How well is the Internal Revenue Service (IRS) managed? This is an important consideration in deciding whether the agency should be continued in its present form or if it should perhaps be dissolved as part of an overall plan to change the nation’s tax system. But, can it really be reformed?

On the surface, the federal tax system appears to be operated very efficiently. The IRS has attempted to make this case to the nation’s legislators in its frequent appearances before Congress. But, over the years, a number of cracks have appeared in this agency’s monolithic image.

A 1993 General Accounting Office (GAO) audit of the IRS found widespread evidence of financial malfeasance and gross negligence. Among other things, the agency could not account for 64 percent of its congressional appropriation.

Amazingly, this was the first audit, ever, of the IRS in the then 80 years of its existence. Not only was the agency unable to account for 64% of its congressional appropriation, but Daniel J. Pilla, a tax litigation consultant, reported that “The GAO found widespread evidence of financial malfeasance and nonfeasance and, perhaps, outright fraud. The GAO could not even ascertain the correctness of the agency’s financial statements because ‘critical supporting information for billions of dollars was either not available or was unreliable.’ ” NOTE: This is the same organization that requires taxpayers to properly document the information on their individual tax returns.

Negative audit disclosures notwithstanding, the IRS attempts to present an image of being well managed and efficient. And, in large measure, they have succeeded.

One of the things contributing to their positive public perception is the ratio of its costs to the taxes it collects. In 1993, the IRS had an operating budget of $7.11 billion and brought in tax collections of $1.176 trillion, a cost of only 63 cents for every $100 of tax revenue produced. According to Congressional testimony given by the president of the IRS employees union (yes, they have a union), that cost had been reduced to 50 cents per $100 of tax revenue produced – contrasted with the tax agencies in other developed countries, which incurred a cost of about $1.25 per $100 of taxes collected, more than double the U.S. record.

With such favorable statistics, Congress has generally been inclined to approve frequent requests for budget increases over the years. The agency’s budget doubled over a recent 10-year period, while the number of employees grew by 20 percent. The IRS Oversight Board’s most current budget report has recommended $11.3 billion in funding for the agency’s 2007 fiscal year, which includes about 115,000 employees.

In 1993, the GAO’s review of the agency’s performance offered a disturbing insight into what has been characterized by Pilla as “an error-prone, negligent, and inefficient agency.”

A General Accounting Office test call survey in 1989 revealed that taxpayers were given incorrect answers to the questions they directed to the IRS “assister” program over 37% of the time. That translates into better than 24 million taxpayers who were given wrong information. By 1989 that record had been improved to 89% accuracy, in response to approximately 77 million inquiries. However, that still left some 8.5 million people whose questions were incorrectly answered. Moreover, what these statistics do not tell us is the percentage of calls from taxpayers that were actually getting through to the IRS. Although the IRS claimed an improvement in the accuracy of their answers to questions, a smaller percentage of their callers were able to reach them.

Today, 61% of tax filers find it necessary to use paid tax preparers to file their returns, and taxpayers’ compliance costs have been driven to a new high of $265 billion.

In November 1993, the GAO reported that the problem was getting worse: “IRS data indicate that taxpayers who call IRS have a good chance of getting a correct answer to their tax law questions; but their chances of getting through to ask these questions are poor. People who called during the 1993 filing season, for example, had a 1 in 4 chance of getting through – even worse than the 1 in 3 chance we reported in 1992.”

A 1988 GAO study revealed huge error rates in the agency’s program of mailing notices to taxpayers. Among other things, they reported, “Our review of correspondence and related cases at three service centers indicated that the IRS’ letters, the adjustments discussed in the letters, and/or the action taken by the IRS in response to the taxpayers’ inquiries was often incorrect, unresponsive, incomplete or unclear. Such notices sometimes resulted in the assessment of incorrect tax and penalties.”

The GAO found that 48 percent of all IRS correspondence and actions regarding account adjustments were either “incorrect, unresponsive, unclear or incomplete.” Furthermore, in 68 percent of the cases studied, the IRS failed to comply with its own “procedures designed to foster good taxpayer relations.”

In 1990 and again in 1992, the GAO revisited the matter of IRS proficiency in handling adjustments and correspondence and found that not much had been done to improve the situation.

After talking with literally hundreds of people, Pilla was convinced that “the IRS was deliberately sending bogus bills to the public.” He further stated, “The error rate in the notices I personally examined seemed much too high to be inadvertent.”

In 1993, the Information Returns Program by itself was responsible for bringing in $3.7 billion in additional tax, penalty, and interest assessments. And, it did not seem to trouble either Congress or the IRS that about half the notices that were sent out were wrong.

Dan Pilla’s conclusion was that the IRS has used the penalty provisions of the code as a back-door method of collecting more money.

In 1992, the IRS promised they would stop using penalty assessments as a means of collecting revenue, rather than using penalties only for the intended purpose of “encouraging voluntary compliance.” (There’s that word “voluntary” again). However, despite their promises, by 1993 total assessments had expanded to almost 33 million taxpayers, up from less than 20 million in 1980.

To summarize, we have a tax system that is so complex that it requires over 73,000 pages to codify the laws, regulations and rulings, the instruction booklet for Form 1040 has grown to 142 pages, and the agency has found it necessary to create 582 forms for taxpayers to comply with various reporting requirements.

Our tax code has been used as much as an instrument of social policy as a set of rules for levying taxes. By any standard, the tax laws are unfairly established and applied. Everyone is cheated by it in one way or another. And, we have a governmental agency that is charged with the responsibility of interpreting and applying our tax laws and collecting taxes that also has a long track record of mismanagement, malfeasance, inefficiency and abuse of power.

The question remains, Should the present tax system be replaced with another form of taxation and the IRS closed?

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Read more of Harris Sherline’s commentaries on his blog at www.opinionfest.com