How Powerful Is The IRS?

By Mark P. Cussen, CFP®, CMFC, AFC | March 07, 2014 AAA
How Powerful Is The IRS?

In 1931, the Internal Revenue Service finally succeeded where the police and FBI had failed for years, when it successfully prosecuted Chicago bootlegger Al Capone for failure to pay income tax, an offense for which he received an 11-year prison sentence. This is a gangster that literally got away with murder, but could not escape the justice of the taxman.

While the conviction of notorious criminals may do a great service for the public, the IRS has also been accused of abusing its power, on more than one occasion, and it has been seen often as a pit bull the government unleashes on its opponents. Although many critics have petitioned Congress to curb the IRS’s power and authority, the voices of dissent reached fever pitch after the revelation in May 2013 that the department had targeted about 75 conservative political organizations, whose tax paperwork had the words “Tea Party” and “patriot,” for audits.

A Howl of Protest

Both Democratic and Republican congressmen unilaterally condemned the IRS for its blatant violation of taxpayers’ rights. Darrell Issa, the Chairman of the Government Oversight and Reform Committee, stated that “The fact that Americans were targeted by the IRS because of their political beliefs is unconscionable. The committee will aggressively follow up … and hold responsible officials accountable for this political retaliation.” Montana Democrat Max Baucus, who chairs the Senate Finance Committee, expressed a similar sentiment. “We shouldn’t rush to judgment,” he said. “But targeting groups based solely on their political views is not only inappropriate, it is intolerable.” Several other key figures in both political parties also joined in criticizing the IRS after the American Civil Liberties Union (ACLU) released information revealing that the Criminal Tax Division of the IRS believed that they had the authority to access private emails and other forms of communication.

A Long-Standing Issue

Of course, negative public perception of the IRS is nothing new. Several previous presidential administrations have been cited for using this agency to target political opponents, including Franklin D. Roosevelt, who used the IRS to go after republican newspaper publisher William Randolph Hearst and Andrew Mellon, the former Secretary of the Treasury. John F. Kennedy also used the IRS to target “extremist” groups to ensure that they adhered to the rules for tax-exempt organizations. The IRS assisted by creating the Ideological Organizations Audit Project, an initiative that focused on right-wing organizations, such as the Christian Anti-Communist Crusade and the Foundation for Economic Education. Kennedy also employed the IRS to audit steel industry executives who refused to comply with his price control policy.

But use of the IRS to go after those who did not share the visions of those in office has by no means been limited to the Democrats. Nixon’s staff created a list of over 10,000 groups and individuals who were labeled as subversive, and those in this category were singled out for audits or other special attention. These practices became known during the Watergate investigation, and it also became known that Nixon had attempted to glean information on his political enemies and other opponents from IRS records.

The Clinton Administration continued this abusive tradition by engineering audits on republican adversaries and personal accusers such as Gennifer Flowers and Paula Jones. Not to be left out, The Obama Administration has endured considerable public embarrassment from a 2013 IRS-related scandal. The IRS began a wave of audits against various conservative groups, and hacked into their private emails and phone records. One IRS executive pled the Fifth Amendment in order to escape indictment, while the acting agency director stated that he had “no idea” that those under his watch were collaborating to deny more than 300 conservative groups their tax-free statuses. In an article for Fox News in June 2013, Dr. James C. Dobson wrote that his own group, Family Talk Action, was among those that were targeted. He revealed that the IRS delayed approval of 501(c)(4) status to Family Talk Action for nearly 19 months, and that a representative from the IRS told them plainly that they were unlikely to get approval because they were a “partisan, right-wing group.” Fortunately, their application was quickly approved after their attorney threatened to take legal action against the IRS.

Beware the Audit

Although many audits that are conducted by the IRS are low-key, routine affairs that are quickly resolved, some have had devastating consequences, both financially and emotionally, for those who endured them. And in many cases, these victims were scrupulously honest filers who became the targets of overzealous IRS agents looking to collect revenue. Some of them have had to devote substantial amounts of time and money to defend themselves from liens, levies, penalties and interest that were assessed by the IRS after it audited their returns. Joan Smith was preparing for spinal surgery when the IRS unceremoniously debited her bank account for $10,000 because she had failed to answer a lien notice that they had sent her in the mail - to her old address, where she of course never received it. She spent nearly a year dealing with this issue and was forced to postpone her surgery. Other taxpayers have complained about being bullied and intimidated by IRS agents who have barged into their homes and demanded money from them. The harsh reality is that the burden of proof often rests solely upon the taxpayer, who can be considered guilty until proven innocent.

These and other accusations prompted the IRS to make a cursory attempt at reform during the Clinton Administration. Congressional testimonies outlined many of the abuses that were perpetrated by revenue collectors, but while some collection procedures were revised, no real action was taken to limit the powers of their agents. Skeptics therefore cynically referred to this meaningless charade as “Rah Rah 98.” The IRS, however, does now say in its brochure titled “Your Rights as a Taxpayer” that taxpayers must receive courteous and professional treatment from IRS employees.

Its Powers Are Gaining

Those who criticize the IRS for its alleged abuses of power may become even more incensed once the Affordable Care Act of 2013 is fully implemented. This legislation has appointed the IRS as an overseer to the public that will both administer and enforce several segments of the plan. The IRS has already received a blizzard of inquiries from the new healthcare exchanges regarding the eligibility of taxpayers for the health insurance premium tax credit, and it is also tasked with administrating a fee for providers of health insurance that appears to be complicated. Although the outcome is uncertain at this point, it seems likely that taxpayers who lose or don't have health insurance coverage will also face an immediate tax penalty. The base penalty is $95 but, again, it gets complicated when trying to determine exactly what you'd owe.

What Should Be Done?

Republicans have cried for either the reform or the abolishment of the IRS for years, but they have been largely unsuccessful in their efforts. But they were able to install an Inspector General in the U.S. Treasury in 1998, a position that played a role in uncovering the recent scandal. The Fair Tax Movement represents a grassroots effort to abolish our current tax structure and replace it with a consumption-based system of sales taxes. Other ideas include allocating the supervision of tax collectors to third-party judges so that the department is not its own policeman. One thing is certain, the IRS needs more systems in place to restrain its ability to target individuals and increase the transparency of its operations.

The Bottom Line

The history of the IRS is checkered with numerous already formidable powers wielded by the agency, and those powers are only likely to continue to grow for the foreseeable future. Taxpayers can protect themselves from abusive audits and revenue collectors by keeping detailed records that back up all of their deductions and credits and keeping them in a safe place. Those who disagree with the IRS about what they owe still have several avenues of recourse that they may pursue, including negotiating a settlement, the Office of Appeals and tax court.

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