Beating the IRS

While the biggest fear for most people is to be called or audited by the Internal Revenue Service or the IRS, a 72-year-old accountant from Baxter, Minnesota took on the tax collection agency and succeeded where others have failed: he beat the IRS in a tax dispute. The case arose when in the late ’90s, mutual life insurance companies went public through demutualization, a process where policy holders were given shares of stock and cash as compensation for the loss of their ownership interests in the mutual insurance companies.

According to the IRS, the policy holders had to pay full taxes for the shares and the cash given them. Charles Ulrich, who has been an accountant for more than 49 years, disagreed, concluding that the cash distributions should be tax free since the policy holders had already paid for ownership rights through their premiums. For instance, if a policy holder received $50 as company shares, then eventually sold them for $55, the IRS says the taxable amount is the whole $55. In Ulrich’s view, the taxable amount should only be the $5 they gained from the share.

The old man began publicizing his interpretation, attracting a number of policy holders in the process who asked him to file tax refund cases on their behalf. Many of the cases involved small amounts, while a number amounted to several thousands. Of course, the IRS wasn’t pleased with the old accountant and accused him of encouraging people to abuse tax shelter laws, even going to the extent of demanding the names of his clients – which Ulrich adamantly refused.

A couple of weeks ago, a federal claims court judge from Washington ruled in favor of one of Ulrich’s clients’ who had sued the IRS in 2004 for refusing to issue a tax refund worth $5,000 plus. According to tax analysts, the landmark decision could benefit thousands of other taxpayers who have filed for refunds. Many marvel at the tenacity of the old man, who was even called nuts by many because more often than not, people would never win against the “tax man.” Even in history, the “tax man” has always been unpopular. In the Bible, Jesus was criticized for taking in Matthew, a tax collector. Jews regarded tax collectors as extortionists and traitors, the worst kinds of sinners, and were ostracized in Jewish society.

If one may also recall, it was the IRS which succeeded in putting the notorious Mafia boss Al Capone in prison in 1931. Capone kept frustrating the dogged efforts of prohibition agent Elliot Ness. At the time, the IRS had been conducting an investigation on Al Capone’s tax records, and they got the break they needed when an agent named Eddie O’ Hare told them where the financial records could be found.

This led to the prosecution and eventual conviction of the Mafia gangster on tax evasion charges, with the court giving him an 11-year sentence. Capone got off after seven years though due to “good behavior” – but before he died of pneumonia in 1947, he had O’Hare killed. Incidentally, the IRS recently released the confidential records of the famous Capone case, ruling that the information could be made public because Capone never filed a tax return.

In the Philippines however, the perception is that it would be quite difficult for the Bureau of Internal Revenue (BIR) to catch people like Al Capone because of the Filipino’s penchant to just make “areglo.” While the BIR has been trying to clean up its ranks through various incentive schemes to its employees and launching programs like Revenue Integrity Protection Service (RIPS), Run After Tax Evaders (RATE), and Run After the Smugglers (RATS), people still consider the agency as a den of graft and corruption.

In the United States, people say that the only thing that is certain is death and taxes. Filipinos however take on a different view – saying that in this country, death is the only thing that is certain, and as for taxes, you never can tell. But then again, there are those who say corruption will stop if people will stop offering bribes just to go around the law. Bottom line is, it’s the Filipino mindset about making “areglo” and other “quick fixes” that has to change.

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