Rewriting the Code

A roundtable on tax reform

Bruce Bartlett, Edward H. Crane, Daniel J. Pilla & Grover Norquist from the July 1995 issue

(Page 3 of 10)

And while the IRS holds the average citizen to inexorably high standards of compliance, the IRS itself doesn't meet the mark. In 1993, the General Accounting Office issued the results of its first audit of the IRS. In testimony to Congress, Comptroller General Charles Bowsher explained that the IRS was unable to account for 64 percent of its $6.7-billion 1992 appropriation. Despite repeated promises to reform, a 1995 GAO report explained that the IRS's own internal audits revealed that its financial statements are "still not accurate, reliable or consistent."

The IRS's inability to manage itself is visited upon the public in a big way. In 1995, the IRS will assess between 32 million and 34 million penalties against individuals and businesses. However, its own annual reports indicate such penalties are wrong about 40 percent of the time. Further, the IRS will issue over 10 million computer-generated correction notices, claiming citizens have made errors in their returns. Numerous GAO reports show those notices are incorrect about 50 percent of the time.

In 1993, the IRS announced a plan to increase its face-to-face audit coverage by 500 percent. This year alone, the number is expected to grow by 100 percent. This explosion is based on the agency's belief that citizens underreport their incomes. Yet its own audit results are wrong about 50 percent of the time.

The average face-to-face audit nets about $5,000 in increased tax and penalties. Thus, the agency's inability to perform its administrative tasks correctly leads to billions of dollars in improper assessments.

As if the ineptitude is not bad enough, IRS invasiveness into private lives of all Americans has reached new heights. Driven by the belief that citizens underreport their income, the IRS announced plans in December 1994 to begin two very troubling programs. The first involves a system of recordkeeping designed to give the agency "on-line access" to records held in all public and private databases.

The agency plans to link its computers with "commercial sources, state and local agencies, construction contract information, license information from state and local agencies...and information on significant financial transactions from reviews of periodicals and newspapers and other media sources." IRS computers will be able to track every financial move of every citizen.

The second program, announced last year, is an audit endeavor known as the District Office Research and Analysis program. DORA audits have little to do with tax returns. Rather, they involve "lifestyle audits." Citizens will be targeted for DORA audits on a random basis, and audit results will be used to develop statistical formulas to be applied on a broader scale. To ascertain whether someone is living beyond his means and therefore more likely to have understated income, an IRS training manual titled Components of Economic Reality instructs agents to evaluate a target's home and neighborhood, furniture and fixtures, educational and personal background, cultural and family background, toys and hobbies, vacations and gifts, clothing and jewelry, and on and on.

Expect auditors to interview one's friends and neighbors, family members and children, business associates and co-workers. The information will then be codified into personal dossiers. The idea is to use the information to catch people in the act of underreporting income.

No doubt such a program will have a serious effect on privacy rights. Without factual justification or probable cause, these are the most deeply invasive investigations imaginable in
a free society. Given the IRS's track record of unreliability with its own affairs, these programs are outrageous, indefensible, and dangerous.

Personal freedom and privacy cannot survive in the face of such invasiveness. And a tax law of 17,000 pages is fertile ground for germinating IRS abuse of taxpayers' rights. It seems clear that if freedom is to survive, we must eliminate the IRS.

Alternative roads lead in two directions. First is the flat income tax, under which Americans would pay a flat rate on income without the current confusing myriad of loopholes. Proponents claim the flat tax could be so simple as to allow citizens to file their returns on a postcard. The second alternative is a national sales tax. This system promises to eliminate personal tax returns, as all tax is paid at the checkout counter. Which course should America pursue?

To answer this question, we must first address the threshold question: Under which system will Americans be free of the invasive, capricious, and error-prone behavior of the IRS? This question must guide our debate, and it leads to one inexorable conclusion: Freedom and an income tax cannot co-exist in the same society. One must necessarily drive out the other.

It is inarguable that a flat tax is simpler to report than our current income tax. Preparing a return will be less exasperating if it can be filed on a postcard. But the flat tax still requires the IRS. It requires the filing of tax returns, which can and will be audited. And it requires elaborate recordkeeping by citizens and allows invasive investigations.

Any system which requires IRS administration must necessarily fall under deep suspicion. It is simply unreasonable to ask Americans to submit to the arbitrary whim of an agency which itself cannot perform the tasks it demands of the public.

Because it requires a tax return, the flat-tax system cannot eliminate IRS abuse. Though there may be no deductions to audit, the IRS will nevertheless insist on auditing one's income. This is the reasoning behind the outrageously invasive DORA audits. Nothing in a flat-tax system can or will stamp out such abuse.

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