Bill Henck: Inside the IRS

As noted at the top, William Henck has worked inside the IRS Office of the Chief Counsel as an attorney for over 26 years. We submit the following personal account by Mr. Henck for the consideration of readers in the context of current controversies without further comment. He writes:

I have been an attorney in the IRS Office of Chief Counsel for over 26 years. Over a number of years, I have attempted, largely unsuccessfully, to alert the public to abuse within the IRS. One of my kids suggested that I contact a blog and Power Line has graciously agreed to publish this account.

I do not personally know whether the IRS has targeted conservative groups or individuals, but I do know that the environment within the agency is ripe for such activity and there is nothing to prevent it from occurring. As stated in more detail below, I have personally witnessed improper giveaways of billions of dollars to taxpayers with inside access at the agency, bullying of elderly taxpayers, the cover-up of managerial embezzlement and misappropriation of thousands of dollars in government funds, and a retaliatory audit. I have also heard credible accounts of, among other things, further improper giveaways, blatant sexual harassment, and anti-Semitism. All of these matters have been swept under the rug.

A number of years ago, a manager in my office was embezzling thousands of dollars in travel funds. His actions were common knowledge, but other managers, including a currently high ranking executive in the office of chief counsel, did not report him. I did report his conduct to the Treasury Inspector General for Tax Administration (TIGTA), but they did not investigate the matter for a considerable length of time. After I complained to my local congressman’s office, TIGTA finally forwarded the matter to the office of chief counsel to be handled internally. Eventually, the office of chief counsel made the manager pay the money back, but took no other disciplinary action, even though others who committed the same type of scheme were punished severely.

The manager in question has led a charmed life. Several years after this episode, he decided to retire, but was starting a new job in a different city two months before he was eligible to retire. He could have retired early or taken annual leave for two months before retiring. However, he did not want to take annual leave because federal employees can cash out annual leave when they retire. Rather than have him burn at least $20,000 in annual leave, the IRS transferred him to the new city, but did not give him any work, allowing him to work his new job while still receiving a government paycheck. I obtained an e-mail from this manager, in which he admitted that he had no work, that the IRS was not planning to give him any work in the new city, and that he was working on matters related to his new job while at the IRS. I forwarded this e-mail to TIGTA, but of course it was ignored by both TIGTA and the office of chief counsel. TIGTA has a well deserved reputation for protecting IRS managers. In fact, a TIGTA agent once stated that “we don’t investigate [IRS] managers.”

At the same time the manager was embezzling travel funds, I was working on a case involving what I call the Elmer’s Glue scam. Tax shelter operators misused a synthetic fuel credit by spraying watered down household glue on marketable coal, degrading the coal, but producing huge tax credits for investors. This was costing the Treasury at least $3 billion a year. The IRS turned a blind eye to this activity and harassed those of us in the agency who were trying to stop it. Since I had witnessed TIGTA help cover up embezzlement, I decided to go to the press about the Elmer’s Glue scam. The Wall Street Journal published a story about it, but the scam continued.

As a result of complaining about TIGTA’s inaction regarding embezzlement and speaking out about the Elmer’s Glue scam, my wife and I were subjected to a retaliatory IRS audit. After an experienced revenue agent from Fairfax spent an entire day auditing our tax returns, he stated that they were clean. Soon thereafter, he called me and apologetically stated that his “special projects” manager had ordered him to return to Richmond and “keep digging” into our returns. He stated that his regular manager would not have ordered this (I believe that because in 26 years at the IRS, I have never heard of an agent being sent back to continue a straightforward individual return that had been judged to be clean). I contacted the Washington Post and gave them a privacy waiver to discuss our tax returns with the Service. When the Post presented that waiver to the Service, they quickly dropped our audit.

Within the past few years, the IRS has used a “cadre” to pursue a particular type of case. I was assigned one of those cases that was in Tax Court. I believed that we should concede the case in question because our legal position was incorrect. As a result, I was called a quitter and a coward, was threatened with retaliation, and in fact suffered retaliation. The “cadre” (I hate that term, but that’s what they call themselves) pushed cases with an obvious legal defect. Taxpayers were denigrated in writing as “upper class twits” and one cadre member stated that, despite the weakness in our legal position, the taxpayers in these cases were typically elderly and could be forced into settling their cases. I stated my ethical concerns to management, but they answered with a short non-response and did not even bother to ask for the name of the cadre member who stated that we could bully elderly taxpayers into settling their cases. (The Tax Court ultimately rejected the Service’s position regarding the legal issue.)

Finally, there is the matter of black liquor. Black liquor is a byproduct of paper manufacture. Paper manufacturers were able to persuade the IRS to qualify black liquor for a refundable tax credit. This cost the Treasury approximately $6 to 7 billion a year. Congress in fact put a stop to it after tax year 2009. That’s when the real backroom abuse started. Most of the companies reported the refundable credits as taxable income on their tax returns and the position within the IRS internally was that these credits were taxable income. In fact, there is a revenue ruling issued by the IRS that states that farmers with similar refundable credits have to report the credits as taxable income. However, Washington lobbyists met with high ranking IRS, chief counsel, and Treasury Department officials and got the decision regarding black liquor reversed. Taxpayers then filed refund claims with respect to the amounts that they had previously reported as taxable income and the IRS exam teams were told to stand down. This cost the Treasury at least $2 billion for tax year 2009.

I was assisting an exam team involved with this issue. The revenue agents and I discussed the issue with a high-ranking official in the IRS. He told us not to pursue the issue of whether the credit amounts were taxable income. When I asked that he put that instruction in writing, even in an e-mail, since he was asking the exam team to ignore published IRS guidance, he stated that the IRS chief counsel had ordered that nothing be put in writing on the subject. I raised my ethical concerns with management, but was ignored.

I contacted Steve Mufson, a reporter for the Washington Post. Steve wrote a detailed story in July that laid out the abusive situation. The response in Washington was a collective yawn. I contacted numerous congressional staffers and journalists about the story, but no one cared about the $2 billion loss to the Treasury. One result of the story, however, was that it smoked out the IRS. In early November, the Service issued low level guidance called a chief counsel advice (CCA, but it should be a CYA), that attempted to defend the indefensible. In addition, the IRS had contacted the Treasury Department about the CCA prior to its issuance, but did not list Treasury as a third party contact in the CCA, in violation of IRC section 6110(d). I have attempted to simplify a complex subject, but suffice it to say that if you are a farmer, a refundable tax credit associated with an excise tax is taxable income. If you have inside access at the IRS, it is not taxable income. That is the bottom line.

I am reporting the information stated above because as a federal employee, I took an oath to the United States. I have a legal and moral obligation to report this information. I am proud of my colleagues in the IRS. The vast majority of us attempt to do our jobs in a conscientious manner. However, there is a culture of corruption within the IRS that dishonors that majority and the government we serve. Any organization will have its share of bad apples and misconduct. What separates the IRS is its junkyard dog ferocity in covering up misconduct. There is a strong cultural imperative within the IRS to protect the organization and high-ranking officials’ positions within it. If you report misconduct or dissent from the party line, your career is finished. Period. (For example, I still as of this moment have a job, but my career was finished as soon as I reported that manager for embezzlement.)

Some may read this account and view much of the misconduct I have reported as minor. However, to quote former FBI profiler John Douglas, no one wakes up one day and decides to become a serial killer. In other words, there is a pattern to human behavior. All Americans should be concerned when IRS officials see themselves as above the law because they are, in fact, above the law. The misconduct described above is united in the complete lack of accountability on the part of IRS officials.

As stated above, I have no direct knowledge of harassment for political reasons. I fear, however, that the ordinary citizens recounting stories of IRS abuse due to their political beliefs are telling the truth. (It is naïve to think that IRS executives would engage in the activities described above, but somehow draw the line at politically motivated harassment.) If these taxpayer accounts are true, then the IRS executives are doing it for a very simple reason: because they can. There is no accountability for IRS misconduct and people within the agency are scared to speak out and also believe, with considerable justification, that such action would be futile.

I have chosen to speak out in part because I have personally experienced the horrific damage that bureaucratic bullies can inflict. I also have tried to live up to the admonition in Romans 12:21: do not be overcome by evil, but overcome evil with good. I could sit around and knock down Jim Beam and complain, or I could try to do something constructive about the situation. I chose the latter option.

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