The headline over the article in the Wall Street Journal declared: "IRS says Nixon friend must pay $22.8 million in taxes and interest."
The story, published Monday, Aug. 6, 1973, concerned a $22.8 million Federal tax lien filed against C. Arnholt Smith, a San Diego, Calif., businessman and friend of the President.
Similar stories appeared that same weekend in newspapers from coast to coast. A New York Times account, typical of the others, began:
"The personal fortune of C. Arnholt Smith, from which he gave generously for more than 25 years to promote Richard M. Nixon's rise from obscurity to the Presidency, has been tied up by a $22.8 million Federal income tax lien.
"The lien, believed to be the largest claim ever levied against an individual for a single tax year, was filed late yesterday by the Internal Revenue Service."
The C. Arnholt Smith stories, as carried by television, radio and newspapers, reflect the way the IRS traditionally has enforced the nation's income tax laws.
Every year, the IRS moves against a select group of C. Arnholt Smiths – prominent citizens whose prosecution, whether in a civil or criminal tax case, is designed to result in a flow of favorable publicity about IRS enforcement efforts.
The purpose of that publicity, and the underlying philosophy, was summed up by an unnamed IRS intelligence agent who was quoted in a Washington Post story last April. Said the agent:
"We want them (the public) to think, 'My God, if they get people like mayors, judges, lawyers, doctors, then maybe they'll get me unless I'm honest.'"
The feeling within the agency has been that if a taxpayer sees that the IRS is prosecuting an influential politician or businessman for income tax law violations, that will be sufficient to keep the majority of taxpayers honest.
But an Inquirer investigation has shown that the prosecution of a Vice President Spiro T. Agnew, or a Congressman Cornelius Gallagher or a United States Circuit Judge Otto Kerner no longer has the same kind of deterrent value it may have had at one time.
For every prominent citizen the agency takes to court, there are thousands and thousands of individual taxpayers and businesses who are avoiding and evading payment of billions of dollars annually. Their errors and frauds go undetected, unprosecuted.
Failure Is Typical
Indeed, far more typical of IRS collection efforts – especially among upper-income taxpayers – are the stories of four taxpayers whose backgrounds were traced by The Inquirer over the last four days, in the newspaper's series, "Auditing the IRS."
Those four taxpayers – according to Federal tax lien notices filed by the IRS – owe a total of $4,470 million in unpaid taxes dating, in one case, back to the late 1950s.
In all four cases, the IRS has failed to collect the money the agency says the taxpayers owe. And in two of the cases, the taxpayers say they have been negotiating with the IRS and expect to settle for a much smaller sum than the IRS claims they owe.
Regardless of the merits of their individual cases, that too is typical of the way the IRS administers the tax laws. As The Inquirer has disclosed in previous articles, the agency generally extracts a higher percentage of money owed from low- and middle-income wage earners than from upper-income taxpayers.
The four taxpayers selected from some 20,000 Federal tax lien notices examined by Inquirer reporters in cities from New York to Los Angeles, are:
DR. ROBERT M. ERDMAN, a Pottsville, Pa., physician, who was the bagman in the payoff of a New York judge and the middleman in the alleged fixing of two income tax evasion cases. The IRS says he owes $906,453.38.
SEYMOUR L. ROSENFIELD, a Philadelphia and Chicago insurance executive who was convicted of failing to file his tax returns, but never bothered to show up to begin serving his jail sentence. The IRS says he owes $2,091,487.04.
THOMAS A. SHAHEEN JR., a Washington, D.C. money broker who shifted all his assets outside the country – in the midst of a supposedly intensive IRS investigation – leaving behind only his unpaid tax bills. The IRS says he owes $743,050.12.
LEO I. BLOOM, a Reading, Pa., financial consultant who acknowledged making more than a quarter-million dollars dealing in stolen securities. IRS says he owes $729,833.06, but already has written off part of that amount as uncollectible.
The Inquirer study of Federal tax liens across the country indicates the stories of those four taxpayers are typical of IRS collection efforts among upper-income taxpayers.
Indeed, the administration of the nation's Federal income tax laws is such that upper-income taxpayers and businesses are encouraged to avoid paying the taxes they owe.
Here is why:
Let's say you avoid paying $200,000 in taxes you owe. The chances are, your omission will never been detected, as was the case in the initial audit of President Nixon's tax returns.
But if the IRS does pick up the mistake and sends you a deficiency notice, the negotiations over the unpaid taxes may drag on for years.
At the end of that period, let's say five years, the IRS will settle for a fraction of the original amount. Forty percent, or $80,000 would be an average settlement.
That means you had the use of $200,000 to invest over the five-year period and even a nominal return on that investment will cover your tax bill, leaving you with the $200,000 you avoided paying.
As one former key IRS official put it:
"There is little or no economic incentive to file a correct return."