The American Spectator

November, 1995

Secret informants, searches at will, contempt for the courts, hatred for the
small businessman and the self-employed, and even anti -clericalism--a
frightening portrait of how the federal government feeds its habit.

BYLINE: James Bovard
James Bovard is the author of Shakedown: How Government Screws You From A to Z
(Viking Penguin) and Lost Rights (St. Martin's).


In 1989 Emil Pikul, a rookie agent with the Internal Revenue Service, called
Glenview, Illinois businessman Vince Han with some bad news: he was going to
be auditing the personal tax returns of Han and his wife, as well as the return
of their antique reproduction clock business. The couple's first meeting with
agent Pikul went smoothly. But for their second rendezvous, Pikul insisted they
meet at the couple's home. And that's when Vince Han's IRS nightmare began.

About a half-hour after Pikul arrived, his supervisor Sherwin Stern showed
up at the couple's house as well. In their basement, Stern pointed a finger at
Han and bluntly announced, "You have to pay $70,000 now. If you don't pay,
you're going to jail." Stern also told the Hans that if they didn't come up with
the money, they would end up forking over "a whole lot more"--and then mentioned
a figure in excess of $345,000. He gave Han seven days to come up with the
money. "Vince Han, who had given the IRS every document the agency had requested
to see, refused to pay. But agent Pikul had not bothered to read some of the key
documents in the file, and concluded that Han had lied when claiming outstanding
debts of several hundred thousand dollars. He made no effort to contact the
people that Han owed to see if the debts had been forgiven or written off; the
agent did nothing to verify his hunch or find a single speck of evidence of tax
fraud. In his official agency report, Pikul merely asserted that Han "was not an
honest taxpayer."

Han then took his case to the Appeals Division of the IRS, which concluded
that Han in fact owed the agency nothing. Han then sued the IRS to recover his
legal costs, but the agency, as is its wont, fought tooth-and-nail to avoid
paying any of Han's legal costs. U.S. Tax Court Judge David Laro ruled in 1993
that the IRS's case was not reasonable in fact or in law," and that the agency's
treatment of Vince Han was a "textbook example of how the IRS should not conduct
an examination."

Yet the case is also a textbook example of how today's IRS goes about its
business. Its contempt for citizens like Vincent Han is so routine, and so
unlimited, that the agency has become a kind of Frankenstein, running wild and
terrorizing Americans at will. The IRS hypocritically requires mistake-free
returns when its own books are in shambles. It demands exorbitant sums of money
without regard to the accuracy of its claims. It doesn't hesitate to use every
possible legal maneuver to get what it wants, sometimes destroying businesses-
-and lives--in the process. And on those rare occasions when the courts rule
against it, the agency blithely declares itself in a state of "nonacquiescence"
--its euphemism for unbridled contempt for the law.

As Daniel Pilla noted in a recent study for the Cato Institute: Congress has
doubled the IRS budget over the past 10 years--making that agency one of the
fastest growing nonentitlement programs. It has increased its employment by 20
percent. The IRS's powers to investigate and examine taxpayers transcend those
of any other law enforcement agency. Virtually all of the constitutional rights
regarding search and seizure, due process, and jury trial simply do not apply
to the IRS.

The increase in IRS power over private citizens is mirrored by the increase
in the number of tax rulings, regulations, and laws that citizens must obey. The
agency's tax rules and regulations have exploded in recent decades, increasing
from less than 200 pages in 1913 to over 7,000 today. Advisory opinions and tax
court rulings amount to scores of additional pages. Money magazine noted,
"Although the Internal Revenue Manual runs to 260 densely printed volumes, tax
collectors enjoy tremendous latitude, partly because courts have ruled through
the years that the manual is not the law. As a result, the IRS can flout its own
rules with impunity." And David Burnham, author of A Law Unto Itself: The IRS
and the Abuse of Power, observes, "The reality that so many are somehow in
violation of a supremely murky law gives the agency and the individual agent an
astonishingly free hand to pick and choose their targets."

The tens of thousands of often arbitrary and sometimes contradictory
regulations and rulings mean that it is easy enough for even the most
conscientious taxpayer to run afoul of them. Nevertheless, the agency follows an
abusive policy of near-tyranny in enforcing them. The General Accounting Office
(GAO) found that the IRS made more than 20 million unjustified changes to
taxpayer accounts last year--resulting in millions of unjustified additional
penalties and wrongful demands for additional tax payments. Because so many
people are intimidated by the agency, however, Internal Revenue collects
billions of dollars each year in unjustified surtaxes and penalties.

According to the GAO, the IRS makes unjustified seizures of the paychecks
and bank accounts of tens of thousands of citizens and businesses each year. The
most frequent reason for the wrongful levies is sloppy bookkeeping by the
agency. An August GAO report noted that, in just one type of tax account, it
took the IRS an average of 316 days to log in payments received from businesses
--thus virtually guaranteeing that many of them would be accused of not paying
taxes they had already paid.

The GAO also noted that IRS computer systems do not even "identify cases of
abuse or taxpayer mistreatment from the taxpayer's perspective." After the
report was issued, IRS Deputy Commissioner Michael Dolan complained, "We believe
that the use of the term "taxpayer abuse" is misleading, inaccurate and

But what's inflammatory is the absurd behavior of the agency itself: its
flagrant violations of decency, of common sense--and of United States law.
Consider the recently settled case of Daniel Heller. Heller is an attorney who
represented the Miami News, which in a 1975 expos' revealed that IRS agents were
engaged in "illegal spying on the sexual and drinking habits of important local
citizens." The agency demanded that Heller reveal the newspaper's sources at
the agency, which Heller refused to do.

The IRS retaliated with a tax fraud investigation against Heller. When the IRS
could not find any evidence of wrongdoing, it engaged in what a federal appeals
court later ruled was "intentional intimidation" of Heller's accountant. (The
lead agent in the case publicly denounced Heller as a "despicable human being.")
The accountant then perjured himself with false testimony against Heller, who
was subsequently sent to prison for four months in 1987--more than eleven years
after the appearance of the original News article. The appeals court overturned
the conviction, and Heller sued the agency, which settled out of court for
$500,000 in 1994. To this day, the IRS refuses to disclose whether the agents
who abused Heller were ever disciplined.

It's unlikely they were, for the IRS seems loath to punish even the most
outrageous errors with anything more than a slap on the wrist. In August 1993
the agency revealed that 369 of its employees in one regional office had been
investigated for browsing through the returns of friends, relatives,
celebrities, and others. (A staggering fact: Roughly half of the agency's 115
,000 employees have access to computer systems with private and corporate tax
information.) Some at the office even altered the files of neighbors or created
fraudulent returns. Most of the guilty employees received only minor reprimands
, in keeping with the attitude of IRS Commissioner Margaret Milner Richardson,
who seems blithely uninterested in the privacy rights of the Americans whose
financial histories she is responsible for safeguarding. When one senator urged
her agency to take the rather minimal step of notifying those citizens whose
files had been perused, Richardson replied, "I'm not sure there would be a
serious value to that in terms of protecting the taxpayers' rights."

If abuses of privacy do not trouble IRS superiors, seizing assets or
concocting large payment demands during audits makes them happy--regardless of
whether the assessments hold up later in court. Since agents are rarely, if
ever, punished for overturned assessments, they have virtual carte blanche to
extort payments from their hapless victims, very few of whom have any
understanding of the hellish complexities of tax law.

Incentives for claiming high assessments also corrupt the agency's own
financial records and cast serious doubt on the reliability of their statistics.
Worth magazine reported earlier this year that a 1993 Treasury Department
Inspector General report noted that twenty-four employees in the agency's
Buffalo office filed formal complaints that their managers were manipulating
audit statistics "to receive merit pay awards." The Inspector General concluded
that IRS managers were "gaming the numbers" and "building a house of cards."

However accurate or inaccurate the agency's numbers may be, tax law
explicitly presumes that the IRS is always right--and implicitly presumes that
the taxpayer is always wrong--in any dispute with the government. In many cases,
the IRS introduces no evidence whatsoever of its charges; it merely asserts that
a taxpayer had a certain amount of unreported income and therefore owes a
proportionate amount in taxes, plus interest and penalties.

The IRS believes it is entitled to impose penalties--or even seize property-
-for overdue taxes, even if it sent tax deficiency notices to the wrong address.
Frank and Ann Cook relocated from Seattle to Connecticut in 1985. The Cooks
filed a proper change of address form with the IRS; but after the agency audited
their previous returns, it sent a bill for $6,300 to the old address. The post
office failed to forward the letter. Worth reported: "Despite repeated phone
calls and letters to the Hartford office, the Cooks did not receive written
notice of the IRS audits until 1989. Ultimately, the IRS seized $35,000 in
salary and savings. The couple and their children were reduced to living on $150
per week for part of a year."

Clayton and Darlene Powell moved from one Maryland town to another in late
1987, filing a tax return with their new address in early 1988. Several weeks
after receiving the new address, the agency nonetheless sent a notice of
deficiency for their 1984 tax return to the old address. The local post office-
-even though it had a forwarding address for the Powells--returned the notice to
Internal Revenue. Though the three-year statute of limitation on demanding
more taxes due on their 1984 return had expired, the IRS sent a notice to the
couple's new address giving them ten days to pay $6,864 or have their property
seized. The Powells promptly paid--and then sued the IRS to get a refund.

A federal court of appeals ruled that the Powells were "entirely innocent"
and ordered the IRS to give them a refund. The agency appealed that decision to
the Supreme Court, contending that as long as the IRS mails a tax deficiency
notice to a taxpayer's "last known address," the taxpayer must be presumed to
have received the notice, even when it is indisputable that the notice was not

In its brief on the case the Justice Department noted that the IRS issues
more than 2 million such notices annually, "and approximately 240,000 of those
notices were returned undelivered during the past year." (The GAO reported last
December that a 1991 internal IRS audit found IRS employees incorrectly entering
almost half-a-million new address changes to its master file each year. In 1988,
these resulted in approximately 300,000 undeliverable notices that claimed a
balance due of about $49 million.) But requiring the IRS to notify citizens of
tax assessments before sending out final seizure notices, the Justice Department
argued, would impose "unmanageable detective burdens" on the IRS. "This case,"
they maintained, "threatens to create a "window of time" during which the
Internal Revenue Service may be helpless to protect its rights in pursuing
delinquent taxpayers." That is, the IRS would be "helpless" if obligated to
notify those people whose property it intends to seize. The Supreme Court denied
the government's request to hear the Powell case.

Though it finally gave the Powells a refund, the agency announced that it
would not be bound by the appeals court ruling in other disputes; the judges, it
said, had misinterpreted the law, leaving the agency free to declare
"nonacquiescence." In other words, the agency gives itself license to disregard
court decisions it disagrees with--making a mockery of due process and the
constitutional rights of Ameri-cans. And since good tax lawyers routinely cost
more than $200 an hour, those embroiled in a nonacquiescence case with the IRS
can have an extremely difficult time securing the legal rights to which a court
decision has entitled them. In such cases, the IRS customarily only obeys
Supreme Court rulings.

Hardly anything diverts the agency's shameless grab for any imagined gain by
taxpayers. In November 1994 the IRS mailed a breathtaking notice to Paul
Zwynenburg, whose brother Mark was killed in the 1988 Lockerbie terrorist
bombing of Pan Am Flight 103. The IRS notice announced, "In accordance with the
provisions of the existing Internal Revenue laws, notice is hereby given that
the determination of the estate tax liability discloses a deficiency of $6,484
,339.39." Zwynenburg and his parents, who were named beneficiaries in the
son's will, were given 90 days to pay the entire amount or appeal to the U.S.
Tax Court.

The Zwynenburg family had not received a single cent in payment for the
death of Mark Zwynenburg. A group of relatives and survivors of the blast's
victims sued the now-defunct airline, but no settlement has been reached. The
IRS simply made a "guesstimate" that the final settlement for Zwynenburg's death
would be $11,702,925--and then demanded that the family pay up. The IRS refused
to back down even after it had been publicly ridiculed. John Zwynenburg, the
victim's father, said, "I have to go out and hire my lawyer and my accountant to
fight something that has no merit."

Like other federal agencies, the IRS has adopted the technique of recruiting
undercover informants from all walks of life. By the agency's own admission, it
was using 900 "controlled informants" in 1989--and 40 of those were accountants.
Indeed, the IRS is happy to provide bugging devices and expert tips to financial
consultants who want to earn a windfall by betraying their clients.

In 1979 St. Louis accountant James Checksfield was recruited to be
"controlled informant No. 43111" after facing a criminal investigation for
failing to pay his own taxes for three years. The IRS dropped its investigation,
and instead put Checksfield on its payroll. Checksfield provided the IRS with
information on how one of his own clients, Steve Noles, was allegedly skimming
money from his pizza business and not reporting it on his tax returns. Noles was
indicted by a federal grand jury and faced up to $900,000 in fines--and
twenty-four years in prison.

The Wall Street Journal subsequently reported, however, that Checksfield had
helped Noles create one of the special accounts for his alleged scheme--what
amounted to a clear case of entrapment. Checksfield swore in a subsequent
affidavit that Noles's tax omissions "could have been prevented" had Checksfield
done his job properly. But IRS assistant regional commissioner Michael Orth
denied his agency's role in the sting anyway, saying, "We don't recruit
informants. They generally come to us on their own initiative because they're
upset someone else is avoiding their share of taxes. Why should we discourage
this sort of patriotism?"

Federal magistrate William Bahn observed in 1991 that the "tawdry facts" of
the case left a "bitter taste," and observed that the case "strongly suggests a
lack of honesty and integrity" on the part of the IRS agents supervising
Checksfield. The IRS finally dropped the charges against Noles just before the
case was to go to trial--but, as Keith Stroup of the National Association of
Criminal Defense Lawyers observed, "I'm sure they did it because they knew the
judge was going to slam them."

The IRS applies scant controls over agents conducting undercover activities.
In fact, the official Internal Revenue Manual--in a chapter entitled "Illegal
Acts or Violations of Rights by Informants"--declares: Special agents, in the
performance of their official duties, may utilize investigative techniques which
appear to, but do not in fact violate a state or local criminal statute. . . .
In receiving unsolicited information for the first time from an informant, the
Service may accept the information and, in accordance with its value, may pay
for such information even if it may have been obtained illegally by the

In 1993 the IRS paid a record $5.3 million to informants for turning
suspected tax violators in to the agency. And federal judges have ruled that
even evidence seized illegally in federal non-tax investigations can be used by
the IRS to prosecute taxpayers.

As with other government escapades gone amok, however, the agency frequently
goes far overboard in its zeal to nab ordinary citizens and convict them of
wrongdoing. Its undercover operation Project Layoff, a sting against illegal
bookies, was launched in 1985 in Las Vegas. The project, which cost the agency
in excess of $500,000, quickly degenerated into a monumental fiasco. Sen. Harry
Reid (D-Nev.) observed that the IRS officials involved in Project Layoff were
"so incompetent that they couldn't even agree on who was going to pay the
monthly phone bill." The GAO noted that the IRS operation lost money "because
the IRS could not use the normal methods bookmakers use to collect unpaid debts
, such as threats, bodily harm or loan-sharking."

Furthermore, the agency destroyed many of the key documents from the
investigation, thus preventing federal investigators from determining whether
IRS agents themselves robbed the till. The agency's own internal audit report
noted, "As this type of operation was new to the Service, there was some
uncertainty as to proper recordkeeping." Such a lackadaisical attitude toward
the books was hardly unusual; a 1992 GAO review found that the IRS failed to do
close-out financial audits of almost half of all undercover operations in which
tax dollars had been spent. And yet the agency is making surprise visits all
around the country to verify the recordkeeping of private citizens.

Recently the agency revised its procedures for performing such
verifications, transforming the already awful audit process into an absolute
nightmare. The IRS has begun including "economic reality" tests as part of its
audit routine. Newt Gingrich recently denounced these lifestyle audits as an
opportunity to "decide they are going to review everything about your life to
see whether or not they approve of the amount of taxes you pay." And the reviews
have already become known as "Calvin Klein" audits--because the IRS agent
practically goes through a person's closet to see how expensive his jeans are.

While some IRS officials have downplayed the new "economic reality
approach," others admire how the IRS is planting its flag on vast new
territories of private lives. IRS Commissioner Richardson has written that the
goal of the new approach is to "audit the taxpayer, not just the tax return."1
Tax Notes reported last December, "According to Kay Howard, project manager for
the economic reality training program, the Service has a right to ask how
taxpayers spend their money. To taxpayer incredulity, she directs agents to
respond that all of what goes on with a taxpayer's income is within the scope of
an audit. The Service wants the economic reality approach to be applied in
every audit."

IRS spokesman Frank Keith counters that the public's concern about the
"economic reality" audits is all a mistake, since the IRS has used such audit
techniques for decades: "The only thing new about it is the name. That's how we
caught Al Capone in the '30s." Maybe so--but the IRS had good reason to believe
that Capone was a major tax swindler, while the average John should not be
treated with the same presumption of extreme guilt. The IRS is now asserting
that it has the right not merely to determine whether a citizen complied with
tax law and paid what he owed; instead, the agency is claiming a right to go
through every nuance of a citizen's private life to paw for evidence of
malfeasance. The official IRS list of questions that agents now routinely
inflict during these audits captures the breadth of the new policy:

* What cash did you have on hand in 1993, usually, personally or for
business,not in a bank--at your home, safe deposit box--etc.?
* What is the largest amount of cash you had at any one time in 1993?
* Did you transfer funds between your accounts? If so, how much and when?
* Did you ever redeposit funds previously withdrawn from your accounts?
* Do you have a safe deposit box? Where? What is kept in it?

IRS agents also ask about the taxpayer's health and the health of his family
members, and who is paying for the college education of his children and
grandchildren. Daniel Pilla, author of How to Fire the IRS, says, "The IRS wants
to evaluate your home, your furniture, your fixtures, how much you spend on
reading materials and smoking and alcoholic beverages; they want to evaluate
your wedding, the wedding of your children--your educational background, your
cultural background, your level of sophistication, the neighborhoods you live
in, and the clubs you belong to."

There is rich irony in the IRS conducting "economic reality" tests on
private citizens--the GAO found that the agency "failed to account for 64
percent of the $6.7 billion it spent in 1992 for items such as office rental,
salaries, and computers" and that it was incapable of confirming that it
"actually holds some $797 million in assets it claimed it seized."

Yet if the economic reality audits are bad, they are a breeze compared to
the IRS's most devastating audit weapon of all--the Taxpayer Compliance
Measurement Program (TCMP). In December the IRS will begin notifying 151,439
lucky families and businesses that they have been selected for TCMP. It will be
by far the biggest mega-audit in IRS history. Newt Gingrich has already likened
it to "the return of the Inquisition."

The TCMP audits will go line by line down the tax return and across the
taxpayer's hide. Married taxpayers will be required to show the IRS auditor a
copy of their marriage certificate--even if they have half a dozen kids and
dozens of grandchildren. Taxpayers will be required to provide documentation and
sworn affidavits regarding practically any financial transaction during the
audit year, even if the IRS has no suspicion of wrongdoing. One doctor who went
through a previous TCMP audit described the process as "an autopsy without the
benefit of dying." Verenda Smith, a USA Today columnist at the time, told the
House Ways and Means Committee that, during her 1983 TCMP audit, the auditor
suggested "digging up my backyard to see if I had not reported money earned
writing freelance articles, which he said might have been secreted in cash in
coffee cans."

The purpose of the TCMP--aside from allowing IRS auditors to drag scores of
thousands of taxpayers through financial hell--is to permit the IRS to gather
information to make proposals for legislative changes to the tax code. But Rep.
Nancy Johnson (R-Conn.), chairman of the House Ways and Means Oversight
Subcommittee, complained on July 18 that the IRS had failed to provide her
committee with any reports analyzing its findings from the 1985 and 1988 TCMP
surveys. Johnson observed, "We have to ask ourselves, 'Is it fair for the
government to place a burden and expense on innocent people in order to better
identify those who may not be so innocent?'"

Former IRS Commissioner Fred Goldberg told a congressional hearing in July
that the TCMP data were "likely to have little practical value." The TCMP
suffers from a huge defect: a blind reliance on the relatively uninformed
judgments of IRS auditors. Goldberg said, "As the name implies, TCMP is intended
to measure taxpayer compliance. Proper 'compliance' means paying the proper
amount of tax. But far too often that may be an uncertain number." Thus, the
IRS's conclusions from the TCMP survey consist largely of what items IRS
auditors could browbeat people into paying penalties and additional taxes for-
-rather than what people actually owed. The bogus nature of IRS audit demands is
illustrated by the agency's dismal record in federal court. In 1993, in tax
cases involving over $10 million, the IRS was permitted by judges to collect
only 17 cents on the dollar of taxes assessed.

But Commissioner Richardson says the TCMP offers many benefits: "The
government gets more money from people who haven't been paying their fair share
, thereby reducing the burden on those who have been playing by the rules." She
also reasons, "Jury duty sometimes disrupts our lives temporarily, but it is a
price we pay for our system. And when you think of the Taxpayer Compliance
Measurement Program, you should consider what you get for that price."

"One thing America has been getting for that "price" has been an idiotic
policy of unrelenting attack on the self-employed. Thousands of small businesses
have been devastated by what amounts to an all-out war on the self-employed
entrepreneur, and emerging high-tech industries have been particularly hard hit.
The IRS is enforcing with a vengeance legal standards that even the Treasury
Department admits do "not yield clear, consistent, or satisfactory answers."

The war on the self-employed originates in arcane federal regulations on the
proper classification of workers. If a person is an employee, the employer must
withhold payroll taxes and remit them to the IRS, paying half of the employee's
Social Security taxes and all of his unemployment insurance tax. If an
individual is an independent contractor, however, a business need only send a
Form 1099 to the IRS reporting how much it paid that person; the contractor then
pays his taxes directly to the IRS.

The IRS bases its classification decisions on a list of twenty questions
concerning the relation between the employer and the contractor/employee. An
official Internal Revenue Commissioner advisory report concluded in 1990 that
"the process of classifying workers is confusing, complex, antiquated and
unfair." The House Government Operations Committee, in a 1992 report, declared
that the IRS "enforcement activities (on independent contractors) present small
business taxpayers with a veritable nightmare of problems and policies that defy
common sense."

Craig Willet, a CPA from Provo, Utah, explained how the process works to the
House Small Business Committee last January:
I had a client who was examined under one of these audits. As a CPA, I
represented him, and the auditor came in and he said, "Let me explain to you.
I'm going to go down this 20 point common law test, and I want to tell you that
I might find in favor on 19 points for your clients but 1 of those 20 points I
may find in favor of the Internal Revenue Service, and if that point is
overriding then I will have the subjective opinion to classify them as an
employee." That was the exact result, and I would say that the instructions I
believe that aren't known to the public are that the examiners are trained to
reclassify and let it be resolved in appeals. This is a particular burden to
small business. Small business owners can't afford to appeal this type of an
audit. It is extremely costly, can cost from $4,000 to $5,000 for just one
employee under an audit.

The IRS agents ask a businessman the twenty questions, after which they
sometimes destroy his business. The announcement that a company has
misclassified its employees (which is the official IRS finding in an
unbelievable 97 percent of the audits) means that firm is likely to be facing a
staggering tax bill--largely because the IRS intentionally forces businesses to
double-pay taxes already paid by independent contractors. As the House
Government Operations Committee noted, "The assessments are based on the use of
preset mandatory formulas which even the IRS admits result in double tax
collections. These back tax assessments have been responsible for putting a
number of those businesses out of business."

Since 1988 IRS agents have assessed over $650 million in penalties and back
taxes in such reclassifications (averaging $68,000 per company) and forced
businesses to count more than 430,000 independent contractors as employees. The
IRS is now forcibly "converting" almost 2,000 independent contractors into
employees each week. Tax lawyer Harvey Shulman says, "Too many IRS field audits
view self-employed workers and businesses which use their services as some sort
of disease that needs to be cured. . . . As one IRS auditor told me, "By the
time we finish audits of the computer industry in this state, there won't be any
more self-employed computer consultants left here."

Roadway Services, the nation's second-largest package delivery service,
forked over $25 million to the IRS in January to settle a long-standing dispute
over the status of its truck drivers. As part of the settlement, the IRS issued
a letter ruling that Roadway's operations properly classified its drivers as
independent contractors--but the company was liable for previous years' taxes of
its "employees" anyway. Said Roadway's chairman Joseph Clapp: "We dislike making
any payment in this matter. We feel we would have prevailed in this litigation,
but it would have taken years."

The IRS crackdown is devastating the health-care industry. Marc Catalano,
president of the Private Care Association, an association of health-care
agencies, accused the IRS of following a "search and destroy posture with
respect to businesses that use independent contractors." John Bailey, a
psychologist at the Family Therapy Center of Madison, Wisconsin, complained to a
congressional committee in 1992 that his clinic "has come under attack. . . .
The IRS methods have been too subjective, applied with ferocity and
arbitrariness, and have caused untold grief for us and other well-meaning small

As part of its crackdown, IRS agents seized $2,000 out of the center's bank
account, and then, after being forced to concede that its case was baseless,
claimed that it could not return the money because of difficulties with its
computer system. The IRS's persecution of the center ended after a Justice
Department attorney reviewed the case and concluded that the IRS's charges were
so weak that they would be thrown out of court.

Federal court decisions have found that the IRS violated the law in its
refusal to recognize certain nurses and real estate appraisers as independent
contractors. In 1994, however, the agency announced it would nonacquiesce to
those rulings, and continues to pursue those professions with a vengeance.

Another industry being hard hit by the crackdown is the adult entertainment
business. In June the IRS slapped a jeopardy assessment of $700,000 (allowing
the agency to confiscate the money instantly) on the owners of the Hide-A-Way
Spa Bathhouse in Adams County, Colorado, claiming that the hot tub bathhouse
owners had not classified the women who leased hot tubs (and directly charged
their customers roughly $100 an hour) as employees. (The bathhouse owners had no
control over any pleasures the women may have inflicted on their customers.)
Last December, the IRS slapped a $6 million lien on the owners of Rachel's, a
strip club in Casselberry, Florida. Though the women paid the club owners for
the privilege of dancing and collecting tips, the IRS insisted that they were
employees. The $6 million lien amounted to a death warrant for the business.

Tax attorney Shulman says, "I have had grown men and women--40 or 50 years
old --cry on the phone to me telling me that their marriage is threatened, they
are seeking counseling, all because the business that they built the last
fifteen years of their lives, the house and other things they've earned from the
fruits of their labor, is all threatened by this IRS employment classification
audit. They ask me, "What did I do wrong? Why am I being persecuted?'"

IRS officials have even encouraged private companies to secretly betray
their competitors. At a 1990 meeting in California, an IRS agent distributed
"snitch sheets" to businessmen and asked them to make allegations of illegal
independent contractor use by their competitors. The IRS agent

IRS efforts to subjugate the citizenry have even extended to the church, in
blatant violation of freedom of religion. The federal tax code classifies all
ordained religious ministers as self-employed for the purpose of Social Security
taxes. But the agency has been zealously reclassifying Methodist ministers from
self-employed to employee status. In one case, the IRS argued that ministers
could not be independent contractors because no "special skill" is required to
do the work they do. Rev. Robert McKibben of Alabama informed the House Ways and
Means Committee that he was told by an IRS examiner that "all ministers" are
"statutory employees." McKibben told the agent about a U.S. Tax Court decision
upholding the self-employment status of United Methodist ministers, but the
IRS official claimed that he was not bound by the court's ruling--another
episode of nonacquiescence. McKibben observed, "The systematic misclassification
of United Methodist ministers also results in a violation of First Amendment
rights . . . (with) the IRS dictating to the church the type of relationship
they must have."

Craig Hoskins, counsel for the United Methodist Church, estimates that more
than a thousand Methodist clergymen have faced IRS audits over their employment
status. Hoskins complains, "The IRS . . . procedurally wishes to treat the tax
filing status of United Methodist clergy as a tax shelter matter. We find it
incredible that a system of clergy selection and placement in place in this
country for over two hundred years is to be procedurally comparable to concerns
about tax avoidance schemes."

Some employers, of course, do ignore federal law and misclassify legitimate
employees as independent contractors. But these employees tend to be those in
low-paid positions, such as farm workers and janitors, who would be covered by
minimum wage laws and be eligible for disability and other benefits if they were
properly classified by their employers. The IRS, however, puts little energy
into such blatantly illegal cases. Instead it focuses almost solely on
independent contractors who wish to remain independent contractors. The agency
estimates that there are 3.4 million Americans now working as independent
contractors who should be reclassified as employees. The Small Business
Administration estimates that there are roughly 5 million independent
contractors nationwide. Thus, if the IRS achieves "total compliance," more than
half of all current independent contractors in the United States could be forced
to abandon their own businesses.

Some believe this amounts to an attempt to abolish the right to work for
oneself. David McFadden, president of a New York referral agency for architects
, declared in 1993: "I believe that the IRS wants to make every working person
in America someone's employee." As Rep. Richard Schulze (R-Penn.) put it in
1989, "The mind-set of the IRS is to eliminate any . . . independent
relationship to ensure that all American workers are easily tracked through
corporate payroll accounting."

The assault on independent contractors is typical of the agency's contempt
for personal freedom in America. The IRS almost always seeks to impose a
"solution" that would legally subjugate the contractor to some employer--to
require a business to exert far more control over a contractor in order to
convert that person into a legitimate "employee."

At the White House Conference on Small Business in June, the crackdown on
independent contractors was voted the number one concern of the attendees.
Commissioner Richardson had this to say: "Believe me, if there were an easy
solution, we would have found it by now. . . . Where we have wage withholding,
compliance levels are 99 percent, but where we don't, that level drops to 30 or
40 percent."

Richardson's portrayal of most independent contractors as tax-dodging
scofflaws is blatantly false. IRS surveys show that more than 80 percent of
self-employed contractors pay their taxes, and their compliance rate rises to 97
percent when the party that pays the contractor complies with tax law and files
a Form 1099 with the IRS. Anyway, as the Treasury Department concluded in a 1991
report: "Misclassification of employees as independent contractors increases tax
revenues, however, and tends to offset the revenue loss from undercompliance by
such individuals, because direct compensation to independent contractors is
substituted for tax-favored employee fringe benefits."

In 1988 Congress enacted the original so-called Taxpayer's Bill of Rights in
order to rein in the most egregious IRS abuses. But the act has thus far had
little impact. Justice Department tax lawyer Edward Robbins asserted in 1992
that lawsuits involving agency violations of its own regulations are "not
relevant to anything." As Tax Notes reported, Robbins "stressed that the Justice
Department knows that violations of the Internal Revenue Manual will not go
anywhere in a court case."

Now, however, Sen. Charles Grassley (R-Iowa), Sen. David Pryor (D-Ark.), and
House Ways and Means Oversight Subcommittee Chairman Nancy Johnson are pushing
the Taxpayer's Bill of Rights II. The proposed legislation--which has been
attached to the giant congressional budget reconciliation bill--would strengthen
the right of taxpayers to recover against the IRS when its agents have acted
negligently or recklessly, make it easier for taxpayers to recover legal costs
when they defeat the IRS in court, and restrict the agency's ability to issue
retroactive regulations.

IRS Commissioner Richardson, appearing before a congressional committee in
March 1995 to urge congressmen to defeat the measure, declared, "Contrary to
what is often, in my experience, a very distorted stereotype, the vast majority
of our employees care very deeply about providing good customer service and
protecting taxpayers' rights. . . . My hope is that the overwhelming number of
taxpayers who come in contact with us will come to know us as a genteel,
Gulliver-like giant."

The gentle giant is likely to be in for a nasty budget fight this fall. The
Clinton administration has requested an almost 10 percent increase in the
agency's allocation--from $7.5 billion to $8.23 billion. The House of
Representatives has already approved a slight increase, but as we go to press,
the Senate is hammering out an agreement to cut agency funding.

Many of the congressmen in favor of slashing the IRS budget maintain that
the agency has grossly mismanaged its Tax Systems Modernization program. This
program was designed to bring IRS computers into the twenty-first century, but
the project has become yet another federal government boondoggle. The GAO
reported in July that the modernization has been an abysmal failure, with the
IRS buying already grossly outdated technology and making extremely poor
decisions in automating its taxpayer service. And those taxpayers, as with all
the other mismanaged, ill-conceived, and reckless programs the IRS has
undertaken, have been footing the bill for their own persecution. Thus far the
modernization has cost $8 billion--in tax money, of course.