"We could do more audits than anybody ever did before and set some kind of record. But the question is, Have we lived up to our obligation to the public to be effective? Effective means not only did we do the job, but did we do it well, seeing to it that the taxpayer was treated fairly?"
If you think tax instructions can be confusing try locating a room at 1111 Constitution Ave. NW Washington D.C. At that appropriately digitalized address sprawls the national headquarters of the United States Internal Revenue Service -- an entire city block's worth of chiseled stone that, with its purposeless columns, confounding corridors, and tedious fenestration, seems to be the architectural equivalent of filling out a Form 1040.
Inside, behind a modest desk on the third floor, sits one of the more awesome presences in the capital -- you know, what's-his-name, the head of the IRS. Although his signature has adorned the front page of tax instruction booklets for the past three years (just below the pitch for voluntary contributions to help defray the national debt), few citizens have the remotest idea who he is or where he came from. Then again, it may be that few want to. As the saying goes, what you don't know can't hurt you.
But if he doesn't turn heads with the regularity of, say, Paul Newman, the atmosphere can be equally charged when his identity is made known to others, inevitably triggering a kind of nervous laughter. He takes it all in stride.
"At most, it provides me with a little bit of enjoyment from time to time," he acknowledges. "But it does tend to remind you that people look upon the individuals of the IRS as identified with tax collection."
That incontrovertible fact notwithstanding, Roscoe L. Egger Jr. does not come across in person as the National Ogre. For one thing, he strikes a tidy, slight figure whose unprepossessing demeanor exudes only the best of will. For another, neither he nor his 90,000 or so subordinates is officially out to "get" anybody -- provided, of course, that the individual or business in question has dutifully filed, accurately accounted for, and timely parted with his, her, or its annual tithe.
As it happens, that is an increasingly significant proviso: Perhaps more than any recent tax commissioner, the 63-year-old Egger is bent not so much on reinterpreting statutes as on bringing shirkers to task, and doing it equitably.
Of course, as Egger appreciates, no one likes to pay taxes. "They never have throughout all of history, and while they do it willingly -- that is most of them -- I suppose it is never pleasant to part with what you've worked for and earned." Pleasant or not, an additional 4,800 citizens are targeted to be sharing that experience this year. In one of his most controversial acts to date, Egger has authorized the IRS to obtain mailing lists of high-income individuals from private vendors, in an effort to track down tax evaders.
To some, the move smacks of invasion of privacy, but Egger strongly disagrees. "The New York Times and others ran articles indicating there's something sinister about what we're doing here. Good heavens, all we're doing is something we could do ourselves, except we can buy it cheaper on the commercial market. The compilations are done from telephone books, auto registration lists, city directories, and various other public sources. It's really a research effort. The information we get has to do with a name and address, the number of people in the household, the age of the head of the household, estimated income level, and one or two other minor things . . . Our purpose is not to identify returns for examination . . . but merely to identify possible individuals who should have filed a tax return and did not. It's strictly a nonfiler program, nothing more."
As for those who file inaccurate returns, Egger is content to go after them with the traditional weapon of the audit. He is pleased to report that since his appointment in 1981, IRS examiners have slashed the "no-change" rate -- the proportion of audited returns that are ultimately accepted as originally filed -- nearly in half, from about 43% to a current 22%. "In other words, we're doing a better job of selecting returns," Egger concludes. "And we'll keep right on bringing that percentage down."
Also down during Egger's tenure has been the raw number of returns selected for examination, currently 1.6 million a year. "We could do more audits than anybody ever did before and set some kind of record," notes the commissioner. "But the question is, Have we lived up to our obligation to the public to be effective? Effective means not only did we do the job, but did we do it well, seeing to it that the taxpayer was treated fairly?"
In selecting returns for audit, the agency's 28,000-person examination division relies heavily on what Egger calls "very sophisticated formulas" for scoring certain line items from each return. When the result is abnormal, the return is subject to the dreaded examination, and the unlucky taxpayer is advised to, as Egger says, "put your things together, and we'll talk about it."
To most citizens, such an invitation is about as welcome as a course of periodontal surgery. If it is any consolation, Egger himself has been on the receiving end of these invitations with a regularity that would be the despair of most others. "Few people in the country have had as many examinations as I have, certainly in the last several years," he reflects with equanimity. And, although he admits to having been apprehensive the first time, he has stood up well under his pace-setting ordeal. "I have not had any difficult experiences."
Now for the bad news: The commissioner thinks more returns should be examined. "The purpose of a tax audit," he points out, "is not just to catch somebody who may have understated his income, but to monitor the system. It is to see how different features of the law play out in their applications. When we capture that kind of information, we then make recommendations through the Treasury to Congress to simplify or eliminate some of the problems we find. So it is important to conduct audits on returns even though there is no reason to believe that there is anything untoward about them."
Lest anyone figure the odds may be changing in his or her favor, however, Egger adds that "we still target our examinations to those returns where we believe there is a high likelihood of some kind of adjustment."
The targeting of examinations has, in fact, been a touchy subject over the years. One suspicion that has made some taxpayers uneasy is that the IRS goes after prominent or rich people, using them as examples for the rest of the flock. Egger insists there is no truth to the allegations. "We do not make return selections on that basis. But if we read in the newspaper where somebody has embezzled a lot of money, or if other information that is out of the ordinary comes to the attention of our field people, the district office might be prompted to pull that return and have a look at it."
Egger also downplays the role of the IRS's infamous under-the-table informer system. "People write or call us about taxpayers and say you ought to look at this individual return. We don't always follow up on those because we recognize that people do this out of anger or resentment."
Policy aside, the truth is that"pulling a return" is no simple matter these days. With some 170 million tax returns coming in each year (not to mention 900 million information forms), it takes six weeks simply to retrieve one from the record storage center in Kansas City, Mo. That situation should change by the end of the decade, however, when the IRS plans to be storing tax information on immensely capacious, ultra-high-speed laser disks. "Our hope is that we'll be able to retrieve a return electronically from anywhere in the country in a matter of seconds," says Egger. "This is not Buck Rogers, it's known technology. It's here."
That unbearably combination -- high technology plus a determined administrator -- is bound to make habitually shortcutting taxpayers think twice in the future. But don't count on a federal tax amnesty. Egger is against the idea, despite the success of recent state amnesties. "My feeling is, once you start that kind of thing, you have to keep it up. People begin thinking that, if they wait long enough, soon there will be another amnesty. It rewards the evasion of tax liability in a fashion I just don't subscribe to."
On the other hand, the IRS has long maintained an unstated policy that allows penitent tax cheats to pay up with little fear of prosecution. Egger himself acknowledges, "If somebody got a pang of conscience and came forward and said, 'I really shouldn't have done that,' certainly we would give that factor a great deal of weight in consideration of whether to proceed with criminal action."
Egger is far less sympathetic toward tax-shelter packagers who knowingly promise more than they can legally deliver. Although he has spent a lifetime in accounting and law -- interrupting a partnership at Price Waterhouse to accept the Reagan appointment -- he has been shocked by some of the sheltering setups he has seen as commissioner. "They are a blemish on the whole system," he declares.
What especially riles him is that the victims are often people with relatively modest incomes, in the $25,000-to-$45,000 range. "The really high-income people, particularly those who are active in the business world, tend to be quite cautious about the shelters they choose to invest in. Most of them are interested in something that's a good investment They aren't so quick to buy merely because it is going to postpone their taxes this year." In contrast, middle-income people have proven to be fairly easy marks for shady shelter promoters. "That's disturbing, because in those brackets it creates a severe financial problem when they discover that the schemes won't work and they have to pay the back taxes plus interest and penalties." As a consequence, Egger has broken with tradition and begun actively seeking injunctions against sellers of abusive tax shelters. "We are trying to identify them on the front end, so people can be forewarned that these schemes are not what they purport to be. We can stop the promoters before they involve too many people." As of February, the Department of Justice attorneys had obtained half a dozen injunctions on behalf of the IRS, with "many, many more in the pipeline," according to Egger.
All of which has been a lesson for the commissioner. "I don't think I really appreciated the impact that such entities as tax shelters have on the system until I got here," he admits. "And I didn't realize the tremendous amount of resources we have to use to deal with these things."
On the other hand, he does not favor any wholesale changes in the system, such as adoption of a so-called flat tax, which would eliminate all deductions in favor of a lower universal rate. We believes that such a tax would "probably bear more heavily on middle-income groups and be quite a boon to the very-high- and very-low-income earners. I suggest that that runs counter to the political philosophy that has surrounded the development of our tax system for a long, long time."
He has even stronger views on the subject of cash-based accounting, whereby to jockey tax obligations companies pay taxes on income when it is actually received, rather than when it is recorded. "When I got here, and looked at the long list of cases that were in her seeking that kind of change, I realized all of a sudden that here was a significant and material distortion of income. I know good accounting when I see it and I can't see any public purpose being served by permitting the cash method, which really isn't a method at all but really a kind of convention."
Indeed, there is probably nothing more taxing to the commissioner's patience than the sight of people steering around the tax code, even if it is tolerable within the letter of the law. If Egger comes back in 1985 -- an event dependent on the Presidential election, a repeat invitation, and his own inclination to accept -- both businesses and individuals can look for loopholes to grow tighter still.
"My experience as a professional was not oriented to gimmickry," declares Egger. "I feel strongly about that. I found that there are many legitimate areas of tax planning that will minimize the impact of taxes on certain transactions and business activities, and that's where the value of the profession lies. I don't think it lies in trying to invent some cute gimmick that clearly circumvents the intent of the law. That never was my intent in practice, and I don't think it belongs in our society. I really don't."