The IRS's most-embarrassing moments - Economic Observer - Internal Revenue Service

EVEN A STOPPED CLOCK is right twice a day! Sometimes, even the Internal Revenue Service gets it right, and you get it wrong. I've always said that only those with tombstones over their heads don't make mistakes, but it's sure embarrassing when the IRS points out where you blew it. In those situations, I like to remind the agency's auditors that nobody's perfect, and that the IRS, too, has had its moments. For example:

If you're sitting in an audit and fail to produce 100% of your receipts and requested documentation, wipe the smirk off your auditor's face by reminding your government representative that on Apr. 14, 1987, then-IRS Commissioner Lawrence B. Gibbs suggested that some agents "need more training in how to be courteous." Follow that up with the March 1, 1999, conclusion of the General Accounting Office that "The IRS cannot do some of the basic accounting and record keeping tasks it expects American taxpayers to do."

Current Secretary of the Treasury Paul O'Neill, in talking about the Internal Revenue Code, remarked on Apr. 26, 2001, that "it is an abomination. Interpreting it is an awful thing to ask human beings to do.... Administering the tax code so that you never, ever, make a mistake is, I would submit to you, impossible." Then, talk to your auditor about removing any penalties he may have been contemplating.

The IRS is infamous for its public blunders. In January, 2001, for instance, taxpayers calling phone numbers listed in two IRS publications were referred to adult content chat lines. Maybe the IRS confused "taking it all off" with deducting an expense. In August, 2001, it was revealed that as many as 40,000 Federal tax returns, requests for extensions, and other tax forms were destroyed or hidden at an IRS processing center in Pittsburgh. According to Sen. Max Baucus (D.-Mont.), chairman of the Senate Finance Committee, his office has received calls from more than 21,000 taxpayers asking about uncashed checks. Millions of dollars were lost in payments that disappeared.

Moreover, 2001 in Pittsburgh wasn't the first time the IRS lost important documents. Remind them of that if they get testy about a missing receipt in an audit. Back in the 1980s, it was disclosed that tax returns were being destroyed or mishandled by IRS employees in Philadelphia and elsewhere. Those allegations eventually resulted in the Congressional reforms imposed on the IRS in the 1990s. Obviously, there are some people working for the IRS who have "returned" to their pre-Reform Act activities. I guess they "lost" the message.

Sometimes, IRS blunders are just annoying. In 1998, it sent out apologies to 20,000 taxpayers for mistakes it made in handling their accounts. Next, the IRS followed up with sending 1,000,000 taxpayers tax packages with the wrong bar code, making them unusable because of zip code errors. Then, things got even worse. Kenneth L. Steen of Chattanooga, Tenn., expected a refund of $513. Instead, he received a letter from the IRS demanding payment of $300,000,-007.57! (A rounding error?) An IRS official reported that 3,000 people around the nation got similar erroneous notices.

The IRS computers try to cross-check W-2 forms and 1099s to what is on your return. If they don't match up, you get a letter from the government. However, according to the General Accounting Office, about half of the 10,000,000 correction notices the IRS issues each year are "incorrect, unresponsive, unclear, or incomplete." If you get an incorrect notice, follow the appropriate procedures to contest it, or contact your local Office of the Taxpayer Advocate at 1-877-777-4778.

IRS officials at least had the good grace to blush when then-Sen. Nancy Kassebaum (R.-Kan.) exposed a $50 penalty against an 84-year-old Kansas City woman who underpaid her tax by 60 cents. Taxpayers "should not be hit with outlandish penalties for failing to memorize the Federal Tax Code," she argued. According to the Washington Post, one couple was assessed an additional $205 when they were found to be one cent shy after paying taxes of nearly $9,000!

It's bad enough when IRS screw-ups take up your time and create unnecessary legal and accounting fees, but sometimes, IRS actions have crossed the line into criminal activity. Former Sen. Edward V. Long (D.-Mo.) compared the IRS to a "Gestapo preying upon defenseless citizens." His Senate committee found the audit and investigative techniques of the IRS to include defying court orders, picking locks, stealing records, illegally tapping telephones, intercepting and reading personal mail, using hidden microphones to eavesdrop on the private conversations of taxpayers with their lawyers, employing undercover agents with assumed identities, and using sexual entrapment.

IRS terrorists know no shame. One taxpayer's wife, stricken with polio, needed an iron lung to keep her alive. An IRS agent threatened to seize the iron lung unless taxes claimed to be due were immediately forthcoming. The panicked taxpayer paid the claimed deficiency immediately.