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MONEY TALK

Happy Return? Chastened IRS Steps Up Activity After Reorganization

August 04, 2000|LIZ PULLIAM WESTON

The Internal Revenue Service is stirring.

After three years of steadily declining audit and collections activity, the federal tax agency is looking to reassert its authority, some attorneys and accountants say.

Tax agents aren't padlocking businesses or making off with the wrong person's yacht, as has been alleged in the past. But a lengthy reorganization is nearing its final stages, and tax experts say IRS officers are starting to move on some long-delayed tax collection cases.

"Revenue officers are beginning to call to inquire when [overdue taxes] might get paid," said Elliott Kajan, a Beverly Hills attorney who specializes in tax controversies. "They're beginning to push the issue."

That's a change from last year, when collections activity all but ceased nationally and locally.

The Los Angeles U.S. attorney's office seized property on behalf of the IRS just three times in 1999, compared with 528 seizures in 1997, according to figures compiled by the Transactional Records Access Clearinghouse, a nonpartisan data research organization at Syracuse University in New York.

Audits and collections also dropped precipitously after the embarrassing 1997 congressional hearings conducted by Sen. William V. Roth Jr. (R-Del.).

A string of taxpayers and five of the IRS' own agents testified against the agency, saying that people were routinely abused and that employees were pressured to meet quotas for audits and seizures.

"In the old days, it was rock and roll. We had a blank check to do whatever we wanted to do," said John Knight, a revenue officer with the IRS from 1966 to 1993 who today is a Woodland Hills enrolled agent specializing in collections issues.

Knight remembers the IRS shipping him to Honolulu in 1972, where "we locked up the whole city," padlocking business after business that had failed to pay taxes.

An aggressive IRS made mistakes, especially with taxpayers who failed to protect themselves by hiring professional representation.

Yet a passive IRS may be a bigger problem for the average taxpayer. With declining enforcement comes declining compliance, most tax experts agree. And nothing is less fair to conscientious taxpayers than letting tax evaders off the hook.

"There really are some people out there that need to be locked up," Knight said.

Hoping to burnish its image after the Senate hearings, the IRS reassigned experienced agents to staff hotlines and to create taxpayer education programs. Meanwhile, the agency's 33 districts have been combined into four massive divisions--for wage earners, small and medium businesses, large corporations and tax-exempt organizations.

The IRS' goal was to be more responsive, of course. But details of the reorganization have consumed its employees for much of the last two years.

A new conduct code for IRS employees, passed by lawmakers in 1998, served to further burden revenue officers, who worried that a taxpayer complaint about a collections activity could send an IRS agent to the unemployment line.

Finally, many collections activities were halted while the IRS incorporated new procedures designed to safeguard taxpayer rights.

With the safeguards in place, collections activity now is being restarted, IRS spokesman Ken Hubenak confirmed.

In addition, the agency's criminal investigations division has been newly centralized, reporting directly to Washington headquarters rather than to individual district heads.

The IRS promises the reorganized division will focus more on tax fraud and income-hiding trusts rather than on the money-laundering and drug-related cases that used to take up much of investigators' time.

The agency also is signaling that it wants to boost its audit activity again.

Last year, IRS audits reached a nadir, with just 31 of every 10,000 taxpayers nationally called in for a face-to-face audit. Counting semi-automated service center audits, which are conducted largely by mail, 91 per 10,000 taxpayers faced IRS scrutiny, the lowest level since 1981, which is the earliest year for which the clearinghouse has data.

The IRS hopes to get more money from Congress this year to hire more auditors and beef up enforcement, though that funding is uncertain and tax preparers say IRS reviews remain rare.

"I haven't heard anybody ranting and raving about an increase in audits," said Steve Duben, an Encino certified public accountant who meets regularly with his peers to discuss compliance and other tax issues.

Still, some tax experts believe the quality as well as the number of audits is likely to rise in the future, as the IRS unleashes more specialized agents.

David Flamer, a Woodland Hills CPA, believes that the new four-division setup makes more sense than the old.

That's good news for honest taxpayers and bad news for dishonest ones, he believes, because both legitimate and phony deductions are more likely to be recognized.

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