(MONEY Magazine) – Deliberately and methodically, the Internal Revenue Service stacks the deck against taxpayers in 10 major ways. A few of its methods are merely unfair, like charging a higher rate of interest on back taxes than it pays on late refunds. Others cause honest taxpayers needless misery and even despair, like seizing your assets without notice and leaving you with too little to live on. * The Taxpayer Bill of Rights failed to end such abuses. Once you understand what the IRS is up to, however, there are ways you can fight back. This is the third in MONEY's ongoing series on the IRS.

No police department can do it. And the FBI doesn't dare. Yet the Internal Revenue Service does -- all the time. It presumes that taxpayers are guilty and then, without a court order, it punishes them by garnisheeing paychecks, snatching cash from bank accounts and trashing credit ratings by slapping liens on property and even seizing cars and homes. ''The IRS makes its own laws, administers those laws and passes judgment on them, in clear violation of our system of checks and balances,'' wrote an angry MONEY reader in a recent letter to the editor signed ''Anonymous IRS Slave.'' Few Americans would oppose harsh actions against tax cheats and chronic deadbeats. But when a government agency is so badly run that nearly half of the 36 million notices it sends out each year demanding additional tax or penalties are inaccurate (MONEY, April), and those kinds of blunders can drive a man to take his own life (MONEY, June), a case can be made that its powers are far beyond its ability to control them. Says tax attorney Robert Spector of IDS Financial Services in Minneapolis: ''The IRS believes that they're the good guys and taxpayers are the bad guys. It amazes me that our voluntary tax system still works despite how the IRS treats taxpayers.'' Congress recognized that the IRS was exploiting a basic injustice built into the rules of tax collecting and tried to correct it two years ago. That was when Arkansas Democratic Senator David Pryor's 11,000-word Taxpayer Bill of Rights became law. Yet our reporting in April and June, plus an unending stream of letters from readers complaining about the IRS, indicated that the wrongs persisted. Given all this, we decided to do a scalpel probe to see whether a key provision of the Bill of Rights was being honored. In May and June our correspondents conducted a telephone survey of 156 taxpayers in 15 cities across the country. All had liens placed on their property by the IRS in the past two years because they owed back taxes. Under Taxpayer Rights, the IRS must send a notice by certified mail warning that a lien establishing the government's priority over other creditors will be filed in court unless the taxpayer pays the amount due within 30 days. Yet a full 35% of the taxpayers queried by MONEY claimed they never received the 30-day warning. Six said they first learned that liens had been put on their property when MONEY's correspondents called. Asked to comment on those findings, IRS assistant commissioner for collection Raymond Keenan replied: ''I'm sure we miss some taxpayers because we don't have their proper address or something like that, but I don't think we miss 35%.'' Ellen Murphy, who heads the IRS public affairs office, objected to MONEY's survey on the grounds that taxpayers answered anonymously and did not give the agency permission to rebut their claims. The IRS has never done a study on the accuracy of its liens.

That unsettling skirmish helped to convince MONEY's tax team to take a deeper look at the IRS. Over a four-month period, we interviewed scores of accountants, tax attorneys, tax scholars and current and former IRS employees. What emerged was a consensus on the 10 most egregious IRS injustices. Since Taxpayer Rights was meant to protect you against several of these practices, we also offer specific advice on what you should demand that Congress do to fix the basic injustice in our tax system.

1 The IRS assesses draconian penalties and interest charges. Life is usually quiet on Wolf River Farm, the 550-acre spread in Athens, Maine where Eugene Swan, 81, and his wife Katharine, 67, raise draft horses and make maple syrup. But the peace was shattered in May 1988 when Katharine received a letter from the IRS alleging her failure to report interest and dividends and demanding $9,559 more in income taxes, $10,366.03 in interest and penalties of $9,982.52 -- $29,907.55 in all. ''We were stunned and frightened,'' recalls Eugene. Although the Swans' lawyer promptly sent the IRS proof that Katharine didn't owe a cent, the agency continued to dun her for 15 months until after the Swans had complained to their congresswoman and U.S. senators and incurred $1,549.57 in legal and accounting fees. That's not the end of the story, however. Last February, the IRS inexplicably sent the Swans a check for $3,562.06, then instructed them to return it so the amount could be credited against their 1990 tax bill. The puzzled couple complied, but wonder what sort of surprise the IRS will spring on them next. When MONEY queried the IRS about the Swans' case, assistant commissioner for collection Keenan replied, in writing: ''There is no question that it took too long to resolve this account. However, we believe that technological advances and procedural changes will reduce such problems in the future.'' But how about now? Keenan concluded that the IRS sent the Swans a refund check for $247.71 last August. Yet IRS spokesman Wilson Fadely later said that the agency sent the Swans a $3,562.06 refund last February and another check for $77.36 last May. Cases like the Swans', in which interest and penalties dwarf the tax allegedly owed, inspired Congress last December to simplify and eliminate some overlaps among the roughly 150 separate penalties the IRS had the power to impose. The new law applies to tax returns filed after Dec. 31, 1989. Unfortunately, it gives precious little relief. Under the new rules, had the IRS been correct, the Swans would still owe $28,231.78, says senior tax manager Marvin Michelman of Deloitte & Touche in New York City. The consensus of expert sources is that Congress should make two moves: -- Take up penalty reform again and provide real relief this time. One way: reduce the number of penalties that can be assessed against a taxpayer who makes one mistake on his return. -- Repeal a 1982 law that allows the IRS to charge compound instead of simple interest.

2 The IRS charges you a higher interest rate on back taxes than it pays you on refunds. This item may seem small, but it epitomizes government contempt for taxpayers that is far from confined to the IRS. Because Congress inserted a particularly ungenerous provision in the Tax Reform Act of 1986, the interest rate the IRS pays on late refunds (those made more than 45 days after April 15) is equal to the federal short-term rate -- that is, the average yield of all outstanding Treasury securities due to mature within three years, plus two percentage points. The rate you pay on back taxes, however, is equal to the fed rate plus three percentage points. What should Congress do? -- Equalize the interest rates.

3 Before you can appeal a tax assessment in U.S. District Court or U.S. Claims Court, you must pay the tax the IRS says you owe. You have four avenues of appeal if you don't agree with a tax bill, but the two best routes are open by law only if you pay up before you go to court. First of all, you can request a hearing with an IRS appeals officer without paying in advance. Some tax pros, however, question your chance of getting a fair shake there. Says tax attorney Robert Spector: ''Appeals officers clearly favor the IRS, which isn't surprising since their paychecks are signed by the Treasury Department.'' Retorts IRS appeals division director James J. Casimir: ''If we weren't really a separate appeals process, we would not be able to reach agreement with the taxpayer on 90% of the cases that come before us.'' After appeals, the IRS actually collects $67.20 of every $100 in additional taxes assessed by its auditors. You can also appeal to the U.S. Tax Court without paying up front. The court, which holds sessions at 77 locations throughout the country, has 42 judges, 20 of whom are former IRS officials. Your chances of winning in Tax Court are slim, though. Last year, the court decided only 4% of 1,268 cases in favor of taxpayers; it issued split decisions 48% of the time. And whenever the IRS loses in that court, the IRS commissioner has the right to formally agree or disagree with the decision. If he disagrees, taxpayers with similar cases must either conform to the IRS view or spend money litigating issues the court has already decided. Your odds of winning an unconditional victory improve if you pay your disputed tax bill in advance and sue either in U.S. Claims Court or U.S. District Court. Last year the claims court decided 8% of its 73 cases in favor of taxpayers and 3% partly in the government's and partly in the taxpayer's favor; district courts favored taxpayers in 18% of the 455 cases decided and issued split decisions in 4% of all cases. Says tax attorney D. French Slaughter III of Charlottesville, Va., a former Justice Department lawyer for the IRS: ''If a client can afford to pay up front, I usually suggest district court. District courts tend to look for fair results, while the Tax Court focuses on technicalities. I'd love it if both courts were accessible without paying the tax in advance.'' What should Congress do? -- Open all four avenues of appeal to taxpayers without forcing them to pay disputed bills in advance.

4 The IRS abuses its powers to seize your paycheck and personal property. Over the past decade, a revenue-ravenous Congress has pressured the IRS to collect more and more money, emboldening the agency to get tougher and tougher with alleged deadbeats. To close 2.1 million delinquent accounts in 1979, the IRS filed 371,357 liens, levied 465,059 paychecks and bank accounts and seized 5,723 items of personal and real property. Last year, the IRS closed 2.8 $ million delinquencies, filed 904,000 liens, served 2.3 million levies and made 12,870 seizures. Asked why liens, levies and seizures are up 143%, 395% and 125%, respectively, when the number of delinquent cases closed is up by only 32%, IRS assistant commissioner for collection Keenan replied: ''The IRS is a growth business.'' In 1979, each collection division employee filed an average of 46 levies; now that figure has blitzed to 125. As MONEY's survey of recently liened-on taxpayers shows, however, the agency frequently fails to give fair warning before taking ham-handed collection actions. By law, the IRS is supposed to levy paychecks and bank accounts only after a taxpayer fails to respond to five tax-due notices sent at five- to six-week intervals. The final notice, which warns of the IRS' power to levy and file liens, is supposed to be sent by certified mail. The IRS can dispense with these warnings in some instances, notably in a so-called jeopardy assessment, if it has reason to believe that you intend to shift assets out of its reach or flee the country. The IRS made only 246 jeopardy assessments last year. Tax-due notices are generated by computers at the IRS' 10 regional service centers. If a taxpayer fails to respond to the notices, his bank account or paycheck may be levied or a lien may be placed on his property. Intractable cases are assigned to one of 21 Automated Collection System offices across the country or to a revenue officer in one of 63 district offices. Sometimes -- no one knows exactly how often -- the IRS seizes assets without warning. Take the case of Penny Stellmacher, 39, of Keizer, Ore. She was employed as a $25,000-a-year systems auditor for a cable television company when the IRS concluded that she owed $95,426 in back taxes and sent a levy notice to her employer in August 1988. Before the agency could seize one of her $650 paychecks, however, Stellmacher hired an accountant who asked her employer to stop paying her until the matter was cleared up. Stellmacher and her husband Paul, 32, then called and wrote to the IRS and were told that Penny owed all those back taxes for 1984. It took their accountant two weeks to convince the IRS that it had erred. The agency hadn't realized that the Stellmachers had been filing joint tax returns since they married in 1984, so it dunned Penny at her former address for failing to file individual returns under her maiden name. The Stellmachers were offended even more by the IRS' arrogance than by its incompetence. Says Paul: ''I realize the IRS deals with a lot of people who don't want to pay their fair share, but most do. They treated us like full- blown criminals.'' The Stellmachers refused to sign a waiver allowing the IRS to comment on their case. ''Our trust in the IRS has really eroded,'' says Paul. Although the Taxpayer Bill of Rights includes a provision meant to head off surprise IRS raids on savings accounts, the law is flawed. Banks and other financial institutions are required to wait 21 days before releasing money from customers' accounts to the agency. But IRS Commissioner Goldberg told Congress last April that some banks were not waiting 21 days before handing money from customers' accounts to the IRS. Unfortunately, the law lacks sanctions that would prevent banks from ignoring the 21-day safeguard. What should Congress do? -- Prohibit IRS service center employees from imposing liens and levies unless one of them personally talks to a taxpayer and determines that no other recourse is possible. The IRS' Keenan says he wouldn't object to such a move, but adds: ''We have to run the IRS as a business, and we have to look at the costs we incur to collect delinquent taxes.''

5 When the IRS seizes your assets, it can leave you with too little to live on. The Taxpayer Bill of Rights tried to solve this problem; characteristically, it didn't go far enough. The law exempts from seizure wages equal to your standard deduction and personal exemptions divided by 52. That formula leaves a family of four only $258 a week, up from $150 prior to 1988. C.P.A. and tax attorney Alan Zipp of Rockville, Md. argues that's still too punitive. ''People run into tax problems because they have financial problems, and all the government does is make matters worse,'' he says. ''I've seen people turn to illegal activities just to pay their taxes.'' Harsher still is the law's provision that empowers the IRS to strip you of all but $1,650 in personal belongings and $1,100 in business property. Those limits were $1,500 and $1,000, respectively, before the Taxpayer Bill of Rights came limping to the rescue. What should Congress do? -- Peg the portion of a taxpayer's paycheck that is exempt from levy to the cost of living in his area and raise the exemptions for personal and business property to $5,000 each.

6 Revenue officers have too much individual discretion. Although the Internal Revenue Manual runs to 260 densely printed volumes, tax collectors enjoy tremendous latitude, partly because courts have ruled over the years that the manual is not the law. As a result, the IRS can flaunt its own rules with impunity. Says Jack Warren Wade Jr., a former IRS revenue officer and author of When You Owe the IRS (Viking Penguin, $6.95): ''No two IRS collection employees or even supervisors are going to work the same case the same way. Abusive activity occurs because of the exercise of this discretion.'' The Taxpayer Bill of Rights, for example, requires that the IRS merely consider allowing you to pay back taxes in installments. So your ability to negotiate such a deal depends on the IRS employee who's assigned to your case. When the American Institute of Certified Public Accountants polled C.P.A.s last year, only 28% said that employees at IRS Automated Collection System offices were always or usually consistent in applying installment payment agreements in similar situations; 42% said that revenue officers in district offices were always or usually consistent. David Carroll, 53, a retailer of western-style clothing, was never given the option of paying $20,601.86 in overdue self-employment taxes, interest and penalties in installments. Instead, revenue officer Leo Andersen surprised Carroll at his Phoenix home one morning in July 1989 and demanded full payment. The men engaged in a shouting match, and Andersen left empty-handed. Two months later, Carroll was indicted for assaulting and threatening a federal officer and faced up to eight years in prison and a $100,000 fine. After hearing testimony last February, a federal judge acquitted Carroll, who had since paid his back taxes. The judge concluded that the 260-pound Andersen and the 220-pound Carroll had merely bumped bellies while bellowing at each other. Says Carroll of Andersen's tactics: ''He's a bully.'' In a letter to MONEY, IRS assistant commissioner Keenan said that Andersen testified at trial that although he felt he had been intimidated, he never believed that Carroll's actions put him in danger. Like Carroll, Brenda Stout, 47, had the misfortune of drawing an overzealous revenue officer on her case. Between September 1988 and May 1989, Sherilyn Heyward of the IRS' Savannah office originally told Stout that she owed $51,821.58 -- then $7,000 more, then $1,009 more, and finally $37,093.76 more -- in back taxes on diesel fuel that she sold at her Garden City, Ga. gas station and convenience store. Stout remortgaged her store to raise the first $51,821.58, paid the additional $8,009 and negotiated to pay the remaining $37,093.76 in weekly installments. After paying most of it but missing several payments, Stout told Heyward last December that she planned to sell her store to pay the remaining $7,532.95. Heyward then attempted to levy Stout's business bank account, but the bank refused to turn over the money because the levy notice showed an incorrect address for Stout. Without any further investigation, Heyward petitioned the U.S. District Court in Savannah to permit the IRS to raid Stout's store, arguing incorrectly that Stout had switched bank accounts to put her assets out of the government's reach. After Judge B. Avant Edenfield granted Heyward's request last May, the agent and five other revenue officers, two armed with guns, burst into Stout's store, searched cash registers and desk drawers and seized more than $1,600 in cash and checks, including $75 that belonged to a woman who sold puppets on consignment in the store. Stout complained to Judge Edenfield, who last June removed Heyward from Stout's case and in a scathing 10-page order characterized the episode as ''a story of bureaucratic incompetence, aggravated by arrogance and hostility toward those the bureaucracy was intended to serve.'' The IRS got to keep the money it seized, however. Indeed, even Stout's small triumph was fleeting. Within a week of the judge's order, she received a letter from the IRS demanding yet another $2,600. When she called the agency, she learned that Heyward had been named acting collection group manager while her boss was away on an eight-day leave. The IRS' Keenan wrote to MONEY: ''Our review shows that during the course of this matter we took actions based on judgments that subsequently turned out to be incorrect . . . While I fully believe that IRS employees did not violate the law or the letter of our policies in discharging their responsibilities, these incidents obviously caused ((her)) distress and inconvenience and I do offer our apologies.'' Keenan's mild rebuke to Heyward underscores another disturbing point that former and current revenue officers made in interviews with MONEY: the IRS is more likely to penalize an employee for being too soft on taxpayers than too harsh. Says revenue officer John Connor of the IRS' Philadelphia office: ''You're never going to get into trouble with the IRS for taking enforcement action. You're going to get in trouble for not doing it.'' IRS public affairs chief Ellen Murphy responded that the agency had received 67 allegations of employee abuse of power from Oct. 1, 1989 to Aug. 4, 1990. Eleven of those cases were closed because the charges could not be supported. Fifteen cases are still pending. In the remaining 41 cases, four employees were fired, 14 were suspended, 12 were reprimanded and 11 resigned when they were confronted with charges of misconduct. Also, in defense of the IRS' collection practices, Murphy offered a February 1990 survey by the consulting firm Booz Allen & Hamilton of 2,070 taxpayers dunned by the agency's collection division. Those results, however, suggest that the IRS has little reason to be self-satisfied. For example, 30% of the taxpayers who had dealt with IRS district offices felt they had been treated unfairly, 43% said they had been treated fairly and the rest reported mixed feelings. Service centers had the best record: 51% of the taxpayers who had dealt with these offices said they had been treated fairly and only 19% cited unfair treatment. Especially disturbing: about half of all taxpayers surveyed felt the IRS did little to help them understand their rights. What should Congress do? -- Require the IRS to write regulations for collection procedures so a taxpayer's treatment does not depend on the independent judgment of the collection agent assigned to his case. -- Make installment payment plans mandatory for taxpayers who owe less than, say, $2,500 and have an unblemished record of tax compliance.

7 Once the IRS unleashes its collection hounds, they're virtually unstoppable. Few taxpayers have ever heard of the Anti-Injunction Act of 1924. Too bad. This law so limits your ability to file a lawsuit to restrain the assessment or collection of taxes that David Keating, executive vice president of the National Taxpayers Union, calls it the ''Berlin Wall of taxpayers' rights.'' Likewise, over the years courts have been very stingy with injunctions, granting them only if taxpayers could prove that they were in danger of suffering irreparable damages and that the government would not win the case under any circumstances. The upshot: taxpayers must appeal for mercy to the hangman himself, the IRS. The Taxpayer Bill of Rights formalized a procedure for asking the IRS to halt collection actions, but it's questionable whether the program has brought relief to many people. The law gives the IRS' problem resolution officers the authority to issue so-called Taxpayer Assistance Orders (TAOs) to stop collection procedures if a taxpayer can show that he or she will suffer a significant hardship. So far, TAOs have been harder to come by than crosses at a vampires' convention. Since the rules took effect on Jan. 1, 1989 to last May, the IRS received 23,081 applications for TAOs -- and issued 10. One reason for the scarcity: the stony-hearted definition of hardship included in proposed regulations issued by the IRS in March 1989. For instance, financial pain alone is not reason enough to grant a TAO. The action the IRS takes against you must also ''offend the sense of fairness of taxpayers in general.'' IRS taxpayer ombudsman Damon O. Holmes, who supervises the agency's problem resolution officers, defends the program by pointing out that the problems of around one-third of the taxpayers the IRS confirmed were hardship cases were resolved without issuing such an order. What should Congress do? -- Amend the Anti-Injunction Act to allow citizens to file lawsuits in federal court to halt IRS collection actions under more circumstances. A notable instance: when the agency makes an improper or illegal tax assessment or violates laws or regulations that provide procedural safeguards designed to protect taxpayers. -- Hold hearings on the TAO program to determine whether it really works or merely serves as window dressing.

8 Taxpayers who have suffered financially through IRS carelessness cannot sue for damages. Until the Taxpayer Bill of Rights became law, citizens couldn't sue the government for damages arising from wrongful IRS collection activities. But even now, suits are permitted only if an IRS employee ''recklessly or intentionally'' disregards tax laws or regulations. Problem is, recklessness is far harder to prove than carelessness. In addition, the law forces you to exhaust all administrative remedies within the IRS before you sue and limits your compensation to the lesser of $100,000 or the actual and direct economic damages you suffered plus the cost of your lawsuit. What should Congress do? -- Give taxpayers the right to sue in federal district court if an IRS employee's carelessness harms them financially.

9 Even if you beat the IRS in court, you won't be able to recover most of your legal fees. Thanks to the 1986 tax reform law, the most you can collect is $75 an hour, though tax attorneys generally charge $175 or more. You can petition the court to award higher fees, but judges rarely do that because of the law. What should Congress do? -- Eliminate the $75-an-hour limit and instead let judges set reasonable fees.

10 You bear a huge burden of proof if the IRS hits you with the 100% penalty. The IRS wields this lavish levy when it cannot collect income and Social Security taxes withheld by an employer from workers' paychecks. By law, the agency may assess penalties in the same amount as the withheld taxes on anyone responsible for paying these taxes. If a revenue officer cannot determine who is responsible, he is instructed by the Internal Revenue Manual to look to the company's president, secretary and treasurer. Critics charge, however, that revenue officers often slap the 100% penalty on bookkeepers, accountants, shareholders and even business owners' spouses. Says David Silverman, author of Battling the IRS (Circle City Press, $14.95): ''Anyone who could sign a check is considered responsible for paying taxes, and it's up to them to prove otherwise.'' What should Congress do? -- Change the law to restrict the IRS to using the 100% penalty only against corporate officers and directors. What taxpayers need now is a Bill of Rights with a full set of teeth. Colorado Republican Senator Bill Armstrong raised hopes recently when he charged that the 1988 Bill of Rights ''is not living up to its name'' and introduced five bills to strengthen it -- including one that would facilitate suing the IRS and recovering costs. But none of these measures has much chance of passing soon, particularly since Senator Armstrong is not running for re- election. Indeed, Congress is pressing the IRS anew to fatten its collections.

Ultimately in a democracy, taxpayers get all the rights they are willing to fight for. So you must first stand up, shout that you are mad and vow that you aren't going to take it anymore.