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October 3, 2004 Sunday

A SHACKLED IRS

By Albert B. Crenshaw

Back in 1998, a Virginia Beach restaurateur named John Colaprete
appeared before the Senate Finance Committee to describe an Internal
Revenue Service run amok, raiding his restaurant and home, terrorizing
his family -- all because his former bookkeeper, whom he fired and
accused of embezzlement, had run to the agency with a tale of drugs,
money laundering and tax cheating.

An eager Congress listened attentively to his testimony and that of
several other individual taxpayers and businessmen, and in the
aftermath voted to restructure the IRS and to pass legislation
mandating the firing of any agency employees caught abusing a
taxpayer.

IRS law enforcement activities shrank sharply. Audit rates and levies,
liens and property seizures fell to historic lows, and even now have
not returned to their previous levels.

Property seizures, which totaled 10,090 in fiscal 1997, dropped to 161
in 1999, and reached only 399 last year. Audits of individuals dropped
from 1.5 million in fiscal 1997 to 617,765 in 2000. The total made its
way back up to 849,296 last year.

These declines took place at a time when the U.S. economy was
expanding rapidly and, as has now become clear, abusive tax shelters
grew into a virtual industry.

Colaprete, his restaurant, known as The Jewish Mother (its company
name is Mom's), and others sued the IRS and Virginia officials,
seeking $20 million in damages. But the courts appear to have been
less convinced than Congress. A federal district court dismissed most
of the complaints in 2000, and last week the 4th U.S. Circuit Court of
Appeals tossed out those the lower court had left standing.

The appellate court found that IRS and other agents acted reasonably
when they obtained the search warrant used in the raid. Even though
Colaprete was never charged with anything and his records and
computers were eventually returned, the court held that the bookkeeper
had given the agents enough to support a warrant.

The raid may have been a mistake, but agents operated within the law.

"The pertinent question is not 'whether probable cause was, in fact,
present," but 'whether the officer could have reasonably thought there
was probable cause to seek a warrant," " the court said.

The court noted that the bookkeeper brought with her cash-register
receipts and other records and told agents she had been keeping, as
she said her employer had asked, two sets of books, which would have
implicated her as well as her employers in criminal activities.

When "an informant's statements are against her penal interest [it]
significantly strengthens the informant's credibility," the court
said.

The picture painted by the court is hardly one of an agency raging
around the country out of control and trampling taxpayers' rights.

Rather it looks more like a lone state trooper trying to enforce a 55
mph zone on a road where half the drivers go 80.

But that seems to be what Congress wants. Last month the House voted
to cut President Bush's budget request for the IRS for next year by
more than $380 million. The Senate has not yet acted, but if the House
funding level becomes law, Internal Revenue Commissioner Mark W.
Everson wrote in a letter to Sen. Max Baucus (D-Mont.), it would
"jeopardize... enforcement initiatives" and "substantially reduce
our ability to hire an additional 4,100 enforcement personnel," which
the agency had hoped to do.

In fact, the cut would leave the IRS $80 million short of what it
needs to pay the enforcement people it hired this year, he added. "We
would likely have to freeze hiring and not be able to cover employee
losses in our service and enforcement areas, which would result in a
net reduction in IRS staffing," Everson said.

Too many speeders? Fire the cops.

If you're a speeder, that sounds like a good idea. But if you drive at
the legal limit and worry about getting hit, it might give you pause.

And honest taxpayers are getting hit. The "tax gap" between what
Americans owe and what they actually pay is running between $250
billion and $311 billion -- a figure, and it's only a guess, that
works out to an average of about $2,000 extra per tax return that
taxpayers have to shell out.