October 10, 1999
I.R.S. Is Allowing More Delinquents to Avoid Tax Bills
By DAVID CAY JOHNSTON
Understaffed and caught in a set
of mixed signals from Congress, the Internal Revenue Service for more than a
year has let many tax delinquents go without paying tax bills that total
billions of dollars.
Those owing back taxes include wealthy individuals, as well as employers
that have withheld payroll taxes but not turned the money over to the Federal
Government, according to I.R.S. tax collectors who spoke on the condition of
anonymity for fear of retaliation by supervisors.
Instead of working cases, tax collectors, whose numbers are dwindling, have
spent much of the year in training on complex new rules imposed by Congress.
In addition, the I.R.S. interprets the new rules as requiring an
all-or-nothing stance on back taxes. Rather than reach negotiated settlements
and work out payment schedules, as was customary in the past, the I.R.S. is
demanding full payment. If the taxpayer is unable or unwilling to comply, the
agency is setting the cases aside as temporarily uncollectible. Then,
calculating that the agency is unlikely to act before the 10-year statute of
limitations runs out, many big tax delinquents are opting to take their
chances and pay nothing.
"I have clients who owe taxes in six figures and could pay 60
percent, 70 percent, and the I.R.S. is collecting nothing," said Steve
Kassel, a tax preparer in Daly City, Calif., who specializes in tax collection
cases. "The I.R.S. is leaving a ton of money on the table."
Two years ago, the I.R.S. collected $30 billion from delinquent taxpayers.
An I.R.S. official said there was no updated tally of the money going
uncollected, but that it amounted to billions of dollars.
Charles O. Rossotti, the tax commissioner, said the number of collection
cases languishing in I.R.S. files is growing, particularly cases involving
taxes withheld from paychecks and then not turned over to the Treasury by
small businesses. "Our case inventory is building up because we are not
working as many cases," he said.
Tax consultants say some wealthy taxpayers are also shielding assets from
the I.R.S. by putting them into homes, fully aware that the Government --
which used to seize as many as 1,000 houses in a year for nonpayment of taxes
-- has not seized one in more than 14 months.
Though some tax advisers say it remains risky to dodge tax debts, even some
high-level I.R.S. officials acknowledge that the latest ploys may be
successful. They blame antiquated computer systems, the shortage of collectors
and complex new regulations that taxpayers can manipulate to delay collection.
"We don't have the resources anymore to do hand-to-hand combat"
with recalcitrant taxpayers, said Harry Manaka, the I.R.S. chief of collection
Since 1990, the number of tax returns filed has increased 13 percent, to
226 million this year, but Congress has cut the number of tax collectors 19
percent, to about 6,800. Meanwhile, restrictions imposed by Congress to
protect people from overzealous I.R.S. officials mean tax collectors handle
far fewer cases.
Some of the new rules were imposed after Senate Finance Committee hearings
in 1997 and 1998 during which armed raids, bullying tactics and other abuses
of taxpayers were described. While some of the testimony has since been
discredited, Senator William V. Roth Jr., the Delaware Republican who was
chairman of the hearings, said that they nonetheless showed that the I.R.S.
was out of control and needed to change its ways. Senator Roth said that the
problems in collections "are like growing pains" and that the new
protections for taxpayers "were never intended to allow tax cheats to
escape the consequences of their lawless behavior." Once the new policies
are fully in place, he added, if the I.R.S. "for some unintended reason
lacks the authority and resources necessary to pursue individuals who break
the law, I can assure you we'll revisit the issue."
Still, the new strictures on the agency have had unintended consequences --
most notably the de facto all-or-nothing policy on tax debts.
The policy stems from a requirement by Congress that the I.R.S. negotiate
all terms of a tax-collection agreement up front. In the past, the agency
would often collect what it could from a taxpayer, and then -- as the period
for collection was about to end -- threaten action such as seizing a house to
persuade the debtor to pay the balance or extend the collection period,
sometimes for decades. Now, according to tax professionals, if a
taxpayer does not agree to pay in full, collectors are quick to designate the
debt "currently noncollectible," which, for the purposes of
performance reviews, effectively closes a case.
"Revenue officers are no longer judged by the dollars they collect,
but by the efficiency with which they close cases," said Mike Wellman, a
tax accountant in Longview, Tex., with numerous clients who he says could pay
more than half of their back taxes but are paying nothing.
Rossotti said he now limits extensions of the statute of limitations on
collecting back taxes to an extra five years. And if the taxpayer will not
grant an extension -- or if regular payments would not cover 100 percent of
the debt even with the extended pay period -- the I.R.S. is refusing to accept
an installment agreement and suspending its collection efforts. If the statute
of limitations expires without I.R.S. action, the taxpayer successfully avoids
paying the debt.
The danger, explained Manaka, the I.R.S. collections executive, is that the
agency could revive the case within the allotted time -- and seek penalties
and interest. "Tax professionals who advise clients to do this are taking
a risky approach," he said.
Manaka acknowledged that the chance of a case being revived is small,
provided the taxpayer continues to file annual tax returns and there is no
evidence of a sharp increase in income.
Adjusted gross income would have to rise between 25 percent and 200
percent, depending on the taxpayer's income level, before I.R.S. computers
would flag the case for review, tax professionals and former tax collectors
Kassel, the California tax preparer, said that for taxpayers with a
stream of income sufficient to pay part of their back taxes, but no
significant assets, there was no incentive to grant the I.R.S. an extended
collections period, let alone pay delinquent taxes.
One of his clients, Louis, a Connecticut taxpayer who insisted his last
name not be used, said the I.R.S. initially told him it would accept payments
that would total $66,000 of the $90,000 of back taxes owed on his family's
failed food business. Six months later, another I.R.S. official said the
payment agreement could not be accepted, because it would not cover the full
Because his income may rise, and so expose him to renewed attention from
the I.R.S., Louis said he was negotiating to settle his tax debt with a lump
sum payment -- a payment that may be as little as 22 percent of what he would
have paid in installments. He called the I.R.S. policy "crazy."
Rossotti said the all-or-nothing policy shows that "there are some
combinations of circumstances that we still need to work on."
In the meantime, many tax professionals say that they have clients who
should be made to pay, but who are facing no I.R.S. enforcement.
Rick Oelerich, an accountant in Davenport, Iowa, said that until recently
he represented an Illinois doctor who owes millions of dollars in Federal
income taxes, but has not faced any collection attempts by the I.R.S. -- even
though he has a substantial income and substantial equity in his home.
"The doctor's conduct was flagrant up and down the line," said
Oelerich, who serves on a national board that advises Rossotti. "I was
not happy that I had taken the case, because the farther I got into it, the
more I could see that there was no doubt that this taxpayer was abusing the
system. The revenue officer had dotted his i's and crossed his t's, and yet
nothing is being done to collect, and it stinks."
"As a taxpayer I am outraged," Olerich said, adding that he has
two other clients who also could, and should, pay back taxes, but whom the
I.R.S. is ignoring.
Marc Albaum, a Manhattan tax accountant who works on collection cases, said
he would advise most clients against counting on the I.R.S. to ignore their
tax debt, especially if they had most of their assets in their home. Knowing
that the Government might seize your house, he said, "is a terrible way
Still, he said, "there is no question the I.R.S. is going to lose a
lot of cases because the statute of limitations will expire."
Rossotti acknowledged that it is widely believed within the I.R.S. that he
has an unwritten policy against seizing homes to pay back taxes, except in
cases involving major drug dealers or people who make their living claiming
that the income tax is a Government hoax.
"That is absolutely not true," he said. "We have heard that
some managers have said, 'Don't ever, ever send a home seizure case to me,'
and we're working to get over that. The fact is that we do have the power to
seize homes, and we will." Seizures will resume, he said, once collection
officers are fully trained in the new rules governing their conduct.
Every significant tax delinquency will be pursued, he said.
By far the Government's biggest source of tax dollars is withholding from
paychecks. Yet in interviews, tax collectors said thousands of cases of
withheld taxes not being paid over to the I.R.S. by employers were simply
being recorded in computer files, with little or no action to collect the
In some I.R.S. offices, tax collectors said, managers have coped with a
shortage of tax collectors by simply raising the threshold for when prompt
action is required, in some cases to more than $100,000.
"Some of these cases are so old that by the time we go out, the
business will be gone and we'll never see a dime," said one tax collector
in San Francisco.
Rossotti acknowledged that there had been a significant increase in
instances of small businesses failing to turn over withheld taxes. His staff
said it had no current figures, however. He wants the I.R.S. to adopt the same
collection practices as private industry, with an emphasis on contacting
taxpayers within days after a payment becomes overdue.
But tax collectors say it takes weeks, and sometimes months, before the
service's ancient computers flag cases.
Rossotti characterized the collection problems as transitory while
collectors are trained.
Copyright 1999 The New York Times Company