Prepared Statement of Katherine Lund Before the Senate FinanceCommittee. Subject - Oversight Hearing on the Internal Revenue Service

Testimony Taxes

Prepared Statement of Katherine Lund Before the Senate FinanceCommittee. Subject - Oversight Hearing on the Internal Revenue Service

September 24, 1997 17 min read
Katherine Lund
William E. Simon Fellow in Religion and a Free Society

Chairman Roth, and Members of the Senate Finance Committee, thank you for allowing me this opportunity to appear here this morning to relate to you my experience with the Internal Revenue Service.

Like many women who have gone through a divorce, I was the one stuck with the tax bill for our last joint return for tax year 1983. The IRS assessed that return for additional taxes of $7,000, but sent all the notices to my former spouse. Unfortunately, it took him over a year to notify me of the assessment. I immediately contacted the IRS. The IRS had ceased to be willing to examine my records and was demanding that I pay them $16,000 instantly. At the time, my former spouse was earning in excess of $40,000 a year as a glazier and had no dependents. My income was approximately $15,000 a year as a newly hired bank employee with a dependent 14 year old daughter. For the two years following my divorce, I was financially destitute. I had just managed to get an apartment -- a real home for the two of us.

I mention this to remind you good people that when an IRS collection procedure gets out of control, the victim of that collection still has to deal with all the other traumas of their life. An honest collection by the IRS, with no snafus, of an amount actually owed is incredibly stressful in itself. Therefore, it is critical that the IRS not be allowed, whether by design or accident, to pursue taxpayers for erroneous debts. At present, there are no effective protections against this.

In my case, I had to file a Tax Court Petition to force the IRS to examine my records, which I did in 1988. This is not unusual if the IRS does not get a response to early requests for records, and I did not feel resentful or persecuted. However, it did cause problems and added to my stress. I had to use my rent money to pay the accountant and lawyer, and so I lost my apartment. My daughter and I were reduced to sharing a rented room. I consoled myself with the thought that we had survived worse and we would get another apartment later.

It is important to note here that my ex-husband was not a party to this petition in tax court. We settled out of court and the IRS agreed to a reduced tax from $7,000 to $2,709, a reduced total demand from about $16,000 to approximately $3,500. I went to the meeting in July 1988 to sign the agreement and, check book in hand, prepared to pay the amount in full at that time.

The IRS refused my payment until they had sent me a bill because they would not have anywhere to credit the money without the bill and they claimed they needed time to calculate the exact interest due. I wanted the payment properly credited. I wanted this to go well and to be permanently resolved. I thought, in a few weeks, I'll have a bill. But, the IRS said that the bill would take six months to prepare and arrive no later than January 1989. Six months! I recall asking if I was going to be charged interest for the six month waiting period and the IRS attorney, through my accountant, said no. The interest would be calculated through the date of the agreement and as long as I paid it right away in January, there would be no additional interest. He said it would be about $3,500 total. I never understood why they could not just whip out their calculator and tell me what I owed right then and get this whole thing over with.

The bill never came and in February 1989, I started calling the IRS asking where it was. I called the Fresno office and they suggested I also call Laguna Niguel. Both offices had no record of any taxes owed by me. I found this hard to believe. I wanted to be absolutely certain they were correct. I wanted to remarry and I did not want to bring this tax bill into the marriage. I called both offices again in March and again before July. I was told the same thing, that I owed nothing for 1983. I asked for a receipt or something to show this was paid because I was simple minded enough to believe this was as a reasonable request. The IRS employees all said that they "don't do that." I had to take the word of the IRS that I owed nothing. In this, I had no choice. At the time, I was not aware that my account had been set up on a separate bookkeeping system to which the IRS employees with whom I spoke did not have ready access.

It works like this: when you file a tax return, it is recorded in a Master-File. This is what the IRS clerks pull up on their computer when you call and ask if you owe money. However, at some point in 1989, the IRS "split" the Master File of our joint 1983 return and transferred separate assessments into two NonMaster Files, in each of our individual names and respective social security numbers. This was due to the fact that I had gone to tax court and my exhusband had not. Since my ex-husband and I had taken separate actions with regard to this matter, the IRS had to handle our files separately.

These Non-Master Files do not show up on the computer when the IRS clerks check a taxpayer's social security number for a balance owed. According to the attorney who explained this to me in 1997, the Master-File continues to exist, but may show as a zero balance, until the IRS recombines those accounts. It will then reflect the correct amount owed according to the agreement. Until that happens, every time the IRS clerk pulled up my or my joint signer's social security number, they will see a zero balance and conclude that no taxes are owed. To add to the confusion, there is no notation in the Master-File that it has been "split."

Therefore, there is no way for the IRS clerk to know that you might have an outstanding collection in a Non-Master File. As a result, I was repeatedly told by IRS clerks that I owed nothing. So far as I know, to this very day, these accounts have not been recombined and the Master File continues to exist with a zero balance while the Non-Master Files shows a balance owed. Yet, the IRS has been aware of this error at least since I notified them of it earlier this year -- if not even earlier. I have made repeated requests of the IRS to recombine these accounts ever since I learned of the problem. As far as I know, it has not been done. It is incredible to me that Non-Master Files are allowed to co- exist with Master-Files at all! It creates two accounts under the same name with the same social security number, that can reflect conflicting balances due for the same tax year for the same person. Such a practice substantially increases the potential for error and confusion inside the IRS while simultaneously making it impossible for a taxpayer to get reliable information from the IRS. The taxpayer either gets conflicting information, or in my case, consistent but incorrect information. Every day the taxpayer is unable to get accurate information from the IRS about a balance owed, is another day's interest added to the debt. Even while the taxpayer is wandering around in this IRS maze of multiple accounts the clock never stops running. This is incredibly frustrating and unfair to any taxpayer. Unable to overcome this obstacle to compliance through no fault of the taxpayer, he or she is charged penalties as well for that failure! Much of my misery was caused because the IRS could not answer accurately the simple question, "How much money do I owe?" As far as I know, that condition has not changed.

To add to the confusion, my former spouse telephoned my fiance to complain that he had paid the tax and now the IRS was after him for it again. He refused to share his records with me, but, his story and the IRS story both matched. Still, I had no independent records to prove either one. I requested his payment records from the IRS in 1988, records to which I learned I was not entitled at that time. I made a second request for those records in 1997. The IRS has refused me these records or even a statement as to their content. Why, if my joint signer has never paid anything on this tax, is the IRS hiding that information from me? How can I know, for certain, what my liability is without the records of my joint signer? Perhaps he has paid nothing, but if that is so, then their refusal to share that information with me makes no sense.

Mr. Chairman, I did everything humanly possible to obtain correct information. I made every attempt to get this tax paid and every conceivable request for some kind of record to evidence what the IRS was telling me. I know of nothing else I could have done. So, after being wrongfully informed that there was nothing owed, I remarried in July 1989. I carried on business with the IRS without incident and my new husband and I filed a joint return in 1990 and received a refund. We were now convinced, of course, that if I owed any money to the IRS, the IRS would never have issued a refund, so now we were confident that the IRS information was correct. It was not.

In September 1990, without any notice and without our knowledge, the IRS filed a tax lien against me.

On December 19, 1990, the first lien holder on our home sued us as a result of that Federal Tax Lien in the sum of $6,161.41. The lender threatened to call our loan if we did not immediately get the IRS lien released. We would have lost our home. A home, by the way, that my new husband bought for himself 6 years before he met me. So, the real damage was being done to him, an entirely innocent spouse.

All of this, after I had been so careful to pester the IRS repeatedly for as a bill and been repeatedly told that no money was owed!

Worse than that, the lien did not reflect the terms of our earlier settlement agreement! The tax lien reflected an assessment nearly twice that of the IRS agreement and the IRS refused to discuss that fact with me. Meanwhile, while the assessment was 'ripening' it had gone up to over $8,000!

I tried to reopen my tax case and was told that the Federal Tax Court did not enforce out of court settlements made with the IRS! How convenient this is! Only the taxpayer is held to the agreement, not the IRS! I was adamant that this was just morally wrong! I was very upset!

I fought this collection for two reasons: (1) because, based on information provided by the IRS itself, I sincerely believed I owed nothing and (2) because I believed the IRS, even if they intended to collect twice, was obligated to calculate my collection in accordance with our agreement.

My new husband contacted the Revenue Officer who had filed the lien. The Revenue Officer informed my husband, and later me, that he had my former spouse's file "..right here on my desk..." and he knew that my former spouse "..had paid the taxes..." but that it was not "..relevant..." because these were separate collections. He insisted that if we wanted my former husband's payments to offset my liability, we would have to produce those records, otherwise we would have to pay it again. The duplicate payment would balance the IRS books and he would help us file for a refund of the overage.

Imagine my new husband's frustration at the prospect of effectively paying $8,000 dollars that we believed had already been paid.

At this point, which was early 1991, I requested a Problems Resolution Officer who,. after some inquiry into my account, came to the conclusion that I, indeed, did not owe anything for the 1983 taxes and that, once she got a written confirmation of this from the Fresno office she could get everything "abated to zero." Meanwhile, she said, the IRS agent should stop collection activity -- which he did not. However, I thought, "Great! This is all going to get straightened out soon!" I was wrong. A few days later she called me and informed me that the IRS Fresno Office had changed its mind about providing her with the necessary documents and, without those, there was nothing she could do.

I made one final attempt at reasoning with the collection agent. He merely repeated that he knew the tax had been paid, and he knew I didn't owe the money, but it didn't matter. The only way to get rid of the tax lien was to pay the $8,000 whether we owed it or not.

The collection agent then offered to assist us with regard to the refund application. He knew we were being sued by the bank because the IRS was a co-defendant. So, he just refused to do anything and let the bank force us to pay what we did not owe. With the bank about to call the loan, we had no choice but to pay the IRS demand in full.

Mr. Chairman, although I am giving you a rather general description of these events for the sake of overall continuity, it is important for me to tell you that both my husband's and my own physical and emotional well being suffered tremendously under the constant strain of these repeated attempts to get the IRS to honor their agreement and collect only what I owed. It was physically exhausting. We almost never slept. Every conversation had to be memorialized in a letter. There were the visits to the attorneys and the accountants, their bills and their depressing advice, "pay it, it's cheaper than fighting" and the very real prospect of loosing our home to the bank if they called the loan. You don't eat, you don't sleep, you're afraid to talk too much to each other for fear you'll take it out on your spouse. If you do talk, it's about the IRS. We were newlyweds! I cannot describe the guilt, knowing that I had brought my new husband into this.

My parents became so concerned for my health that they cashed in a retirement CD and loaned us the money to pay the IRS. Since they were living on a fixed income, this was a big deal for them to do. I know they made sacrifices to do this. It was as a selfless act of love.

On February 21, 1991, we handed a cashier's check for the entire amount they demanded, $8,194.73. Please keep in mind the original underlying tax was $2,709 and that the original amount due was supposed to be no greater than $3,500. The balance was interest that accrued from July 1988 to February 1991, a period of 18 months. In that time frame, the "bill" that I could not get anyone to give me to pay nearly tripled from the original amount! I was forced to pay $4,500 for their mistakes!

In exchange for this payment, we were given a Certificate of Release of Federal Tax Lien. My cashier's check reflected my name, my social security number, the tax year to which it was being applied -- 1983, as well as my tax court docket number. In other words, the IRS had everything it needed to properly credit the payment. I could not have made it any clearer where to apply the proceeds of the check.

In February, 1992, a letter arrived from the IRS office in Maryland signed by a woman with the authoritative title of "Chief, Accounting Branch." The letter said the IRS had received a payment and, if we had made this payment, please send the IRS a copy of the check with an explanation, which we did. We also asked her in that letter not to refund the money or any portion of it unless she first made sure neither of us owed any money anywhere for any year.

In March 1992, we received an unsigned IRS form letter indicating that the payment had been applied to our 1990 joint return. I actually telephoned the IRS and asked about this and was told simply that, if the Accounting Branch determined that there were no taxes owed for any year, the only way to refund the money was to credit it to the most recent tax year.

In other words, they could not credit the payment to my 1983 tax year unless there was a balance due. Therefore, we logically concluded that the Accounting Branch did what we asked, checked out our taxes, found nothing owed and was merely refunding us the overpayment in accordance with their own bookkeeping system. We had absolutely no reason to think that the refund was in any way erroneous.

In November of 1996, nearly 5 years later, out of the blue without so much as one prior notice, we received a certified letter from the IRS containing a Notice of Intent to Levy. The particulars of the tax being levied were identical to the particulars of the tax lien that had been released in 1992. For reasons unknown to us, they changed their mind and wanted more money again. Why? I telephoned the agent who sent the letter and was told it was a different assessment because, even though everything else was identical -- the tax year, the amount, the assessment date -- there was an "N" after my social security number on this assessment and therefore, I had to pay it again. The "N", I later learned, is a tag for "Non-Master" File. Remember those? The separate collections that nobody seems to know about? Well, this was one of them. Whether the IRS failed to close it at the time we paid it in 1991, or whether they reopened it because they wanted to get the refund back they gave us in 1992 doesn't really matter much to me. Whichever one occurred, the fact remains, the IRS had made yet another error. Once again, they demanded that I balance their books and pay for their mistakes. How many times was this going to happen, I wondered?

A tax attorney informed me that my release of lien was meaningless adding, "..the IRS refiles these all the time. I cannot tell you how many people come in here clutching these things (release of lien) for dear life thinking that they offer some kind of protection .... "He stated the Taxpayers Bill of Rights did not allow the IRS to collect interest from the taxpayers based on its own errors, and even suggested that I write to my Congressman but cautioned me not to expect a significant outcome because, "..they (Congress) can't really do anything...", Congress is less than effective when dealing with the IRS on behalf of taxpayers.

I gave Problems Resolution another try. This time, they were less an advocate for me than an arm of the IRS collection office. It was, in fact, the Problems Resolution Officer who told me "..you know, you kept a refund to which you knew you were not entitled...". Her tone of voice was not friendly. Keeping a refund that you know you are not entitled to is a crime. She demanded I pay back the refund. So much for the Problems Resolution Office. After a brief hospitalization for surgery resulting from a freeway pile up that totaled our car, my husband resumed work in January 1997, only to discover that while he was recovering from surgery the IRS had levied against his salary. My husband would be allowed to keep $18 a week to support me and the children for approximately two months. Anyone entering a grocery store today knows that is tantamount to condemning us to a soup kitchen for our meals. Two months of being unable to meet our financial obligations would have sent us into bankruptcy and foreclosure. Again, the innocent spouse was going to be punished for my old tax problem.

To protect his ability to provide for his children and myself, my husband set up a separate residence in San Clemente and filed for divorce on February 3, 1997. In California, the day you file for divorce your salary is your sole and separate property. The IRS ignored that fact and left the levy in place. In an unusual determination, the county refused to comply with the second levy and my husband's income was safe. However, his retirement fund was not. That was community property and we fully expected the IRS to swoop in the next day and take the whole thing. So, on the 5th of February 1997, I filed bankruptcy to stop the IRS long enough for us to figure out what to do about this.

My bankruptcy notice was hand delivered the same day. The following day the IRS notified me that my schedule C's for 1993, 1994 and 1995 were "questionable," and asked me to reconsider them. We took this as a thinly veiled threat to punitively audit our returns.

The IRS refiled the lien for which I had a release. We discovered this in March of 1997. I am informed that this is common practice. The liens threatened my husband's residence which was his separate property but the IRS ignores this in community property states. I have been informed that the liens would survive the bankruptcy, as all liens do. So even though this was his sole and separate property, it was possible.

My now widowed mother could not bear watching us go through this and took out a loan against her retirement so we could pay the IRS and get this over with. However, my husband and I knew that paying the demand would never resolve this. We tried that in 1991. They would screw this payment up too and in a few years be back for more "with interest." We needed closure, some way to end this forever.

Since the real problem occurred back in 1989, and the IRS never correctly set up my account for $3,500, and because every penny over that amount was a result of that error, we determined that under the Taxpayer's Bill of Rights provision that the IRS could not make us pay interest for their mistakes. We should not owe more than $3,500. If we could get the IRS to correct their errors we should be able to pay $3,500 and be done with it. So, that's what we did. We made a directed voluntary payment of $3,500. We put the rest of the money in a CD in case the IRS swooped in to destroy us unannounced. We waited.

Our lives are now forever altered. Joint tenancy, joint bank accounts, joint tax returns are no longer a part of our life. We will pay additional taxes every year as a result. Our confidence in the integrity of the IRS has been completely shattered. This year we got a refund on our 1996 taxes and sits in a CD as does the $3,500 that the IRS recently returned to us without any explanation. We don't dare cash refund checks anymore. My credit is completely destroyed, and my husband's credit is seriously damaged. We will suffer the effects of this IRS collection for the rest of our lives.

I originally wrote to you, Mr. Chairman, because the IRS should not be above the law. Couples should not have to divorce because of the IRS. Once you became involved, the IRS released all the liens and sent us back the $3,500. Senator Roth, your effort saved us from being forced to live apart, and preserved our ability to provide for our children. For this, we will be forever grateful. However, the conduct of the IRS remains the same, and for thousands of other taxpayers, there is no help. Ours is a hollow victory if the IRS is allowed to continue this type of conduct. People tell us how terrified they would be to do what we have done. They are convinced that the IRS will target us for punitive audits. One person put it this that s like painting a bull's way, when she learned we had written to Congress, "that's like painting a bull's eye on your chest and giving the IRS a loaded gun .... "She believes the IRS will never forget this and someday get back at us in retaliation. Mr. Chairman, she could very well be right. The IRS is judge, jury and executioner -- answerable to none. We do not believe that our experience is isolated. For over 10 years the IRS has conducted itself as a legalized extortion operation willing to commit abusive acts to collect money, even that which they know is not owed.

An agency of the United States Government, allowed such sweeping authority as that granted to the IRS, should be held to the highest standards of honesty and integrity. The IRS is not. Those of us subject to that authority should be guaranteed an accessible and effective remedy for its abuse. We are not.

It is a disgrace to our nation that an arm of our democratic government is allowed to behave as if it were an extension of a police state. I hope that Congress can act to end this national shame.

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Authors

Katherine Lund

William E. Simon Fellow in Religion and a Free Society