbing occasional IRS abuses, press treatment often is favorable to the agency. In 1985, Representative Andrew Jacobs, Jr., an Indiana Democrat, introduced an amendment to a pending tax bill. The amendment would have allowed federal judges to hold some IRS employees personally liable for the attorney’s fees and court costs of taxpayers who have proven that agency auditors had acted in an “arbitrary and capricious” manner.
On February 11, 1986, Anne Swardson, the Washington Post reporter then covering taxes, wrote a story that prominently warned readers that the passage of Jacobs’s amendment could result “in fewer audits, fewer court cases and less federal revenue.” Swardson did not quote Jacobs until the eighth paragraph as asserting that his amendment was designed to protect taxpayers against unreasonable harassment. The Post’s headline accurately reflected the unbalanced quality of Swardson’s story: “Tax Provision Seen Crippling IRS.” Of course, the amendment was killed.
The very definite pro-IRS bias in Swardson’s story is not at all unusual, according to several recent surveys of newspaper content conducted by the agency’s Research Division. In 1985, the researchers found that the messages implicit in 70 percent of the articles they examined were either positive or neutral. Examples of headlines on typical positive stories were “Help Is Available for Late Filers” and “Tax Reform Will Produce a Fairer and Simpler System.” An example of a neutral story summarized IRS rules for how to file a tax return. Stories classified as negative cited IRS statistics showing that agency performance in processing tax refunds had worsened since the previous year.
Very occasionally, an aggressive reporter provides the exception that makes the rule. From 1967 to 1969, a smart young Reader’s Digest reporter named John Barron wrote a series of extremely tough articles about the IRS. The first one, for example, charged that in the name of collecting taxes the “IRS has bullied, degraded and crushed countless citizens—while unaccountably favoring others.” Barron reported about how the IRS harassed waitresses, salesmen, and even a nursing mother for taxes they did not owe while at the same time it was writing off $26 million in back taxes owed by a major New York City real-estate company that had received $67 million in government-insured loans.
The August 1967 Digest article infuriated the IRS and, interestingly enough, the agency’s friends in Congress. On August 10, the House subcommittee in charge of the IRS’s appropriations held a hearing on “charges of abuses by Internal Revenue Service Agents.” The hearing was revealing. Subcommittee chairman Tom Steed did not call the dozen individuals whose cases had been cited by Barron. Neither did Steed call the Reader’s Digest. Instead, the only witness was Sheldon Cohen, then the commissioner.
The hearing was a total whitewash. One of the first matters inserted in the transcript was a seventeen-page agency press release. “An article in the August issue of the Reader’s Digest, entitled ‘Tyranny in the IRS,’ contains too many half truths, distortions, and unsubstantiated conclusions to go unanswered,” the release began. At the same time, however, the IRS added that “the misrepresentations in the article are too numerous to be refuted in detail.”
(John Barron said in an interview that the Digest immediately released a rebuttal denouncing the IRS’s seventeen-page press release and standing behind all the charges in his article. He said that the magazine’s lawyers, while preparing this rebuttal, were surprised to discover that the press release attacking his report contained a quote from a federal judge that the agency had fabricated. In addition to the rebuttal, the Digest published a formal statement in its November 1967 issue in which the editors again stated their confidence in the factual accuracy and balance of Barron’s report.)
That the IRS was angry is not surprising. But that one of the most important oversight bodies of Congress would blindly accept the IRS version of the truth without hearing from the taxpayers who believed they had been unfairly treated is a sad commentary on the generally defensive attitude of Congress toward the agency.
Steed’s concern for the IRS went beyond giving Cohen a bully pulpit to denounce the magazine. The Oklahoma Democrat said that almost all IRS agents were honest, dedicated individuals whose major desire was to serve the public. Steed added that the article was filled with unjust “innuendo and propaganda.” Finally, he asked Cohen whether either Reader’s Digest or Barron had tax problems that “might be grounds to question their motives”?
Cohen’s answer was elegantly devious. “As the chairman knows, the Revenue Code forbids us to discuss the tax affairs of any individual or corporation and therefore whatever knowledge we might have of the tax affairs of these people is not relevant. I won’t say there is or I won’t say there isn’t a motive, but sexy stories sell magazines or newspapers.”
The strong IRS bias displayed by Representative Steed and his subcommittee is widespread in the academic community, where writing law review articles on the subtle nuances of tax policy or on the intricacies of tax law is considered much more rewarding than efforts to undertake tough-minded research about how the largest U.S. enforcement agency actually functions.
THE COURTS LOOK THE OTHER WAY
Over and over again, federal judges have found ways either to ignore or actually to legitimize the growing reach of the tax collectors. As in the case of Congress, this pattern of judicial tenderness is partly the product of the natural sympathy that those in power always feel toward the tax collectors. But it is reinforced by a series of laws that give the IRS more protection from citizen suits than any other federal agency has.
Montie S. Day is a large, agile man whose six-foot-four-inch frame filled up the small Washington conference room where we first met. Day was brought up poor. His father was an impoverished lumberjack in the Sierra Nevada mountains of California, and there was a period when young Day and his family actually lived in a tent. After graduating from high school, Day worked his way through college with the help of a football scholarship, playing tackle and defensive end for Fresno State. After a brief stint as a professional football player with the Chicago Bears and the Detroit Lions in the mid-1960s, he became an IRS agent, then a special assistant U.S. attorney in San Francisco, and now a tax lawyer in Oakland, California.
Partly because of his hands-on experience in the IRS and the Justice Department and partly, I think, because of the inborn aggressive quality that one would expect of a serious football player, Day in recent years has become a leading practitioner in a specialized area of the law: representing citizen taxpayers who have been abused by the sometimes arbitrary IRS.
From his years of experience battling with the IRS, however, the California lawyer argues that the game is not being played on a level field. The field has been strongly tilted against the taxpayers, he says, by the combined impact of a well-established principle of common law and three congressional statutes.
The ancient common law doctrine of sovereign immunity holds that the government cannot be sued without the government’s consent. But Congress, at least as far back as 1911, recognized that there were situations in which citizens should be allowed to sue the government. The result: the Federal Tort Claims Act. This law defines specific circumstances in which the doctrine of sovereign immunity does not apply. In its wisdom, however, Congress decided that the IRS should not be among these exceptions. A provision of the Tort Claims Act specifically states that the waiver to the doctrine does not apply to “any claim arising in respect of the assessment or collection of any tax or custom duty, or the detention of any goods or merchandise by any officer of customs or excise or any other law enforcement officer.”
The result: Until 1988, a citizen could not sue the IRS for damages directly connected to the assessment or collection of taxes, regardless of the wrong or injury. David Pryor’s Taxpayers’ Bill of Rights opened up a hole in this general prohibition. The new law allows taxpayers to sue for damages resulting from the action of an IRS employee who recklessly or intentionally disregards the law or regulations relating to the collection of taxes. Relief is available only for acts committed after November 10, 1988. Damages are limited to the lesser of $100,000 or the actual and direct economic damages and the cost of the suit. The award is further limited by damages that could have been mitigated by the taxpayer. Before bringing suit, the taxpayer must exhaust all administrative remedies. To prevent what the IRS feared would be a deluge of claims, the law was amended to allow the agency to seek damages against taxpayers who use it in a frivolous manner.
A second key law is the Anti-Injunction Act. Originally, this law provided that the federal courts could not accept citizen suits requesting that the IRS be enjoined from assessing and collecting taxes. Over the 125 years this law has been on the books, the courts have ruled that the prohibition did not apply in only a handful of cases. In general, however, the courts have supported the Anti-Injunction Act, even extending it to the investigative actions and processes that the IRS may have taken before actually assessing any taxes. It almost goes without saying that bringing any suit normally requires the paid services of a lawyer.
Finally, the Declaratory Relief Act establishes the general right of the federal courts to provide relief to citizen complainants against the government “except with respect to Federal taxes.”
Except for the limited situations spelled out by the Taxpayers’ Bill of Rights, a strong majority in Congress and most federal courts have long agreed with the theory that the waiver of sovereign immunity or a modification of the anti-injunction and declaratory relief acts would cripple the ability of the agency to collect taxes.
Day disputes this. He notes that the FBI, the Secret Service, and other law enforcement agencies made the same argument but that their operations were not crippled when citizens were provided additional remedies against abuses. “I submit that making the IRS more accountable for damages resulting from abuses of its power will make the agency more likely to operate in a lawful fashion,” the lawyer said.
Day described two hypothetical cases to illustrate his claim. “Assume you are under audit and somehow you learn that the revenue agent has decided the best way to investigate you is break a window of your office, climb through it, and examine your correspondence,” he explained.
“You come to my office for advice, wanting the court to rule that the IRS agent can’t conduct his audit in this way. We consider filing a suit for declaratory relief, but then we remember that the court does not have the authority to issue such a declaration of rights in tax matters because of that exception in the declaratory relief act.
“Then we think about requesting a court order to enjoin the agent from conducting his tax investigation by breaking into your office. This approach, of course, cannot be followed because the court is forbidden to even consider such requests under the anti-injunction act.
“In my hypothetical, after the agent has smashed the window and climbed into the office to examine your records, the IRS decides that the evidence it obtains shows there is no tax case and it sends out what is called a ‘no change letter.’ You now would like to sue the agency in an effort to require it to pay for the repair of the broken window in your office. I sue for damages. Assuming the agent only examined your return after breaking in your office, the government would argue and the judge would be compelled to agree that under the doctrine of sovereign immunity the suit must be dismissed for lack of jurisdiction.”
Day’s second hypothetical is much simpler. “Assume you are shot by an on-duty federal agent who is drunk. If the agent works for the FBI, it is almost certain that the court will order the government to pay your medical expenses because the agent has been negligent. But if the agent is on the payroll of the IRS, the chances of recovering your expenses are almost nil.” (Some experts contend that, because of a fairly recent Supreme Court decision, Bivens v. Six Unknown Named Agents of the Federal Bureau of Narcotics, Day’s analysis may be a trifle pessimistic.)
The California lawyer said he understands that the two cases may sound ridiculous. “But in reality these powerful bars to liability are very real and have served to shield the IRS from liability and accountability for its misuse of power. As a former IRS agent I know that the IRS needs unusual legal powers to collect taxes. While the IRS must have power to assess and collect taxes, such power must be used in a responsible manner. Power, without accountability, lends itself to abuse. To control frivolous legal action, the courts have the power to require the citizen or lawyer who brings [such a case] to pay the government’s costs and attorney’s fees. But it is just plain wrong, and I think harmful to the IRS, the tax system, and our government to deny citizens access to the courts.”
One other provision of law has developed into an important protective device for the IRS. This is Section 6103 of the Internal Revenue Code, which was approved by Congress in 1976, shortly after the disclosure of the Watergate abuses of the Nixon White House. The important goal of the legislation was to establish the principle that tax information should be kept confidential and only used by the government for legitimate purposes. Before the passage of the provision, for example, a federal prosecutor could obtain an individual’s tax records merely by informally asking the IRS to send them over. Since 1976, an assistant U.S. attorney conducting a criminal investigation who wants a tax return must obtain the permission of the attorney general, deputy attorney general, or assistant attorney general and then obtain a court order authorizing the transaction.
The protection of individual tax records from casual snooping was a major achievement of the 1976 law. But in the process of curbing the improper use of information, Congress may have inadvertently made it harder for outsiders to assure themselves that the agency is functioning properly. Tax lawyers like Montie Day charge, for example, that the IRS sometimes marshals Section 6103 to block the legitimate inquiries of citizens who need information to help them prove that their rights have been abused by the agency.
A second unintended effect of the privacy law has been to undermine the ability of the House of Representatives and the Senate to examine the performance of the IRS. One part of Section 6103 establishes that the House Ways and Means Committee and the Senate Finance Committee are the only two committees routinely authorized to see tax returns. The law further provides, however, that with the passage of a resolution by either the House or the Senate, other congressional committees may also gain access to tax records in the course of a formal investigation.
During the spring of 1988, the House Government Operations Subcommittee with the legal mandate to conduct oversight investigation of the IRS obtained information about what appeared to be widespread corruption in the IRS. The subcommittee, headed by Representative Doug Barnard, Jr., began a preliminary inquiry. To fully resolve the merits of the allegations, however, the subcommittee’s staff required access to several tax returns. The subcommittee drafted the resolution required by Section 6103.
It was at this point that Ronald A. Pearlman, senior congressional staff official on tax matters, stepped into the picture. Pearlman was chief of staff of the Democratic-controlled Joint Tax Committee and, curiously enough, a former assistant secretary of the treasury in the Reagan administration. For the last few months of 1988, Pearlman worked to prevent Congress from even considering the proposed resolution, approval of which would have led to the first thorough investigation of IRS corruption in more than thirty-five years. The question of why the staff director of the Joint Tax Committee, ruled by Democrat Rostenkowski and Democrat Bentsen, would work to undermine an investigation of corruption in the Republican-ruled IRS is a puzzle.
Part of the answer, it seems certain, was a turf war between the tax committees, which have specific responsibility for tax matters, and the House Government Operations Committee and its subcommittees, which have general responsibility to ensure the efficiency of all federal agencies, including the IRS. But Peter Barash, who has been the staff director of the House Government Operations Subcommittee for fifteen years, is certain that another force may be at work. “Although I have no way of proving it, I am convinced that the resistance of Ron Pearlman and the House Ways and Means Committee was partly because of IRS pressure on them,” Barash observed. It should be remembered that except for a brief period immediately following the disclosure of the Watergate abuses in the mid-1970s, the Joint Tax Committee and the Ways and Means Committee have strenuously resisted any serious investigation of the IRS.
The forces working against meaningful oversight are considerable. Citizens are discouraged from seeking legal redress in the courts by an elaborate set of barriers established by Congress. Lawyers are blocked from obtaining information they need to initiate suits challenging genuine IRS abuses as a result of the misapplication of a well-intentioned privacy law. A congressional committee empowered to investigate the IRS is partially blocked from investigating serious allegations of IRS corruption by a tortured application of the same law. The IRS has repeatedly initiated audits, leaked information, or otherwise harassed individual citizens, both in and out of government, who raised valid questions about its performance.
Like all bureaucracies, public and private, the IRS wages a continuous war against all efforts to make it accountable. Over the years, this war against oversight has taken many forms. When Congress passed the Freedom of Information Act in 1966, establishing the broad principle that most government documents are public property, the IRS mounted a determined and continuing campaign to subvert the goal of the law. When in the early seventies Congress sought to increase the role of the General Accounting Office in measuring the performance of agencies of the executive branch, the IRS resisted. When Congress required most of these agencies to establish an independent inspector general, the IRS mounted a successful effort to be exempt from this mandate. When a citizens’ taxpayer group in 1974 fought to require the IRS to make its private tax rulings public, the IRS led the battle to maintain a system that gave special advantage to the wealthiest taxpayers with the highest-paid lawyers. When Congress in 1988 approved a law imposing limited new restrictions on computer matching by the federal government, the IRS was exempted from its restrictions.
An unfortunate symmetry emerges when the IRS’s active dislike of oversight is compared with Congress’s aversion to investigating the workings of the IRS.
But there are exceptions to this dismal litany, occasions when individual citizens have overcome the resistance of the IRS and insisted upon their rights to examine the workings of their government. I have in several places in this book cited the studies of Susan B. Long, currently a professor of quantitative analysis at Syracuse University. Sue and her husband, Philip, are the kind of citizens who stand up to official bullying.
In November 1969, a small family business run by Philip Long in Bellevue, Washington, was audited by the IRS. Two weeks later, at an informal conference, the IRS informed him that he owed a substantial amount of back taxes.
Long explained to the IRS supervisor that he had an excellent accountant, but that he would be delighted to take the matter to court and abide by whatever a jury decided. The supervisor was not amused by what he viewed as Long’s impertinence.
“‘Do you know what a jeopardy assessment is?’” Long recalls the supervisor asking. “I replied that I had no idea. He said, ‘Well, you just better find out.’” A jeopardy assessment, as I’ve discussed, is an emergency legal procedure that allows the IRS to seize swiftly the assets of taxpayers it believes may flee the United States. Because almost all of Long’s wealth was tied up in real estate, the possibility of a hasty retreat was impossible and the IRS threat spiteful.
Long called in an outside expert, a certified public accountant and former IRS employee who at the time was working for one of the Big Eight accounting firms. “He spent a day going over my accounts and concluded that the IRS was dead wrong,” Long continued.
Four months after the initial audit, Long received a notice from the IRS alleging that he owed the government $33,000 in back taxes. Philip and Sue Long felt seriously wronged. Two days after receiving the notice, they flew to Washington, D.C., and requested an interview with the commissioner. After their request was refused, the Longs placed the first of a series of eleven advertisements in the Washington Post. The ads explained their plight and requested information from other taxpayers who felt that the IRS had acted in an unconstitutional or unethical manner.
Long also appealed the thirty-three charges that the IRS had brought against him. After the expenditure of tens of thousands of dollars in legal fees to fight the allegations through the IRS’s administrative procedures, the Tax Court, and finally the federal court of appeals, every one of the IRS’s thirty-three charges against the Longs was dropped. Phil Long was not a tax cheat.
In addition to a great deal of money, the ultimately successful appeals process required many years. As it was proceeding, and with the help of both frustrated taxpayers and IRS employees, the Longs launched an aggressive campaign to collect information about how this theoretically public agency functioned. The IRS was not happy. One of the couple’s first requests was for the IRS manual, the massive printed compilation describing the agency’s policies and procedures. Under the Freedom of Information Act, each agency was explicitly required to make public “administrative staff manuals and instructions to staff that affect a member of the public.”
“Despite the act’s clear disclosure requirement, we were told the IRS had no in-house handbooks or manuals,” Sue Long said. “Inquiries at the IRS’s national office produced the same response. In short, we were greeted with falsehoods. Even our congressman was unable to obtain them from the IRS, just the name of an index to IRS materials. When we tried to visit the IRS reading room, which the law requires be opened to the public, we were informed that the reading room had been closed and the indexes destroyed. Senior IRS officials told us to drop our foolish efforts. An attorney in the IRS’s general counsel’s office warned that the agency had six hundred lawyers, by which we assumed he meant the agency had sufficient legal power to hound us for the rest of our lives. Even a request for blank IRS forms was refused.”
In June 1971, the Longs filed their first suit under the Freedom of Information Act in the federal district court in Seattle. They asked the court to order the IRS to provide them with the manuals, statistics, and forms they had requested in twenty-three separate written requests. On August 9, 1972, the court ruled that the IRS had unlawfully withheld the manuals and the audit statistics from the Longs. The first skirmish in what has become a life-long battle had been won.
When this battle began in 1969 Sue Long was an undergraduate. Now, twenty years later, she has earned a Ph.D. in sociology, with a dual major in quantitative methodology and criminology. More important, she and Philip have continued their quest despite the persistent resistance of the IRS. At the present time, the couple have filed a total of thirteen suits against the IRS under the information act, of which eleven have been completed successfully and two are still pending.
Despite the IRS’s continued resistance, Sue Long so far has obtained over 1.3 million pages of statistical data, hundreds of thousands of computer tape records, and dozens of reports and analyses. Today, her carefully documented studies of the IRS have earned her a reputation as one of the agency’s best-informed and most thoughtful students.
For most of this campaign, the Longs have been without allies. But in January 1987 a unique event occurred in the history of the U.S. Congress: For the first time since the Senate Finance Committee was formed the senator appointed to head its IRS Oversight Subcommittee actually believed the problems of the IRS should be aired in public hearings.
In 1987 and 1988, Senator David Pryor, a former Arkansas governor, acted on his beliefs by holding three sets of hearings during which victims of IRS excesses were allowed to tell their stories. Also called were IRS employees who offered testimony about the harmful impact of IRS production quotas. Finally, the subcommittee required IRS Commissioner Lawrence B. Gibbs and other senior executives to explain to the public various administrative problems, including the agency’s disastrous handling of the new W4 form for reporting estimated income.
While the hearings were a significant first for the Senate Finance Committee, the subcommittee was unable to investigate many of the shortcomings that existed. This was because under long-standing Finance Committee tradition its subcommittees are not allotted any funds for staffing. This tradition meant that the subcommittee’s expenses, mostly the salary of its single staff member, Jeff Trinca, had to be paid out of the budget given to Senator Pryor for representing his Arkansas constituents. Trinca is an intelligent, hardworking, and insightful lawyer. Despite his considerable abilities and the full backing of Senator Pryor, however, the idea that a single staff person can keep track of an agency with more than 100,000 employees is inherently silly.
Pryor is a moderate Democrat of the new South. But he has an old-fashioned populist streak that these days is very much out of style in Washington, especially among members of the congressional tax committees. During the hearings, Pryor decided that the witnesses were describing problems that required a remedy in the law. Working with Trinca, Pryor began drafting what he called the Taxpayers’ Bill of Rights.
At first there was very little support, partly, as explained earlier, because many members of Congress genuinely fear the IRS. Slowly, however, as the scope and form of the provisions in the bill were modified, Pryor began to pick up support. Of course the IRS and its allies, most importantly the chairmen of the House Ways and Means and the Senate Finance committees, argued that the proposal would pose a serious threat to the ability of the IRS to collect taxes. As Congress came close to adjournment, however, Senator Lloyd Bentsen of Texas, chairman of the Finance Committee, changed his position. Almost miraculously, in the final hours of the hundredth Congress, the substantially modified Taxpayers’ Bill of Rights became law.
Senator Pryor is rightfully proud that Congress passed his bill, noting that it marked the only occasion in the 124-year history of the IRS that the House and Senate have approved a piece of tax legislation “aimed solely at helping the little guy in the tax collection process. For many decades we have continued to strengthen the hand of the IRS with more power and more personnel. This is the first time we have done something to strengthen the hand of the taxpayer in dealing with the IRS,” he told me in an interview.
While the new law has important provisions, its actual impact on an agency with the power of the IRS is quite limited. For example, the statute requires the IRS to inform a taxpayer of his rights and obligations prior to beginning an audit or other proceeding and prohibits the IRS from basing pay raises or promotions on the collection statistics of individual revenue officers.
Another section that could prove important is that for the first time ever the Treasury Department inspector general was granted the right to investigate the IRS. During the law’s consideration by Congress, of course, the agency strenuously objected to this change.
A third potentially important provision of the Taxpayers’ Bill of Rights would allow taxpayers to recover the fees they pay to accountants and attorneys during the administrative proceedings that establish whether the IRS has brought an unreasonable claim. Under past law, taxpayers could only recover such fees incurred in court.
The fourth key provision gives taxpayers the right to sue the IRS if the agency recklessly or intentionally disregarded the Internal Revenue Code in the collection of taxes. The damages would be capped at $100,000. In the past, as explained by California lawyer Montie Day, such suits were almost impossible to win.
Any improvement, however modest, in the right to challenge an agency as large and powerful as the IRS must be regarded as significant. But a handful of suits brought by a tiny fraction of taxpayers who each year are improperly treated by the IRS will not work miracles. To effectively help the agency collect the necessary taxes in a fair and evenhanded manner will require drastic changes in the priorities of the IRS itself and in the attitudes and actions of the committees of Congress, the supervising officials in the White House and Treasury, and the editors and reporters of the great national newspapers. The IRS’s mission is too important, its impact too far-reaching, to leave in the hands of a few senior bureaucrats. The watchdogs no longer can afford to remain silent.
*Doernberg prepared his paper in response to an IRS invitation to be the keynote speaker at the agency’s sixth annual tax research conference on November 17, 1988. His title: The Market for Tax Reform: Public Pain for Private Gain. Upon receiving Doernberg’s paper, a somewhat simplified version of previous studies that he and Fred McChesney had done for the New York University Law Review and the Minnesota Law Review, the IRS asked that the names of Representative Dan Rostenkowski, chairman of the House Ways and Means Committee, and Senator Lloyd Bentsen, chairman of the Senate Finance Committee, be removed from his paper. Doernberg believes that the IRS was concerned his paper would offend the members of Congress who theoretically oversee the agency. After Doernberg refused to remove the names of the two powerful chairmen and two other influential members of Congress, the IRS withdrew its invitation for him to attend the conference. The paper was published by Tax Notes, an excellent trade weekly, on November 28, 1988, at pp. 965–69.