A Modest Proposal: A (temporary) IRS Amnesty

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There is a simple, easy way that will help close the $1 trillion-dollar federal deficit: Declare a temporary tax amnesty.

Under the 24/7 Wall St.  plan,  individual and business taxpayers who owe less than $100,000 in back taxes would be able to come clean with the IRS and not be subject to penalties. Those above that threshold would see their additional costs for compliance cut in half.  They would still owe the taxes, which they would be able to pay off over time.  Anyone under civil and criminal investigation would not be eligible. It would last for about a month.

Though it’s impossible to say exactly how much an amnesty would generate,  it likely would bring in tens of billions in unpaid taxes that the IRS would not otherwise be able to collect.   The so-called Net Tax Gap — the difference between the amount of taxes collected and the amount owed —  is about $300 billion.  That figure, though, is based on data from the 2001 tax year and likely is inaccurate.

A federal tax amnesty is not a new idea. Congress considered these types of proposals the 1990s and, given the state of the economy, will probably do so again though the IRS reportedly is vehemently opposed to it. States have done amnesties for years and usually gotten huge responses from taxpayers. Data from the Federation of Tax Administrators shows that 46 states and the District of Columbia enacted one or more amnesty programs between 1982 and March 2010, according to The Fiscal Times.

“In the short-term, it’s a good idea because it brings in money fairly painlessly… It would provide a significant one-time boost to the Treasury,” says Martin Sullivan, an economist at Tax Analysts, in an interview, adding that an effective program would be difficult to design.  “If it’s too generous, everyone will come in.”

The problem with amnesties, according to Sullivan and other tax experts, is the long-term.   Taxpayers may decide not to pay their taxes because they expect their debts will be eventually be forgiven by Uncle Sam.  Moreover, these programs are unfair to law-abiding citizens, most of whom pay their taxes in full and on time, the argument goes.  Officials from the IRS, who declined comment for this article,  reportedly are not too keen on the idea for those reasons.

While these criticisms do have merit, they miss the bigger picture.  The U.S. government has to address the federal budget deficit over the next few years or drown in a sea of red ink.  That certainly was the message of the President’s commission that recently studied the problem.  As for the “rewarding bad behavior” question, that argument was raised during the Wall Street bailouts when the government gave trillions of dollars to businesses which made wrong bets on the housing market.  They got help from Uncle Sam anyway despite the moral hazard.  Tax collectors also want to cut wealthy tax evaders a break. Last month, IRS Commissioner Douglas Shulman said the agency was “seriously considering” a new partial amnesty program for people to declare offshore bank accounts, repeating a similar program from 2009.  Even though the breaks were  significant, tax attorneys were unsure if they should advise their clients to accept the amnesty because of concerns that taxpayers might open themselves up to more trouble.

“The devil is in the details,”  Sullivan says, who estimates that between $1 billion and $50 billion may be illegally hidden by Americans overseas.

It is unfair of the IRS to treat rich taxpayers so much better than everyone else.  Moreover, getting help from the IRS can be an exercise in futility.  According to the National Taxpayer Advocate, the IRS office tasked with helping taxpayers, inflation-adjusted spending for the IRS Enforcement account has increased by 17.9 percent between FY 2004 and FY 2011 (projected), while spending for Taxpayer Services has declined by 6.8 percent.

“In fact, the Administration’s FY 2011 budget proposal projects that from FY 2011 to FY 2013, Enforcement spending will rise by another 13.7 percent while Taxpayer Services spending will decline by an additional 7.2 percent,” the NTA says in its latest report to Congress.

For taxpayers, the results are horrible. More than one in four taxpayers who wants to reach a live “assistor” is unable to do so, the NTA says. The organization, which has been critical of the IRS’ collection tactics, argues persuasively that not all delinquent taxpayers are deadbeats.

“… many taxpayers who fall behind on their tax payments have paid taxes in the past and have simply hit a rough patch in their lives – e.g., they have experienced a job loss, serious illness, or other personal setback,” the report says.

Larry Lawler, National Director of the American Society of Tax Problem Solvers, which represents taxpayers before the IRS, says he has found that many people compound their tax problems by hoping they will go away.  That places them in even deeper hot water when they face the Agency.

“They honestly think the best thing to do is not tell the IRS,”  he says, adding that the complexity of the tax code is not the issue. “The IRS is not in the job of helping people.”

The IRS could easily administer a tax forgiveness program.  But the biggest impediment to a tax amnesty may be the IRS’s famously Byzantine bureaucracy.  The  Treasury Inspector General for Tax Administration found last year that the agency may have issued $1 billion in bogus refunds because of the sorry state of its computer networks.  The Fiscal Times noted in another report that the IRS’s withholding tables for a tax provision included in the 2009 stimulus could “cause millions of taxpayers to under-withhold taxes from their pay.”

In the end, though, America is a land of second chances.  Michael Vick, the quarterback for the Philadelphia Eagles, got back into the National Football League even though he was convicted and went to prison for his role in a dog fighting ring. He will lead his team into the playoffs Sunday.  President Obama praised the team for taking a chance on Vick.  Maybe Obama ought to apply that compassion to millions of taxpayers who are in debt to Uncle Sam.

It is the American way.

–Jonathan Berr

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