Charles E. Grassley, the Iowa Republican who heads the Senate Finance Committee, wants the "whole story" from the Internal Revenue Service.
Mr. Grassley has sent IRS Commissioner Charles O. Rossotti a letter expressing concern about the agency's recently announced declining audit rate. He is requesting the whole story of the number of returns reviewed by the IRS."It is painting an incomplete picture to talk about audits and reviews of taxpayer returns, and yet fail to mention ... the invisible audits," wrote Mr. Grassley. "The IRS appears to be providing a distorted picture to the Congress and, more importantly, to the taxpayer, that there is no one in the guardhouse."
Mr. Grassley suggested that the low audit rate reported by the IRS - less than one half of 1% of nearly 125 million returns were audited last year - "could be used to justify budget and staff increases" that may not be warranted.
The IRS is seeking an 8% increase in its fiscal 2002 budget, in part to continue its program of hiring 4,000 people and modernizing computer systems.
At issue are computer reviews of millions of tax returns to check for discrepancies in such items as the income a taxpayer reports and the amount of a deduction, such as that for home mortgage interest. The IRS compares tax returns to information provided by employers, financial institutions and others to see if they match.
Although the IRS does not regard a computer review as an audit, in 1999 an untold number of those reviews resulted in 3.6 million letters asking taxpayers to explain the discrepancy or informing them that additional taxes are owed. That same year, there were only 366,000 face-to-face IRS audits and 715,000 correspondence audits.
Bottom fishing
* In an attempt to bridge the gap on tax cuts, Senate Minority Leader Tom Daschle has sent President Bush a letter proposing to push legislation to immediately reduce the bottom tax rate. The South Dakota Democrat predicted that such a bill - which would lower the 15% bracket to 10% - could be on the president's desk for signing by May 1.
Mr. Daschle said that in that scenario, agreement over the rest of the tax cut package in the evenly divided Senate might be more easily reached.
Security flaw found in IRS computers
* Government investigators were reportedly able to hack into the IRS computer system last year and access Social Security numbers and other sensitive information from electronically filed tax returns, according to a report from Congress.
"We demonstrated that unauthorized individuals, both internal and external to IRS, could have gained access to the IRS' electronic-filing systems and viewed and modified taxpayer data contained in those systems during the 2000 filing season," the General Accounting Office report said.
The investigators said that they were able to gain access to taxpayer information because the IRS had not securely configured its operating systems, implemented adequate password management practices or used encryption technology.
Couple gets jail for adviser fraud
* A California couple has received lengthy jail sentences for a massive conspiracy to defraud the IRS. The case is part of a nationwide crackdown by the IRS and the Justice Department on tax evasion involving fraudulent trusts.
The evidence at their trial established that from 1993 through 1998, Dorothy and George Henderson sold packages of bogus trusts to their clients. They also advised their clients on how to use the trusts to generate fraudulent tax deductions.
The couple's clients included doctors, dentists and consultants who would transfer their businesses, homes and other assets into the trusts. But evidence at trial established that the clients, who were appointed managers of the trusts, continued to control their assets. On their tax returns, the clients claimed various personal expenses - including home repairs, lawn care and housecleaning - as deductible expenses of the trusts.
Further, the clients deducted all mortgage payments and depreciated the value of their residences, frequently passing those "losses" from the trusts onto their personal tax return.
Some clients who made more than $150,000 annually claimed the earned income credit that supposedly is available for only the most needy taxpayers.
The Hendersons operated a still-more-complex scheme to conceal additional income from the IRS for their higher-income clients. In that scheme, the Hendersons passed income through a series of bank accounts in the United States and various Caribbean tax havens.
The funds flowed through various accounts controlled by the Hendersons and ultimately were transferred back to the clients - less a 5% fee for the Hendersons. On their tax returns, clients then took deductions for the distributions of the funds to offshore entities, but did not report the return of the funds.
At the Hendersons' sentencing hearing, U.S. District Court Judge Garland E. Burrell found that the tax loss caused by the Hendersons was at least $10 million to $20 million, not including any interest and penalties - and was almost certainly more than the government's estimate of $13.8 million.
The judge said that the couple had shown "outright defiance" and "disrespect for the tax laws of this nation," and that the only way to deter them from future violations was "to put them away for as long as the law allows." Ms. Henderson received a 13-year sentence, and Mr. Henderson was sent away for six and a half years.
Cite: Justice Department news release
A lawyer must pay legal fees to the IRS
* The U.S. Tax Court recently assessed legal fees against a lawyer for "unreasonable and vexatious delay." Even worse, the fees were precipitated when the lawyer's client attempted to withdraw her petition.
The taxpayer, Shirley Johnson, claimed Schedule C expenses and charitable contributions along with a distribution deduction from a trust.
The IRS assessed deficiencies and accuracy-related penalties. It also pressed the issue of whether the trust lacked economic substance and whether its income would more accurately be reflected on her personal tax return.
Ms. Johnson apparently pursued the matter to the U.S. Tax Court. The IRS asked the court to dismiss the case "for lack of prosecution" and award the IRS legal fees from Ms. Johnson's counsel, Joe Alfred Izen Jr.
Before the trial, the IRS requested information and documents in accordance with court rules, and later filed a motion to compel discovery.
Ms. Johnson's responses to the requests consisted mostly of the phrase "Fifth Amendment" in lieu of the requested information. Although the court encouraged an exchange of information between the parties, Ms. Johnson failed to comply.
Tax Court Judge Mary Ann Cohen noted that Ms. Johnson and the trust never fully complied with the outstanding discovery order and weren't prepared for trial, and that Ms. Johnson indicated she wished to withdraw her petition.
Noting that petitions couldn't be withdrawn without a decision against Ms. Johnson, the court held that the IRS' motion to dismiss for failure to prosecute was appropriate and so ordered.
The judge also considered Mr. Izen's performance and admissions, and concluded that penalties under Section 6673, "Damages For Delay," should be imposed on him instead of Ms. Johnson. The court noted that Mr. Izen had had a long history of involvement with sham trusts as counsel of record, and a history of chronic failure to comply with discovery orders and court rules.
Further, the court ruled that Mr. Izen's tactics had often demeaned the judicial process. Thus, Ms. Cohen concluded that Mr. Izen multiplied the proceedings in the case vexatiously, even after warnings. The court awarded the IRS legal fees for 57.25 hours at $150 an hour, plus travel costs.
Cite: Shirley L. Johnson, et al., v. Commissioner, 115 T.C. No. 10
Court rules no delay in 8-year-old case
* The U.S. Tax Court recently ruled that the government had not abused its discretion in denying an individual's request for the abatement of interest on a tax deficiency that was related to his partnership investment.
Seymour Leffert invested in Blue Glen Associates, a limited partnership. An IRS revenue agent tried to contact the Blue Glen tax-matters partner several times during an audit and eventually issued notices of partnership administrative adjustment to the Blue Glen tax-matters and notice partners.
Mr. Leffert, on behalf of his 7201 Associates but no other partner, contested the proposed adjustments and requested an appeals conference. Appeals Officer Stephen Koniarski met with Mr. Leffert, who suggested a cash settlement, which Mr. Koniarski rejected in a letter Mr. Leffert denied receiving.
Mr. Koniarski made several attempts over the next four years to schedule a conference with the Blue Glen tax-matters partner for settlement purposes, and eventually closed the case as "defaulted." Mr. Leffert objected to the interest assessed against him and argued that the IRS delayed a response to his protest.
Tax Court Judge L. Paige Marvel refused to abate the interest due on the assessed taxes. The court noted that in order for the interest to be abated, Mr. Leffert had to show an error or delay in the IRS' performance of a ministerial act.
The court found that Mr. Koniarski had quickly scheduled and held a conference with Mr. Leffert, had made many attempts to reach the tax-matters partner to settle the case, and had exercised his judgment in organizing his caseload priorities.
Cite: Seymour Leffert, et ux., v. Commissioner, T.C. Memo 2001-23
