Eight Tax Myths – Lessons for Tax Week Part III

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We welcome back guest blogger Bryan Camp for part three of his three part series dispelling tax myths. In Part III he covers myths 7 and 8.  Post 1 can be found here and Post II can be found here. Keith

This post originally appeared on the Forbes PT site on April 15, 2015.

7. The IRS Abuses Taxpayers

Some myths are based on a kernel of truth and this is one of them. But the abuse is not what you think it is.

Taxpayer abuse happens when a taxpayer is not treated fairly according to his or her circumstances. The key to abuse is the idea of discretion.  On the one hand, if there is no discretion in applying rules, then some folks will inevitably be abused because their circumstances were not foreseen by those who wrote the rule.  On the other hand, giving someone discretion to bend the rules also results in abuse because the humans exercising discretion will inevitably make poor judgments in exercising the discretion.  That’s what it means to be human: to make mistakes.

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Here’s a simple example: let’s say we want to give “equal” access to justice and so we have a rule that one must climb 39 steps to reach the courthouse door and file suit.  If you don’t climb those 39 steps, you cannot obtain justice.  If that rule applies to everyone “equally” so that there are no exceptions, then the rule abuses those folks who cannot climb the 39 steps because of some disability.  But if we station a person at the bottom to decide who must climb the 39 steps and who need not do so, we now create opportunities for abuse by that person.  We may put rules in effect by which that person must exercise the discretion but, at bottom, it’s a case-by-case determination.

So it is with the IRS. Both types of abuse exist but it is the second kind that most of us associate with taxpayer abuse.  For example, the gist of the so-called “targeting scandal” is that IRS employees had discretion on how to approve applications for exemptions and abused that discretion in giving extra scrutiny to applications from conservative organizations.  The mythology being built on top of this story is impressive, but my purpose here is to simply note the example.  Interested readers can find a lucid and geekily comprehensive take on the matter by Professor Philip Hackney of LSU.

This abuse of discretion certainly exists because IRS employees often have discretion to decide what actions to take on a taxpayer account, and so if follows that IRS employees sometimes abuse that discretion. You can even find court cases on this, where a court—usually the U.S. Tax Court—finds that an IRS employee abused discretion.  For example, taxpayers generally cannot ask for forgiveness of their tax liabilities, but there are exceptions and certain IRS employees have discretion to compromise the tax liability—i.e. forgive some or all of it—in some situations.  In a case called Szekely v. Commissioner, heard by the Tax Court in 2013, Mr. Szekely asked to compromise his tax debt and the IRS employee reviewing his request refused. The Tax Court ruled that the IRS employee did not treat Mr. Szekely right because the employee rejected the request a mere one day after Mr. Szekely missed a deadline to provide additional information.  Under the circumstances of Mr. Szekely’s situation—detailed in the Court opinion—that refusal was an abuse of discretion. Mr. Szekely got a “do-over.”

While this second idea of abuse—IRS employees abusing discretion—is sometimes true, it is a myth that such abuse is widespread. One has to go back to 1997 to even find allegations of widespread taxpayer abuse.  In was then that Senators Roth and Grassley held hearings—one set in September 1997 and one set in April 1998—hearings for which they had spent over a year carefully gathering the stories of this kind of supposed IRS abuse.  The hearings were high political theater and, as with most theater, were mostly fictional: the dramatic allegations made from behind face screens and voice screens turned out to be almost all false, according to later independent investigations from the General Accounting Office and the Treasury Inspector General’s office.

If you really want a juicy IRS “scandal” you need to go back to the 1940’s, as I have explained in gory detail elsewhere. That scandal resulted in the removal or resignation an extraordinary number of high-level officials, including the Assistant Commissioner in Charge of Operations, the Chief Counsel, the Assistant Attorney General in Charge of the Tax Division of the Department of Justice, and 9 high-level agency employees, 3 of whom were also criminally prosecuted.

In contrast, the 1997 and 1998 so-called scandals resulted in no criminal prosecutions, no forced resignations, no removal from office. The sole individual implicated in the congressional hearings was a mid-level manager.  And yet, of the 20 allegations against this individual—described in an 80 page narrative report with 2,200 pages of attachments reflecting interviews with 140 people, including every revenue officer and manager in the this individual’s office—only 6 violations of policy were substantiated, none involving abuse of specific taxpayers.

And the current “tea party” scandal? There have been two forced resignations and no prosecutions.

The clear-eyed view of our tax system is to see how it is effectively administered by computers, not humans.  Once the myth that humans run the show is exposed, one can more easily see the devastating effects of budget cuts as I have elsewhere blogged. And so we move to Myth #8.

8. The IRS is Run by Humans

Lots of folks work at the IRS. Even after five years of punitive budget cuts, the IRS still employs some 80,000 workers.  It is true that the IRS budget is mostly spent on personnel costs.  It is true that the face of the IRS is human, currently the Commissioner John Koskinen, who appears as able a Commissioner as any since the redoubtable George S. Boutwell held the position in 1862.

But behind those employees, behind that elfin face of Koskinen, lies the heart of our tax administration system: computers. The story of tax administration since WWII is the story of increased reliance on automation, on computers.  And computers run on rules.  Strict rules. The basic job of the humans at the IRS is actually to prevent the abuse that results from rigid application of rules.

The myth that humans run the IRS, that the fiendishly complex Tax Code (not IRS Code!) created by Congress is administered by actual human beings, obscures both what is good and what is not good about the current state of tax administration. Let’s look at two examples.

First, on the tax assessment side, we have already seen in Myth #4 how IRS computers rule the returns processing function. If one in a series of computer filters flags a return, the IRS will not process that return unless, and until, an IRS employee decides to accept it.  Put another way, it is the computer that decides whether to assess the tax reported on a return.  It takes a human to override the computer’s decision.  The good part about this is that the computers can process millions of returns far more efficiently than humans.  The bad part is that if the computer makes an error, the risk falls entirely on the taxpayer because it is up to the taxpayer to see the error and find some human IRS employee to fix it.

Similarly, the IRS has other computer systems that relentlessly propose increases to tax liabilities, increases that will be assessed unless and until a human IRS employee decides to override the decision of the computer. One example is the Automated Underreporter system.  It compares the W-2’s or 1099’s filed by third parties to what the taxpayer reports on the Form 1040.  If the numbers from the third party information returns are more than what the taxpayer has reported on his or her return, the computers follow the rule that the numbers on the W-2’s or 1090’s are correct.  The computers (not humans) send out a notice to the taxpayer.  And if the taxpayer does not respond to the computer-sent proposal in the right amount of time and to the right office with (often) the right-sized envelope, the computers (not humans) automatically print out the increased tax for assessment.  No human being ever reviews these cases before assessment unless and until there is a recognized taxpayer response to stop the computers.  The IRS employs a similarly automated system for what it calls “correspondence exams.”  Here is how the National Taxpayer Advocate described that system:

Once the IRS engages the batch system, cases move through the examination process automatically. Each step in the process has a pre-established period programmed into the system.  Files are not created or examiners assigned to the cases until the IRS receives and controls a taxpayer‘s correspondence.  If a taxpayer fails to furnish the requests documentation precisely within the prescribed period, the case automatically moves to the next phase in the process.  … Because the batch system automatically processes a case from its creation through the issuance of a Statutory Notice of Deficiency and subsequent closing, the IRS has effectively eliminated the need for human involvement in every case in which a taxpayer does not reply in a timely fashion.

 

We see the same model of computer action on the collection side, in the Automated Collection System. This is the computer system that collects unpaid taxes.  The computer, not humans, matches the W-2 information filed by employers and the Form 1098 information filed by banks to identify where taxpayers work or have assets.  Then the computer, not a human, sends out a Notice of Levy to grab wages or grab a taxpayer’s bank account.  It is the computer, not a human that will file a Notice of Federal Tax Lien (NFTL), which not only makes it difficult for taxpayers to sell their homes but also results in a major hit to the taxpayer’s credit rating.  If the taxpayer wants to undo any of these actions, or if the taxpayer believes the actions were abusive or unfair, the taxpayer must find a human IRS employee and persuade that employee to use discretion to ameliorate the damage.

Just look at the volume of levies and NFTLs in FY14: over 2 million levies and some 535,000 NFTLs.  That’s the work of computers, not humans.  And while the computers might be shutdown if the IRS shuts down, they will keep on working, even if employees must be furloughed. So finding the human to override the computer becomes increasingly difficult.

The clear-eyed view of our tax system is to see how it is effectively administered by computers, not humans. Once the myth that humans run the show is exposed, one can more easily see the devastating effects of budget cuts.  First, fewer and less trained employees means that taxpayer will be increasingly unable to undo the mistakes that computers will inevitably make.  Second, the less money the IRS has to hire and train competent employees, the more reliant tax administration will be on computers.  One sees this in the current IRS plea for expanded math-error authority.  The problem with this expanded authority, as Keith Fogg promises to explain in his typically thoughtful way, is that it will simply shift more work current done by humans to computers, creating more room for computers to make automatic initial decisions against taxpayers that then can only be undone by humans if and when the taxpayer responds.

This concludes my series on myths about tax and tax administration. I have little doubt most of them will persist.  That does not trouble me.  As a teacher, my job is to introduce curious minds to new ideas and give those who are interested tools to pursue their interests further.  I hope at least to have accomplished that.

 

 

Comments

  1. Bracket Creep says:

    “No human being ever reviews these cases (AUR cases) before assessment unless and until there is a recognized taxpayer response to stop the computers.”

    This is actually incorrect. Potential discrepancies initially identified by the AUR system are manually reviewed by tax examiners before a notice is sent to the taxpayer. A manual review may identify something the computer could not, such as an income item mistakenly reported on the incorrect line of a tax return. This practice, internally referred to as screening, annually removes approxmately 15-20 percent of cases from AUR inventory. This is an improvement from the earlier days of document matching in the late 1970’s and early 1980’s, when 50 percent of cases were removed after being manually reviewed. As you note, the expansion of math-error authority may partly explain this condition. Additionally, although computers have increased the ability to identify and detect unreported income, the ability to pursue cases still remains is dictated by the number of human bodies available on the back end to process amended returns, correspondence, and answer phone calls generated by the notices.

    Apart from that, I agree that taxpayers’ ability to respond (forced by operational presumption) is an overlooked consequence of an enforcement strategy that is increasingly reliant upon automation.

    • Bryan Camp says:

      Hi Bracket Creep, Much obliged for the info. Good to know. Any chance you can point me to a place in the IRM setting out the manual review procedures in the AUR process? I’d be grateful. I have not yet memorized that beast (grin). Regards, -bryan camp

      • Bracket Creep says:

        IRM Section 4.19.3.1(11) – “The tax examiner performs an in-depth analysis of each case. The tax examiner determines if the discrepant income or deduction(s) in question are satisfactorily identified on the tax return. If so, close the case.”

        IRM Exhibit 4.19.3-4 also shows AUR process codes used by tax examiners. Process codes are two-digit numbers used to identify the action taken on a case. Some process codes relate to case closing actions taken during the pre-notice (or screening) phase. For example, process code 21 is used to show “discrepancy accounted for.”

        Happy to help. Keep writing, your insights are very valuable to the tax administration community.

        • Bracket Creep says:

          I forgot to add that IRM Section 4.19.3.4 contains the analysis procedures. As they are somewhat limited, I would assume that the tax examiners rely on the more extensive job aid document.

  2. Eric Rasmusen says:

    Philip Hackney’s article’s abstract concludes as follows about the Tea Party scandal: “The Article recommends that the Service continue using names to screen applications for tax-exempt status. However, the Article suggests the Service implement procedures to document an unbiased process when evaluating applications that raise questions of a fundamental Constitutional nature.”

    Of course, lack of documention of an unbiased process isn’t really the problem, and requiring extra paperwork wouldn’t solve it. The problem is more like destroying documentation of a biased process, and lying to Congress, which wouldn’t be helped by creating extra busywork for the IRS to add to what it already conceals.

  3. Jason T. says:

    Contrary to my expectations, the third time is not the charm for Professor Camp’s “myths.” In fact, his final two “myths” are all too true to many a taxpayer.

    In its regular course of business, IRS employees abuse taxpayers. Not only do we witness it in our respective practices, but individuals as diverse as David Burnham, William Roth, Shelley Davis, Charles Yancey, David Pryor, and even Charles Rossotti have documented those abuses. It is no coincidence that these varied individuals, among many others, write books titled, “A Law Unto Itself,” “The Power To Destroy,” and “Unbridled Power.”

    The good Professor contends the IRS abuse stories that came out of the 1997-98 Senate Finance Committee hearings were “almost all false.” That is a myth. Professor Camp is quick to tell us those stories implicated only one IRS employee in wrongdoing. What he forgets to tell us is that not one taxpayer, or tax professional, who testified during those hearings was implicated in wrongdoing. That is quite a record for a group who furnished to a congressional committee testimony under oath that was “almost all false.”

    The Professor mentions GAO and TIGTA reports that support his “almost all false” contention. That is another myth. The GAO and TIGTA issued no such reports. What the Professor really means is IRS’s apologists interpreted those reports in a way that would whitewash the agency’s misdeeds. I would ask Professor Camp, if he were the taxpayer discussed in Mom’s, Inc. v. Weber, 82 F. Supp. 2d 493 (E.D. Va. 2000), how he would feel about the IRS’s conduct toward him. That case illustrated the IRS’s finest in not atypical action prior to RRA ’98.

    If we want to find an IRS scandal we need not hearken back to the 1940s, we need only look around us. Refusing to read taxpayer correspondence, misconducting the CDP balancing test, declining to entertain reasonable proposals, engaging in prohibited ex parte communications, disclosing return information without authorization, issuing third-party summonses without according the taxpayer his right to quash them, improperly coaching witnesses in giving court testimony, those acts and many more like them, abuse taxpayers every day…including today and tomorrow.

    To wrap us his “myths,” Professor Camp presents us with the tale of 2015: A Tax Odyssey; if not HAL9000, its descendant computers, not humans, run the IRS. Might I be brash enough to ask this…who runs the computers?

    If the good IRS humans are intervening to save taxpayers from the acts of bad IRS computers, then bad IRS humans must be programming those computers to so act. Unless I missed a few science classes, computers do not act on their own. That means, then, it is not computers that “relentlessly propose increases to tax liabilities.” No, it is IRS humans. And because it is IRS humans, the statement that the IRS is run by humans is no myth.

    I am exhausted by these alleged myths. With the Professor’s Part III behind me, though, I shall now decamp.

  4. Eric Rasmusen says:

    Does anybody know what happened to Szekely in the end? The case was very appropriately and politely remanded to the IRS administrative people for reconsideration of a decision that was clearly discretionary but also clearly a bad decision, with a deliberately vague threat by the judge to look at it again if they didn’t treat Szekely better. This is the kind of case that needs “Tax Law Stories” treatment, because I also wonder why the IRS allowed this to go to court— did Szekely offend in some other way too, or was there IRS office politics going on, etc.?

  5. Joe Erwin says:

    This “myths” article was appropriate for a popular press website like Forbes and even TaxProfblog. Now Procedurally Taxing has become politicized. How unfortunate.

    • Anonymous says:

      Hi Joe,

      I am curious as to which of the myths you believed were politicized. Perhaps it is a matter of perspective? Like what Mel Brooks is reputed to have said about comedy, something to the effect that “If you fall down a manhole and die, that’s comedy, but if I cut my finder, that’s tragedy.”

      So if I happened to burst a bubble of belief that is commonly held by folks of a political viewpoint opposite yours, that’s busting a myth but if I burst a bubble of belief held by folks of a political viewpoint akin to yours, that’s being political?

      Regards, -bryan

  6. Anonymous says:

    Dear Mr. Camp,

    Thanx for your input. I see you hold a positive, apologetic appreciation of the IRS and their activities. I assume you write for the benefit of the tax administration (as noted above by Creep), and not the recipients of IRS activities?

    From what I’ve seen over the decades, IRS abuse of the common man is so prevalent and harsh, that the only word for it that comes to mind is “Marxist slavery” (that’s a scholarly term; Bastiat called it socialism). I believe the correct term for the IRS/CIR is “political weapon”.

    The local high-level tax attorneys know who does what out of the local IRS offices, and their comments are less than flattering. I’ve heard attorneys refer to them as gangsters. Alvin Brown’s web site calls what they do a shake-down. It’s not difficult to see what the IRS is and what they do, unless you’re stupid.. You’re a professor, so I doubt you’re stupid.

    Would you be so kind as to answer one simple question for me?

    What word/phrase is used in the text of the federal constitution to identify the federal income tax (please don’t refer to the 16th Amendment).

    Thanx! … Chris

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