Taxes are what we pay for civilized society.
— Oliver Wendell Homes, Compañía de Tabacos v. Collector
It’s time for one of our periodic looks at the Internal Revenue Service. In July it announced it was eliminating one-half of the IRS personnel who were responsible for auditing the tax returns of the wealthiest Americans who made gifts or had died.
Those who have made large gifts to children know the joy of giving and know equally well how distressing it is to have the IRS come between the taxpayer and the gift with annoying arguments about what the gift was really worth, as if the taxpayer and the children didn’t know exactly what it was worth. Arguing about the value of a gift takes much of the joy out of giving and taking steps to reduce those arguments is long overdue. Even worse is arguing with the IRS about transfers made at death.
Anyone who has experienced the death of a loved one knows what a trying time that is. To couple the loss of a loved one with an audit by the IRS of the loved one’s estate is more than people should have to bear and, thankfully, fewer will in the future.
Although the IRS and the Department of the Treasury have both said that estate and gift tax auditors are among the more productive of IRS auditors, generating on average $2,200 per hour for each hour spent auditing returns, the IRS says it makes more sense to audit income tax returns of wealthy Americans. The money saved by firing estate and gift tax auditors will be used to hire more income tax auditors.
Some of the auditors whose jobs are being eliminated said that the IRS was doing this to help people with political connections. I find that hard to believe. These steps are nothing more than an example of a more compassionate George Bush who has a friendly approach to collecting taxes. The fact that the new approach benefits only the rich is of no moment.
In October, there was another surprise announcement of benefit to taxpayers, rich and poor alike, who were affected by Hurricane Katrina. Mark Everson, the commissioner of the IRS, instructed the IRS to delay collecting back taxes from Katrina victims and to refrain from sending out notices to victims who had failed to file returns. He said these steps were taken to avoid putting the IRS in a bad light during the holiday season. This is probably one of the first times that an election has been considered to be part of the holiday season although for Democrats on the day after elections the conjunction may have been apt.
As always there were curmudgeonly types who criticized Mr. Everson. Four people who once held the same position as Mr. Everson said it was unheard of to postpone collection activities because of an election. They did not equate election day with Christmas day. Jerome Kurtz, who served under President Jimmy Carter, described Mr. Everson’s order as “unthinkable.” Since Mr. Everson thought of it, Mr. Kurtz was clearly wrong.
Now that collections have resumed in the new year, one other bit of IRS news is worth noting. Acting under the authority granted it by the American Jobs Creation Act of 2004, the IRS is starting to farm out collections to private collection agencies. Instead of phone calls from the feared IRS agent, those owing taxes can look forward to hearing from friendly private collection agencies such as the law firm, Linebarger Goggan Blair & Sampson of Austin, Texas. According to the New York Times that company has been in the business of collecting debts for other governmental agencies. It got a collection contract from the city of San Antonio although one of its partners, Juan Peña, admitted he paid bribes to win the contract. He’s no longer a partner. He’s in jail. He won’t be calling you. One of his former partners may.
Hiring private contractors to collect taxes is part of Mr. Bush’s goal of outsourcing debt collection for the government. Mr. Bush wants to do it even though Mr. Everson says that he “freely” admits that outsourcing tax collection is more expensive than keeping it in-house. He’s got that right. According to former IRS commissioner Charles Rossotti, by using private debt collectors the IRS will net $1.1 billion over the next ten years. If additional revenue agents were hired instead, the agency would net $87 billion. Losing $85.9 billion by hiring private contractors seems like a lot of money to lose but the pain is lessened when one realizes a concomitant of the loss of money is shrinkage in the size of government. That’s clearly a good thing. If you don’t believe me, ask George Bush. Or one of his rich friends.