IRS Feels Heat Despite Report Finding No Rampant Abuses

The Internal Revenue Service remains under intense political pressure to reform its conduct, despite the release of a report this week that showed no evidence of widespread wrongdoing by the agency’s criminal investigation division.

IRS officials said Wednesday that they have undertaken a massive restructuring in response to Senate hearings last year exposing abuses by IRS agents. The disclosures prompted the investigative report released Tuesday.

While the inquiry by former FBI and CIA Director William H. Webster found no evidence of widespread abuse, his report recommends an overhaul of the investigative division to refocus on tax cases instead of narcotics-related money laundering and other crimes.

In addition to Webster’s recommendations, IRS reform proponents said a key federal bill passed last year and additional studies of IRS operations underway should maintain the momentum for substantial change at the much-criticized agency.

“The work that is done in the months ahead will have a profound influence on the future,” Sen. William V. Roth Jr. (R-Del.), chairman of the Senate Finance Committee, said in a hearing Wednesday. “It will demonstrate what can be accomplished to make even the largest bureaucracies . . . more civil in their interaction with the people who matter most--the taxpayers who pay for them.”

In his report, Webster also said the division needs to adopt new methods of measuring its performance and make more detailed analyses to determine whether its agents should conduct armed searches or use less-intrusive tactics.

Although Webster did not find extensive abuses by IRS criminal investigators, agency officials publicly apologized last year after the Senate hearings drew attention to numerous instances of misconduct. Among them was one case in which an IRS agent in Tennessee attempted to initiate a bogus criminal investigation against then-Sen. Howard Baker.

Senate staff members said Webster had complained that his job was complicated by a lack of data from the investigative division on its performance. Webster could not be reached for comment.

IRS Commissioner Charles O. Rossotti embraced the recommendations in Webster’s study, but the agency is likely to face even more scrutiny in the next few months as other reports surface.

Investigators from the General Accounting Office, an arm of Congress, are conducting a review of allegations against IRS criminal investigators made by several IRS employees at last year’s Senate committee hearings.

Senate staffers said witnesses at the hearings have suffered retaliatory actions since they returned to work at the IRS, including one employee who was demoted and another who was forced to watch a videotape of his testimony while fellow employees ridiculed him.

Another report on the agency by former Energy Department Inspector General John C. Layton is to look into specific instances of abuse in the IRS’ examination division, the agency’s internal watchdog. Both the GAO study and the Layton report are expected in the next few months, and the Senate Finance Committee may hold another hearing on the alleged witness retaliation in the fall.

IRS experts pointed out that Webster’s review, by focusing on the criminal investigation division, did not explore the agency operations that are of greatest concern to most taxpayers.

“The reason the IRS was taken to task is that it was synonymous with big, bad government,” said Andre Fogarasi, managing director of federal tax services in the Washington office of accounting firm Arthur Andersen. He said lawmakers who have been angry with the agency “won’t be appeased by this report. Their feeling is that the IRS has too much connection to our daily lives, and they want to remove that.”

Pete Sepp, a spokesman for the National Taxpayers Union, said the Webster report “should not be portrayed as some kind of clean bill of health” for IRS practices.

“Taxpayers are not necessarily going to come into contact with the criminal investigation division,” Sepp said. “Overbearing auditors, [ignorant] IRS telephone personnel and errant data-entry people can all cause headaches for taxpayers that they would define as abuse.”

The IRS also is under the gun to overhaul its tactics as a result of last year’s passage of the IRS Restructuring and Reform Act. Among many other things, the sweeping law shifted the legal burden of proof in civil tax cases from taxpayers to the IRS, provided the right to a hearing before the agency can seize taxpayer assets, and established a nine-member oversight board to supervise the agency.

Critics of the Clinton administration note that the president has failed to fill any of the seven seats on that watchdog board.

“Without that outside oversight, many of the reforms under the 1998 law will fall by the wayside,” Sepp said.

White House spokeswoman Elizabeth Newman replied that “we are in the process of completing the evaluation of potential nominees and expect to have the names out shortly.” President Clinton, she said, “is committed to IRS reform.”

IRS Commissioner Rossotti on Wednesday also outlined his progress in trying to reform the tax agency, including new training for nearly all of its more than 100,000 employees. But he acknowledged in a Senate hearing that its central computer and accounting systems remain “fundamentally deficient” and still based on 1960s technology. IRS officials plan to replace virtually their entire inventory of computer applications.

“There is no quick fix and there is no magic bullet,” Rossotti said. “Nor is there a low-risk plan, since such major and fundamental change necessarily carries with it the risk that plans and timetables may need to be altered and operational errors may occur along the way.”

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* TAX BITE: The burden of income taxes has eased for most Americans. A1