Terrorizing America: How the IRS Threatens Our Liberties

A century and a half ago, the U.S. Supreme Court intoned that “the power to tax involves the power to destroy.” Today, we are finding that the power to collect taxes involves the power to destroy, for the government enforces America’s confiscatory, incomprehensible, and inequitable tax laws by frightening — even terrorizing — the American people.

The use of fear is not surprising, since the IRS fears the breakdown of “voluntary compliance.” New York City University economist Peter Gutmann has estimated the untaxed “subterranean economy” to be more than one-sixth the size of the official Gross National Product — $450 billion today. And various government sources estimate that some forms of income, such as farmers’ income and rental income, may be understated by 50 percent or more.

And the terror is likely to worsen. Federal taxes and spending may exceed a trillion dollars in 1985—a five year tax increase of half a trillion dollars. Resistance and evasion will only increase, as will efforts to force compliance and submission.

While in theory the IRS is supposed to administer the tax laws “fairly,” in practice, it seeks to extract as much money as possible from the taxpayer. For example, in 1979, one judge said of a particular regulation: “Viewed as a hunting license to authorize IRS agents to flush up additional revenue from employers, the regulation is brilliantly conceived. As a guide to employers in their regulations [sic] with employees, it is nearly worthless.”

In fact, the IRS admits that its purpose is to terrorize. Former IRS Commissioner Donald Alexander responded to a Congressman’s question about the IRS’s “campaign of terror among the American people”: “I think you and I understand the realities of this world. The truth is that we have such a limited budget, such limited manpower to enforce the income tax laws and collect the revenue, that the only way we can keep them honest and paying their taxes is to keep them afraid.”

The weapons used by the IRS to scare the American people are many and varied.

First is the presumption of guilt. The IRS almost automatically rules against the taxpayer, forcing the payment of substantial legal and accounting costs in order to prove innocence.

Not only did the IRS ruthlessly extract capital gains tax from the victims of the Grand Teton Dam disaster in Idaho who were forced to sell their property, but it routinely attacks “tax shelters,” is seeking the power to decide the validity of marriages in order to prevent tax-induced divorces, and is attempting to revoke the tax exemptions of churches such as the Church of Scientology which do not follow the IRS’s undefined “accepted public policy.”

Where withholding is impossible—for example, with tips—the IRS uses the weapon of an economic model for income reconstruction which estimates income and taxes. Nevada Senator Laxalt has testified about the refusal of the IRS to take into account shift differentials, short shifts, and the differing qualities of entertainment—or ever detailed and extensive taxpayer records—in assessing taxes. The IRS simply conclusively presumes the taxpayer to be guilty.

An even more fearsome tool used to force compliance with IRS rulings is the audit. The number of returns audited has fallen from 5 percent in the early 1960s to approximately 2 percent. However, not all taxpayers are created equal. The odds of an audit vary among income groups, types of deductions taken, and by state.

But the audit serves three purposes other than to check those taxpayers with the greatest revenue potential:

1. To increase its perceived “efficiency.” According to A.W. Carney, Jr., a former tax auditor, the IRS tends to focus on middle-income non-business taxpayers because their returns take 30 percent to 50 percent less time to audit than other groups.
2. To gather statistical norms. Every two years, the IRS takes a statistical sample—roughly one half of one percent of all returns—as part of the Taxpayer Compliance Measurement Program (TCMP), and audits them line by line, requiring proof of everything. Former IRS Tax Law Specialist Paul N. Strassels calls the TCMP audit the “single worst thing the IRS can inflict on you, short of sending you to jail.”
3. “To produce the greatest volume of voluntary compliance.” Many returns are audited primarily for their fright potential. According to Strassels, the IRS attempts to audit people with individual or group visibility, leading to “a statistical strategy that allows them to reach all across America, across all income levels and classes, and into as many pockets of society as they can.”

(IRS audit terror is compounded by IRS audit error. The General Accounting Office (GAO) found that examiners made technical or computational errors in roughly 40 percent of the audited returns. The American Bar Association concluded that it is “solely by reason of chance” that an audit may determine the correct tax liability.)

Litigation is also used to cow the American taxpayer. One internal memo from the Boise, Idaho, District Office Group Manager explained:

It is stated you do not wish to litigate a case you may lose. However, failure to attempt litigation will foster their (the taxpayers’) program far more than a loss in court. At least by litigating, the Taxpayer is forced to produce the necessary substantiation. In addition, the Taxpayer is committed to spend time and money defending his position. Perhaps the inconvenience alone will inspire future compliance.

The IRS is attempting to use withholding to combat the growing underground economy. Since businesses do not withhold income, social security, or unemployment compensation taxes from independent contractors, the IRS began a full-scale assault on independent businesspeople in the 1970s. According to a 1977 GAO report, “It appears that the IRS’s approach to solve such non-compliance problems is to limit the number of self-employed persons instead of using the array of administrative mechanisms available to it.”

For instance, Reginald and Barbara Dwyer run a small logging business in Vermont. The Dwyers contract with several independent contractors to fell, haul, and cut the wood. Each of these sub-contractors is a specialist, owns his own equipment, and is paid by the work performed, not the time worked.

Though audits in 1969 and 1970 found nothing wrong, in 1977 the Dwyers were audited and assessed back taxes of $18,500 for the “employee” woodsmen for 1973 through 1975. The IRS didn’t even consider the taxes already paid by the woodsmen. The Dwyers resisted, and, after two years, the IRS dropped the case.

The IRS has similarly descended upon other independents—from Vermont lumbermen to Texas truck drivers, Georgia barbers, and Maine lobstermen. The IRS is attempting to destroy independent workers and businesses, in order to increase its ability to collect taxes.

Another IRS weapon is the power to embarrass taxpayers. IRS agents not only interrogated Massachusetts accountant Donald R. Lord, confiscated his papers and threatened him with jail; but they questioned his neighbors and relatives, including his 88-year-old grandmother, as well. Idaho businessman L. Jack Stolfo suffered through a similar experience in 1977 when his friends and social and business acquaintances were questioned, and his parents threatened.

Also in Idaho, the IRS has padlocked the doors of restaurants and attorneys’ and doctors’ offices, and chained a logger’s pickup truck to a telephone pole in an attempt to collect overdue taxes. In fact, the Idaho IRS office circulated a memo that unashamedly stated that “[a] proven method of preventing delinquency has been through embarrassment.”

The national IRS office then said that the memo did not “reflect” national policy.

A more brutal weapon is taxpayer harassment, which takes many forms. For example, Alaska Congressman Don Young recently related the case of an Alaskan fisherman who was interrogated in a 4’ x 8’ room for seven hours. The IRS agents refused him permission to call his attorney or CPA, or to go to the bathroom, threatening him with contempt.

Another Alaskan, Charles Bumpus, a city councilman and bank director, was interrogated at the regional IRS headquarters for two hours; he was refused a chair and had to sit on the floor. And the unconscionable investigative techniques used against a well-known publisher caused the nervous collapse and hospitalization of an employee. The publisher, a Nazi war camp survivor, was remined of Gestapo interrogations.

Similar disregard for the law was evidenced by the IRS when it demanded a depositor’s record from Missouri bank president Gordon W. Warren. Warren tried to notify the depositor and was promptly threatened with a $10,000 fine and ten years’ imprisonment. In another case, the IRS filed an $80,000 delinquent tax claim against a corporation bookkeeper, for which she had no liability, solely to force her to testify against her employer. And this is not an isolated case.

More serious still is the use of force. The IRS once proposed to use an armed squad as an “educational instrument” for taxpayers. On October 16, 1975, Howard Martin, then an Idaho IRS District Director, authorized a “Returns Compliance Program” for Fremont County, Idaho. At a time when the community had but five policemen, some 25 armed IRS agents were to go door-to-door to request to see copies of back tax returns. The 25 IRS stormtroopers were to operate from two headquarters, maintain a complicated communications system, and have back-up forces, to descend on some 167 supposed tax resisters and dangerous people including women, missionaries, bedridden patients, and community leaders.

The plan was cancelled four days before its implementation date because of pressure by some IRS employees and their union, yet its originator was not only commended, he was subsequently promoted to the national office, to administer the Freedom of Information Act!

Nor were these the only people put on the IRS’s “prone to violence” list. Church members, ordinary citizens who’ve paid their taxes, nonviolent protesters, and others end up on such secret lists. Though former IRS Commissioner Kurtz did not confess to keeping the secret lists, he did admit that the IRS’s Intelligence Division worked with the FBI and the Idaho State Police to generate the names of potentially violent people, to “forewarn” IRS personnel.

Perhaps the most important, and misused, weapon is the lien/levy/seizure. A tax lien is automatically created when a tax liability is assessed and not paid, and can then be filed. A levy is used against a taxpayer’s assets held by third parties, such as salaries, bank accounts, and accounts receivable. A seizure involves the taking of the taxpayer’s property and selling it.

The devices allow the IRS, according to a study by the federal Administrative Conference, to “reduce individuals to penury, make them indigent overnight and strip them of all means of supporting their families.” And that is precisely what the IRS does.

The Oversight of Government Management Subcommittee of the Senate Governmental Affairs Committee found that the IRS virtually ignores alternative payment mechanisms, such as installment pay agreements and special trust accounts, which ensure payment but do not destroy lives. Even J. R. Starkey, Director of Collections, admitted that the IRS had no evidence that the more draconian measures increased taxpayer compliance.

Yet, in the first six months of fiscal year 1980, the number of seizures increased 44 percent, and the rate of seizures 33 percent. The Subcommittee found that “This increase in the rate of seizure, while alarming in and of itself, is made more ominous because there is evidence that many seizures are made arbitrarily and unnecessarily, and are even counter-productive.”

It found that many seizures were made “not for the purpose of collecting delinquent taxes, but for purposes of IRS management policies such as improving statistics....” Agents were officially assigned revenue quotas through 1974, after which date such quotas were officially banned. But nothing has really changed.

The Subcommittee heard testimony, read affidavits, and saw memos and performance evaluations which demonstrated the existence of an unofficial quota system in states such as Michigan, Missouri, and Alabama. They illustrated “a penchant within the IRS for seizure and enforcement statistics, with little attention to the amount of money collected, or to the circumstances of the particular case.”

Indeed, during the July hearings the national IRS officials were forced to admit again and again that regional officials were not following national policies, and that the national office continued to circulate seizure statistics, despite the fact that this policy created a pressure for quotas.

This situation has led to a parade of horrors:

• In August 1979, the IRS smashed the windows of Stephen and Mona Oliver’s car, and dragged the couple out over the glass, in order to seize the car.

• An army chaplain requested to be allowed to pay in installments since he had to pay for a very costly operation for his wife; the IRS emptied his bank account before the taxes were even due.

• In 1965, after 30 years as a lumberman, Ed McCanse was assessed $119,000 for unpaid taxes. The IRS seized his bank account and lumber-mill stock, forcing McCanse to sell the stock for a fraction of its value. He spent $90,000 in legal fees before the IRS, in 1969, admitted that it was wrong and rufunded McCanse’s $119,000 plus interest.

• Los Angeles contractor Melvin J. Morris, Jr., was charged with a delinquency and his property was seized. Credit dried up and he was forced out of business; two years later the IRS admitted that he owed no tax.

• Reese Brothers, a forest management company of Kelso, Washington, fell behind in employee tax withholding, but finally sent the IRS the required $10,000. However, the regional office failed to tell the local office, and the local IRS chained the business’s doors, seized 148 items, and locked up the company payroll. Ten days later the IRS admitted its mistake.

• King and Virginia David of Washington, D. C., paid their back taxes. But the local office either didn’t know, or didn’t care, seized the couple’s bank account (causing several checks to bounce) and levied upon Ms. David’s salary. Three months later the money was refunded.

Even innocent third parties cannot escape. A Miami handyman saw his car confiscated, and only after great expense, was able to prove that it was his, and not the delinquent taxpayer’s. It took a Miami plumber six months, and James White, a carpenter, $1,500 and eight months, to recover their cars in similar incidents.

And Chicago accountant Howard F. MacNeil was personally assessed for the taxes of a former client. His bank account and home were seized, and he lost his business. He later won the case.

Such capriciousness is particularly devastating for small businesses. The Oversight Subcommittee found that liens tie up property, levies strip cash flow reserves and cause lost clients and work, and seizures paralyze and often close down businesses, bankrupting them.

Collections Chief Starkey testified that the IRS kept no statistics on the number of business closures, but others provided stories of all too many. For instance, Maurice Bishop’s Michigan business suffered an embezzlement, and owed $40,000 in back taxes. The IRS placed a lien on virtually all of his property—$400,000 worth—making it impossible to borrow, and to run the business. Even months after payment, the lien was not discharged.

In another case, a corporation owed $60,000 in taxes and gained new management. An agreement was reached with the IRS to pay in installments. The IRS official in charge changed, the agreement was voided, and the company was given ten days to pay. The company petitioned for bankruptcy.

Finally, in Alaska, a publisher sold his newspaper. The new owner fell behind in his payments, and the old owner took back the paper. The IRS went to the old owner for $300,000 in taxes, then seized and sold the paper.

In response, former Commissioner Kurtz testified last July, “It is inevitable that some things will go wrong….”

But “things going wrong” cannot explain the agency’s lawlessness. In the mid-1960s, Missouri Senator Edward V. Long chaired a Senate Subcommittee that constructed a three-year probe of the IRS. He found that the IRS used two-way mirrors, microphones, infrared sniper-scopes, lock picks, and wiretaps, and opened mail and stole records, to spy on taxpayers. The investigation did not stop the agency.

And in hearings before the House Ways and Means Committee’s Oversight Subcommittee last May, IRS officials admitted to the use of mail covers in investigations, but denied that they were abused. However, there is evidence of illegal mail opening in the cases of Idaho businessman L. Jack Stolfo and Alaska bank director Charles Bumpus.

Stolfo has also discovered interference with his phone, despite the assurances of then IRS Commissioner Kurtz last year that the IRS does not use wiretaps. Bumpus claims that his taxpayer organization has been subject to electronic surveillance, and Massachusetts accountant Donald R. Lord was called to a conference with the IRS that was bugged.

The IRS also admits that it regularly monitors phone conversations and meetings if it has the consent of one of the speakers, and occasionally uses pen registers, which record the date, time, and number of phone calls.

In an investigation in the Bahamas, the IRS paid an informant, Sybil Kennedy, to have sex with Michael Wolstencroft, the resident manager of the Nassau Castle Bank. Her job on the night of January 15, 1980 was to keep Wolstencraft “occupied” so that the contents of his briefcase could be copied.

In Idaho, Larry Fullmer wrote an anti-tax letter to the editor. An IRS agent contacted Fullmer without identifying himself, borrowed Fullmer’s materials and books, and refused to return them. The IRS also started a file on him.

The IRS’s attack on Fullmer exposes the final, and perhaps most terrifying, weapon: intimidation. Blake Fleetwood, in a Saturday Review article, “The Tax Police,” explores the cases of Senators Long of Missouri and Joseph Montoya of New Mexico, both of whom investigated IRS abuses.

Long’s tax returns were illegally leaked during his 1968 reelection bid, and all sorts of irregularities were suggested. He was cleared of any tax violations—after losing his first race in 38 years.

In 1972 Montoya was privately labeled a “dangerous protester” by the IRS, and, in 1976, his campaign was ruined in part by allegations of tax irregularities. He lost, and his 40 year career was over.

Also in 1976, Idaho Representative George Hansen, a severe critic of the IRS, faced stories that he hadn’t paid his income tax and had filed late through a special arrangement with the IRS. The charges were not true, and he won the election despite them.

Fleetwood also documents the cases of retaliation against Playboy magazine, which published critical articles in 1976 and, three months later, had $7.7 million assessed against it; ABC documentary writer Paul Altmeyer, who was responsible for a 1975 investigation of the IRS, and was audited two weeks after the special IRS screening; and Las Vegas Sun publisher Hank Greenspun, who also investigated the IRS and was harassed. Washington Star tax columnist E. Edward Stephens says that few people “complain because the IRS has the power to destroy their business.”

The IRS has also used its extensive powers for political, rather than revenue-raising, purposes, starting with alleged mobsters in the 1930s and culminating with political dissidents in the Nixon era. This chilling form of totalitarianism is a different form of abuse, and lies beyond the scope of this article.

The IRS does its best to convince everyone that all is basically well. Indeed, former Commissioner Kurtz once said that “a lot of people have an emotional reaction to the tax system . . . but I think in their more reflective moments most have to say that it’s a fair system….”

Nevertheless, the IRS is desperately fighting all reform proposals to help protect taxpayer’s rights, such as proposals to allow taxpayers to recover attorneys’ fees against the IRS, and to require court orders for property seizures, for any such limitations would threaten its virtually unprecedented power.

The IRS is an agency beyond control. It ignores the law. It rules on whim. It acts capriciously. It seizes people’s property and violates their privacy. It spys on them. It harasses them. It embarrasses them. And it bankrupts them. How long will we permit America’s tax Gestapo to continue to plunder and terrorize America?

Robert James Lee is a Washington attorney.