Tag Archives: IRS

Games Republicans Play With Taxes

Media sources have begun warning of a “tax nightmare” ahead for April–filing delays and other administrative headaches , delayed refunds and a variety of mistakes likely to make us crazy.

“Things might be more challenging even than what we anticipate — and what we anticipate is very, very challenging,” a Treasury official told Axios, using the phrase “death spiral” to refer to one set of issues.

Why the warning? Why the situation? Funding. Actually, the lack of adequate funding.

The IRS raises the money America needs. According to official reports, the IRS collects 95 cents of every dollar in federal revenue. So you would think that giving the agency the resources to do its job, and do it efficiently and well, would be a high priority.

It isn’t. Instead, the agency is routinely described as being “in crisis.” Its budget has declined by 20% since 2010, while the number of taxpayers has increased by 19%.

The agency relies on software built in the 1960s, and it is facing a big backlog of paper filings including 6.2 million unprocessed 1040 forms.It doesn’t even have scanning technology– humans open the mail and manually enter information into its system.

According to one report, last year the agency answered only 29 million of the 282 million phone calls it received. And although the vast majority of taxpayers got their refunds fairly promptly last year, the agency was depending upon a significant increase in funding
from the Biden administration’s Build Back Better legislation.

Good luck with that.

So–why has Congress gutted the IRS? Pro Publica tells us in the subhead:

An eight-year campaign to slash the agency’s budget has left it understaffed, hamstrung and operating with archaic equipment. The result: billions less to fund the government. That’s good news for corporations and the wealthy.

The article begins with an example of what we are losing–money that must be made up by law-abiding taxpayers. Us.

In the summer of 2008, William Pfeil made a startling discovery: Hundreds of foreign companies that operated in the U.S. weren’t paying U.S. taxes, and his employer, the Internal Revenue Service, had no idea. Under U.S. law, companies that do business in the Gulf of Mexico owe the American government a piece of what they make drilling for oil there or helping those that do. But the vast majority of the foreign companies weren’t paying anything, and taxpaying American companies were upset, arguing that it unfairly allowed the foreign rivals to underbid for contracts.

Pfeil and the IRS started pursuing the non-U.S. entities. Ultimately, he figures he brought in more than $50 million in previously unpaid taxes over the course of about five years. It was an example of how the tax-collecting agency is supposed to work.

But then Congress began regularly reducing the IRS budget. After 43 years with the agency, Pfeil — who had hoped to reach his 50th anniversary — was angry about the “steady decrease in budget and resources” the agency had seen. He retired in 2013 at 68.

Because the cuts have come over an 8-year period, the utter collapse of the agency has escaped widespread notice. But at this point, according to Pro Publica, the bureaucracy is on life support, and America is losing tens of billions in revenue. (ProPublica estimates a toll of at least $18 billion every year, but admits that the true cost could easily run tens of billions of dollars higher.)

Tax obligations expire after 10 years if the IRS doesn’t pursue them. Such expirations were relatively infrequent before the budget cuts began. In 2010, $482 million in tax debts lapsed. By 2017, according to internal IRS collection reports, that figure had risen to $8.3 billion, 17 times as much as in 2010. The IRS’ ability to investigate criminals has atrophied as well.

And who stands to benefit? Need I share the following paragraph?

Corporations and the wealthy are the biggest beneficiaries of the IRS’ decay. Most Americans’ interaction with the IRS is largely automated. But it takes specialized, well-trained personnel to audit a business or a billionaire or to unravel a tax scheme — and those employees are leaving in droves and taking their expertise with them. For the country’s largest corporations, the danger of being hit with a billion-dollar tax bill has greatly diminished. For the rich, who research shows evade taxes the most, the IRS has become less and less of a force to be feared.

There is much, much more at the link, and it is all depressing. The GOP’s constant insistence that all of America’s ills can be solved with tax cuts is dishonest–and stupid–enough. But tax cuts aren’t the only way the party plays tax games to help its donors–and screw over the rest of us.

Enforcing The Rule Of Law

Americans spend a lot of time arguing about legislation. For that matter, this blog is predominantly focused on what we call “public policy,” which is essentially a term meaning “laws and regulations.” What tends to get much less attention is an equally important aspect of the rule of law: enforcement.

With the exception of policing–the enforcement of criminal laws–we tend to ignore the behaviors of those who have been authorized to enforce the laws once they’ve been passed. For one thing, it is much harder to ferret out the degree of enforcement. If Congress or a state legislature passes a measure, reporting that fact– or opining about its wisdom– is fairly simple. Figuring out whether the law is being fairly and evenly applied–or applied at all–requires considerably more effort.

Take tax law. Bills to raise or lower taxes receive widespread reporting and discussion. But enforcement–or the lack thereof–is equally important, and gets much less attention. When we are talking about taxes, however, there are two equally effective methods for reducing  tax liability for the mega-rich: lower rates, and inadequate investigation and application of those rates. When staff levels at the IRS are kept too low, when the agency lacks the ability to audit more than a handful of returns, the millionaires and billionaires can be confident that the odds favor the significant success of various tax avoidance ploys.

President Biden has moved to beef up IRS’ staffing, which has been decimated by the former guy’s administration, and six former IRS commissions have applauded that move in a column for The Washington Post.They provide the context.

As former IRS commissioners, we know the challenges of administering the tax system, which has grown in size and complexity, particularly in recent years.

Yet, during the past decade, budget cuts have substantially diminished the IRS workforce. In real terms, the IRS budget is smaller than it was in 2010, and it has 21,000 fewer employees. The IRS has fewer auditors today than at any time since World War II. Moreover, the agency has struggled to keep pace as complicated tax structures, such as partnerships and pass-throughs, have grown in popularity. Workforce attrition has been most pronounced among agents who examine these complicated tax filings: Thirty-five percent fewer revenue agents handle these returns today than a decade ago.

Their essay goes on to remind readers that, despite its reduced workforce, the IRS has seen its responsibilities increase. The agency administers significant provisions of the Affordable Care Act, and during the pandemic, it has been the IRS that has delivered three rounds of federal payments to hundreds of millions of taxpayers. Now, the agency is preparing to deliver periodic payments of the recently-enacted expanded child tax credit.

Thanks to its expanding authority and reduced staffing, the former commissioners report that

There has also been a substantial decline in enforcement scrutiny of high-earners and large corporations with complex returns: Audit rates for millionaires have fallen more than 70 percent since 2011; audits of large corporations decreased from essentially 100 percent a decade ago to less than 50 percent, according to the most recent IRS estimates.

This situation is no fault of the IRS or its committed workforce, who are dedicated to fair implementation of the tax code and the strongest possible support for taxpayers. Provided appropriate resources, the IRS can make good on its commitments.

The former Commissioners agree that the changes and additional resources that President Biden proposes would “produce a great deal of revenue by reducing the enormous gap between taxes legally owed and taxes actually paid — much of it through increased voluntary compliance.”

The Biden proposal includes provisions on third-party reporting, leveraging information from financial services providers to learn basic information about account inflows and outflows. This information could assist taxpayers in filing accurate returns and help the IRS better focus collection efforts. Research shows that when the IRS has access to third-party reporting, compliance rates top 95 percent. Without third-party information reporting, compliance rates are below 50 percent. Reliable information is critical to an effective and fair tax system.

The statistics cited in the essay demonstrate the importance of effective enforcement. It isn’t simply tax rates that favor the rich–lax enforcement costs an enormous amount that the rest of us must make up. Estimates are that uncollected taxes from those sources are equal to the total taxes paid by the lower 90 percent of individual taxpayers.

It is long past time to give the IRS the resources it needs to ensure that corporations and billionaires pay their taxes. If enforcement is fair across the board, the rest of us will feel a lot better about paying ours.

 

Scandal at the IRS

I’ve been reading a variety of reports about the allegations that the IRS singled out Tea Party tax exemption applications for extra scrutiny. So here are a few random observations, culled from those reports and accusations:

1) It’s worth noting that condemnation has been utterly bipartisan. Liberal blogs and Democratic commentators have been highly critical of politicization of the IRS. (Why do I think that, if this had happened during a Republican administration, the reaction at Fox “News” would have been considerably more defensive?) And let me be clear: if the IRS singled out any organizations for differential treatment based upon their politics, that was wrong. 

2) That said, what we are seeing is in significant measure yet another unanticipated result of the wrongheaded Citizen’s United decision. Citizens United allowed any organization of any kind to spend money out of its general treasury to run political ads. As Chris Hayes has noted, that decision brought about a pivotal moment for politics and taxes and campaign spending in this country and we’re still dealing with the fallout. Republican Karl Rove and Democrat Bill Burton used the Citizens United ruling in the run-up to the 2012 elections. Both of them used social welfare nonprofits to run overtly political ads; that allowed them to intervene in political campaigns without disclosing their donors. Others soon followed.

“Suddenly, the IRS starts getting a flood of new applications from other political groups and strategists saying, ‘Oh, oh, it turns out I too want to set up a social welfare organization that just so happens to be focused on taking the country back from Barack Hussein Obama. Now, here is the thing the IRS appears to have done unequivocally wrong, that we all agree was absolutely inexcusable. They reacted to all this by targeting one part of the ideological spectrum in looking at whether this flood of new applicants passed the smell test. Being skeptical about a new wave of wolves in sheep’s clothing invading the nonprofit game was entirely appropriate.”

3) As Hayes points out, Congress requires the IRS to review every application for tax-exempt status to weed out organizations that are partisan, political, or that generate private gain. Congress has imposed this requirement on the IRS, and its predecessor agencies, since 1913.  When it comes to 501(c)(4) organizations, the IRS is supposed to draw a distinction between groups that are “primarily engaged” in politics and groups that really are primarily engaged in “social welfare”—somehow “promoting the common good and social welfare of the community.”

4) The social welfare tax exemption is being used by existing 501(c)(4) organizations, including some very large ones, to promote partisan political interests—the very activity Congress has explicitly prohibited for a century. The New York Times ran a useful explanation  about this last Tuesday.

5) It is not an excuse, but it does bear noting that none of the organizations that the IRS subjected to improper levels of scrutiny was denied tax exempt status.

6)  Congress is demanding that the agency do more and more with less and less. As David Levinthal reported at the Center for Public Integrity, the IRS’ Exempt Organization Division–the division charged with the violations–processed significantly more applications in 2012 than it ever had. At the same time, the entire IRS was operating on a much-reduced budget, as a result of several rounds of Congressional cost-cutting.

“Over the last two years, government watchdog groups filed more than a dozen complaints with the Internal Revenue Service seeking inquiries into whether large nonprofit organizations like those founded by the Republican political operative Karl Rove and former Obama administration aides had violated their tax-exempt status by spending tens of millions of dollars on political advertising. The I.R.S. never responded… Because they purport to be engaged primarily in issue advocacy, not election advocacy, tax-exempt groups are not closely regulated by the Federal Election Commission. That task falls, instead, to the I.R.S., which can take years to investigate problems and is required to do so in strict secrecy… The tax code states that 501(c)(4)’s must operate “exclusively” to promote social welfare, a category that excludes political spending. “

The fact that the agency is understaffed does not excuse lawbreaking; what this revelation does, however, is point to systemic fiscal and managerial issues within the IRS that need to be addressed. Unfortunately, given the blood-lust of those in Congress who are intent upon using the IRS misbehavior for entirely partisan purposes, a carefully calibrated and deliberate review of agency operations is unlikely.

What the IRS should be doing is looking closely at every application. The politics of the applicant is irrelevant–but compliance with the rules governing tax-exempt status is anything but. Granted, those rules have been considerably complicated and confused thanks to Citizens United, but that makes competent, even-handed oversight more important than ever.

If Congress wasn’t so broken, this episode might lead to meaningful reform. I’m not holding my breath.

Pulpit “Freedom”

A couple of nights ago, Stephen Colbert took on “Pulpit Freedom Sunday,” a protest being mounted by hundreds of pastors against the IRS’ “political activity” regulations.

Here’s the deal: the IRS allows people to deduct contributions to charitable and religious organizations, effectively subsidizing those contributions. If I give 100.00 to my synagogue or church, that gift doesn’t really cost me 100.00. Depending upon my tax bracket, the effective cost to me can be significantly less. In return for that subsidy, the charitable/religious recipients promise–among other things–to refrain from partisan politicking. They can still take positions on the issues of the day; what they are not supposed to do is endorse specific candidates.

The pastor who came on the Colbert Report didn’t see this as a mutually beneficial agreement–he saw it as some form of spiritual slavery,  and kept talking about “freeing” the church. On Sunday, he and the other aggrieved clergy will defy the law (as they evidently have on a similar “Freedom Sunday” for the past five years) by issuing a partisan endorsement from the pulpit. According to him, the IRS regulation means the church is being “controlled” by government, and he thundered against any effort to “tax the church,” by which he evidently meant the elimination of this highly preferential tax treatment.

I’m all for giving the churches freedom. Complete freedom. Clergy should be able to say whatever they like, and the IRS should eliminate the current tax policy that allows parishioners to deduct contributions. The church would then be free of the “special rights” and tax benefits that evidently keep it enslaved.