The Impact Of Tax Cheats

The Internal Revenue Service estimates that, each year, about 16.3 percent of the nation’s federal taxes go unpaid — and that’s after the IRS takes whatever action it takes to try to achieve compliance.  This “compliance gap” leaves a pretty big hole in the federal budget.  In 2018, if all of the federal taxes that were owed were actually paid, it would have meant another $643 billion in revenue for the federal goverment — which would have covered about 83 percent of our ridiculously large federal budget deficit.

celebrity_tax_cheats-624x300Why don’t people just suck it up and pay what they owe?  That’s not a self-answering question.  The Government Accountability Office says there are three main reasons for non-compliance:  third-party reporting issues, reduced IRS budgets and staffing, and the complexity of the Internal Revenue Code.  The first and third reasons involve mistakes — where third parties don’t correctly report what a taxpayer has earned, or has received in a taxable transaction, or where a taxpayer has legitimately tried to figure out what they owe, and simply been wrong — but the second category clearly relates to the ability of the IRS to ferret out, audit, and penalize those who are knowingly cheating.  In short, if you had perfect compliance, reduced IRS budgets and staffing wouldn’t make a difference.  And the lines between the three categories may be blurry, too.  If a taxpayer professes confusion about how to treat a particular source of income but adopts a stretched reading that dramatically minimizes their taxes, is that cheating, or a product of tax code complexity?

So, what can we do to improve the compliance numbers, recognizing that getting perfect, 100 percent compliance is an unattainable goal?  The answer to that question seems to turn on political inclinations and your view of human nature.  Some people, like the author of the article linked above, think that simplifying the tax code would result in a higher compliance rate — an argument that presupposes that people honestly try to figure out, and pay, what they actually owe.  The flip side argues that increasing the IRS budget for oversight and compliance is the best way to promote compliance.  In short, if more people fear they’re going to get caught, it will have a prophylactic impact on a wider group of taxpayers who will choose to simply pay their taxes rather than risk audits and penalties.

There’s undoubtedly merit in both arguments, although being somewhat cynical about human nature, I tend to agree more with the latter camp — but it’s also true that neither of these solutions has much promise in the short term.  Tax simplification has been the Great White Whale of politics for as long as I’ve been filling out 1040 forms, and it never quite happens.  And campaigning for office on a platform of increased IRS funding and more aggressive tax enforcement doesn’t seem like the ticket to political success.

So we’re likely to bump along as we have been, with many people accepting their federal tax burdens, a segment of the population consciously cheating on their tax obligations, and a continually growing deficit because we can’t actually do something about the “compliance gap.”  It makes you wonder:  at some point, is that “compliance gap” going to grow even larger?

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Tax Torn

Well, it’s Tax Day — April 15, the due date for most federal and state income tax filings.  The butt of jokes by comedians for decades.  The annual source of angst for millions of American taxpayers.  A rallying cry for conservative anti-taxers ever since the Sixteenth Amendment was ratified in 1913 and allowed the federal income tax in the first place.

My feelings about Tax Day are decidedly ambivalent.  I recognize that taxes are the price we pay for living in a free society, and I pay them willingly.  A modern military with modern weaponry, a welfare state system that tries to help the poor and elderly, and a government that shoulders far-reaching tasks like disease control or preventing alien species from invading the Great Lakes can’t be funded by the system of duties and tariffs that supported a much more limited government during the colonial era.  I also think it’s ridiculous for people like Ted Cruz to talk about abolishing the Internal Revenue Service.  If you accept that taxes must be paid, as I do, there must be an entity that collects the tax.

At the same time, it’s hard for me to feel warm and fuzzy about our tax system or the IRS.  Last night Kish and I watched the latest Last Week Tonight with John Oliver, and it tried to make viewers feel sorry for the IRS, because IRS jobs are boring, the Internal Revenue Code is constantly being changed by Congress, and IRS funding has been cut.  Good luck with that effort!  The IRS may be necessary, but don’t expect me to give it a hug, okay?  And when I sign my forms and send in my payments, don’t think I’m a nut if I wonder about the presence of unfairness in our tax code and abuse and favoritism in the highly political process by which tax exemptions are determined and tax rates are imposed.

Every year, as I look at the forms and the complicated instructions, I wonder if there isn’t a simpler, fairer way to do it.  Say what you will about the sales tax, but it’s a straightforward percentage that anybody can calculate, and it targets consumption rather than work.  If you want to soak the idle rich, wouldn’t a tax when they buy ridiculously appointed $200,000 SUVs be a good idea?  And user fees that are triggered when a specific federal service is used — say, for use of ports and customs, for airline security, or for drug or vehicle testing to ensure compliance with safety standards — also seems fair.  Couple that with an income tax and withholding system that involves fewer exemptions, exclusions, deductions, tax rate levels, and schedules, and maybe you’ve got a workable system that won’t cause so many Americans to take the IRS’s name in vain come every April 15.

The IRS PR Problem

It hasn’t been a good few months for the Internal Revenue Service.  The investigation about whether the IRS became politicized and improperly targeted conservative groups has continued and has gathered steam as new revelations have come to light.

A key official has taken the Fifth Amendment.  After months of efforts by lawmakers to get her emails, and a promise by the new head of the IRS that the emails would be produced, IRS officials belatedly announced that a number of the emails were lost in a computer crash and buried the news in the middle of a long letter.  Then it was announced that the computers of other IRS officials involved in the probe had also crashed.  Then the IRS disclosed that it had not tried to restore the emails from back-up tapes, and that the back-up tapes that would have stored the emails had been recycled.

Most recently the head of the IRS, John Koskinen, has come in for tough questioning at congressional hearings on Friday and Monday night.  How could he have testified in March that the emails would be produced without raising the issue of the computer crashes and lack of back-up tapes, when the IRS knew of those matters by that time?  Why has it taken the IRS so long to disclose the problems?  Why does the IRS seem to be trying to bury the bad news, rather than simply admitting to it?  The aggressiveness of the questioning caused Democrats on the panel to rise to the defense of Koskinen.  It’s got to be uncomfortable for Democrats to be vigorously defending the IRS — hardly a beloved agency — especially when the IRS’ own actions have created the problems.

It’s another example of the time-honored public relations lesson.  PR pros always tell anyone who is dealing with bad news to get ahead of the story — divulge all the bad news at once, be forthcoming about what happened, and apologize and move on.  The IRS didn’t learn that lesson.  Instead, it has clearly hoped that the story would just go away and that it could bury the bad news in places where no one would notice it, and even now Koskinen refuses to apologize.  As a result, the IRS’ credibility has been taken a significant hit as the bad news has frittered out in dribs and drabs.  The approach has kept the story on the front pages of the news, and people who weren’t paying much attention to the story at the outset now are wondering whether the IRS’ apparent stonewalling is actually hiding something harmful.

I think most people would agree that an IRS that targets people or groups for audits and special treatment because of their political views is a bad thing.  The IRS’ botched handling of the matter seems to be turning a simple investigation into a burgeoning scandal.  It’s a useful reminder of a basic PR lesson — one the IRS has yet to learn.

Politicizing The IRS

Ask Americans which federal agency they fear the most, and many are likely to say it’s the Internal Revenue Service. Every year, Americans send in their federal tax filings by the April 15 deadline — which is only four days away, folks — and we’ve all heard stories about tax liabilities, painful audits, and the IRS taking people’s houses on those urgent tax-preparer and tax-problem-solver radio and late-night TV commercials.

That backdrop of angst is what makes the current issues about a politicized IRS so troubling. On Wednesday, the Office of Special Counsel, which is responsible for investigating allegations that federal employees violated federal law that bars them from engaging in partisan campaign activities, announced that it had found improper political activity by IRS employees. The activities included official telephone calls with taxpayers in which IRS employees explicitly promoted President Obama’s reelection and criticized Republicans.

Also on Wednesday, a House Committee investigating allegations that the IRS targeted conservative groups seeking tax-exempt status for special scrutiny released emails showing that former IRS official Lois Lerner mentioned the possibility of getting a job with Organizing for Action, an offshoot of President Obama’s reelection campaign. Lerner’s email statement may have been an ill-advised joke, but we can’t know for sure because she has invoked the Fifth Amendment and refused to testify about her activities beyond making a general statement that she has done nothing wrong. Another unanswered allegation is that the IRS leaked a conservative group’s application for tax-exempt status to an investigative website. The IRS targeting allegations have caused the House Ways and Means Committee to recommend that the Justice Department prosecute Lerner, and Lerner’s refusal to answer questions has caused the House Oversight and Government Reform Committee to vote to hold Lerner in contempt of Congress. The actions of the two House Committees, it should be added, were taken on straight party-line votes — which only adds to the partisan odor.

Has the IRS become politicized? That’s an important question for everyone, regardless of their political inclinations. Through their tax filings, Americans provide the IRS with huge amounts of otherwise highly confidential information each year — about what they own, what they’ve earned, the charities they help fund, and the causes and candidates they support. Americans need to be able to trust that that information will be kept private and won’t be used for political purposes or to single out people or groups for adverse treatment. The disclosures about political activities by IRS officials and line employees, and the fact that Republicans and Democrats can’t agree about how to investigate the targeting allegations, are bound to erode that essential trust. Whether you are a Democrat or a Republican, if you are a taxpayer that is a very unsettling development.

A Widening Scandal, And Some Valuable Lessons

The IRS scandal may have been knocked off the front page by Edward Snowden’s fugitive travels and the George Zimmerman-Trayvon Martin trial, but it’s still out there, and there have been some interesting recent developments.

The House Ways and Means Committee investigation of the IRS targeting of certain groups seeking tax-exempt status has borne fruit.  The AP is reporting that, according to documents obtained by the Committee, the IRS targeting lasted longer than was originally reported and was broader in scope, with the IRS looking not just at “tea party” and “patriot”-named groups, but also at groups that used terms like “progressive,” “medical marijuana,” and “Israel.”  The documents indicate that the prior report of the Treasury Department inspector general may have barely scratched the surface of what IRS functionaries were doing.

DSC04187The new acting commissioner of the IRS, Danny Werfel, has concluded that the IRS used “inappropriate criteria” on certain screening lists and states that he ended the process earlier this month.  He said he found no evidence of “intentional wrongdoing” by IRS employees, but rather “insufficient action” by managers to prevent and disclose the problems.  Werfel says the IRS is committed to correcting its mistakes and holding individuals accountable as appropriate, and the AP report states that the top five people in the IRS responsible for the tax-exempt status of organizations have been removed from their jobs.

It’s all predictable, and the scenario is a familiar one.  Improper action by an agency comes to light, and the first response is to argue that the practices have ended and there is nothing left to examine.  Sometimes that approach works, but when it doesn’t, and congressional committees begin digging, different stories often emerge, and new questions get asked.  How did the IRS screening lists get created?  Who vetted the terms included on the list?  What process was followed when an organization whose name included such terms was identified?

The IRS scandal shows the value of congressional committees that actually conduct investigations, use their subpoena power, and take meaningful testimony.  It also shows that we shouldn’t necessarily trust the reassuring initial statements of agency heads or accept inspector general reports as the last word.  The congressional committees should continue their investigations, but then they need to take the next step — determining whether the tax-exempt status laws should be changed, and if so, how.  That will require Congress to wrestle with some uncomfortable questions:  Why do we grant tax-exempt status to these organizations — regardless of their political affiliations or apparent interests — in the first place, and should that practice continue?  If so, how do we rein in the exercise of discretion by the IRS, so that bureaucrats can’t simply decide to target one group over another on the basis of whim and caprice?

There’s still a long way to go on this one.

A Little Bit More On The IRS And Politics

When my friend the Biking Brewer recommends something to read, I take notice — and not just because he is accomplished at creating fine malt beverages and has a discriminating sense of Belgian ales.

The BB sent along a link to this article from Salon, entitled When the IRS targeted liberals, that seeks to add a little context to the current story about the IRS actions with respect to conservative groups.  President Obama has called the IRS actions “outrageous” and he’s right about that — but the Salon article usefully points out that the IRS has been embroiled in political issues before.

The key point here is not which groups are being targeted by the IRS, or who is the President at the time the targeting occurs, but rather the fact that IRS employees think they have the right to target specific groups at all.  Our federal government has become so colossal in size, and so removed from interaction with average citizens, that many government employees think they can do just about whatever they damn well please because they are from the government and, well, they just know better than we do.

This isn’t a political issue — or , at least, it shouldn’t be.  When agencies like the IRS can become politicized, no one at any point on the political spectrum is safe.  The question is how to change the culture of these bureaucratic leviathans, where employees have jobs for life and have little accountability to anyone who isn’t their direct line supervisor.  Shrinking the size of the bureaucracies, and establishing performance standards that don’t give every employee a lifetime job, would be a good place to start.

The IRS ‘Fesses Up — Sort Of

The Internal Revenue Service admits that its agents engaged in “inappropriate” targeting of certain conservative political groups and has apologized — but there seems to be a lot more to the story.

Some people in the IRS decided that groups with “tea party” and “patriot” in their names should be given additional scrutiny, to see whether they were acting in ways inconsistent with their tax-exempt status.  About 300 groups received the scrutiny.  The IRS says that low-level employees were responsible and that, when more senior officials learned about it months later, the practice was stopped.  However, it now appears that the IRS simply adopted new criteria that focused on “political action type organizations involved in limiting/expanding Government, educating on the Constitution and Bill of Rights, social economic reform movement.”  That doesn’t really seem much better, does it?

This story is disturbing on many levels.  First, when individual IRS agents can target groups because of their politics, that should be troubling to everyone — regardless of their political views.  When people are given the authority to act on behalf of the IRS, we expect that authority to be exercised responsibly, not politically.  If IRS agents can agree to look at groups that have “patriot” in their names, what criteria might they use under the next Administration?

Second, where were the supervisors?  How much unbridled discretion do individual IRS agents possess?  Didn’t some manager notice a pattern in what the agents were doing and realize they were targeting groups on a political basis?  The actions of the agents seem to contradict the statements made by the former IRS commissioner, Douglas Shulman, in testimony to Congress, and the IRS response contends that knowledge of what was happening was limited to people multiple levels below Shulman.  So, the IRS defense seems to be that it is so bureaucratic that the Commissioner isn’t told about what is actually happening on the ground!  That’s not very comforting, either.

In his recent remarks at the Ohio State University, President Obama encouraged graduates to reject cynicism and decline to listen to “voices that incessantly warn of government as nothing more than some separate, sinister entity that’s at the root of all our problems.”  This IRS story is precisely the kind of story that breeds such cynicism.  When IRS agents can target groups for political reasons, the IRS Commissioner denies that such targeting is occurring, and the IRS defends the truth of those denials because the agents involved were too far down the chain for the Commissioner to notice, perhaps a little cynicism is in order.