Monday, February 18, 2008

The Tax Auditor

Many people are surprised to discover that I spent a number of years working as a tax auditor for the IRS. I was hired to do audit work at a service center where I did not interact directly with taxpayers. But my training, which lasted over a year, required me to spend a lot of time doing face-to-face audits. Frankly, I hated that part of the job.

Most of the people that I audited were folks that were honestly trying to file their taxes correctly. But there were more than a few that purposely pushed the envelope on what was appropriate. Then there were a handful of downright dirt bags. Two in particular stick out in my mind.

I wondered why one guy had paid nearly triple the amount of tithing that was required by his church. At least it looked like that from the amount of income and charitable donations he listed. I requested bank records and discovered that he had a lot more income than his tax return showed. Eventually, we discovered that the man had embezzled from the business he worked for. But, hey, at least he paid tithing on it. I had to turn that case over to the criminal investigators.

Another guy worked as a private assisted living specialist. He would go to old peoples’ homes and prepare food, bathe them, lift them, and help them do what they could not do for themselves. This guy carried an air of distrust about him before, even I ever heard him even utter a word. His banking records showed a lot more income than he had reported on his return. He had received regular infusions that he said were gifts from the elderly people for whom he cared. He claimed these were not a form of compensation, but were free will gifts. This was difficult to verify because most of his clients from the tax year I was auditing had passed away by the time I was doing the audit.

Contacting the estate executors of these people (usually one of the children), revealed that this guy had taken advantage of these folks. Many of this guy’s elderly clients had at least somewhat diminished mental capacities during the period of care. He schmoozed these folks and suggested gifts, which some of them gladly gave, much to their children’s chagrin. The guy was a slimeball. But from the perspective of the IRS, he had not violated any tax laws.

Perhaps more interesting than the direct taxpayer interactions was the corporate culture at the IRS. The power structures in the organizations where I worked were somewhat bizarre. It seemed like ego was the primary benefit of management, since pay wasn’t very high. People that were otherwise nice folks frequently ruled their organizations in a Stalinist style once they came to power. And many workers put up with it. The tenacity with which some managers and workers guarded their ‘turf’ was like something from a bad Cold War spy novel.

I found the attitudes of other auditors particularly instructive. Many were simply trying to do their job. They were trying to make sure that tax laws were followed, but they also tried to give people a fair shake. They understood that it’s deucedly difficult to correctly file a tax return in the U.S. if your situation has any kind of complexity at all.

But then there were the auditors that enjoyed sticking it to taxpayers. I recall a woman that seemed to particularly enjoy haranguing taxpayers over what I thought amounted to petty issues. She would go after a $10 unverified deduction with the tenacity of a pit bull. And then there was the guy we called Killer. He would sit across the desk from a taxpayer, looking at them with this condescendingly smug-evil smile on his face that reminded me of when the Nazi SS Major Arnold Toht in Raiders of the Lost Ark says, “Fräulein Ravenwood, let me show you what I am used to....”

One of our nicer auditors once had occasion to audit a former congressman. The issues were not terribly complex, but an adjustment was necessary. The former congressman (who was a nice guy, but perhaps not a terribly effective politician) remarked that if he had realized how these laws impacted regular people, he would have paid more attention during committee meetings. Now, doesn’t that give you warm fuzzies about the laws that come out of Washington, DC?

I spent most of my auditing years working on tax shelters. Congress had passed all kinds of tax loopholes that encouraged the formation of small corporations and partnerships. Unfortunately, many of them were nothing more than sham organizations that generated no revenue, except for the money that came from often unwitting investors. This cash was pocketed by the main scammers in exchange for tax write-offs, which many investors dutifully took.

By the time the jig was up, the scammers were nowhere to be found. The tax returns of the (often elderly) investors had to be adjusted to remove the tax write-offs. These people had no recourse. They now owed IRS thousands of dollars in taxes, interest, and penalties. And they had no way to get their scammed investment back from the guys that had sold them the bill of goods. It was not a pretty picture.

During my years as a tax auditor I gained an appreciation for the immense complexity of our tax laws and the stifling effect this has on entrepreneurship in our nation. I learned that most taxpayers are willing to pay their share, but many are frustrated that it is so difficult to do. I found that there are some bad guys out there that prey on others. And I found that there are some bad guys within the IRS that enjoy exercising unrighteous dominion over others.

The interesting thing about all of this is that it hardly matters who is in the White House or which party controls Congress. The bureaucracy has a life of its own. National politicians might be able to change its course one or two degrees, but the bureaucracy is so strong that most of what is done at the top levels has little effect other than to grow the size and scope of the problems.

The idea that the federal leviathan will be cowed and properly managed by whoever seems to be the next great hope is an incredibly ignorant concept. They might manage better than our current crew, but it will make little difference. The only way to better manage the beast is to reduce its scope and size. It does not appear that Americans want that right now, as evidenced by those they are bringing to power. Both major parties have embraced the engulf and devour style of central government. Does anyone out there care?

Next segment in this series: The Fiddler Must be Paid

Past posts in this series:

Money Attitudes
YM and OPM
Repo Man
Our First House


Quesi said...

I definitely care about the continued advancement of big government. I am not sure if that is what your question was directed to or whether anyone cares about the scumbags in the IRS and citizenship of U.S. Either way, I care about both of these. Being a small business owner I have received threatening letters from the IRS while trying to pay my taxes as honestly as I can (not because I enjoy paying taxes).

As far as big government goes, it seems we are in a downward spiral. Can it be reversed? I know not. I would like to think it could be, but it is up to "We the People" and "We the People" seem to like big government.

I have often thought that educating the masses in basic economic principles would go a long way, but logic (i.e. econ 100) doesn't seem to win hearts. Hearts are won through emotions. Maybe if one could teach economic principles (and social, foreign-policy, etc... principles)while shedding a tear and telling stories about the depression being caused by big government then hearts could be won? :)

Scott Hinrichs said...

Interestingly, emotion is the only thing the current Democratic front-runner for that party's nomination has going for him. But a lot of people are buying it.