Will the IRS reform bill get the job done?

Journal Record, The (Oklahoma City), Jul 7, 1998 by Richard W. Stevenson N.Y. Times News Service

WASHINGTON -- After building a case that the Internal Revenue Service harasses and intimidates taxpayers, Congress wrapped up work last month on a bipartisan bill to rein in the agency. Taxpayers will get more legal protections when they get into disputes with the IRS. The agency will now have to operate under the eye of an outside board, and it will be prodded to undertake a reorganization intended to make it more customer-friendly.

There is almost no one in Congress who thinks any of this is a bad idea, and President Clinton is eager to sign the bill, which cleared the House 402-8 and will come to Senate floor early this month.

"This bill will give every American a fighting chance when the tax man comes a-knocking," said House Speaker Newt Gingrich.

Yet history suggests that a few years from now, Congress will be holding another set of hearings, asking why the IRS is not doing a better job of collecting all the tax revenue the government is owed.

Members of both parties will bemoan the increasing lack of compliance and note that if the IRS could just collect a fraction of the money lost to evasion, Congress could finance bigger tax cuts or more preschool programs or another wing of fighter planes.And few politicians will stop to ask whether Congress itself may have gone too far in 1998 in defanging the IRS or in portraying the tax- collection agency as populated by jack-booted thugs intent on driving honest citizens to despair or worse.

"There is a constant tension between effective tax administration and the perception the public has of an overbearing tax authority," said Gregory F. Jenner, a tax policy expert at the Coopers & Lybrand financial services company in Washington. "That tension has existed since the dawn of time and we are now seeing the pendulum swing toward one extreme."

The IRS has clearly mistreated some taxpayers, failed to provide quick, accurate answers to people befuddled by their forms and generally earned its standing as the most-loathed arm of the government.

But in bashing the IRS so relentlessly, Congress has created at least the risk of aggravating other problems, not least public faith in a system that relies largely on self-assessment and voluntary compliance.

"That kind of negative publicity about tax enforcement can't help but hurt collection efforts," said Joseph Thorndike, head of the tax history project at Tax Analysts, a non-profit publishing company. "That might be a price worth paying if there are in fact serious problems within their collection activities. But it won't be cost free."

One way to measure the cost is the $13 billion price tag attached to the bill by Congress, much of which is money that won't be collected as a result of the new protections granted to taxpayers. Divorced or separated people who claim ignorance of tax evasion by their former spouses, for example, will win protections that the bill values at $1.6 billion over the next decade.

Republicans said it is wrong to think of the revenue as lost, since by the bill's definition the government would no longer have any claim on it. Still, some provisions could, as a White House analysis put it, "unintentionally make it easier for noncompliant taxpayers to avoid paying their fair share of taxes." And tax evasion is already a huge problem.

IRS Commissioner Charles Rossotti told the Senate Finance Committee in May that the tax "gap" -- the difference between the revenue actually collected by the federal government and what Washington figures the actual total tax bill should be -- is running at about $195 billion a year. That is about 11.5 percent of the expected $1.7 trillion federal budget next year and roughly double the last estimate, in 1992.

During much of the 1980s, closing the tax gap was a much bigger issue than IRS excesses. Democrats called the Reagan administration to task for slashing too deeply into the IRS budget, and wanted more effort expended on making sure the rich could not so easily use both legal and illegal tax dodges. Republicans and Democrats alike saw tightening up on tax collection as a politically easy way to mitigate the pain of ever-mounting budget deficits.

For some years now, the pendulum has been swinging back toward taxpayer protection. Under pressure from Congress, the IRS dropped a program under which it randomly selected a cross-section of taxpayers and subjected them to intense audits as a way of getting a handle on how much cheating was going on.

One reason for the swing is the improvement in the government's finances, which has removed the pressure to scrounge for new revenue. Another is the ascendancy in Congress of the Republicans, some of whom see attacking the IRS as a way of softening up public opinion for the bigger goal of overhauling the tax system. But the biggest reason may be that in the absence of any compelling reason to do otherwise, members of Congress are going to heed the complaints of their constituents. And few subjects bring so many complaints as taxes.

"The biggest problem with the tax system," said Sheldon Cohen, who was IRS commissioner during the late 1960s, "is that Congress responds to a sad story."