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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Trump’s 2005 Taxes

There was a dust-up yesterday about Donald Trump’s taxes.  MSNBC’s Rachel Maddow obtained two pages of Trump’s 2005 personal tax returns, which apparently had been leaked — by someone.  The two pages show that, in 2005, Trump reported income of $150 million, paid $38 million in taxes, primarily through the alternative minimum tax, and benefited from a continuing write-off of losses that apparently date back to 1995.

48550944-cachedThe White House bemoaned the leak of the two pages of the tax returns, noting that an unauthorized leak of tax returns is a violation of federal law.  At the same time, the White House noted that the two pages show that Trump paid a big chunk of money in federal taxes — while also pointing out that he has no obligation to pay one penny more in taxes than the law requires, a position that virtually every taxpayer heartily agrees with — and added that Trump also paid “tens of millions of dollars in other taxes, such as sales and excise taxes and employment taxes, and this illegally published return proves just that.”

In addition, some Trump supporters used the two pages of the return to refute some of the things said by Trump opponents during the presidential campaign — namely, that Trump wasn’t releasing his taxes because he was a poor businessman, his business empire really wasn’t that successful, and his returns would show that he paid no taxes at all.  As a result, some people are speculating that Trump himself engineered the leak and is using the 2005 return to play the media like a Stradivarius — by releasing limited documents that appear to refute opposition talking points, while at the same time objecting to leaks in violation of federal law.

It’s a messy story, and we’ll have to see whether we learn anything further about the source of the leak.  For now, I hold to two basic points:  (1) if Trump didn’t approve the leak and somebody in the federal government (specifically, the IRS) leaked the two pages of the 2005 return to advance their own personal political agenda, that is both illegal and a grossly inappropriate intrusion into Trump’s personal information and should be opposed by anyone, regardless of their political views, who has entrusted the government with their confidential information, via tax returns or otherwise; and (2) the returns show why presidential candidates should release their returns and why, if they object to such a release, voters should insist that they do so.  The 2005 returns indicate that Trump paid millions of dollars pursuant to the alternative minimum tax — a tax that Trump has talked about abolishing.  The public deserves to know whether political positions are motivated by a politician’s own self interest.

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.

The Case Of The Missing Emails

The congressional inquiry into whether the IRS targeted conservative political groups has been a weird story for some time now, and it keeps getting weirder.

Last Friday afternoon — the bad news always seems to be released on a Friday afternoon, doesn’t it? — the IRS told congressional investigators that the computer of the key figure in the probe, Lois Lerner, had crashed in 2011, and as a result two years of emails had been lost.  Then, backup tapes that would have preserved the emails were progressively wiped clean as part of a standard recycling program.  So, the IRS says, Ms. Lerner’s email box is lost, but it tried to retrieve the emails from other IRS sources and was able to get some of them.  Republicans are crying foul; Democrats are saying it’s another ginned up controversy by conspiracy-minded, scandal-obsessed opponents of the President.

Then today the IRS disclosed that the emails from another six IRS employees — including people who Republicans believe were involved in the alleged targeting of the conservative groups — also were lost when their computers crashed.  In addition, IRS technicians told congressional investigators that they were aware that Lerner’s emails were lost back in February or March, but waited until now to disclose that fact.  The IRS says it tried to retrieve Lerner’s emails, but forensic analysts were unable to do so.

The mainstream press seems to be paying more attention to this story; the articles linked above are from NPR, USA Today, and ABC.  I think the attention is warranted, because even the innocent explanations sure make it seem like the IRS follows odd practices.

Lois Lerner was the head of the exempt organizations division of the IRS, not some flunky.  If her computer crashed and she lost all of her email, why didn’t IRS computer geeks just grab the most recent back-up tape, download her email box, and restore it to her computer?  What’s the point of keeping back-up tapes if you don’t use them in the case of a crash and catastrophic data wipeout?  And could the IRS really have computers that are so crappy that seven different employees — including Lerner and the chief of staff to the deputy commissioner of the IRS — experienced devastating crashes that caused them to lose all of their email, which again was not restored through resort to back-up tapes?  And if the IRS determined that the emails were lost months ago, why didn’t they ‘fess up immediately rather than withholding the information until now?

Folks, this isn’t a mere political football, it’s a matter of accountability and good practices.  If the IRS has ludicrous computer capabilities and poor data practices, we should address that — and if there was some kind of targeting campaign and cover-up, we obviously have a right to get to the bottom of that, too.  Congress has a right to investigate the activities of federal administrative agencies, and those administrative agencies — even the IRS — should respond openly, completely, and promptly.  It doesn’t appear that that was done here.  Why not?  It’s a fair question.

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.

The Politics Of Whining

Yesterday the Sunday news shows were largely focused on New Jersey Governor Chris Christie and his staff’s decision to shut down lanes of the George Washington Bridge in order to exact some kind of political retribution on a New Jersey mayor.

Some conservatives reacted by counting how many minutes the shows devoted to the New Jersey story or by comparing how much air time and how many column inches have been devoted to “Bridgegate” as opposed to incidents like the Benghazi killings or the IRS targeting conservative organizations. They contend that the news media is biased and that Republican scandals always get more attention than Democratic scandals do.

This kind of reaction is just whining, and it’s neither attractive nor convincing. Both parties do it. When the news media was reporting every day on the disastrous rollout of healthcare.gov, Democrats were doing the same thing and arguing that the media was ignoring the positive things accomplished by the Affordable Care Act. It’s a juvenile response to the news media doing its job.

The amount of coverage a story receives is largely a function of factors that have nothing to do with politics. The George Washington bridge incident has all the elements of a great story — a powerful politician, venal and misbehaving staff members, an initial cover-up, and average Americans being inconvenienced by some crass political power play. There is footage of traffic jams to be shown, angry and easy-to-find people to be interviewed, and a contrite governor’s press conference to cover. The same is true with the Obamacare website story: there are good visuals, lots of individual stories to tell, and obvious story lines to follow, like how did this happen and how much did it cost and who screwed up. Ask yourself which story is easier to cover — the New Jersey bridge closure or the shootings in faraway and dangerous Libya — and you’ll get a good sense of which story will in fact get more coverage.

Modern politicians always seem to have an excuse and always look for someone else to blame. Whining about news coverage apparently is part of the playbook, but I can’t believe it works. Whining is pathetic, not persuasive.