Taxes: What You Don't Know Can Hurt You
I know you're out there…Do you sleep easily at night knowing you've "cheated" on your taxes? Or do you have nightmares, perhaps like this: You're at the airport, returning from a trip overseas, and you hand your passport to the creep at Customs. He taps a few keys on his computer, squints at the screen, then reaches beneath his stand-up desk for a phone. He mumbles into the mouthpiece, and a few moments later you hear a polite cough behind you.
"Excuse me, sir," says one of a group of business-suited thugs. "Will you come with us?" And then you're led into one of those unmarked mystery rooms that line the concourses at busy airports like Miami International.
Ooops. Sorry, young freedom fighter. You've been snared by the Treasury Enforcement Computer System, used jointly by the FBI, CIA, IRS, DEA, and Customs. Marvelous what modern technology can do.
Could it happen to you?
It certainly could, depending on how much Uncle Sam knows. And you need to know what that might be. You can't learn everything, but you can sometimes learn a lot. There are three principal methods. They sometimes overlap, but space is limited, so I won't get into that.
First is the Privacy Act of 1974, which gives citizens and U.S. residents the right to inspect the records maintained on them by federal agencies (but not investigatory records). Then there's Section 6110 of the Internal Revenue Code. It can give you access to any "background file document" relating to certain "written determinations" made by the IRS. It works. Whenever they write to you, you can (if you think it's wise) write back demanding the background file documents relating to their letter.
Last is the Freedom of Information Act (FOIA)—the most sweeping and most "popular" of these laws, so that's what I'll be discussing here. The FOIA (Title 5 U.S. Code, Section 552) requires disclosure of various kinds of information by government agencies, upon request by any person.
Not everything has to be disclosed under the FOIA. But the feds have the burden of proof in showing that one of nine statutory exemptions applies to any information they want to withhold.
What are the nine exemptions?
Generally, the feds don't have to disclose matters pertaining to: national security; internal agency rules and practices; information exempt by other statutes (this prevents you from getting your hands on my tax returns); trade secrets and confidential information; interagency and intra-agency memoranda (words of devilishly ambiguous meaning); and material that would result in an invasion of privacy. Similar exemptions apply to Section 6110 disclosures by the IRS.
The exemptions have teeth. For example, when a taxpayer under criminal investigation sought disclosure of all information concerning himself and his corporation, the IRS refused to comply, saying it would hamper their investigation by disclosing confidential informants, the nature of their testimony, and the scope, direction, and strength of the investigation. The courts backed up the IRS.
Well then, what can you get? Lots of goodies: General Counsel's memoranda (interpreting IRS regulations); IRS procedure manuals; the Justice Department's Manual for Criminal Tax Trials; all kinds of statistics; and loads of information about your own tax situation—deficiency notices, revenue-agent and appellate reports, reports on refund claims, and maybe even revenue-agent referrals for potential fraud cases. Just use your imagination.
How do you make the FOIA work for you? You have to make a request "in accordance with published rules." The request has to be in writing and signed by the person making the request. It must describe the records sought as specifically as possible and state that the request is pursuant to the Act. You have to say whether you merely want to inspect the records or have copies made and furnished without prior inspection. You have to agree to pay all costs incurred in connection with the records search and duplication, or, alternatively, to specify the upper limit that you'll pay. You have to blunder around until you find the proper official (district director, service center director, etc.) to answer your request.
The IRS (or other agency) has to respond within 10 business days, notifying you whether the records can be located or telling you they need more time (another 10 days). If they blow the time limits and fail to respond, you can sue right away. Otherwise, you have 35 days after they turn you down to appeal their refusal to the commissioner of the IRS. The commissioner then has 20 business days to respond to your appeal. If he turns you down, then you can sue to require production of the records.
The court can assess attorneys' fees against the feds if you win, but don't count on a burst of generosity to pay your legal fees. You're unlikely to come out whole, even if you do win.
The court can also find that the feds acted arbitrarily and capriciously in withholding the records, which requires a civil service proceeding to determine whether the bureaucrats should be disciplined. Don't count on that happening either. It's nice to dream about, however.
Another benefit of using the FOIA is that you'll be tying up bureaucrats while they respond to your request, which diverts their attention from their regular business—harassing the population.
This kind of thing is undoubtedly safer, more rewarding, and lots more fun than hopelessly litigating tax-protestor issues.
Get the picture?
Warren Salomon is an attorney and tax specialist practicing in Miami.
This article originally appeared in print under the headline "Taxes: What You Don't Know Can Hurt You".