Summary:
Case shows effect of threats by Internal Revenue Service agent while performing a tax audit.

"I can make their life miserable," said the Internal Revenue Service auditor. If they didn't agree to pay the additional tax, she said she will ruin their business by contacting suppliers and customers and standing by the premises' front door.

The company accountant said this was auditor Victoria Fedele's response to him when he tried to resolve issues she raised.

The confrontation arose when the IRS started auditing The Wellington, a popular restaurant in suburban Chicago. When Fedele arrived, she learned quickly this audit would not be a piece of cake. The restaurant's attorney told her he would not turn over accounts receivable records without a fight. Then she found out the restaurant had not retained cash register tapes and guest tabs, only summaries.

With no source records, Fedele decides to reconstruct Wellington's income. Her computations show the restaurant was short $1.6 million for one year. She had multiplied the pounds of meat bought by the sales price per pound. With this formula, Wellington had a beef: It never sells all the meat it buys--it discards some. A videotape showing employees trimming meat before serving to customers would prove, the attorney said, her estimates of meat usage had too much fat. The agent refused to watch it.

Fedele discovered a large share of business comes from banquets by repeat customers. To get banquet information from phone call records, she asks permission from her group manager to issue a summons to the phone company.

The restaurant sued to prevent the IRS from getting phone records, saying the agency acted in bad faith. In court, Wellington said employees use the phone for personal calls so the agency would be compromising their privacy. The IRS calling the phone numbers would ruin business because customers would fear becoming entangled and would stay away. It also said Fedele's request was a sinister attempt to ruin the business and pressure it to pay additional taxes. In support, the restaurant pointed to its accountant's affidavit, that stated he requested a meeting with the agent's group manager to resolve the audit. Fedele responded there would be no meeting, and they could resolve the matter only by paying the taxes she said were due.

The judge ruled for the IRS, saying it could have access to phone records. He explained: Because the restaurant had inadequate records, the agent could reconstruct income, and phone records could help. The agent's tough language to get records or a settlement showed bad faith by her, not bad faith by the IRS. If she and the IRS officer approving the summons had acted in concert, however, this would show bad faith by the agency. But Wellington didn't prove this.

(more at IRS Audits)