IRS targeting hurts more than just Conservatives

Recent news headlines are filled with sensational revelations about alleged IRS targeting of certain conservatively oriented social welfare groups seeking tax exempt status (under IRC Section 501 (c) 4) for their organizations.  Members of Congress from both sides of the aisle have been decrying the apparent abuse of power by IRS personnel who allegedly scrutinized some applications for tax exemption so tightly that applications were delayed for months or even years in some cases.  The acting Commissioner of the IRS has been asked to resign and a new interim Commissioner has been appointed in an effort to demonstrate that the Administration is taking action to correct the abuses.  The head of the IRS Exempt Organizations unit has been placed on administrative leave after declining to answer questions from Congress.  Some in Congress have even suggested that a special counsel needs to be appointed to get to the bottom of all this.

Congressional hearings are under way and there is a new sound bite seemingly every day suggesting a new element of the scandal and who may have authorized the scrutiny of the applications of conservative groups.  Now we are confronted with revelations about possible overspending by IRS on employee training conferences including a large one held in Southern California in 2010.

While it will take months or perhaps even years for the investigations to conclude and the results to be released, the damage to the reputation of the IRS is done.  The public is left wondering if the IRS is an organization out of control or is it simply another large institution populated largely by honest hard working people with a few less than exemplary employees behaving badly.  A recent Gallup poll suggests that 42% of Americans think the IRS is doing a poor job suggesting a serious deterioration in confidence over ten short years when only 15% were displeased in 2003.

Whereas the damage to the reputation of the IRS produces sensational headlines and provides political fodder for late night comedians and critics of the agency, we are left wondering if the damage to our society as a whole is not even more severe.

The US tax system is a self-assessment system, meaning simply that citizens are asked to declare their income and deductible expenses voluntarily and pay their tax from that information.  Certainly safeguards now exist in the form of required information reporting of income on forms W-2, K-1’s and other information returns, such as 1099s, to insure taxpayer honesty.

At its core, however, we still have a system that depends upon voluntary taxpayer compliance.  Despite its size, IRS resources are limited.  The agency audited (according to Forbes) only 1.1% of the 142,823,105 individual returns filed in 2010.  Anything that undermines the confidence of the public in the IRS tends to reduce voluntary compliance.   This is a bad thing, I think, for our republic.  The public needs to have confidence in its political leadership and the institutions of government that administer the laws of the land.

The tax laws are an aspect of government that touches almost every citizen.  For the agency charged with administering them to be accused of abuse of power or reckless spending works to undermine the voluntary nature of our tax system.   Public confidence in the IRS is critical to sustaining our tax system.  My hope is that  the Administration moves swiftly to restore trust in the IRS, by bringing in a high profile person of unquestioned integrity and proven leadership skills from outside the government to take the reins of the tax agency.  It would be the olive branch to the American public that the IRS needs.

What do you think?


 

DLK LRDoug Kennedy is a senior member of the International Practice group and serves numerous foreign companies as they set up U.S. operations and U.S companies as they set up foreign operations. He advises on the topics of payroll, taxation, and general areas of governmental compliance.

If you would like to speak with Doug, please use the Comments section to make a request.

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