New York Times: July 18, 1999

Tax Professionals See Pitfalls in the New I.R.S.

By DAVID CAY JOHNSTON

For Robert Kolb, a lawyer in Walnut Creek, Calif., 1997 and 1998 were especially good years as people with overdue taxes sought his help fending off collectors from the IRS.

“People had to wait two or three weeks just to see me,” Kolb said, “and I had to work weekends to keep up until, finally, I had to tell my secretary to cut back” on accepting new business.

Then in December the telephones abruptly stopped ringing.

The IRS, operating under a new law and led by a commissioner who calls taxpayers “customers,” radically cut back on its traditional collection techniques: garnishing wages, tapping bank accounts, placing liens on property so the government gets paid first when the property is sold, and seizing businesses and homes.

The IRS now lets low-level employees make installment agreements on exceptionally easy terms to people who owe $25,000 or less, on the theory that it would collect more and write off fewer tax bills.

To Kolb and other tax professionals across the country who specialize in dealing with tax collectors, however, it was a disastrous development for their business. And, they warn, taxpayers may come to regret the new policies.

“The new IRS,” Kolb said, “has almost put me out of business.”

Much of the decline in tax enforcement was prompted by the the IRS Restructuring and Reform Act of 1998, a bill enacted after Senate Finance Committee hearings in which some taxpayers and IRS workers accused the tax agency of abuses, though much of the testimony has since been discredited.

Tax collectors say the new law puts them at risk of being fired if they make any mistakes, a fear that the tax commissioner, Charles Rossotti, says is overblown.

Still, one result of a combination of fear among collectors and the fact that their numbers are shrinking is that wage garnishments and bank account seizures now run just one-fourth the rate of two years ago and many tax collectors complain that they have been pulled off collections to answer telephones and do public relations work.

Rossotti has repeatedly told Congress that his efforts to make changes will fail unless the agency gets more money, both for computer technology and for sufficient law-enforcement resources to assure taxpayers that chiseling and cheating is being policed effectively. But just last week the House Ways and Means Committee voted to cut another $135 million from the proposed $8.2
billion budget.

But tax lawyers, accountants and tax preparers known as enrolled agents said in interviews that in the agency’s zeal to be friendly, and to cope with too many demands, tax enforcement has shriveled.

Steve Kassel, an enrolled agent in Daly City, Calif., said that for years two-thirds of his clients came from mailing 1,000 letters a month to people in the San Francisco Bay Area who had a tax lien placed on their home or business.

“So few liens are being filed now that I have seen a drastic decline in my business,” Kassel said. “But I replaced most of my business by moving my marketing to the Internet.”

Bobby Covic, an enrolled agent in Incline Village, Nev., who teaches negotiation of tax discounts, said that everywhere he travels, other tax professionals tell of “much heat within the service for revenue officers to bend over backwards and solicit offers to settle and then to help the taxpayer make them into offers good enough to be accepted.”

Kolb said he encountered this change in attitude recently when the case of one of his few remaining clients, who wanted to settle his tax debt at a discount, was assigned to a revenue officer with a reputation for being aggressive.

“She called me and said, ‘How much time do you want? Thirty days? Sixty? Ninety?”‘ Kolb recalled. “Even before I filed the offer in compromise papers she called me again to suggest we meet so she could help me fashion the offer. I was astounded. She told me that she has to get cases out of her inventory and so closing the file was all she cared about.”

He added: “If this keeps up billions of dollars are going to go uncollected because IRS officers do not want to risk putting their neck on the block, they just want to close cases and move on. The IRS is not in an enforcement mode and it is going to cost billions and billions of dollars.”

The IRS believes that its new collection strategies will bring in more revenue, not less, principally by contacting taxpayers earlier and offering easy payment terms.

Joel Goverman, who is in charge of revising IRS collection strategies, said: “We are emphasizing customer service and working with the taxpayer to come to the proper resolution. When we studied the best practices of businesses in collecting delinquent accounts we found that where the customer and the organization came to terms, especially on a monthly basis, they had a higher
success rate in seeing accounts paying in full, and we believe that taking hard immediate action will result in our ending up collecting less money.”

Last year taxpayers owed $246 billion in overdue taxes, up $12 billion, or 5 percent, from 1997. But more than half of that money is no longer collectible, the IRS has concluded.

Tax professionals warn that the newer, friendlier IRS policies are traps for taxpayers, especially in new, easy payment plans.

Rick Oelerich, an accountant in Davenport, Iowa, who serves on a national IRS advisory panel, said the new policies might create a class of taxpayers perpetually in debt.

“If you get an installment agreement for past due taxes,” Oelerich said, “the official stance is that if you violate your installment agreement you can never get another one. But in fact they will usually sit down and work it out with you because they do not have the collection manpower to deal with you any other way. This may turn into disaster because people who owed an amount they could work out will have larger and larger debts.”

Kenneth Martin, a tax preparer in New York City, said the IRS often agreed to take too little.

“I had a guy who owes $20,000 and the IRS agreed to $200 a month in payments,” Martin said.

Martin said he was pleased for his client but, as a matter of policy, “that’s crazy because the interest alone will be most of that.” At the current 8 percent interest rate, it would take nearly 14 years for the client to pay his past due taxes.

Marc Albaum, a tax accountant in New York, said he had made deals for as little as $75 a month, far below the interest charges alone, meaning that each month the taxpayer gets deeper into debt to the government.

“That is not a long-term solution, but for the moment it keeps the IRS at bay,” Albaum said.

Mike Wellman, a tax accountant in Longview, Texas, who said his inventory of collection cases had begun to dwindle, warned that “the new streamlined easy payment plans are a formula for disaster because it will get some people who had a manageable tax debt at one time into an easy payment plan this year and next year and the next year and soon they will end up up owing $50,000 or
$100,000 before they get help.”

Wellman predicted that “next year you will begin to see problems with people who are in so deeply with the IRS that there is no way they can pay the debt because of these installment-payment agreements.”

Marti Myers-Garver, an enrolled agent in Alamogordo, N.M., said many people were not aware of these nuances because as part of its new policies, the IRS had made many people with overdue taxes believe that they did not need to pay for professional help.

“The IRS Web site gives you almost everything you need in almost plain English” to make payments on or negotiate a discount of an overdue tax bill, Mrs. Myers-Garver said.

Covic, the enrolled agent in Nevada, said the fine print in these deals could trap unwary taxpayers by waiving their right to file personal bankruptcy and have their tax debts wiped out. In some cases, he said, taxpayers who negotiate a discount on their tax bill can end up owing the full amount plus penalties and interest that cannot be wiped out in a bankruptcy proceeding.