A Shackled IRS

Back in 1998, a Virginia Beach restaurateur named John Colaprete appeared before the Senate Finance Committee to describe an Internal Revenue Service run amok, raiding his restaurant and home, terrorizing his family -- all because his former bookkeeper, whom he fired and accused of embezzlement, had run to the agency with a tale of drugs, money laundering and tax cheating.

An eager Congress listened attentively to his testimony and that of several other individual taxpayers and businessmen, and in the aftermath voted to restructure the IRS and to pass legislation mandating the firing of any agency employees caught abusing a taxpayer.

IRS law enforcement activities shrank sharply. Audit rates and levies, liens and property seizures fell to historic lows, and even now have not returned to their previous levels.

Property seizures, which totaled 10,090 in fiscal 1997, dropped to 161 in 1999, and reached only 399 last year. Audits of individuals dropped from 1.5 million in fiscal 1997 to 617,765 in 2000. The total made its way back up to 849,296 last year.

These declines took place at a time when the U.S. economy was expanding rapidly and, as has now become clear, abusive tax shelters grew into a virtual industry.

Colaprete, his restaurant, known as The Jewish Mother (its company name is Mom's), and others sued the IRS and Virginia officials, seeking $20 million in damages. But the courts appear to have been less convinced than Congress. A federal district court dismissed most of the complaints in 2000, and last week the 4th U.S. Circuit Court of Appeals tossed out those the lower court had left standing.

The appellate court found that IRS and other agents acted reasonably when they obtained the search warrant used in the raid. Even though Colaprete was never charged with anything and his records and computers were eventually returned, the court held that the bookkeeper had given the agents enough to support a warrant.

The raid may have been a mistake, but agents operated within the law.

"The pertinent question is not 'whether probable cause was, in fact, present,' but 'whether the officer could have reasonably thought there was probable cause to seek a warrant,' " the court said.

The court noted that the bookkeeper brought with her cash-register receipts and other records and told agents she had been keeping, as she said her employer had asked, two sets of books, which would have implicated her as well as her employers in criminal activities.