Struggling IRS At The Mercy Of Politicians

by Leroy James, Tax-News.com, New York

17 September 2002

The US Internal Revenue Service is running up against a problem that sooner or later affects all high-taxing countries: the higher tax levels climb, and the more complex the tax code becomes, the more incentive and opportunities there are for taxpayers to avoid taxes. The level of tax and the complexity of tax law always march together, as politicians weave ever more elaborate webs to collect more money while simultaneously pretending to be on the side of the taxpayer for electoral purposes.

When the game becomes too intense, the politicians spin themselves into a black hole of electoral disapproval, although typically they don't realise it until too late. This is what is currently happening to Chancellor George Brown and his Labour party in the UK. The game is playing out in a different way in the US, where Congress directly controls the level of resources that can be allocated to tax collection (no such problems for the UK's Treasury), and has starved the IRS of resources even as it has monstrously accelerated the complexity of the Tax Code.

As a result, the IRS is faced with the problem of having to use its limited resources in the most effective way, and its decisions can easily be seen as political - the agency has tended to attack individual rather than companies, which use the most effective tax avoidance schemes but are well able to defend themselves in court. Hence the amnesty offered this year to tax-shelter users; but this puts the IRS on the Republican side, as the friend of big business in the eyes of many.

IRS officials said on Monday that between now and the end of the year, they want to close hundreds of tax-shelter cases stemming from the amnesty program. The IRS already has waived penalties for those taxpayers that disclosed their shelters; now it is preparing to give the companies and individuals a break on part of the tax they owe, as well, in order to dispose of the backlog of cases. Officials said on Monday that around 1,200 taxpayers had joined the program; in May, the agency said that the first 600 taxpayers to join the program had avoided roughly $5 billion in taxes.

It also emerged this week that the IRS is courting further criticism with settlement offers of 80% of the tax owed by major corporations that used an employee life-insurance scheme to create tax savings; the agency has estimated that at least 100 companies are involved and that more than $6bn of tax was avoided.

Last week's announcement by the IRS that it is targeting wealthy individuals for tax audits can be seen as an attempt to limit political fallout from its apparently lenient treatment of tax-avoiding companies. "This step is critical to maintain faith and fairness in our tax system," said IRS Commissioner Charles Rossotti. But a focus on individual audits runs up against budgetary constraints very quickly.

The agency had about 11,600 revenue agents in the 2001 fiscal year, down from a total of almost 16,000 in 1995. Sen. Max Baucus (D., Mont.), the chairman of the Senate Finance Committee, asked the White House Office of Management and Budget for additional resources for the IRS last week, citing a statement by Treasury acting assistant secretary Pam Olson that the "need to train, supervise and administer new IRS personnel places significant limits on how quickly new audit resources can be added productively for these cases."

Congress ought to decide what it hates least: more tax, more complexity, or more IRS agents. But on past form, it won't be doing so any time soon!

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