Reform bill would rein in the IRS

Nation's Business, Feb, 1998 by Joan Pryde

In 1981 the Internal Revenue Service notified optometrist F. Barry Jacobs that he had failed to pay two years' worth of payroll taxes for himself and his three employees. The agency billed him for $11,000 in back taxes and penalties. Jacobs, who says he had never missed a payment, was flabbergasted.

Nearly 17 years later, the case still isn't closed. Although in 1996 the IRS apologized in writing to Jacobs and his wife, Nancy, for any inconvenience it may have caused them, the Jacobses have not yet received a full refund of the money that the IRS seized during the long payroll-tax dispute.

Nancy Jacobs, bookkeeper for her husband's Bakersfield, Calif, optometry business, says the most disturbing part of the couple's ordeal was the IRS's accusatory attitude. "IRS employees were not interested in listening to us, much less in investigating our assertions" that the taxes had been paid, she says. "They assumed we were guilty and we owed the money."

Equally disturbing to IRS critics is that the Jacobses' case is not unusual. A parade of witnesses, including Nancy Jacobs, told a Senate committee this past fall that they too had fallen victim to errors and shabby treatment by the IRS.

Congress got the message: The IRS needs major reforms. And this is the year that Congress is likely to pass reform legislation.

The House approved an IRS-overhaul bill shortly before adjourning in November. The Senate is expected to pass its own measure early this year.

Critics say there's plenty to be fixed: IRS agents who hound taxpayers into settling cases; outmoded computers that fail to keep proper records; poorly trained auditors; a system that assumes guilt; and a lack of help from IRS officials when disagreements arise.

The House's IRS-reform legislation aims to fix these problems by:

* Creating an outside board of directors to oversee management of the IRS.

* Mandating an upgrade in the agency's computer systems.

* Adding more than two dozen provisions to strengthen taxpayers' rights in dealing with the IRS.

The reform legislation reflects recommendations of the National Commission on Restructuring the IRS. The commission, created by Congress in 1995, issued a 200-page report this past June suggesting ways to improve the agency.

Thomas J. Donohue, president and chief executive officer of the U.S. Chamber of Commerce, says IRS reform can't come soon enough. "It is critical that the business community and all taxpayers keep up the heat on the president and Congress until the name `Bill Clinton' is firmly affixed to substantive IRS reform," Donohue says.

Confusion Over Numbers

The Jacobses' battle with the IRS illustrates a lot of what critics say is wrong with the agency. The couple had closed an optometry practice in Stockton, Calif., in 1976 and opened a new one in Bakersfield in 1979.

Their troubles began when they made the mistake of applying for a new IRS employer identification number, not realizing that they should have continued using the number obtained for the Stockton practice. Instead of catching the Jacobses' mistake, the IRS issued them a new number. To compound the error, the new number had already been assigned to another employer.

During the next two years, 1980 and 1981, the Jacobses paid their payroll taxes faithfully, they say, never suspecting a problem. Meanwhile, their tax money went into the other employer's account.

The first hint of a problem surfaced unexpectedly in the mail in 1981, when the IRS notified the Jacobses of failure to pay payroll taxes. They met with a local IRS official, says Nancy Jacobs, and showed canceled checks to support their claim that they had paid the taxes. She says the IRS official insisted they still owed the money, contending that if the taxes had been paid, the funds would be in their account.

Moreover, she says, every time she tried to talk with an IRS official, she felt the agency had no interest in investigating her assertions that the taxes had been paid -- despite all the documentation she produced.

Meanwhile, the Jacobses kept making payroll-tax payments for which the other employer got credit.

To recoup what it claimed were delinquent payments, the IRS seized $27,000 in income-tax refunds owed to the couple from 1989 to 1993.

A tax attorney hired by the Jacobses in 1992 finally unraveled the mistake with the employer identification numbers. But Nancy Jacobs says it took four more years of dealing with uncooperative IRS officials before the agency confirmed that the couple was "in full compliance" and sent them the letter of apology.

Since then, the IRS has returned $12,000 of the $27,000 it seized. The Jacobses say the IRS hasn't given them a reason for its delay in returning the remaining $15,000. Citing privacy rules, the IRS refuses to comment on any specific taxpayer cases.

Management Overhaul

Under the pending IRS-reform legislation, a board of directors would have a mandate to fix problems that lead to horror stories like those related by the Jacobses.

The 11-member board, which would be appointed by the president and ratified by the Senate, would include eight private-sector individuals and three government officials. Candidates for the private-sector slots would be chosen for their expertise in information technology and management of large service organizations.