ataxingmatter

IRS Scrutiny of 501(c)(3)s

As most everybody is aware by now, the IRS has been under considerable strain for a number of years from budget and staff reductions that have left it underfunded, understaffed, and under pressure.  This is part of the right's effort to "shrink the government to a bathtub and drown it."  If the main organization for helping Americans understand their tax obligations is understaffed, it is likely that many people will become irritated with the agency and blame it (and taxes) for all their problems.  If the main organization for enforcing the U.S. tax laws fairly has too few people to audit the most likely scoflaws and too little money to prepare guidance and rulings to make it harder for scofflaws to scoff at the law, then many people will become irritated with the agency and blame it (and taxes) for their problems while many other people (especially the privileged rich) will continue to scoff at the law by overstating their basis when they sell capital assets, hiding assets in tax havens, and just hiring lots of expensive tax attorneys and accountants to come up with schemes for wiggling through the loopholes in the Code to avoid more taxes.

And of course, if the main organization for ensuring that tax-exempt organizations are not abusing their tax exempt status by using "dark money" to allow the domestic elite and foreign powers to influence and control federal elections and legislation, then odds are the rich and elite and foreign powers will wield more and more influence and control over who gets elected and what kind of legislation they pass.  Odds are we will see even more of the kinds of absurd legislation disenfranchising the poor and minorities by making it harder to vote, harder to get a State-issued I.D. card, harder to wait in line for hours at the polls (if you will be fired for not reporting to work), etc.

None of this is any surprise.

None of it is good government.

All of it is supported by the current radicalized uber-right-wing Republican Party hacks that are running many state governments and hold the majority right now in the U.S. Senate and House of Representatives.

As the New York Times editorial board noted, "[c]laiming a 'social welfare' tax exemption has become a tool for powerful political operatives like Karl Rove, the Republican campaign guru.  His Crossroads GPS group, which has 501(c) status, has spent $330 million on ads and candidates since it was created in 2010."  See Editorial,  Dark Money and an I.R.S. Blindfold, New York Times (Apr. 28, 2016).  And of course, with all the ranting about it being a problem to pick a group with "Tea Party" or "Progressive" in their name for closer scrutiny (when any common sense analysis will tell you that such a group is quite likely to be engaged in forbidden lobbying activities), "the IRS has groiwn ever more gun-shy about enforcement."

So the latest bill wreaking havoc on democracy, put forward by Republican Peter Roskam in the House of Representatives, would eliminate the current law that requires those who donate more than $5000 to a nonprofit to be disclosed to the IRS (though redacted for public versions of organizations' tax forms)..  See, e.g., Richard Rubin, House Republicans Seek to Block IRS Collection of Non-profit Donor Data, Morningstar, Apr. 28, 2016. That means a foreign corporation or a foreign sovereign power could contribute enormous sums to shape the legislative and regulatory regimes in our country, and there would be NO WAY TO POLICE THE PROBLEM. 

Further, it is hard to understand why any donor to a tax-exempt organization should be entitled to anonymity.  The organization is able to avoid paying any taxes on the funds received, and--especially under the current malevolent eye from Congress towards the IRS--the IRS is hamstrung in enforcing the law against political campaigning with 501(c)(3) funds.  What we should do instead of allow complete anonymity and the power plays that encourages is the opposite:  the name of every donor who gives anything more than some de minimis threshold amount to any tax-exempt organization should be publicly available, and the amount given should be publicly available.  After all, if money is "speech", "speech" is supposed to be heard.  Remember the old saying about the tree that fell in the forest and whether there would even be any sound if there were no eardrum available to hear it.  That's certainly the case with speech.  If giving money is a form of speech, than the gift and giver shouldn't be hidden under a bushel but should be broadcast far and wide for anyone who wants to know.

Note that the bill would also mean that the 'dark' groups under 501(c)(4) wouldn't even have to provide information about the number of large versus small donors that it has. 

By the way, if you have any doubts that Peter Roskam has no interest in the best interests of ordinary Americans, remember that back in November he was one of the gang of four that proposed pre-empting the rule expected from the Labor Department to impose a "best interest" standard on retirement advisers.  They were so worried (weepy face) that some professionals who handle money for retirees might refuse to do it any more if they weren't allowed to continue paying more attention to lining their own pockets rather than providing sound advice to their clients.  See Teresa Tritch, A New Threat to Your Retirement, New York Times (Nov. 19, 2015) (with a swarmy picture of Peter Roskam).

Related articles

Dark money group spends $58,000 attacking Consumer Financial Protection Bureau

Fortune 500's Massive Use of Offshore Tax Havens

Levin Floor Statement on IRS Publication 17 Resolution

Defending the IRS Against Right-Wing Attacks

The IRS is a government agency that endures all kinds of hostile attacks.  Most people don't really like to pay taxes.  Even I don't really "like" paying taxes, though I do recognize the importance of paying taxes and supporting the societal infrastructure that pays for the Centers for Disease Control, basic research, the space telescope, programs for those in or near poverty, Pell Grants for students to attend college and many other important and necessary federal programs (not to mention the tax-guzzling military budget that probably could be cut in half, if only we had the gumption to do it).  So the right-wing effort to "drown the government in a bathtub" and make the world safer for the corporatist elites to sock away their wealth without paying a dime to support the society that made that wealth possible tends to demonize the IRS at every possible opportunity under a Democratic president. 

ASIDE:  This is on a par with the way other things are treated.  Reagan cut taxes in 1981 and then increased them every year thereafter, mostly increasing the burden on those in the lower end of the income distribution, so Reagan is remembered as the great tax cutter.   Reagan's administration had the Beirut bombing that killed 241 U.S. soldiers in their barracks, but Obama's administration bears the millions of dollars spent in eight (and counting) investigations of the four deaths in the Benghazi attacks.  There is a tendency for people to remember events and fiscal policy to suit their preconceived view of things.

So the New York Times on Friday reported on the havoc that the right's attacks on the IRS's budget and its employees' morale has wrought.  Congress writes the tax laws, but the right tends to talk about the executive agency as though it 'owns' the tax laws instead.   I.R.S. Fights Back Against House Republicans' Attacks, New York Times, Apr. 22, 2016.   As the article notes, "the agency even got the blame for the hated tax code, which Congress writes and Republicans have promised for five years to rewrite and simplify."  (And remember, simplification is the wrong aim--it is part of the propaganda that wants ordinary Americans to support a tax code rewrite that tilts the code even further towards the wealthy.  See the last two posts on A Taxing Matter.)

As certain as death and taxes, tax season political attacks on the I.R.S. go back decades. But in recent years, the intensity has grown and the agency’s funding in turn shrank more than any other time in memory. The campaign gained strength in 2013, when Republicans seized on management failures to allege that I.R.S. employees had singled out conservative groups for greater scrutiny and delays in reviewing their applications for tax-exempt status as “social welfare” organizations, though liberal-leaning groups were examined as well, investigations showed.

Clearly, the IRS is a centrally important agency that cannot be eliminated.  We need to collect taxes, and we need an agency with the expertise to advise Congress about tax law and policy as well as to interpret the laws in a way that makes it possible to implement them.  (Congress has a tendency to leave anything really difficult to the IRS to figure out, by authorizing or ordering the Secretary of the Treasury to promulgate regulations carrying out the intent of specific provisions.)  We need to have sufficient IRS staffing to enforce the law through tough audits, especially of the wealthy and corporate enterprises.  We need to have sufficient funding to maintain updated technology--one of the problems with the cuts in funding to the IRS is that the computer systems are more easily hacked than they should be.  That fault lies with Congress, which expects managerial miracles from an agency with constant battering from the right-wing to try to demoralize its employees and constant resource cuts that make budget planning and regular maintenance of systems practically impossible.  When Congress adds additional functions to the agency (whether in the form of additional tax systems to oversee, such as the penalty provisions in the Affordable Care Act,  or additional tax expenditures operating as a subsidy to one or another of Congress's favored groups, such as the section 199 "manufacturing" deduction) but fails to add funding to cover the additional responsibility, it means that the IRS's ability to carry out its task well will be jeopardized, and service to taxpayers will decline.

“The Congress on one hand adds complexity to the tax system by the tax laws they enact but will not recognize the costs and administrative burdens placed on the agency to carry out the laws it passes,” said G. William Hoagland, who was a senior budget adviser to Senate Republican leaders for more a quarter-century.

The fact is, the IRS makes money when Congress gives it funding to ensure tax compliance:  as the article states (and many studies support), "the agency collects at least $4 for every $1 it spends for tax compliance."  Former IRS commissioners--during Republican and Democratic administrations--therefore joined together to urge Congress to undo the perverse results of underfunding the IRS.

“Over the last 50 years, none of us has ever witnessed anything like what has happened to the I.R.S. appropriations over the last five years and the impact these appropriations are having on our tax system,” they wrote.

Federal reports document the impact. Tax audits are at the lowest level in a decade, affecting fewer than 1 percent of taxpayers. Reduced efforts to enforce compliance cost an estimated $6 billion in uncollected revenues in 2014 and $8 billion in 2015. The I.R.S. has a backlog of almost a million pieces of correspondence from taxpayers.

Stan Collender, a budget analysis, is right when he says (as quoted in the article):

“You really shouldn’t be able to reduce the amount you spend on I.R.S., decrease their performance ability and then complain about their performance.”

 

Related articles

The GOP Plan to Wreck Government Is Doing Great, Thanks Very Much

Senate Finance Committee cuts tax return preparer regulation

As most tax practitioners realize, many people who hold themselves out as "tax return preparers" actually know nothing about the tax laws and may even assist their clients in cheating on their taxes by inventing home offices, travel-away-from-home expenses, or other fictional deductions.  The U.S. Department of Treasury sought to deal with this by amending regulations governing "practice before the IRS" in Circular 230 to require those who prepare returns for payment to acquire an identification number and pass certification requirements.  The ABA Tax Section has been supportive of these requirements, because it is clear that both individual taxpayers whose returns are not accurate and the U.S. government suffer when scams are perpetrated by shady tax return preparers. 

But some of those regulated under Circular 230 objected and brought suit.  They got the D.C. Court of Appeals, in Loving, to hold that the longstanding provision that permits the Treasury to regulate tax practitioners that 'practice before the IRS' covered only litigation-like controversies.  This is, in my view, patently absurd.  If anything constitutes practicing before the IRS, the preparation of taxpayers' tax returns must.  It is the core interaction of a taxpayer with the IRS/Treasury, and is something that we must do.  If an 'adviser' prepares the return for us, that adviser is representing us to the government.  That clearly should constitute "practice before the IRS."

So once the Loving court ruled against the government on its ability to regulate these maverick 'tax return preparers' who do not have to know or follow the law, many tax practitioners and others pushed Congress for legislation to permit the Treasury to regulate tax return preparers.  The ABA Tax Section wanted the Big ABA (the American Bar Association that includes all of the various "sections") to support a resolution urging Congress to pass legislation allowing the regulation of tax return preparers.  But the Big ABA was not willing to even consider the resolution.  That was a revealing moment for me, since it showed that attorneys in the leadership of the Big ABA are not really serious about wanting what is best for individuals that we serve or for the good of the country.

Nonetheless, there has been a push to enact legislation to permit regulation.  And the Senate had a bill before it that included a provision authorizing regulation.  But the AICPA (the national organization for certified public accountants) apparently lobbied heavily against the provision.  So guess what.  Congress--that dysfunctional branch of the Federal government that seems to think that holding hearings about scam videos and shouting at the former Secretary of State about Benghazi is reasonable expenditure of time--is showing itself dysfunctional again.  The Senate Finance Committee, which will hold a markup of the bill this Wednesday, will not include the provision for regulation of tax return preparers.

See JCT Publications 2016 :  JCX-28-16 (April 18, 2016) (JCT report noting deletion of the return-preparer provision)

Furthermore, the Senate Finance Committee continues to harass the IRS with more provisions demanding information on IRS audits. See JCX-30-16 Note that this will almost always work to the advantage of cheating taxpayers (especially the rich) and the disadvantage of the government, as IRS employee morale deteriorates and IRS employees fear that their jobs will be on the line if they are aggressive in pursuing likely tax cheaters. See JCX-30-16 (chairman's mark for "The Taxpayer Protection Act of 2016").

This is one more bad example of the influence money and profit-making have over congressional deliberation and the poor policy decisions that result.

Beanie Baby creator to pay more than $50 million for offshore accounts

Ty Warner, one of the 250 wealthiest Americans as sole owner of Ty, Inc. , a company that created and profited hugely from the 1990s Beanie Baby fad, will be charged with federal tax evasion and indicates he will pay $53 million for failing to file the Foreign Bank Account Report (FBAR). See Michael Tarm, Beanie Babies creator charged with federal tax evasion, attorney says he'll pay $53M penalty, Huffington Post-Canada (Sept. 18, 2013). The charges could also result in jail time of up to five years.

Warner may well be one of the Americans whose accounts were discovered in the original UBS crack in Swiss banking secrecy.  Court documents trace the evasion to secret accounts established with UBS in 1996, and his lawyer reports that he "has been trying to resolve" the situation for several years.

 

 

 

Related articles

Beanie Babies Creator Charged With Tax Evasion

Swiss and US Apparently Reach Deal on Bank Disclosures related to Tax Evasion

Ty Warner, creator of Beanie Babies, charged with tax evasion

Beanie Babies Creator Charged with Tax Evasion

Beanie Baby Founder To Plead Guilty To Tax Evasion

Proposals for Cutting the IRS Budget

As the  budget battles loom again in our dysfunctional Congress, one of the targets of the right is, not unexpectedly, funding for the IRS.  Sequestration is already hampering the IRS's ability to perform its functions.  See $6 collected for every $1.  But the right wants to cut funding for the IRS to a mere three-fourths of its current level.  See Rubin,  GOP Proposes Reducing IRS Budget by 24%, Bloomberg, July 9, 2013, at Accounting Today.

It's worth thinking about what this kind of budget reduction for the IRS--one of the biggest "too big to fail" financial institutions in the country--would mean.  Remember that the IRS performs essential governmental functions--enforcing the tax laws and collecting necessary government revenues.  In connection with these enforcement and collection functions, the IRS has implement a number of congressional policies (often with very little guidance) and, working with others in Treasury, provide guidance in the form of revenue rulings and regulations for many different types of taxpayers, as well as internal procedural guidelines for revenue officers.  It has to determine eligibility of numerous organizations for the various "tax-exempt" categories Congress has created.  It has to track information received from the myriad tax-reporting provisions.  It has to ferret out tax scams and shelters invented by high-paid accountants and law firms and in-house counsel.  It has to examine and audit and negotiated with taxpayers who are often better resourced and therefore able to "outgun" the agency.  It has to provide information and testimony to Congress.  It has to interact with tax lawyers in their professional organizations, such as the ABA Tax Section and the NYSBA Tax Section.  And, to do its job decently well, it must spend considerable effort recruiting and training employees and overseeing them. 

Much (if not all) of the problems pointed out (especially by the right-wing propaganda corps attempting to generate a "scandal") about the IRS mismanagement of the thousands of 501(c)(4) applications it receives stems from under-resourcing of the agencies and the lack of skills training, computerized systems and solutions, and sufficient management personnel to ensure efficient and timely use of resources to target scrutiny to those organizations most likely to be in breach of requirements.

So one would think that the right response to the intense need for a good revenue collection and tax-law enforcement agency would be to increase resources rather than to cut them.  But there is a significant portion of Congress people-especially in the House--that is not interested in ensuring that the government that they are a part of function properly and especially not interested in having the tax-collection-and-enforcement agency work properly.  As James Maule put it on Mauled Again earlier this year in a discussion on IRS hearings:

[A]nother member of the panel tried to make the point that cutting IRS funding doesn’t necessarily mean revenue will decrease. He tried to make his argument by claiming that increasing IRS funding does not increase revenue. He asserted that funding for the IRS increased from 2001 to 2009 and yet revenue decreased during that period. No kidding. The revenue
decreased because in 2001 and again in 2003, the geniuses behind tax cuts succeeded in persuading the nation to accept a cut in its tax revenues at the same time it was pumping trillions of dollars into war expenditures. It was encouraging to hear another member of the party point out that the economic downturn also was a reason for the decrease in revenue collection. Yet it remains deeply disturbing that Americans have elected to Congress someone who thinks that sequestration of IRS funding won’t have an adverse impact on revenue.

 

 The attempts to shrink the IRS is part of a larger, pervasive, foundational aspect of the anti-tax crowd’s plans to unchain themselves from any attempt on the part of anyone to get in their way as they exalt themselves at the expense of the society on which they are, no matter their denial, very dependent. I have explored the short-term foolishness of cutting IRS funding in posts such as Another Way to Cut Taxes: Hamstring the IRS. At a time when the Congress has piled dozens of new credits, deductions, and exclusions onto already complex tax law, has turned the IRS into the health care enforcer, and has required the IRS to serve as a collection agency for unpaid child support and other debts, it is absurd to cut IRS revenue collection efforts. When people defending the anti-government agenda claim to take their inspiration from the private sector, they conveniently ignore the fact that if a business wanted to eliminate its operating loss, the prognosis for success would be zero if the business ceased all advertising and left its cash registers and online payments systems unattended and unfunded.

 So Cutting IRS Funding Won't Reduce Revenues? Yeah, OK, Mauled Again (Apr. 1, 2013).

 This idea of cutting the agency that is already so underresourced that it cannot fight the hired guns of the multinational corporations and Big Oil, Big Pharma, and other sophisticated big-monied taxpayers fits with the general corporatist approach of those on the right  these days.  It is an approach laden with anti-populist, pro-oligarchic, class warfare sentiment.  It is the "meritocratic" notion that those who have most already should have even more because they "merit" it, while those who have less can be allowed to suffer their plight without any role of government to provide a safety net.  It is the force that pays CEOs and other top managers and directors  obscenely high salaries in bad times as well as good times, no matter what they do to create ruin for their communities and their employees and even their companies, under the false belief that the people at the helm are responsible for all productivity gains and none of the productivity losses of the firm. It is behind the effort to reduce pensions of already-retired union employees and the fight against unionization from wealthy interests (like the billionaire Walton heirs whose WalMart stores still refuse to pay a living wage). It is behind the decades of Reaganomics and Friedmania, two cult ideologies masquerading as economic theories  that have wreaked havoc on the US economy and most especially on its middle class and poor.  It has left one-fourth of American children living in poverty.  It has created a country with untold wealth that won't pay for decent public schools or decent public health care.  It has privatized education to the point that poor school districts are forced to subsidize religious and other private schools while trying to maintain a decent quality of education in public schools for the not-wealthy children that remain in them.  It has allowed Big Banks and Big Insurance companies to reap "rentier" profits from municipal necessities and personal health care needs, all in the name of claiming to support personal freedom. It is behind the GOP-driven refusal to support Detroit in Michigan where businesses and the wealthy get huge tax breaks, but the city on which the state depends for its future is treated as a misbehaving child, with its (mostly black) residents punished for the city's exploitation by Big Banks and by corrupt leaders.  This right-wing behemoth continues --with the aid of the so-called "centrist" Democrats--to paint Social Security and Medicare as too-generous "entitlements" whose benefits need to be pushed back to avoid the need to increase taxes to support them. This corporatist class warfare, in other words, is remaking the US economy into a have and have-not society that privileges the wealthy while peonizing everyone else.  The push to defund the IRS is a useful piece of the class warfare battle gear for the right--by handicapping tax revenue collection and tax law enforcement, the right facilitates the wealthy elite and the multinational corporations they own and run in ripping off the nation and jeopardizing the lives and fortunes of the middle class and especially the working poor.

There is one bright spot in this budget debate--those Senate Democrats who are proposing an increase of about $26 million in IRS funding, in recognition of the great disadvantage in which the agency, with so many diverse tasks, is put by underfunding compared to the sophisticated taxpayers who are willing to aggressively push the boundaries of tax evasion.  See several links, below.

 

Related articles

"Getting Rid of the IRS"--Detroit's Nolan Finley's wrong solution to the wrong problem

The Boom and Bust Cycle of Tax Shelters and Intimidation of the IRS

Senate Democrats Propose Increase To IRS Funding

Senate Democrats Want to Increase IRS Funding by $276.5 Million

Senate panel refuses IRS cuts sought by GOP

UK Territories to sign OECD Tax Info-Sharing Agreement, Reveal Beneficial Owners

The UK's David Cameron announced  that Britain's 10 crown dependencies and overseas territories--Cayman Islands, Bermuda, Jersey, Gilbraltar, Anguilla, Turks and Caicos Islands, Guernsey, Isle of Man, and the British Virgin Islands--would sign on to the OECD's multilateral convention on Mutual Administrative Assistance in Tax Matters.  They also agreed to "produce action plans about providing information on who owns which companies and who benefits, the so-called beneficial ownership."  Wall St.J., June 17, 2013, at C3.

While many vacationers may know most of these spots because of their location in tropical paradises, most tax practitioners recognize them as key linchpins in tax avoidance plans of many wealthy individuals, banks and corporations.  As many as 18,000 corporate offices are located in mailboxes in a three-story building in the Caymans, all with a few Cayman laywers as their principal directors. And of course one of the reasons these tax-haven countries are in demand is that they have both very low taxes and a good deal of secrecy about just who owns what.

Signing the OECD tax convention won't solve all the many problems that revolve around tax haven and banking secrecy jurisdictions.  The exchange of information provisions, while an advance over no agreement to exchange information, are still far too difficult to bring into play without having some information about owners and account holders.

But getting these tax haven jurisdictions on board the convention is a first step in the right direction, just as the signing of the convention by other tax haven and banking secrecy jurisdictions like Singapore earlier this year was.  One can't help hoping that it is a signal that these tax haven countries realize that tax secrecy ultimately will not be a great way to maintain a stable economy and they will eventually need to produce something useful besides tax avoidance regimes.

Related articles

Cameron calls in tax havens ahead of G8 summit in June

Britain presses territories on tax action before G8 summit

Moving in the right direction: US, UK, Aussies to share tax info

PM urged to forge global tax deal

It is in the UK's power to end tax havens

PM: Territories must act on tax

G8: British territories sign up to tax transparency deal

Tax transparency deal risks scoring 'own goal' for Britain

UPDATE 2-Bermuda says won't agree UK Territories tax deal before G8

"Getting Rid of the IRS"--Detroit's Nolan Finley's wrong solution to the wrong problem

I suppose it shouldn't be surprising that the mostly-to-the-right Detroit newspapers would have a center-page opinion piece calling for the elimination of the IRS, that ages-old mantra of the radical right and of those corporate-backed propaganda tanks and radical-liberatarian idea pushers like Cato and Heritage Foundation and Claremont and many of the Tax Party groups, etc.  But this one is so bad that it is necessary to call it out for what it is--a bunch of hog-wash.  See Nolan FinLey,  Let's Get Rid of the IRS, Detroit News (June 10, 2013).

Finley starts out with a presupposition that the scandal-mongering about the IRS is not only completely accurate (which it isn't--liberal and conservative groups were selected for scrutiny, and scrutiny was called for in respect of groups that had "tea party" in their names, since most of them were in fact mainly doing politicking) but that it was also "obvious[ly]" done from at the orders of Obama operatives to aid the President's election chances (which is completely unfounded conspiracy-mongering speculation).  He states that "the IRS has been caught red-handed targeting conservative political groups for special scrutiny in what seems obvious was an attempt to aid the reelection bid of President Obama."

An initial scaffolding of distortions and malicious speculation cannot bode well for any opinion piece.  So it isn't a surprise that the rest of the piece doesn't hold water, either.  He calls the required statutory scrutiny of applicants for 501(c)(4) status a "dragnet"--failing to even acknowledge that the statutory requirement states that such groups must be "exclusively" operated for social welfare purposes and that it is in fact through administrative dispensation via interpretative regulations that the IRS applies instead a "primarily" for social welfare purposes test, thus permitting (too much) politicking as long as it isn't the primary activity.

He goes on to claim that use of the term "patriot" as a screening filter for politicking groups implies that "the United States government finds something sinister in patriotism".  Again, that's a ridiculous association of what may possibily have been a perfectly reasonable though politically unwise filter term--i.e., if there are lots of groups with "patriot" in their names that do a lot of politicking, then it is a reasonable term to pick for giving those groups extra scrutiny to see if they do too much politicking, though the expectation that conservatives would rise up in arms if those types of groups receive extra scrutiny should have been a red flag cautioning against use of that term in spite of its usefulness.

Then Finley asserts that this conspiracy-theory thinking provides "more than enough reason to jettison plans to make it [the IRS] the enforcement arm of Obamacare."  Now, it is true that the IRS has so many different federal programs that it has to oversee that it is almost impossible for it to do an appropriate task of doing so.  Congress has loaded it with tasks (including all the tax expenditure programs embedded in the federal income tax code) and consistently underfunded it so that it is usually understaffed and overstretched.  But the answer to that is not to take away a task that it is perhaps best suited for out of all the agencies, but rather to fund the IRS appropriately so that it can do the tasks assigned to it by Congress.  Finley completely ignores the underfunding problem, since--as revealed later on--he really wants to decimate or eliminate the IRS entirely.

 Finley talks about the IRS as "an institution America no longer trusts"  because it is "the most feared agent" and on "that has proven itself willing to manipulate the levers of government to achieve a political end."  Again, many problems in this rhetoric. 

• If the IRS is actually the "most feared" (I personally suspect the CIA and FBI and NSA would come in ahead in that race, but haven't seen any actual empirical study on this issue)--even after the enactment of three laws pulling back on its power to enforce and essentially hamstringing its employees with the "ten sins" provisions included in the 1998 act (see earlier post)-- it is because for decades the right-wing propaganda tanks and media have been pushing distrust of the IRS and of taxes and of government generally.  People are influenced by that constant cry of "bad guy" based on blowing up of individual anecdotes into massive (presumed) patterns.
• And the claim that the IRS "has proven itself" using its power for political purposes is simply unfounded.  There is no "proof" of the assertion made by Finley.  He is merely playing the Bill O'Reilly game of asserting speculation--or even worse, falsehoods,-- as fact in order to buttress his own personal vendetta against the IRS and its employees.  Most IRS employees are civil servants, not political appointees.  I've known quite a few Republican IRS employees in my years as a tax practitioner, and have considered writing about what I consider a related problem -- that  too many IRS employees are too willing to court the pleasure of taxpayers such as big multinationals or large law firms or accounting firms that may well become their future employers or clients when they leave the Service.

 Now Finley hits his stride with his real objective--arguments for disbanding the IRS, eliminating the income tax, and replacing it with a (regressive and hard to enforce) national sales tax.

The most fitting punishment would be to disband the IRS. And junk the income tax, too. Mike Huckabee, former governor of Arkansas and now a TV talk show host, is urging Congress to replace the income tax with a national sales tax. You’d pay tax on the money you spend instead of the money you earn.That would eliminate the need for an IRS that audits tax returns, hands out non-profit status and enforces a tax code that is egregiously complex and unfair. Id. (paragraphing removed).

 Finley reveals his true ignorance here (if he hasn't done for most readers already).  Let's just consider first some of the ancillary issues around "disbanding the IRS".

• Because the IRS does function as the major enforcement agency for many things besides the income tax, Congress would have to undertake a comprehensive analysis of all of those activities and assign them to some other agency.  In all likelihood, that other agency would lack agents with expertise to handle the assigned task, and the result would be essentially a transfer of those currently staffed with the activity to the other agency, requiring considerable time to merge functions and perhaps failing to do it well enough to maintain current operating efficiency, much less improve it (just as huge mergers or consolidations of businesses often go awry). 
• Further, the time to do the study, legislate the transition, and implement the transition would require continued operation of the current agency and the replacement agency, duplicating costs at a time when conservatives like Finley claim they want to cut wasteful government spending.
• The Internal Revenue Code is not really "egregiously complex."   

1. Read earlier posts on the right's tendency to overstate (by tens of thousands of pages) the "size" of the Code and to treat "size" as an appropriate substitution for any analysis of complexity. 
2. Only 30% or so of individual taxpayers itemize, and itemization is the primary complexity faced by individual taxpayers.  Most of those who do itemize are in the relatively wealthy part (upper 30% )of the income distribution, and most of those who have difficult and complex decisions to make are the very wealthy who have expensive tax experts to do their work for them.
3. Most of the complexity in the Code stems from two factors--(a) tax expenditures (subsidies) that benefit (substantially, in most cases) particular types of wealthy and business taxpayers lobbied for by those taxpayers and (b) anti-abuse rules necessitated by the clever tax strategies invented by the wealthy taxpayers' (especially corporate and business taxpayers') expensive tax experts.
4. It is naive to think that any tax system--whether income or excise or transfer or territorial or worldwide or sales or VAT-- could be "simple" for wealthy individual and corporate taxpayers with a global playing field and incredible sums able to be spent on avoidance and at the same time generate sufficient revenues to provide for the most basic of public goods and services, including a decent safety net for those caught in vulnerable positions by age, illness, or other lack of privilege.

5. Most sales tax systems include incredible arrays of exemptions (for example, for non-profit groups and charities) and exclusions (for "necessities" where the sales tax could make a difference between life and death for those living in poverty) and special provisions (lobbied for by particular industries).  A VAT (if that were the form required) would in all likelihood require the same complexities about what is income or not that an income tax requires.  A VAT or a national sales tax would require a mechanism for enforcement of collection not unlike the IRS's function and a mechanism for tracking individual's payments not unlike the IRS's current function.  It would not permit the elimination of audits of tax returns (just different kinds of returns), handing out nonprofit status (just a different rationale and basis) or enforcing a complex tax code (just a different one). 

 Finley's ignorance is further revealed by his claim that a "similar outcome" (disbanding or making the IRS much smaller) could be achieved by "vastly lowering current income tax rates in exchange for eliminating all deductions and credits" because there would be "no reason to examine returns."

• lowering rates doesn't achieve anything but less revenue--which will have to be made up for in other ways (adding complexity) or by further hardship on the already suffering ordinary people of this country who bore the brunt of the Great Recession, the foreclosure crisis, the unemployment crisis, and the corporatisation of education that has paid administrators twice or more what they are worth while cheating professors, teachers and students;
• eliminating all deductions and credits might simplify somewhat the income tax, but at the cost of considerable unfairness in many cases--for just a few obvious examples, removing the foreign tax credit for taxes paid to other countries would result in some instances in "double taxation" of the same revenue by the US and the other country; removing the "standard deduction" and "personal exemption" would undermine a universal view that the income tax shouldn't reach the amount necessary to maintain a barely sustaining level of income for food, shelter and clothing;
• even if it were possible to "lower rates and eliminate all deductions and credits", it wouldn't be possible to get rid of the IRS or eliminate audits or curtail enforcement or reduce the tax code to something a kindergartner could understand--a critical question for the Code is "what is income"--and therein lies a huge portion of the complexity and most of the ways that taxpayers have found to abuse the rules by claiming "phantom" losses.  (Note that Finley doesn't talk about removing elections, exemptions, and exclusions--was that intentional?)  There would still be the same need for returns, audits, and enforcement, and there would still need to be all the procedural provisions for litigation and regulations and penalties and interest on overdue taxes.  There would be rules still for all the different types of entities (much of the complexity of the Code lies in the rules for permitting partnerships to have considerable flexibility in their allocation of income and losses among the partners).  Certainly Finley wouldn't suggest that the tax code should get to tax gross income and taxpayers be required to forego claiming any losses!

Finley ends with what he thought was a question requiring an obvious answer of "none"--essentially asking that if we can eliminate the IRS and get rid of the health care "entitlement", "what's the downside?"

The answer is not the one he so ignorantly professed to believe.  The downside is huge, and there is little upside.  Finley disregards the growing inequality in this country and the continuing poverty in what is still the richest country in the world.  He doesn't care, apparently, that his "solution" would create even more problems for the poor, as programs that they depend on administered through the IRS-such as the Earned Income Tax Credit and the standard deduction and personal exemptions--would be eliminated with his proposal.  Further, without a tax collection and enforcement agency, much of the good done by the federal government would wilt on the vine--from the Centers for Disease Control to the NIH and the Smithsonian, from transportation safety to education funding, and even the right's much beloved military.  We simply can't and shouldn't get rid of the IRS--every advanced country in the nation has a bureau that collects and enforces the tax laws.  We could get rid of the particular health care reform enacted as Obamacare, but we shouldn't --rather, we should continue to improve it, ultimately instituting Medicare for all and removing the rent-seeking profiteers from the picture except for those who have so much money that they can afford to buy luxury health care.

Finley's proposal amounts to more hot-air from the right about their favorite target--taxes and tax enforcement--that would have regressive results lopsidedly benefiting their favorite beneficiaries--the wealthy and Big Business (owned mostly by the wealthy).  Apparently, people like Finley really want a country where brute market forces allow a few to reap all the benefits and the many to suffer, resulting in a classed society with the few living in relative splendor and the rest living off the dregs.  That would be the result of most of these proposals for turning to a regressive sales tax and shutting down federal tax enforcement, making such proposals a form of class warfare pure and simple.

(if you don't believe me about "rent-seeking profiteers" in the health care business, read Saturday's New York Times story about the way Questor--a Big Pharma company--has reaped huge profits by essentially building a monopoly power over an immune-disorder drug called Acthar and now intends to purchase a competitor's potential threat (selling for tens of thousands less) because  a US startup wanted to make it available cheaply in the United States.  Questor bought Acthar in 2001 when it was selling for just a few hundred dollars a vial.  By 2007 questor had increased the price to almost $1500 a vial.  And in 2007, Questor increased the price in a single jump to $23,000 a vial--yes you read that number correctly.  This is the perfect example of the fact that the right's beloved "market" doesn't work if the government doesn't provide the right framework--in this case, enforcement of anti-trust laws much more stringently than has been done in the last few decades as anti-trust has practically dropped from the national vocabulary.)

Related articles

The real IRS scandal

More on The Overblown IRS "scandal"--Cummings (D-vice chair) vs Issa (R-Chair)

As the House hearings have continued into the "much ado about nothing" "scandal" of the IRS Cincinnati office using terms like Tea Party and Patriot to filter 501(c)(4) status appications for groups that were likely to be politicking and thus merit extra scrutiny before granting the status, there continue to be statements that lambast the government generally and the Obama White House in particular, accusing it of intervening in IRS affairs and implying that the Obama White House is using the agency to get at its political enemies.

Darryl Issa, the Republican chair of the House Oversight Committee, one of the various politicians avidly pursuing the issue, spoke with CNN's Candy Crowley and claimed that IRS agents were being "directly ordered from Washington".  See Joan Walsh, Elijah Cummings Outplays Darryl Issa, Salon.com (June 9, 2013).  Issa hinted that interviews with IRS staff had turned up plenty of proof of such shenanigans, but Cummings, the Democratic vice-chair of the Committee, called his bluff, saying that a senior Republican staffer who described himself as a "conservative Republican" had made quite clear that wasn't so and challenging Issa to release the transcripts of interviews.  (Cummings ultimately released the transcripts himself.)  Cummings suggested that it was time to close the book on this case. id.  If only.

Related articles

The real IRS scandal

Cummings calls Issa's IRS bluff: 'I'll release' transcripts clearing White House if he doesn't

Dem Rep. Elijah Cummings: Darrell Issa, 'release the full IRS transcripts or I will. Period.'

Rep. Cummings Promises Candy Crowley: If Rep. Issa Doesn't Release IRS Transcripts Within The Week, 'I Will'

Rep. Cummings: Proof clears WH of IRS targeting scandal

Cummings Calls Issa's IRS Bluff: 'I'll Release' Transcripts Clearing White House if He Doesn't

White House not involved in reviews, IRS manager says - Boston.com

Update on Ray Lane's Tax Shelter

As noted in an earlier post focusing on the way intimidation of the IRS tends to lead to more tax avoidance and even tax evasion through promoted "shelters", Hewlett-Packard official Ray Lane engaged in a phony tax shelter back in 2004.  He got caught and has apparently settled the $100 million tax bill.  See, e.g., Reuters, H-P Board member Ray Lane Settles long-running tax bill (June 6, 2013);  Tax Prof listing of assorted stories.

Related articles

Ray Lane Rode Tech Boom Tax-Shelter Wave Broken by IRS - Bloomberg

The Boom and Bust Cycle of Tax Shelters and Intimidation of the IRS

Ex-HP boss Ray Lane reportedly in $100 million spat with IRS

HP's Ray Lane faces $100m tax bill over 'sham' tax shelter

H-P director Ray Lane is having a bad year

Silicon Alley Insider: Former HP Chairman Ray Lane Slapped With $100 Million Tax Bill (HPQ)

The Boom and Bust Cycle of Tax Shelters and Intimidation of the IRS

[edited 6/9/13 to correct some glaring typos :) ]

In response to concern about taxpayer rights and potentially abusive tax collection activities, Congress passed two "taxpayer bill of rights" laws, in 1988 and again in 1996.  Together, these laws protect taxpayers with further notice and information, shift the burden of proof to the government in many cases, and create an office of taxpayer advocate that reports directly to Congress, among many other provisions.  The 1988 law (consolidating five different proposed bills into an "omnibus" bill under HR 4333) included provisions that sharply restricted IRS' employees' ability to ferret out tax evasion for fear of potentially violating the law. See summary of HR 2190,  "the IRS Administration Reform and Taxpayer Protection Act of 1987", incorporated in the 1988 legislation passed as HR 4333.  The 1996 law, HR 2337/ Public Law 104-506, beefed up the Taxpayer Advocate office, modified various penalty and collection provisions, and required an annual report to Congress on IRS employee misconduct.  While these laws provided important new protections for taxpayers and noteworthy additions to the law governing collection authority, some were  overgenerous to taxpayers and at the least made enforcing the tax laws more difficult for IRS employees.

It was only a short while after the 1996 law was enacted when the Senate Finance Committee held an elaborate series of hearings looking into alleged "abuses" of "innocent" taxpayers by the agency in collecting taxes and investigating potential criminal evasion of taxes:   hearings on IRS practice and procedures, Sept. 23-25, 1997;  hearings on IRS restructuring, Jan. 28-29, Feb. 5, 11, and 25, 1998; and hearings on IRS oversight, May 28-30 and June 1, 1998. Let it be clear: these  hearings targeted the IRS with an apparent objective of changing the agency's focus from enforcement and collection of taxes to "nice-guy" relations with taxpayers.  They included "sob stories" about harassment by the IRS from a priest, a divorced mother, a restauranteur and others, and alleged abuses in the collection and investigatory processes within the agency.  

Much of the inflammatory testimony in those late 90s hearings was just that--stories, hand-picked to highlight purported problems, with the result that they inflamed the citizenry against the agency.  The selected testimony was anything but balanced, in that it ignored myriad examples of just the opposite and included made-up tales of abuse.  Danshera Cords, in an article discussing the 1998 Act, describes the restaurant owner's testimony and its lack of truthfulness as follows:

John Colaprete, owner of the Jewish Mother restaurants, "told the Finance Committee that IRS agents and other law enforcement personnel forced children to the floor at gunpoint, leered at scantily clad teenage girls, and generally violated his Fourth Amendment rights against illegal search and seizure, all on the word of his felonious bookkeeper." Ryan J. Donmoyer, Judge May Dismiss Jewish Mother Lawsuit, 83 TAX NOTES 1696, 1696 (1999). Mr. Colaprete testified before the Finance Committee that, while attending his son’s first Holy Communion, "[a]rmed agents, accompanied by drug-sniffing dogs, stormed my restaurants during breakfast, ordered patrons out of the restaurant, and began interrogating my employees." IRS Oversight: Hearings Before the Senate Comm. on Finance, 105th Cong. 75–79 (1998); ROTH & NIXON, supra note 5, at 189.

Danshera Cords, How Much Process is Due? IRC Section 6320 and 6330 Collection Due Process Hearings, 29 Vermont L. Rev. 51, 52 note 7.

That sounds atrocious, until you find out that Colaprete later recanted the whole thing, when it was found that he was actually out of the country at the time it was claimed to have happened.  Id.

There were two later reviews of the testimony--the Webster Commission and a GAO study (both cited in Cords' article).  The Webster Commission found isolated abuses but no pattern of misconduct by the criminal investigation division.  Criminal Investigation Div. Review Task Force, IRS, Review of the IRS's Criminal Investigation Division (1999).  The GAO study found no evidence supporting the allegations that tax assessments were improperly handled or criminal investigations inappropriately undertaken. GAO, Tax Administration: Investigation of Allegations of Taxpayer Abuse and Employee Misconduct Raised at Senate Finance Committee's IRS Oversight Hearings (reprinted in 2000 Tax Notes Today 80-13 (Apr. 25, 2000)). David Cay Johnston, in his highly regarded book on the tax shelter business, describes those hearings as "going after the IRS".  Perfectly Legal (2003).  Bryan T. Camp describes Congress as seeing tax administration as an "inquisitorial" process.  Bryan T. Camp, Tax Administration as Inquisitorial Process and the Partial Paradigm Shift in the IRS Restructuring and Reform Act of 1998, 56 Fla. L. Rev. 1 (2004) (describing the hearings at 78-86).

The  Senate Finance hearings enabled the passage of additional legislation in 1998, the Internal Revenus Service Restructuring and Reform Act of 1998. The law reorganized the IRS, the main agency to enforce the law, into "units serving particular groups of taxpayers with similar needs"--i.e., changing its focus from law enforcement to "serving taxpayers".  It  "significantly limited" the agency's "historically broad powers".  Id. (Cords, at 51).  It created a collection due process hearing requirement before the IRS can proceed to collect on taxes due; a bureaucratic (red-tape) approval process for levies, liens and seizures; and severe limitations on examination and audit techniques and impositions of penalties.  The agency suffered not only from increased disrespect (from media attention to the inflammatory hearings) that facilitated the right's mission to spread the Reagan mantra that "government is the problem," but also from underfunding, strict limitations on methodologies, and effective intimidation that made it harder to enforce the tax laws and collect unpaid taxes, thus encouraging tax evasion and even tax fraud. Stress, time and resource constraints, and understaffing, got worse, even while Congress dumped more and more administrative responsibilities on the agency.

The always innovative tax practitioners (attorneys and CPAs) noticed.  Corporations and their high-wealth CEOs and majority shareholders were already engaging in more tax avoidance with the help of crafty lawyers finding loopholes in the interstices of the tax law and the more restrictive 1988 and 1996 laws that made it harder to enforce or collect.  Many now took advantage of the newly flourishing tax shelter schemes from the late 1990s to mid 2000s.  These were often promoted by big-money law partners at law firms like Donna Guerin at (now shut down) Jenkens & Gilchrist or Raymond Ruble at Brown & Wood (later Sidley Austin) and financed by investment banks like Deutsche Bank and others eager to profit from derivatives that made deals appear to move money around while essentially leaving it in place, with avid assistance (and sometimes design) by accounting firms like Arthur Anderson, KPMG, and BDO Seidman. The shelters usually had fancy acronyms like "COBRA" and "FLIPs."  They frequently involved invented (phantom) losses or phony deductions.  Many used purported federal income tax partnership structures to selectively pass gains to tax-exempt or tax-indifferent parties so (phantom) losses could be passed to parties that "needed" a tax loss to offset a large, expected, and real gain. 

Hitting the news today is yet another story about a top CEO who engaged in those phantom-loss- generating partnership tax shelters.  Zajac & Drucker, Ray Lane Rode Tech-Boom Tax Shelter Wave Broken by IRS, Bloomberg.com (June 7, 2013). Lane, former president of Oracle and current chair of Hewlett-Packard, used a shelter involving partnerships with long and short positions called "POPS"--put together by Sidley & Austin, Deutsche Bank, and BDO Seidman--to shield $250 million from taxation. Id.  As Chris Rizek, a tax lawyer at DC's Caplin & Drysdale told Bloomberg, the IRS slacked off on enforcement in those years after the series of bills restricting tax administration because "they were intimidated." Id.  "They could be cowed again," Rizek said, given the focus in Congress this month.

We seem to have a "boom or bust" cycle in terms of attitudes towards the IRS as the primary agency for enforcing our tax laws.  And that's unfortunate, because a country that cannot force wealthy and corporate taxpayers to pay their share of the tax burden is a country that will fail.

This history should serve as an important warning to Congress, the mainstream media, and citizens as hearings exploiting anti-IRS sentiments spread cries of alleged abuses (seemingly with as little evidentiary support for widespread patterns of abuse as the 1998 hearings) that may again lead to overly restrictive legislation.  

While any agency should avoid wasting money on unnecessary travel (and certainly luxury suites is a waste for any government employee), IRS employees should not be restricted from participating in important activities like attending and speaking at the ABA Tax Section's three annual meetings.  And while it is important to ensure that there isn't a corrupt abuse of agency power, the hearings so far into the 501(c)(4) selection of various groups (conservative and liberal) for greater scrutiny bear too strong a resemblance to the hyped-up hearings by the Finance Committee in 1997-98, which inappropriately intimidated IRS employees from doing their jobs.  Congress should not prevent the IRS from taking forceful actions to fight violations of the tax laws, such as appropriately screening applicants for 501(c)(3) and (c)(4) tax-exempt status.

Related articles

Former HP Chairman Ray Lane Slapped With $100 Million Tax Bill (HPQ)

Ernst & Young Pays $123 Million to Avoid Tax Shelter Prosecution

LIVE NOW: Hearing on excessive IRS spending