08/19/96 IS A CHAINSAW THE WAY TO FIX THE IRS?

IS A CHAINSAW THE WAY TO FIX THE IRS?

If you want to make Chris Mitchell's blood boil, merely mention the Internal Revenue Service. Last summer, the owner of American Specialties Inc., a small San Antonio maker of embroidered sportswear, received an IRS notice warning that she hadn't submitted quarterly payroll taxes for her 16 employees--even though she was certain she had. Facing a 90-day deadline before the IRS slapped a lien on her business, Mitchell went down to the wire with dozens of calls to indifferent IRS agents before the agency realized its error: An IRS clerk had inexplicably changed Mitchell's employer ID code to a previous ID number.
Did Mitchell get an apology? Hardly. Three months later, the IRS made the same mistake--making the San Antonio businesswoman relive the Kafkaesque experience. The IRS ``needs a clear revamping,'' fumes Mitchell. ``They run roughshod over everybody. There are no limits to what they can do.''
Bob Dole is hoping to tap into such seething anger at the polls this November. As part of his sweeping economic agenda, Dole vowed on Aug. 5 to ``eliminate the IRS as we know it'' by simplifying the tax code, privatizing many of the agency's functions, and reining in IRS auditors who conduct what he calls ``KGB-like'' probes of taxpayers. ``My administration will free the American people from tax tyranny,'' Dole vows. IRS critics applaud the approach. The Dole proposal, exudes Peter Sepp, spokesman for the Washington-based National Taxpayers Union, ``could help take some of the teeth out of the pit bull.''
But some tax experts question whether Dole's reforms would be too sweeping, if not too impractical, to be enacted. His proposal to allow the 40 million Americans who file one-page returns to simply have their taxes withheld at work would probably provoke a backlash from employers finding themselves juggling extra paperwork. And experts say Dole's proposal to restrict the IRS from conducting intrusive audits conflicts with his desire to shift the legal burden of proof in IRS audits from the individual to the government. ``If the IRS had to prove everything, they'd have to poke into your personal affairs in ways you'd resent,'' says Holmes F. Crouch, a Saratoga (Calif.) tax preparer.
Perhaps more important, critics in the Clinton Administration and elsewhere warn that Dole's proposed 30% cut in the IRS's staff by 1999 would imperil the agency's ability to maintain a voluntary compliance rate that, at nearly 83%, ranks among the world's highest. ``These proposals would bloat the budget deficit, penalize the vast majority of taxpayers who pay all of their taxes, and undermine respect for the law,'' says Deputy Treasury Secretary Lawrence H. Summers.
Other skeptics fear that Dole's plan to provide a one-year amnesty to tax delinquents might turn into a boondoggle. While Dole is banking on the one-time shot of new tax revenues it would generate, skeptics say it would also send a signal that compliance doesn't matter. They note that similar state programs produced revenue windfalls but didn't always improve compliance--and sometimes emboldened a whole new group of tax scofflaws to wait for the next amnesty. ``Most taxpayers would be rightfully annoyed if their next-door neighbor pays his taxes late and gets amnesty,'' says Joseph F. Lane, a Menlo Park (Calif.) agent licensed to represent taxpayers before the IRS.
Ironically, candidate Dole's proposals to shrink the IRS would cause troubles for President Dole if he were elected. That's because the plan might reduce the revenues Dole would need to balance the budget. Indeed, even such fellow IRS-bashers as House Ways & Means Committee Chairman Bill Archer (R-Tex.) have come to realize the limits to their rhetoric: Despite his frequent attacks on the agency, Archer in late June opposed a House subcommittee's efforts to slash the IRS's fiscal 1997 budget by 8%, to $6.75 billion. Perhaps mindful of Administration estimates that every dollar in IRS budget cuts costs $4 in lost tax revenues, Archer warned that ``substantial federal revenues could be lost, thereby exacerbating our federal budget-deficit problems.''
To be sure, the IRS has long been a target for public scorn, given its unpopular mission. That resentment has increased as the tax burden has grown for many Americans--and as more taxpayers are subjected to IRS audits. Thanks to the IRS's success in automating more functions, the agency conducted a record 1.9 million audits last year, nearly 50% more than in 1991.
STREAMLINING? At times, though, the agency can be pretty heavy-handed. Particularly irksome to many taxpayers are the controversial ``lifestyle audits'' that IRS agents have conducted in recent years when they suspect that taxpayers' living standards grossly exceed their reported income. Dole now wants to end such audits, which involve deep probing into the individual's personal spending, except in cases of clear criminal behavior.
Experts believe that Dole, if elected, might better succeed by attempting to streamline a tax code that has become complex and unwieldy. ``The only way to create a better IRS is to simplify the tax code,'' says Stuart Kessler, senior tax partner for New York-based Goldstein Golub Kessler. And that approach might avert a revolt by taxpayers like Chris Mitchell.
By Dean Foust in Washington