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Posts Tagged ‘Internal Revenue Code’

I recently appeared on CNBC to talk about everyone’s favorite government agency, those warm and cuddly folks at the IRS.

Our tax system is a dysfunctional mess, but you’ll notice that I mostly blamed politicians. After all, they are the ones who have unceasingly made the internal revenue code more complex, starting on that dark day in 1913 when the income tax was approved.

But I don’t want to give the IRS a free pass.

I’ve cited IRS incompetence and misbehavior in the past, most notably when discussing political bias, targeted harassment, and other shenanigans.

And, as illustrated by these five examples, we can always cite new evidence.

Such as lack of accountability.

…a new report from the Cause of Action Institute reveals that the IRS has been evading numerous oversight mechanisms, and it refuses to comply with laws requiring it to measure the economic impact of its rules. Congress has passed several laws, including the Regulatory Flexibility Act and the Congressional Review Act, that require agencies to report on their rules’ economic impact to lawmakers and the public. …These good-government measures are meant to ensure unelected bureaucrats can be checked by the public. …the IRS has made up a series of exemptions that allow it to avoid basic scrutiny. The agency takes the position that its rules have no economic effect because any impact is attributable to the underlying law that authorized the rule.

Such as inefficiency.

Private debt collectors cost the Internal Revenue Service $20 million in the last fiscal year, but brought in only $6.7 million in back taxes, the agency’s taxpayer advocate reported Wednesday. That was less than 1 percent of the amount assigned for collection. What’s more, private contractors in some cases were paid 25 percent commissions on collections that the I.R.S. made without their help…the report stated, “the I.R.S. has implemented the program in a manner that causes excessive financial harm to taxpayers and constitutes an end run around taxpayer rights protections.”

Such as rewarding scandal.

The Internal Revenue Service (IRS) issued more than $1.7 million in awards in fiscal 2016 and early fiscal 2017 to employees who had been disciplined by the agency, a Treasury Department watchdog said. “Some of these employees had serious misconduct, such as unauthorized access to tax return information, substance abuse and sexual misconduct,” the Treasury Inspector General for Tax Administration (TIGTA) said in a report made public this week. …in fiscal 2016 and early fiscal 2017, the IRS had given awards to nearly 2,000 employees who were disciplined in the 12 months prior to receiving the bonus.

By the way, the IRS has a pattern of rewarding bad behavior.

Such as pursuing bad policy.

…for 35 years the Internal Revenue Service has exempted itself from the most basic regulatory oversight. …Tax regulations (like all regulations) have exploded in recent decades, and of course IRS bureaucrats impose their own policy judgments. The IRS has in recent years unilaterally decided when and how to enforce ObamaCare tax provisions, often dependent on political winds. In 2016 it proposed a rule to force more business owners to pay estate and gift taxes via a complicated new reading of the law. …Secretary Steve Mnuchin’s Treasury…department is inexplicably backing IRS lawlessness with a string of excuses.

Again, this is not the first time the IRS has interfered with congressional policy.

Such as stifling political speech.

The Internal Revenue Service infamously targeted dissenters during President Obama’s re-election campaign. Now the IRS is at it again. Earlier this year it issued a rule suppressing huge swaths of First Amendment protected speech. …The innocuously named Revenue Procedure 2018-5 contains a well-hidden provision enabling the Service to withhold tax-exempt status from organizations seeking to improve “business conditions . . . relating to an activity involving controlled substances…” The rule does not apply to all speech dealing with the listed substances, only that involving an “improvement” in “business conditions,” such as legalization or deregulation. …This is constitutionally pernicious viewpoint discrimination.

In other words, the bureaucrats didn’t learn from the Lois Lerner scandal.

Now that I’ve hopefully convinced people that I’m not going soft on IRS malfeasance, let’s look at the budgetary issue that was the focus of the CNBC interview.

Is the IRS budget too small? Should it be increased so that more agents can conduct more audits and extract more money?

Both the host and my fellow guest started from the assumption that the IRS budget has been gutted. But that relies on cherry-picked data, starting when the IRS budget was at a peak level in 2011 thanks in part to all the money sloshing around Washington following Obama’s failed stimulus legislation.

Here are the more relevant numbers, taken from lines 2564-2609 of this massive database in the OMB’s supplemental materials on the budget. As you can see, IRS spending – adjusted for inflation – has nearly doubled since the early 1980s.

In other words, we shouldn’t feel sorry for the IRS and give it more money.

To augment these numbers, I made two simple points in the above interview.

  • First, we should demand more efficiency from the bureaucracy.
  • Second, we should reform the tax code to eliminate complexity.

The latter point is especially important because we could dramatically improve compliance while also shrinking the IRS if we had a simple and fair system such as the flat tax.

Last but not least, here’s a clip from another recent interview. I explained that the recent shutdown will be used as an excuse for any problems that occur in the near future.

Standard operating procedure for any bureaucracy.

P.S. My archive of IRS humor features a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a Reason video, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a collection of IRS jokes, a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

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For the past 30 years, I’ve been criticizing both the tax code and the IRS. Which raises an interesting chicken-or-egg question about who should be blamed for our nightmarish tax system.

Should we blame IRS bureaucrats, who have a dismal track record of abusing taxpayers? Or should we blame politicians, who have been making the tax code more onerous ever since that dark day in 1913 when the income tax was adopted?

In this exchange with Stuart Varney, I take an ecumenical approach and blame both.

As you can see, I am slightly conflicted on this debate.

There are plenty of reasons to condemn the IRS, and not just because of what I mentioned in the interview about its deplorable campaign to suppress political speech by Tea Party organizations.

Yet there is an equally strong case to be made that politicians are the real problem. They are the ones who created the tax system. They are the ones who make it more complex with each passing year.

And they are the ones who constantly give more power and money to the IRS in hopes of generating more cash that can be used to buy votes.

Indeed, the most important thing I said in the interview is that the IRS budget has dramatically increased over the past few decades. And that’s after adjusting for inflation!

So while I’m surely not a fan of the IRS, I’m probably even more critical of politicians since they’re the ones responsible for the bad laws that empower bureaucrats.

But that doesn’t really matter because the solution is the same regardless of whether one blames politicians or the IRS. Throw the tax code in the garbage and replace it with a simple and fair flat tax (or, if there are ever sufficient votes to undo the 16th Amendment, replace the internal revenue code with a national consumption tax).*

Let’s close with some humor. First, here’s a painful reminder (h/t: Reddit‘s libertarian page) of the relationship between taxpayers and politicians, though it’s worth noting that they want to grab your income regardless of whether there’s a lot or a little. In other words, the taxpayer could be holding a minnow and nothing would change.

Maybe I should add this image to my archive of IRS humor, which already features a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a Reason video, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a collection of IRS jokes, a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

*In my libertarian fantasy world, we would return to the limited government created by the Founding Fathers, thus eliminating the need for any broad-based tax.

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In a previous blog post, I showed a cartoon joking about Obamacare as a Trojan Horse for the IRS, but with each passing day we are learning new – and always unpleasant – details about the mammoth legislation that was imposed by the left. The excerpt below from the Boston Globe reveals that businesses will face costly new reporting requirements to the internal revenue service because of government-run healthcare:

Tucked away in just 23 lines of Section 9006 of the Healthcare reform bill be a dramatic change in the 1099 reporting requirements.  No longer will corporations or payments for merchandise be exempt 1099 reporting.  This new law is effective January 1, 2012.  A large majority of payments made by a business will now be reported on a 1099.  …There is no doubt this will be an administrative nightmare for many businesses in the first year or two.  Taxpayer identification numbers need to be collected for all vendors.  Have a large business related meal at a restaurant, this will need to be reported on a 1099.  Spend a week in a hotel in Waco Texas, you will need to send a 1099.

My Cato colleague has more details in one of his recent blog posts.

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This would be much more enjoyable if it weren’t true.

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Being an American citizen is an honor in many ways, but it is a huge millstone around the neck for highly successful investors and entrepreneurs because of an oppressive and complex tax system. This is particularly true for those based in and/or competing in global markets. Indeed, because the tax system (and regulatory system) is so onerous and because it is expected to get far worse in the future, a growing number of Americans are actually giving up citizenship and “voting with their feet.” The politicians view these people as “tax traitors” and are trying to erect higher barriers to hinder economic migration, particularly in the form of confiscatory “exit taxes” that are disturbingly reminiscent of the totalitarian practices of some of the world’s most unsavory regimes. The Wall Street Journal recently reported on this issue:

The number of American citizens and green-card holders severing their ties with the U.S. soared in the latter part of 2009, amid looming U.S. tax increases and a more aggressive posture by the Internal Revenue Service toward Americans living overseas. According to public records, just over 500 people world-wide renounced U.S. citizenship or permanent residency in the fourth quarter of 2009, the most recent period for which data are available. That is more people than have cut ties with the U.S. during all of 2007, and more than double the total expatriations in 2008. An Ohio-born entrepreneur, now based in Switzerland, told Dow Jones he is considering turning in his U.S. passport. Mounting U.S. tax and reporting requirements are making potential business partners hesitate to do business with him, he said. “I still do dearly love the U.S., and renouncing my citizenship is not something I take lightly. But more and more it is seeming like being part of a dysfunctional family,” said the businessman, who asked that his name not be used for fear of retribution. “The tax itself is only a small part of the issue,” the Swiss-based entrepreneur said. “It’s the overall regulatory environment.” …”Fifteen or 20 years ago there was a big rush to make sure your kids became U.S. citizens, for access to U.S. schools for example,” said Timothy Burns, a tax lawyer at Withers law firm in Hong Kong. “Now we’re seeing just the opposite.” Last month, the Treasury Department announced more rigorous requirements for Americans living abroad to report information on foreign bank accounts. The reporting requirement has been in place for years, but only in the most recent couple of years has the IRS gotten tough about enforcing penalties. …Others are giving up their U.S. nationality to avoid tax increases in the U.S., as the government struggles under huge budget deficits. The top marginal tax rate is set to rise to 39.6% from 35% at the end of this year. A proposal to tax fund manager pay at ordinary income rates, instead of the 15% capital gains rate, is gaining currency in Congress. “Everybody sees the tax rates are going up. At a certain point, it gets beyond people’s pain threshold,” said Anthony Tong, a tax partner at accounting firm PricewaterhouseCoopers in Hong Kong. Unlike most jurisdictions, the U.S. taxes the income of citizens and green-card holders no matter where in the world it is earned.

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Clemson University was a big rival when I was at the University of Georgia, so it seems natural that I am locking horns with someone from that school as we debate whether we should have a flat tax or the current system. You can see both arguments at this link, and there also is a chance to cast an online vote. At the time this was posted, the flat tax was winning with 65 percent of the vote.

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Here’s a new Economics 101 video about the cost of the tax code from the Center for Freedom and Prosperity. I won’t spoil the surprise by giving the details, but you if you’re not angry now, you will be after watching.

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