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The Taxman Doesn't Cometh

February 5, 2007

Monday's New York Times offers an analysis of the latest front in the partisan class war, the battle to collect unpaid taxes. The plot of this morality tale is predictable. On one side, Democrats seek to capture up to $100 billion in tax fraud to help fund their "paygo" budget plans. On the other, the GOP hopes to continue its gutting of the IRS and perpetuate the transfer of audits - and tax burden - away from the wealthiest of Americans.
Congressional Democrats and IRS Commissioner Mark Everson alike are confident that the government can begin to reap part of the $300 billion lost to fraud and unpaid taxes. Everson voiced optimism the IRS could collect "between $50 billion and $100 billion without changing the dynamic between the I.R.S. and the people."
Unsurprisingly, the Bush Treasury Department and the Republican litany of business allies are standing in the way of fundamental fairness during a time of war. Hoping to reprise its 1996 war on the IRS, the GOP hopes to conjure up images of invasive tax-collectors running roughshod over Americans. As Michele Davis, a Treasury Department spokeswoman, put it, "We are very mindful of the compliance burden on taxpayers who do follow the law."
Nina Olson, an independent taxpayer advocate at the IRS, disagreed with the dire assessments of the Republican tax avoidance crowd, declaring "I think there's a significant amount of money that's left on the table and that's not hard to recover."
For more background on the Republican class warfare against the IRS, continue reading from "IRS Slashes Staff Auditing Wealthiest Americans," below...


In the latest sign that Republican class warfare is alive and well in Washington, the IRS is planning draconian cuts to its team of estate tax lawyers handling the audits of the wealthiest Americans. In the next 70 days, the IRS will shed almost half of the 345 lawyers assigned to monitor the gift and estate taxes paid - or not paid - by those with some of the largest fortunes in the United States.
This latest effort to gut the IRS is simply class warfare by other means. Unable to permanently repeal the estate tax, the Bush administration plans to cripple enforcement. As the New York Times reports:

Six I.R.S. estate tax lawyers whose jobs are likely to be eliminated said in interviews that the cuts were just the latest moves behind the scenes at the I.R.S. to shield people with political connections and complex tax-avoidance devices from thorough audits.
Sharyn Phillips, a veteran I.R.S. estate tax lawyer in Manhattan, called the cuts a "back-door way for the Bush administration to achieve what it cannot get from Congress, which is repeal of the estate tax."

According to the Times, deputy IRS commissioner Kevin Brown confirmed the cuts, but claimed that "because far fewer people were obliged to pay estate taxes under President Bush's legislation." Brown also rejected as "preposterous" the notion that IRS looked the other way when it came to rich tax cheaters.
Sadly for Brown, the data suggests otherwise. Six years ago, the I.R.S. reported that 85 percent of large taxable gifts it audited shortchanged the government. And as the Times details:

Over the last five years, officials at both the I.R.S. and the Treasury have told Congress that cheating among the highest-income Americans is a major and growing problem.

Which is exactly the way Congressional Republicans want it. As David Cay Johnston describes in his book Perfectly Legal, the GOP during the Clinton administration waged an all-out war on the IRS, turning the priorities for auditing Americans upside-down. As Senator William Roth's Finance Committee held hearings in 1997 and 1998, Mississippi's Trent Lott and Alaska's Frank Murkowski decried the IRS' "Gestapo-like tactics." Don Nickles of Oklahoma raged, "The IRS is out of control!" Congress went on to pass and Bill Clinton signed the IRS Reform and Restructuring Act in 1998.
Those reforms in essence gave wealthier Americans carte blanche to cheat and fundamentally undermined tax fairness in the United States. Within one year, property seizures for unpaid taxes dropped by 98%. Liens were sliced by three quarters and levies on bank accounts by two-thirds. Johnston describes (p. 134) the overnight shift of tax policing onto poorer Americans:

In 1999, for the first time, the poor were more likely than the rich to have their tax returns audited. The overall rate for people making less than $25,000 a year was 1.36%, compared with 1.15% of returns by those making $100,000 or more...Over the previous 11 years audit rates for the poor had increased by a third, while falling 90 percent for the top tier of Americans.

The IRS' free ride for the wealthy was accompanied by a crackdown on Americans who qualified for the Earned Income Tax Credit. Targeting lower-income Americans "who work hard and play by the rules", the popular and often bipartisan EITC has long been in the cross hairs of the GOP class warriors like Nickles, who called it "a welfare program." The result, as Johnston details (p. 132):

The IRS audited 397,000 of the working poor who applied for the credit in 2001, eight times as many audits as it conducted of people making $100,000 or more. That works out to one of every 47 returns seeking the credit, compared to about one in every 366 taxpayers who did not apply for it.

Fast forward to 2006. The Bush administration, by hook or by crook, remains determined to kill the estate tax. Since 2001, President Bush and the Republican leadership have pushing to eliminate the so-called "death tax," a levy paid by only 1% of American families. The Center for Budget and Policy Priorities estimates abolition of the estate tax would burn a $1 trillion hole in the U.S. budget over 10 years. A supposed compromise version passed by the House GOP in June, that would raise the eligible estate size while cutting the rate from 45% to the capital gains rate of 15%, would be nearly as destructive. CBPP forecasts that the House bill would cost American taxpayers $750 billion in lost revenue and increased interest payments on the national debt.
As with most initiatives of the Bush administrations, the motivation and intent of the IRS cuts is quite transparent. As John Hruska, an IRS estate tax lawyer in New York put it, "This is not a game the poor will win, but the rich will." The result, as Colleen M. Kelley of the National Treasury Employees Union summed it up, "a lot of taxes that should be paid will go uncollected, and that impacts every taxpayer who is paying their fair share."

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Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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