The curious failure of criminals to pay income taxes on revenue gained from their activities has been used by the Federal government for years to assist local police in their pursuit of criminals. In the last 20 years, the Internal Revenue Service has brought tax evasion actions in cases involving extortion, forgery, counterfeiting, bookmaking, theft, kidnapping, prostitution, and once against a practicing gypsy palmist who contended that the money was an offering to offended spirits, rather than income to herself.
The main weapon of the IRS against such crimes has been the criminal penalties in the Internal Revenue Code, which can be imposed on those who willfully attempt to evade or defeat taxes. These penalties are subject to the usual constitutional rules requiring that an accused be proven guilty of something before being deprived of liberty or property.
In addition to the criminal penalties, however, the IRS has available to it a little-known procedure known as spontaneous assessments, described recently by a senior U.S. judge as a weapon having "atomic potentialities in the arsenal of the tax gatherer." This procedure permits the IRS to assert that a citizen has received income, assess tax on it, and immediately seize and sell all of his property in payment of the tax. This can be done without any evidence other than a belief by any of the 58 IRS District Directors that collection of the tax thought to be due might be in jeopardy.
Because of the severity of spontaneous assessments, it had been longstanding IRS policy to use them sparingly. As recently as January 1972, the Director of the Collection Division of the IRS stressed that such assessments are made in only the most extreme situations. And, although available records are scanty, there appear to have been only 279 in fiscal 1966.
ARMING THE IRS
The availability of an "atomic" weapon did not go unnoticed, however, by the administration which brought us Watergate, enemies' lists, and abuse of the IRS. On June 17, 1971, President Nixon announced an expanded effort to combat drug abuse in a message which included a little-noticed project to conduct tax investigations of middle and upper echelon narcotic traffickers, making maximum use of spontaneous assessments. This project, referred to variously by the IRS as the "Narcotics Trafficker Program," or the "IRS Narcotics Project," continues at this date.
The size of the Narcotics Project is only recently beginning to surface. From June 1971 through June 1974, the IRS had made spontaneous assessments in 3,920 cases, total assessments under the project had reached $218.1 million, and collections had totaled $34.5 million. The program is continuing at a rate of around 1,400 cases a year.
Spontaneous assessments are authorized in two parts of the Internal Revenue Code under a subchapter titled "Jeopardy." The first part, "Termination of Taxable Year," permits the IRS to declare anyone's taxable year immediately terminated and to demand immediate payment of the tax for that period. The only requirement for a termination (as the IRS calls it) is that the IRS must find that a taxpayer intends to act in a way tending to prejudice proceedings to collect the tax. This finding, which can be made by any District Director, is not subject to court review as to whether there is any basis for it or whether the amount assessed has any relationship to anything. As a result, the Service typically computes the greatest liability possible and assesses a 25-percent penalty authorized by another section of the Code. The total amount assessed has, as a result, been six times higher than the amount actually collected.
The second part of the subchapter in question is titled "Jeopardy Assessments." Under this part, the IRS may immediately assess a deficiency in tax and demand its payment if it believes that the assessment or collection of the deficiency will be jeopardized by delay. Again, this belief may be entertained by any District Director, and neither its basis nor the amount assessed is subject to judicial review.
An IRS demand that tax be immediately paid is supported by an armory of collection procedures. After the tax has been assessed, it is a lien in favor of the government on all property of the taxpayer. The IRS can then seize any and sell all of the taxpayer's property in payment of the assessment.
In the case of a jeopardy assessment, a person can do only two things to get his property immediately returned. First, he can ask the District Director to change his mind. Second, he is permitted to post a bond, a procedure the courts have described as a "mockery" because virtually no bonding company will provide a bond without security, and no security is available if all of the taxpayer's assets have been seized. In the case of a termination, the IRS contends that the taxpayer can do neither of these things, and over 90 percent of spontaneous assessments have been called terminations by the IRS.
If the taxpayer decides to go to court, he must contend with an 1867 law under which suits to restrain the assessment or collection of any tax are absolutely prohibited. This prohibition has been interpreted by the Supreme Court to mean that a person is entitled to an injunction against the IRS only if he can prove that collection of the tax would cause him irreparable injury and that under no circumstances could the government eventually win. The latter point is usually impossible to prove.
Despite the general unavailability of court relief, the unprecedented number of spontaneous assessments has produced an unprecedented number of court cases against the IRS. As of December 1974, there were at least 70 Federal court cases pending, and there have been at least 20 reported decisions. These decisions, although representing only a fraction of the cases, give some indication of IRS tactics and the targets of the project.
Consider, for example, the case of Sharon Willits. In April 1973, a car in which she and a friend were riding was stopped by officers of the Miami Police Department. The friend had been under surveillance by the police for approximately five months because he was suspected of dealing in narcotics. Neither she nor her friend was arrested, but her license was examined.
Six weeks later Ms. Willits realized that she was being followed by an unmarked car. She pulled to the curb momentarily to let it pass, but it pulled in behind her. No one emerged from the car, and she pulled away. Again the car followed and then pulled up beside her. Two men dressed in casual clothes with full beards and long, frizzled hair tied in pony tails waved police badges. One was the same officer who had stopped her earlier.
Ms. Willits refused to give the strange-looking officers her current address and was arrested for speeding. She was not taken to the traffic section of the police department, however, but to the narcotics section (The officers had not been assigned to traffic.) A search of her purse revealed two vials containing a few barbiturates that had been purchased under a prescription from her doctor, a pistol, some cash, a gold coin, and items of jewelry. She was charged with speeding, carrying a concealed weapon, and possession of narcotic drugs and was released on bond.
The next day the Miami Police informed the IRS of the arrest and the materials taken from her. The IRS promptly computed that she had earned $60,000 on sales of $240,000 worth of cocaine during the first five months of 1973. That afternoon her taxable year was terminated, and she received a notice demanding payment of $25,549. The money and jewelry held by the police were seized by the IRS.
The state charges against Sharon Willits were dismissed in December 1973. Earlier, she had brought an action to enjoin the IRS from collecting its assessment and to return her property. No evidence was ever produced that Ms. Willits had at any time had any dealings in cocaine, nor was she ever charged with such a crime. Nevertheless, the Federal court, holding that she had failed to show that there was no way the government could win, dismissed her suit.
The court of appeals in New Orleans reversed the decision in July 1974. It described the evidence as scanty and largely inaccurate and said that the courts cannot allow the IRS to use jeopardy procedures as summary punishment to supplement regular criminal procedures.
A "TRIGGER-HAPPY" IRS
Another instructive case is that of Roberto Flores Aguilar, a Mexican national who owns a trucking business in Mexico and has never done any business in the United States. In July 1972, two of his employees were sent with $11,270 in cash to San Antonio to buy trucking parts for his business, but they had to turn back because of engine trouble. The truck was stopped in the border town of Laredo for a "title check," and the cash was discovered in a search of the driver's compartment. The police seized the truck and the two employees trekked back to Mexico on foot.
Six days later, the IRS terminated Mr. Aguilar's taxable year on the basis that he was suspected of trafficking in narcotics. This was surprising to Mr. Aguilar, who didn't even know that he had a U.S. taxable year. Even more surprising was the tax bill of $12,774. Unable to pay promptly, his cash was seized, and the truck was sold for $750. The basis for "calculating" the tax due was never disclosed, although it was unusually close to the total value of the seized cash and truck.
Unsatisfied with his encounter with American justice, Mr. Aguilar brought suit to get his money back. The district court thought that he did not show that under no circumstances could the government win, so it dismissed the suit. The same court of appeals which considered Ms. Willits' case overruled the decision of the district court on this point.
The cases of Sharon Willits and Roberto Aguilar are unique—they both got some relief from the court of appeals. In nearly every other case the courts have turned their heads at this wholesale invasion of individuals' rights.
THE COURTS: IRS BACKUP SUPPORT
A good example of a more typical court response is the case of Sterling and Elizabeth Hall of Kentucky. Sterling was arrested in Brownsville, Texas, where he was convicted and sentenced for trafficking in marijuana. After he had been locked in prison, the Kentucky State Police searched Elizabeth Hall's home and found a minuscule quantity of marijuana that apparently had been left by her husband. The next day, February 1, 1973, her taxable year was terminated and she was presented with a bill for taxes in the amount of $52,680.25 for the one-month period of January 1 to January 31, 1973! Since she was unable to pay the tax, the IRS seized her Volkswagen and bank account.
The district court enjoined the sale of the car because the IRS had not sent her a form letter called a deficiency notice within 60 days of assessment, as required by the jeopardy assessment procedure. The IRS contended it didn't have to send one because this case was a termination. The court of appeals agreed with the district court, and the government appealed to the Supreme Court, which upheld the ruling of the two lower courts. This minor victory for Mrs. Hall still didn't get her property back, and the IRS can continue to try to collect the tax assessed if it sends her the right form.
Prior to the recent Supreme Court decision for Mrs. Hall, the IRS position that it need not send the deficiency notice had been sustained by several courts. In the case of David Boyd of Pennsylvania, the IRS terminated his taxable year and assessed nearly $14,000 in taxes after his arrest in Philadelphia in October 1972. Despite the fact that in December he was found not guilty of the charges for which he had been arrested, the IRS confiscated $5,751. The Philadelphia District Court refused to enjoin the IRS or require it to issue a deficiency notice.
A WAR ON CRIME?
It is not unusual that criminal charges were not sustained in the cases described. In many of the reported cases, the taxpayer has either not been charged with narcotics trafficking, or the charges have been dismissed. In the case of James C. Johnson, arrested in Mobile, Alabama, for possession of marijuana, the charges were dropped, but the IRS assessed taxes of over $10,000. Charges of reckless driving and possession of dangerous drugs (physician's samples) against Charles R. Rambo of Kentucky were also dropped, but the IRS assessed taxes of over $28,000 for a 4-month period. In neither case was the seized money or property returned.
In defense of these procedures, the IRS has claimed that it is only after the "top people" involved in narcotics traffic, not the pusher on the street. Nevertheless, the IRS assessed taxes of over $11,000 against an elderly black woman who had not worked since 1961 and seized all of her assets. Another case in Las Vegas involved a 65-year-old illiterate black man whose social security funds were seized. If these are the top people in narcotics traffic, they are certainly well disguised.
The seizure of money and property on the mere suspicion of crime seems obviously unconstitutional. Nevertheless, the constitutionality of spontaneous assessments was upheld by the Supreme Court in 1931 in a case involving taxes assessed against a shareholder of a dissolved corporation (taxes which should have been paid by the corporation). The basis of the decision was that the governmental necessity for money justified its being taken first. The Court argued that the public is adequately protected by the individual's right to bring a refund suit. "Property rights," said the noted liberal, Mr. Justice Brandeis, "must yield provisionally to governmental need.…Where only property rights are involved, mere postponement of the judicial enquiry is not a denial of due process."
DISARMING THE IRS CASE
Governmental necessity and the adequacy of the legal remedy of a refund suit are the same two reasons for which the law prohibiting suits to enjoin the collection of taxes has been upheld since 1870. At that time, all taxes were collected under procedures which did not allow a prior court challenge. This approach was repudiated by Congress in 1924 with the establishment of the Board of Tax Appeals, the predecessor of the Tax Court. In this court, a taxpayer is permitted to contest his liabilities prior to payment, and virtually all of the $273.6 billion of estimated collections for the 1974 fiscal year were collected under procedures allowing for this possibility. The last 50 years of experience in collecting taxes shows clearly that the system does not break down if people are permitted to challenge the government before they pay taxes.
The argument from government necessity assumes that the purpose of the allegedly necessary procedures is to collect money. In the case of the IRS Narcotics Project, however, the stated purpose is to supplement enforcement of drug laws. The $34.5 million collected in the first three years of the project is less than one ten-thousandth of one percent of the Federal revenues collected in the same period. It is therefore hard to accept the argument that the government really needs the money.
The argument becomes even shakier when it is realized that the government is spending more on the Narcotics Project than it is taking in. During its first three years, the IRS spent $51.2 million to collect $34.5 million, a deficit of nearly $17 million. These figures do not include court time or the lost revenue resulting from the diversion of personnel to this program. In testimony before Congress in March 1974, IRS Commissioner Alexander said the IRS had to turn back over 2,500 ordinary tax cases in fiscal 1972 and 1973 which it couldn't handle because of the diversion of personnel to the Narcotics Program. This diversion of personnel through July 1974, amounted to 2,249 man-years of time.
Even assuming that the government really does need the money, the Narcotics Program cannot be justified. Most scholars would conclude that, under the Constitution, the government cannot decide to fine everyone charged with crime before conviction simply because it needs the money. By the same token, governmental need should not justify assessment and seizure against persons who are not charged with any crime at all.
OBSTACLES TO RESISTANCE
The adequacy of a refund suit as a legal remedy is another example of judicial sloganizing which has nothing to do with reality. Those considering a refund suit in Federal court have first to contend with "Catch 22," a 1960 Supreme Court ruling that requires payment of the entire amount assessed before a suit can be brought. Since IRS Narcotics Project assessments average six times higher than the combined total of the taxpayer's assets, it is unusual for a taxpayer to have the funds to pay the tax in full.
Even if this problem is somehow overcome, there is also a requirement that a refund claim be filed with the IRS before a suit is brought. Then, although everyone knows that those who took the money in the first place are not going to just turn around and hand it back, the taxpayer must wait six months before filing a complaint. Then the government has 60 days to answer, and if the taxpayer is lucky, the case will only take 2 years. During this time the IRS continues to hold all of the seized assets of the victim, leaving him with nothing to pay the grocer, the landlord, or even the lawyer he hired to represent him in the suit.
The only other alternative for getting one's money back is the Tax Court. Until recently, this posed a "Catch 23" situation: in order to get into Tax Court, one must have a notice of deficiency, generally referred to as the "ticket" to the Tax Court. As indicated earlier, however, the IRS has contended that it did not have to give a "ticket" in a termination case (the procedure in 94 percent of its assessments). The issue was appealed by the government to the Supreme Court, and in January 1976 the Court rejected the IRS argument, ruling that a deficiency notice must be issued within 60 days of a termination.
Assuming that the taxpayer is given a ticket to the Tax Court, he can still expect a 2-year wait for the game to start. During this time he will be hard-pressed to pay his lawyer or put food on the table, and so, it seems, even this "ticket" is not worth very much.
IRS WEAPONS ARE UNCONSTITUTIONAL
The Supreme Court's 1931 decision upholding spontaneous assessments is in marked contrast to its recent holdings in commercial transactions. In the 1969 case of Christine Sniadach, the Supreme Court held that the seizure of $31.59 of her wages without judicial notice and a hearing violated "the fundamental principles of due process." And in the 1972 case of Margarita Fuentes, the Court similarly held that the seizure of a stove and stereo could not be made without prior notice and a judicial hearing. Justice Stewart, speaking for the Court, argued that "the prohibition against the deprivation of property without due process of law reflects the high value embedded in our constitutional and political history, that we place on a person's right to enjoy what is his, free of governmental interference." Rejecting the argument that a later hearing provides an adequate remedy, he noted (apparently forgetting about the 1931 decision upholding jeopardy assessments): "This Court has not embraced the general proposition that a wrong may be done if it can be undone."
The Court's view of "mere property rights" in 1931 should be compared to the 1972 case of Dorothy Lynch, in which $10 of weekly wages were seized without prior notice or hearing. Again speaking through Justice Stewart, the Court declared: "The dichotomy between personal liberties and property rights is a false one. Property does not have rights. People have rights. The right to enjoy property without unlawful deprivation…is a truth, a personal right.…In fact, a fundamental interdependence exists between the personal right to liberty and the personal right in property. Neither could have meaning without the other."
We cannot be encouraged, however, by the excellence of this reasoning—it is unlikely that the High Court will strike down spontaneous assessments or the IRS Narcotics Project. In the Fuentes decision cited above, the Supreme Court added in a footnote that it has allowed summary seizure of property to collect the internal revenue of the United States because of the "need of the government promptly to secure its revenues." Although this note is not decisive of the question, it has already been relied on several times by lower courts in deciding that the constitutionality of spontaneous assessments is beyond question. In none of the cases was the government's "need" examined at all.
In a recent speech before the Tax Section of the American Bar Association, IRS Commissioner Alexander indicated concern about using the IRS as a tool of criminal enforcement and the effect of doing so on the public's faith in the tax system. Despite this rhetoric the IRS has no current plans to withdraw from the Narcotics Trafficker Program. Neither the IRS nor the courts are going to stop the Narcotics Project. The procedures on which it depends, however, arise out of specific congressional authority. It is only a step in the right direction, but it is that authority that must be removed in order to curb the inordinate power of the taxing arm of the government.
Robert B. Martin, Jr. is an attorney in Newport Beach, California with the firm of Bergland, Martin & McLaughlin. A graduate of U.S.C. Law School, where he was an editor of the Law Review, he has published five articles in legal journals on taxation and corporate law.