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HORROR STORIES SPUR IRS CHIEF TO VOW REFORMS

With the IRS accused publicly of mistreating taxpayers, the agency's chief said today he would ban tax collection quotas and institute new efforts to resolve disputes over taxes.

The Senate Finance Committee summoned Michael P. Dolan, acting commissioner of the Internal Revenue Service, as the final witness in three days of hearings into the conduct of the tax-collection agency.

Dolan said he would order hundreds of district directors and senior collections officials to Washington within 30 days to review allegations the committee heard about taxpayer abuse.

And IRS districts will begin holding new monthly "problem-solving days," in which taxpayers will have face-to-face meetings with IRS staff to resolve problems.

In addition, the IRS will quit ranking district offices based on tax collections. This change responds to repeated testimony that such rankings pressured IRS managers to quietly pursue collection quotas -- outlawed in 1988 -- so their district wouldn't be ranked last.

"We must immediately take specific actions to prevent the recurrence of these kind of circumstances," Dolan said, referring to taxpayer horror stories the panel heard on Wednesday.

Dolan's announcement came as the committee opened its third day of hearings with the witness table shielded by six large partitions to conceal five current IRS agents and one former agent from public view.

These people largely corroborated the whistle-blower testimony of Houston IRS agent Jennifer Long, who described a range of abuses in her public testimony on Wednesday.

The first concealed witness, identified as a longtime IRS employee, began testifying with his voice electronically scrambled in an eerie warbling tone.

Today's testimony wasn't as powerful as Ms. Long's, who told her story without her identity concealed the day earlier.

"I have actually witnessed IRS management manipulate income-tax return figures just to increase their office or division collection statistics," said Ms. Long, a 5-year IRS employee.

Testifying under oath and with senior IRS officials watching, Ms. Long asserted that low-income taxpayers are being singled out for audits, for reasons she couldn't explain, while agents were told to steer clear of friends of agency managers.

Ms. Long said some of her colleagues "have been instructed by IRS management not to conduct audits of particular taxpayers who happen to be personal friends of someone in IRS management."

Sen. Phil Gramm, R-Texas, said he wanted the agent's allegations investigated.

"I think that's criminal activity and something should be done about it," he said.

IRS spokesman Frank Keith said he couldn't discuss Ms. Long's specific allegations, but added that the alleged conduct "would be absolutely improper. That behavior should be reported to the inspectors."

Ms. Long initially was scheduled to testify with today's panel of other IRS agents who had their identities shielded. She decided to go public on advice of her attorney.

Several of those secret witnesses today corroborated parts of Ms. Long's testimony.

"Over my 20 years of service, I have become painfully aware of the ability of the IRS to retaliate against employees who dare to speak out," said one witness, identified as an IRS criminal investigator.

This person said the agency's "climate and culture" often hinders investigations of employee wrongdoing. IRS managers have weakened administrative sanctions to the point "where they have no effect in controlling employee misconduct," the witness said.

Another secret witness, identified as a revenue officer with 35 years at the IRS, charged that his colleagues commonly pull up secret taxpayer records to check on "prospective boyfriends" or "even team coaches."

Such browsing was made illegal in a bill enacted earlier this year.

During Wednesday's testimony, the committee heard emotional accounts from taxpayers who alleged abuses from IRS auditors and serious billing errors that lingered for years.

Tom Savage, 69, a contractor from Lewes, Del., told the panel that he was working on a prison construction project for the state of Delaware in 1993 when it turned out that a subcontractor had not paid his payroll taxes. When the IRS found that it could not collect from the subcontractor, it turned its attention to Savage's company.

After failing to hold Savage personally liable, he said an IRS employee fabricated a partnership between Savage's firm and the subcontractor, had the agency issue an employer identification number for this entity, and assessed Savage for the subcontractor's liability.

"He created a company that did not exist," Savage said.

Savage appealed, but while he was waiting for a hearing, the IRS seized a $145,000 payment from the state to his company. He sued, but the IRS said it would fight, and Savage, unable to pay his bills, settled, paying $50,000.

During Wednesday's hearing, the committee produced an internal memo from the Justice Department to the IRS district counsel that said, in effect, that the agency had no case against Savage.

Monsignor Lawrence F. Ballweg from New York told of having the IRS threaten to seize his bank account and car when, as it turned out, he did not owe any taxes.

As trustee for a charitable trust set up by his mother's will, Monsignor Ballweg filed the trust's 1995 tax return.

Last year, while in Florida, he said he got a notice that he owed $18,000. He called the IRS in Atlanta, saying his records were in New York and asking for a copy of the return. The agency refused, but told him to fill out a form and send a check for $14 to obtain a copy.

The Catholic priest did so, but the agency said his name, Lawrence F. Ballweg, was not the name on the return. The name on the return was "Lawrence F. Ballweg Trustee U/W Elizabeth D. Ballweg."

He said he wrote a long letter explaining the situation and again requesting a copy of the file. "Instead, I received a 'Final Notice' . . . in which I was told that the IRS intended to take steps to take my bank account, auto or other property," he said.

Tired of the bullying tactics, Monsignor Ballweg heard of the Finance Committee investigation and wrote a letter. The results were dramatic.

CNN put his case on television, "and the next day, I received a call from an IRS taxpayer advocate, (and) received a copy of my file and was advised how to make the necessary adjustments."

In March, Monsignor Ballweg said, the IRS formally informed him that he owed nothing.

But "for eight months, I lived in constant worry, if not fear, that the trust that my dear mother had established to help the poor would be penalized because of what I can only call the unprofessional, callous and indifferent behavior of IRS employees who are devious enough never to sign their names to any notices that they send out," he said.

Dolan later issued a "sincere apology to these taxpayers for any mistakes we have made and for any anguish we have caused."

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