THE CLINTON ADMINISTRATION just succeeded in brow-beating Congress into giving the Internal Revenue Service one of the largest budget increases in the agency’s history. Clintonites had warned that, without a windfall for the revenuers, America was at grave risk of insufficient tax audits.
Clinton persuaded much of the media that America has nothing to fear from the IRS — and that many of the criticisms of the agency have been unfounded. Listening to Clintonites, one could easily conclude that the IRS in recent years has actually been less aggressive than the average Girl Scout cookie-selling campaign.
It is important to keep in mind the human cost of IRS abuses. The following cases of Clinton-era IRS abuses illustrate why the IRS continues to have far too much power.
Savaging a former firefighter
Tom Savage, a retired fireman and businessman, was at home in Wilmington, Delaware, on the morning of April 4, 1993, when an IRS agent knocked on his door. When Savage came out, the agent pointed at the “For Sale” sign in front of his house and asked, “What are you doing, trying to get out of town before you pay your taxes?” The agent demanded to see Savage’s personal tax documents and Savage obliged him, assuming that a quick examination would prove that he owed nothing to the government.
Savage’s firm, Tom Savage Associates, was in the prison-construction business. Unbeknownst to him, a subcontractor of his firm had failed to pay payroll taxes for its employees. This was the first time that Savage had ever done business with that particular firm, yet the IRS agent announced that Savage was personally liable for all the payroll taxes of his subcontractor. This demand was totally in violation of federal tax law. Savage hired a law firm, and within a week, the IRS abandoned its wrongful demand.
However, the IRS agent, on his own authority, created and registered a new partnership — purportedly consisting of Tom Savage Associates and the other firm, assigned them an Employer Identification Number, and then demanded that Savage personally pay $315,000 in taxes for the nonexistent partnership. Since IRS agents have no legal authority to create new partnerships, especially involuntary ones, the agent’s audacity stunned Savage and his lawyers. Once again, the lawyers went back to the IRS to get the wrongful demand dropped.
Before Savage’s lawyers could meet with IRS appellate officials, the IRS confiscated a $145,000 check from the state of Delaware to Tom Savage Associates. The IRS is prohibited by federal law from seizing taxpayers’ money until a tax deficiency has been formally assessed. The IRS’s action completely flouted the law — but once the agency had Savage’s money, the law no longer mattered.
Savage’s lawyers sued the agency on September 23, 1993, to get the money returned. On November 1, 1993, Acting Assistant Attorney General Michael Paup, head of the Tax Division of the Justice Department, sent a memo which informed the IRS,
We believe that the levy in question was wrongful, even assuming the facts in their most favorable light. No assessment existed against TSA [Tom Savage Associates] or the alleged joint venture partnership. In fact, we read your defense letter to essentially concede that the levy was wrongful, and yet the levy was pursued, notwithstanding the fact that the U.S. Department of Justice Tax Division wrote that it was wrongful.
Yet Justice Department lawyers, exercising clever legal tactics and manipulating court rules on behalf of the IRS, found one excuse after another to continue denying the agency’s wrongdoing. Government lawyers also made it clear that even if Savage won in federal district court, the government would appeal the decision all the way to the Supreme Court — and run up his legal expenses as high as possible. As Savage’s lawyer, Jerome Grossman, commented: “They had the money — they felt that they could wear us down with delays, appeals, and other court tactics.”
A year and a half later, Savage settled the case by allowing the IRS to keep $50,000 of his wrongfully confiscated money; the agency returned $95,000 to Savage. Savage did not want to settle, but his company faced destruction unless he could get some of the money back and move on.
The IRS’s abuse of Savage cost him $167,016 cash out of pocket and several hundred thousand dollars in lost business. It also forced him to delay his retirement for three years. Neither he nor his wife drew a salary from the corporation from 1994 through 1998, and he is still working to pay off the debts from the battle with the IRS. Savage observed,
The emotional damage done to my wife and me outstrips the financial damage we suffered. All this time and you are scared to death. They can come and take your home away and you have no say.
Savage commented bitterly that the IRS agents “didn’t give a damn. They were acting illegally. They knew it. And they didn’t care.” Savage concluded that the lesson is “the old story that power corrupts.”
The IRS officials and Justice Department lawyers who abused Savage were never reprimanded or sanctioned for their actions.
Squashing a tax preparer
On March 29, 1995, Richard Gardner arrived at the office of his tax-preparation service in Tulsa, Oklahoma, to find 15 armed IRS agents and 5 U.S. marshals waiting for him. Gardner related to the Senate Finance Committee in 1998,
One of the IRS special agents directed me into one of my other offices, handed me a search warrant and said, “We are seizing all of your clients’ tax returns, computers, large printers, personal papers and other records.” He then said, “I want you to make a phone call for us. I will tell you what to say. We will tape it. And if you do this for us, we will ask the judge to be lenient on your sentencing.” The agent was using me to set up the accountant to deliberately get him into trouble.
Gardner refused to backstab his colleague. At the time of the IRS raid, the agency had no complaints against Gardner, who ran one of the largest independent tax-preparation services in Oklahoma. One IRS agent was angry that Gardner had filed for bankruptcy a few months earlier, after being told to pay overdue employee taxes. Two days later, Gardner paid all the taxes and canceled the bankruptcy filing.
Two years after cleaning out all the records in his office and attempting to put him out of business, the IRS and the Justice Department announced a 23-count indictment against Gardner. “It was the intent of the IRS to break me emotionally and financially, over what eventually would be a total of 33 months, so that I would plead guilty to at least one count each of bankruptcy and tax fraud,” Gardner testified.
They tried to force some of my clients to wear a hidden microphone into my tax office to record me. And when they refused the special agent became angry and hinted, as a result of their refusal, that they too might experience some problems with the IRS. My employees were threatened with the loss of their jobs and were informed that they could buy out my tax business cheaply, since I would soon be out of business.
Gardner noted, “The IRS lied to the grand jury on the indictment.” Summarizing the agency’s proceedings, he said,
In the end, the IRS had put between three and five agents working on my case and had supposedly put between 6,000 and 8,000 tax returns on its computers in an attempt to show fraud, and failed. The IRS examined between 35,000 and 45,000 of my client tax returns for fraud, and failed. It had questioned hundreds of my clients, threatening them, and spent hundreds of thousands of dollars to prove wrongdoing, and failed.
After getting Gardner indicted, the IRS became strangely reticent about presenting its evidence to a judge. At a pretrial hearing in December 1997, the IRS asked that its expert witness not be required to file an official expert report and informed the judge that the agent in charge would not be testifying. At a January 5, 1998, hearing on Gardner’s motion to dismiss the case because of prosecutorial vindictiveness, the Justice Department and IRS announced the charges were being dropped.
Gardner then sued the IRS and the federal government for his attorney fees, claiming that the prosecution had been in bad faith. The Justice Department fought the suit, claiming that “a defendant does not prevail in a criminal case unless he is acquitted on all or substantially all counts or he affirmatively succeeds in bringing the entire prosecution to an end in his favor.”
The Justice Department also claimed that Gardner had not prevailed because the government still had the option to re-indict him on some of the same offenses.
Thus, even though the feds dropped the charges to avoid an embarrassing court loss, the judge was still supposed to presume that the accused had been guilty.
When Judge Sven Erik Holmes issued his opinion on Gardner’s suit, he was not impressed by the feds’ attempt to weasel out of any liability:
Specifically, the Government argues that there is no “criminal case” until a grand jury returns an indictment against a defendant and that the “position of the United States” refers to the Government’s litigating position after the defendant has been charged, and therefore only the litigating position of the Department of Justice, not the conduct of the IRS, is relevant.
Holmes ruled that IRS misconduct was relevant and ordered the government to compensate Gardner for its abusive prosecution.
The IRS never provided Gardner with any explanation for the raid or explained why the indictment was dropped. In January 1999, the Justice Department paid $75,000 to Gardner’s lawyer, Thomas Seymour, for violating a 1997 law intended to curb prosecutions that are “vexatious, frivolous, or in bad faith.”
The federal tax code remains hellishly complex — and the tax law’s incomprehensibility continues to vest sweeping discretionary power in IRS agents. It is only a question of time until the next major IRS scandal breaks across the front page of the nation’s newspapers.