The War on Refund Mills

In my own case the words of such an act as the Income Tax, for example, merely dance before my eyes in a meaningless procession; cross-reference to cross-reference, exception upon exception--couched in abstract terms that offer no handle to seize hold of.

--Judge Learned Hand in 1947

SINCE then, the tax laws have become still more complex, driving more Americans every spring to seek help in filling out their returns. The trend has led to a rapid proliferation of commercial tax specialists, including many "refund mills" that pop up like crocuses in March, make a killing helping taxpayers cheat the Government, then fade away on April 16. Now the Internal Revenue Service has opened a nationwide campaign of investigations, arrests and prosecutions to root out and discredit these fly-by-nights. At the same time, the taxmen have launched a sweet-talking publicity campaign urging people who have minor tax problems to seek help in preparing their returns from IRS agents themselves--a campaign that outside taxmen can hardly believe anyone would take seriously. Cracks one specialist: "It's kind of like asking the canary to visit the cat."

These moves dramatize a deep concern at the IRS about the growing cost to the Government of fraudulent or erroneous tax returns. Even with computerized checking, it is not too difficult for a taxpayer to get away with such dodges as claiming a couple of phantom dependents because the iRS's limited staff cannot run down every suspected cheat. One unofficial estimate puts the drain on revenue last year at $30 billion or more, about 15% of total collections. The problem has grown especially acute since 1969, when a change in tax laws so complicated the job of making out returns that many people gave up trying to do it alone. Last year more than half of the 77 million individual returns were made out by tax preparers at a total (and tax deductible) cost of about $600 million. The IRS stresses that larger firms like H & R Block of Kansas City, Mo., are generally trustworthy. But it suspects that vast amounts of revenue are being lost because of the activities of cheating or inept smaller tax preparers.

For fees generally ranging from $2 to $30, these unscrupulous specialists urge their not-always-unwilling clients to inflate claims for property damage, write off the value of items lost in a robbery that never occurred, or deduct interest paid on nonexistent loans. Before his recent fraud conviction, one Texas expert encouraged clients who owned dogs or parakeets to classify themselves as farmers and claim depreciation allowances. In ghetto areas, where knowledge of tax law is skimpy, some hustlers get clients to sign a blank return for a flat sum of, say, $50. The preparer then fills out the form and arranges to have the rebate--often $500 or more--mailed to himself.

Gaudy. IRS agents in recent weeks have made a series of highly publicized arrests of tax specialists in New York, Georgia, Louisiana, Alabama and Texas. So far, IRS investigations conducted mainly by agents or volunteers posing as clients have resulted in fraud convictions of 126 tax preparers and indictments of another 85. The refund mills under IRS scrutiny usually consist of one or two people who often set up shop in a storefront and earn up to $40,000 for three months' work.

In order to woo away those clients of small tax preparers who are not scared off by the arrests and indictments, the IRS is pressing a promotional campaign that for a Government agency is positively gaudy. The theme that taxpayers can get friendly help from the IRS itself is hammered home by tax agents making lecture tours and even on a Goodyear blimp that flies over Los Angeles flashing the message: UP IN THE AIR? GIVE THE IRS A CALL. The agency also has enlisted such personalities as Steve Allen, Tony Randall and Tennis Star Arthur Ashe to plug its services on TV. In one spot, Vincent Price, dressed as a Himalayan monk, tells a confused taxpayer who climbs to his mountaintop seeking help to go to a neighborhood IRS office instead.

A key aim of the drive is to persuade people with moderate incomes to take standard deductions on the short 1040A form. In New York a team of IRS experts rides the ferryboats between Manhattan and Staten Island dispensing advice to interested passengers. "Taxmobiles" staffed with agents now trundle through back-country roads in Tennessee and into shopping centers in California bringing tax assistance to all who want it. In Chicago, the IRS has stationed a trailer within a tax return's throw of a mobile office operated by America's Computerized Tax-Aid, a large tax-preparing firm.

Chiefs of the big and reputable tax-preparing firms strongly resent what they see as unfair--and wasteful--competition. They argue that although the IRS charges no direct fee, its services are scarcely "free" because they are paid for out of tax revenues. They also question the value of the help that a taxpayer gets from the IRS. Says Robert Dulsky, president of the Tax Corporation of America in Montrose, Calif.: "We dig for a deduction, but the IRS will not." Some IRS officials themselves worry that if the service sells its tax-assistance program too successfully, they will be swamped with more clients than they can handle. "I don't know if we can afford the price this program is costing," says Charles Miriani, assistant district director for Illinois.

Unhappy tax preparers may soon get the small satisfaction of seeing the IRS on the griddle. A substantial number of taxpayers have complained that overzealous agents auditing their returns have bullied them into paying questionable penalties. Senator Joseph Montoya, a New Mexico Democrat, has opened an investigation of the Government's tax-collection methods. Among other things, the hearings before a Senate appropriations subcommittee will seek to determine whether the salaries and promotions of IRS agents are in any way tied to how much money they can squeeze out of taxpayers in back taxes.

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