Tax Collector for the World

0 Comments | Insight on the News, July 30, 2001 | by John Berlau

Though an agency under the Treasury Department, the IRS operates semiautonomously. It still is headed by Clinton appointee Charles Rossotti, despite potential ethical conflicts from his ownership of as much as $80 million worth of stock in American Management Systems (AMS), a large IRS technology vendor (see "A Taxing Dilemma," April 23). "The IRS is going off on an ideological exercise that's flouting congressional intent and the rule of law," says Mitchell. "This regulation is a test: Who is in charge, the Bush appointees or the Clinton career bureaucrats?" So far, it's hard to tell. Treasury spokeswoman Tara Bradshaw says officials are "in the process of reviewing" the regulations.

Rossotti may have a financial, as well as ideological, interest in the regulations. Although the IRS says in its regulations that it plans to share information with treaty partners, it is requiring banks to report the interest on accounts from citizens of all countries. In comments to the IRS and Treasury, banking groups have said that calculating and reporting interest payments of citizens of all foreign countries would require expensive computer upgrades and software, particularly for smaller banks. "Credit unions do not generally have data-processing systems that have been programmed to identify nonresident-alien individuals' accounts and prepare IRS [forms]," notes the Credit Union National Association in comments to the IRS. "For credit unions that are automated, and many smaller ones are not, new software would have to be purchased or current systems would have to be substantially altered at an appreciable cost to the credit union." Robert Brookes, president and chief executive officer of Eagle National Bank, a community bank in Miami, said the regulation would cost his bank $100,000 in the first year and $35,000 in succeeding years in compliance costs.

Naturally, this new burden to banks would create a new line of business for information-technology consulting companies such as AMS, and Rossotti could see his stock soar as a result of the regulation. Having long provided systems integration and software to both the IRS and the banking industry, AMS seems well-positioned to serve the banks hit by the IRS reporting requirements. A recent company press release boasts that AMS has worked with more than 350 banks and financial-services institutions and is "providing leading technology and services to the financial-services industry."

Mitchell says he doesn't know Rossotti's motivation or level of involvement in the regulations but believes Rossotti should sell his AMS stock to avoid the appearance of a conflict of interest. He expresses concern that the IRS deliberately understated the compliance costs. "It's clear that they did that to evade the law for writing cost-benefit analyses, but I assume that's just standard bureaucratic chicanery."

Miami banker Brookes says that whatever the IRS motivation, his bank and his city will suffer because of the rule's compliance costs and because of capital loss. "I'd have to sell off loans, sell off investments, call loans and basically stop doing what I'm doing now, which is using my nonresident-alien money to lend to the local community for local projects," he says.