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Tales From the IRS

The Whistle Blower
If there was anyone who respected the Internal Revenue Service, it was Jennifer Long.

She was born and raised in Austin, where her parents had worked all their professional lives as auditors at the IRS regional headquarters. While Long was enrolled at the University of Texas, she also worked at the headquarters herself.

And in 1984, Long, an accountant, found herself working as an auditor for the agency's Houston office. And over time, she lost all respect for the IRS.

Last fall, first on network TV and then before Congress, Long publicly charged that the IRS is a misguided, incompetent, mean-spirited agency controlled by unqualified nitwits. She was speaking, she said, from firsthand experience.

Seven months later, she's still working at the IRS. And if anything, she thinks even less of it now.

In the oil boom years of the '70s and early '80s, the IRS's Houston office grew rapidly; according to Long, it was soon bringing in more money than most entire districts. Lots of Houstonians were making lots of money, and they used earned income credits and tax shelters to hang onto it. IRS revenue agents took hard looks at those shelters, and their work frequently resulted in large adjustments in favor of the government. Long felt good about her work.

But that all changed in 1988 -- the result of low oil prices and Congress's elimination of tax shelters. "After the crash, a lot of people couldn't pay," says Long. "They didn't have anything, so we couldn't collect."

Long noticed that she was no longer auditing mostly the rich. In the past, she'd focused on people who hired expensive accounting firms and high-priced tax attorneys. But by the mid-'90s, her caseload was dominated by non-filers -- many of them downright poor.

"I have never worked cases like I have worked in the last two or three years," she says. "Some of these people couldn't even afford air conditioning. I don't see the point of auditing people like that."

She was also troubled by the agency mindset that all taxpayers are criminals. "I just don't buy into that," she says. "And I'm not saying that I haven't had fraudulent taxpayers. I have. But not everybody is a crook."

At first, she says, she tried to work within the system, making her qualms clear to her superiors. But when she complained, she says, she became a target. After she wrote letters detailing her concerns, she found herself being investigated.

Her breaking point came in November 1996, one day before she was scheduled to leave on a month-long vacation in Europe. She worked out of her home and, before the trip, planned to drop off at the office several case files. Suffering a skin rash, she called in sick that morning, but said she'd deliver the files after seeing a doctor.

But before she could leave for her appointment, several IRS agents appeared at her front door, and a West University Place police officer blocked her driveway. The agents demanded that she turn over all her files immediately.

Long refused to let them into her house; they didn't have a warrant, and she didn't want them rifling through her personal possessions. Besides, she says, she was worried about what would happen to the files if she surrendered them. She had no idea what the agents would do with the confidential documents in them. "I have an obligation to protect taxpayers' information," she explains, "and this situation was totally out of control."

After the agents and the cop finally left, Long drove downtown to her union office, where she copied all her documents. She then arranged to turn over the documents, in the presence of a union representative, to an IRS agent. Then she left for Europe, worried that the agency would break into her house, and wondering how she'd be greeted on her return.

"When I came back, they didn't say a word," says Long. "They acted like nothing had happened. But I had not forgotten."

She wrote a letter to then-IRS commissioner Margaret Richardson. Eight days later, she received a disciplinary letter that accused of her causing dissension and discord in the workplace. The date of the alleged discord was the day the agents had come to her home -- a day Long was never even in the office.

Undeterred, in February 1997, she sent a letter to Houston Congressman Bill Archer, the chairman of the House Ways and Means Committee and a longtime critic of the IRS. She also contacted Senator William Roth, chairman of the Senate Finance Committee. She didn't hear anything back until June.

"They had received more than 800 letters from IRS employees around the country," says Long, "and asked me if I was interested in testifying before Congress." She was.

 

In September, she related her tale of woe to the Senate Finance Committee. She was also featured in a segment of CBS's 60 Minutes and was interviewed on CBS's Face the Nation. Accounts of her testimony appeared on front pages across the country.

Once again, when she returned to work, her superiors didn't say anything about her activities -- but they must have noticed. Long had touched a nerve with the American public. "Taxpayers were ringing the phone off the wall asking for me," she remembers. "People were going up to my group on my floor and looking for me and saying they didn't want anyone else to solve their tax problems except for me. And taxpayers I had audited would call and tell me they were so proud of me. It still happens."

Shortly after her walk in the limelight, Long filed a federal suit against her boss, Deborah Kellogg, and Treasury Secretary Robert Rubin. In it, she alleges that the IRS has committed sins she didn't testify about before: both racial and age discrimination. Long, who is 47 and white, says that younger black superiors pressured older white employees to leave the agency. In particular, she complains that Kellogg screamed at her, calling her a "lazy, stupid liar"; refused to let her call a union representative during meetings dealing with her job-performance evaluation; and "has attempted to provoke physical confrontations and placed the plaintiff in fear of imminent physical danger."

Long refuses to comment on the case; next month, it goes to pretrial mediation. And at least for the time being, she still works for the agency.

The Businessman
Two weeks ago, the IRS wrote 76-year-old Johnny Johnson a check for $3.5 million. According to Johnson's lawyer, it's the most the agency has ever paid an individual taxpayer as the result of a lawsuit. It took Johnson 17 years to win his case. And as much as he's pleased by the money, he's even happier about simply beating the IRS.

After serving as a B-17 pilot in WWII, Johnson went to college on the G.I. Bill, then worked his way up at American National Insurance Company of Galveston. He started as a general sales rep, and eventually rose to executive vice president in charge of worldwide insurance sales.

His weekdays were spent traveling the country, teaching sales techniques to other field agents. Apparently, they learned his lessons well: From 1972 to 1981, American National improved its sales by roughly 700 percent, increasing profits from $14 million to $105 million.

Johnson had an unlimited expense account for his travels, and generally dropped about $15,000 to $20,000 a year -- about $7,500 of it in cash. Foolishly, he now admits, he often didn't bother to get a receipt for all of his cash expenses.

To make matters worse, his wife, who kept track of the family's finances, tried to make up for the lack of receipts by doctoring Johnson's credit-card records. If Johnson had spent $100 in cash for things like cab fare, his wife would simply add a 1 to a $50 American Express receipt, making it read $150. Johnson claims he had no knowledge of his wife's creative bookkeeping and that she had no idea she was doing anything wrong.

Not that he's proud of the episode: "I don't deny that I made some mistakes," he says.

In 1976, the IRS notified American National that it intended to audit the company and several of its top officers. The agency had a history of wrangling with the company. In the early '70s, American National had purchased a financially troubled Oklahoma City insurance company. During the acquisition, American National -- and Johnson in particular -- butted heads with the IRS over whether defaulted premiums of the Oklahoma company could be written off American National's taxes. American National eventually took the case to court and won.

So in 1976, Johnson suspected the IRS was looking for payback -- but he believed his own record to be spotless enough to stand inspection. "When a large company like this is audited," he explains, "15 or so of the top officers are usually audited also. I was number two at the time, so I volunteered for the damn audit."

For the next five years, Johnson, his attorneys and the IRS tangled over his 1974 and 1975 tax returns. In 1981, when it appeared that both he and his wife might be indicted, he struck a deal. Johnson would plead guilty to tax evasion, would pay his back taxes, and would serve a six-month suspended sentence and a year of probation. In exchange, the IRS agreed not to bring charges against Johnson's wife. Additionally, the charges against Johnson would be filed under Johnson's legal name -- Elvis E. Johnson -- instead of his nickname, Johnny, which everyone called him. American National promised that if Johnson could keep his name out of the papers, he could keep his job.

 

But despite the agreement, on April 13, 1981, the IRS issued a press release that said all Johnson had wanted kept private. "In U.S. District Court here, Apr. 10," it read, "Elvis E. 'Johnny' Johnson, 59, plead [sic] guilty to a charge of federal income tax evasion." A second release with essentially the same information followed and was issued to 21 media outlets in the Houston-Galveston area.

Johnson's cover was blown, and American National asked for his resignation. He returned to his hometown -- Springfield, Missouri -- determined to get even.

Johnson and his attorney decided to attack from two angles. First, they filed suit under the federal Tort Claims Act, saying that by releasing the information about Johnson, the IRS and its agents had severely damaged his ability to earn a living. Besides reneging on its deal, Johnson maintained that by releasing any information about him, the IRS had violated its own internal code.

In 1986, U.S. District Judge John Singleton ruled that the IRS was indeed liable under federal tort law, and awarded Johnson $10.9 million. The IRS appealed the ruling, and the Fifth Circuit Court would end up issuing three sets of opinions. In both 1992 and 1993, three-judge panels upheld the lower court's decision. But in March 1995, after review by all 15 judges of the Fifth Circuit, it was determined that the government can't be sued for something that is not a violation of state law. Since no Texas law had been violated, the IRS could not be held liable. But the Fifth Circuit acknowledged that the IRS agents involved had violated the agency's own internal code.

Johnson and his attorneys regrouped, and in May 1996, filed a suit that avoided the tort claim and, instead, focused on the contention that the issuance of the press release had violated the IRS's own policies. This time, a federal jury ordered the agency to pay Johnson $9 million. Again, the IRS appealed.

And again, in August 1997, the jury's decision was overturned. The Fifth Circuit ruled that during the trial, U.S. District Judge Kenneth Hoyt may have been biased and that his instructions to the jury may have been misleading. But once again, the appeals court affirmed that the IRS agents had violated the agency's own code.

"Essentially, the Fifth Circuit told us we were going to win the case," says Larry Campagna, one of Johnson's attorneys. "But the court gave the government another chance to try it again as far as what the damages were going to be."

This past February -- 17 years after Johnson cut his first deal with the government -- he cut another one. This time, the IRS agreed to pay him $3.5 million, and he agreed to drop the case.

"It only took two federal judges, a federal jury and three appeals court rulings to tell them what they did was wrong before they finally settled the case," says Campagna.

The IRS declines to comment on the settlement.
With the money, Johnson and his wife plan to set up a trust fund for their children. He harbors no bitterness toward the country, and even believes there are many honest, hard-working people at the IRS. But it was his misfortune, he says, to have dealt with several who would starve to death in the streets if forced to compete in the real world.

Sometimes he wonders how much it cost the government to defend those agents' actions. "Of course," he says, "they wouldn't give that figure to the Lord himself."

The Deputy
In October 1996, James "Smokie" Phillips and ten other people were indicted on charges of participating in a drug-trafficking ring allegedly connected to Colombia's Cali Cartel. Over five years, the ring was said to have distributed more than 600 kilos of cocaine.

The group's ringleader, according to federal prosecutors, was Wendell Alboyd Cornett. Investigators contended that Cornett used his bowling alley pro shop to negotiate deals for the drug, which he stored in his two paint and body shops. Phillips, a Harris County deputy sheriff, was accused of using his position to provide security and perform surveillance for the drug dealers. It was also alleged that Phillips used state computers to check license-plate numbers of vehicles Cornett suspected might belong to undercover cops.

During the ten-week trial last spring, prosecutors never stated how much they thought Phillips had been paid, but they did point out that he had a penchant for living large. Between 1991 and 1995, Phillips never earned more than $26,000 a year -- but, noted the federal attorneys, he wore a Rolex and owned both a Mercedes-Benz and a Corvette.

 

Phillips admitted that he knew Cornett, who'd done paint jobs on his cars. But he denied knowing anything about Cornett's alleged drug activity.

Last June, after four days of deliberation, a jury found Phillips guilty, along with Cornett and another alleged conspirator, and Phillips faced the possibility of life in prison. But two months after his conviction, U.S. District Judge Nancy Atlas granted Phillips's motion for a new trial. Federal prosecutors then chose not to retry the case.

In her decision, Atlas noted that several government witnesses had erroneously identified Phillips as the voice on a key tape-recorded conversation. (Near the end of the trial, prosecutors discovered the error and withdrew the tape as evidence, but only after it had been played for the jury.) Also, during the trial, witnesses had testified that they had seen Phillips wearing a Harris County constable's uniform, when, at the time in question, Phillips had already moved on to the sheriff's department.

Additionally, said Atlas, federal attorneys had relied on numerous faulty assumptions and conclusions made by both the U.S. Customs Service and the IRS. For example, an IRS agent testified that she believed Phillips had paid off a vehicle loan with $3,500 in cash; he'd actually written a check. The judge also pointed out that the agent eventually testified that there were no financial irregularities in any of Phillips's purchases.

"Phillips's non-tax-related dealings demonstrate conspicuous consumption and aggressive borrowing, but no improprieties," wrote Atlas. "Phillips's serious impropriety was his failure to timely report income and pay taxes accordingly. However, such behavior does not justify a conviction for drug conspiracy."

The case had taken ten weeks to try; more than 100 witnesses testified, 38 of them on Phillips's behalf. Of those 38, Phillips says, a whopping nine -- including his mother -- received audit notifications from the IRS shortly before or during the course of the trial.

Officially, all of the roughly two million audits the IRS conducts each year are determined solely by the contents of each individual's tax return. An IRS spokesman declined to comment on the odds that nine out of 38 witnesses in a federal trial would be randomly audited.

Phillips now works as a dispatcher for Harris County Constable A.B. Chambers, but is hoping to get back his job as a deputy sheriff. He doesn't buy the "purely by chance" theory. "The IRS was trying to intimidate them," he says. "It was government muscle and intimidation."

In November, President Clinton appointed 57-year-old Charles Rossotti, a former computer-industry executive, as the new commissioner of the IRS. The president gave Rossotti a mandate to overhaul the agency, making it a "taxpayer advocate" where citizens are treated as respected customers, not criminals. Rossotti likes to tell reporters that "a new day has dawned at the IRS."

Last month, Rossotti visited the IRS's downtown Houston office. In a meeting with about 120 employees, Rossotti fielded questions. But according to one person in attendance, Rossotti's handlers steered him clear of those who might ask something embarrassing.

Still, whistle blower Jennifer Long likes what she has heard about Rossotti. She believes Rossotti is sincerely interested in reform, and that he might restore the agency to its former respectability.

"The problems of the IRS are out in the open, now," says Long. "They can't hide them anymore.


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