In Defense of the IRS: Sacre Bleu!

The data we read is conflicting,  which is disturbing in its own right. Early this month news sources reported that the Internal Revenue Service arm of the Treasury Department has more than 100,000 employees. Other outlets suggested 90,000. No one can question that we should be able to definitively count “employees.” The stories early in the month had the administration targeting a staff reduction of 50%. A few days ago that number moved to 20%. So, we can’t really tell how many employees IRS has and we may have miscalculated by 30,000 in terms of what we need. Suffice to say none of this reporting is comforting in a world where we aspire to “efficiency.”

Then there is the page 1 article in the March 20 Wall Street Journal. “The Case of One of America’s Biggest Alleged Tax Cheats.” The target of the investigation was a government contractor alleged to have scored a $7 billion dollar contract to provide fuel to our operations in Afghanistan in the early 2000s. He is married to a foreign national whose citizenship in France and residence outside the U.S. meant that she did not have U.S. tax on her income. And, through the magic of law and science she came to be the owner of the businesses that were paid the $7 billion. Her husband, the U.S. citizen, professed to make roughly a million dollars a year when he filed taxes – which was not often. I don’t know if it’s still true but I recall having a case in the 1990s where the husband with a local real estate business made $5 million a year but he was never anxious to file tax returns. There was a reason. He would pay quarterly estimates and his payments were quite substantial. When I asked my expert how this man avoided the April 15 filing deadlines year in and out, I was told that the IRS really did not care because the statute of limitations does not begin to run on any return until it is filed. The service “assumed” the estimated payments were close to accurate because of interest and penalties for underpayment. That seemed insane then and, if still true, it seems even more insane when we have trillion dollar deficits.

Turning back to Mr. and Mrs. Petrol, our gas provider in Western Asia, the lifestyle of providing fuel to our troops produced a bevy of homes in Europe including one valued at close to $50 million. Life was good until a whistleblower told the IRS about Mr. Petrol’s tax problems. The IRS investigated and concluded that Mr. Petrol underreported his income by $350,000,000. The tax on that kind of income without interest and penalties is about $130 million dollars. What makes this even more frightening, if true, is that the Defense Department paid money to the family business that produced profit of $350 million but somehow the Treasury Department “missed” this income turning up on a tax return. Another story for another “more efficient” day.

We all live in America; a country founded on avoidance of taxes. We couched it back then as “Taxation with representation” but in 18^th century Devon and Cornwall there were an average of 4 people entitled to vote in each square mile of territory. Until 1831, Britons had no right to vote unless you owned land and could pay a poll tax. Thus, English people were as underrepresented as we were in America. And when Britain imposed that much hated Stamp Act in 1765, the money raised from the taxes was specifically allocated to maintain troops in America. Again, we don’t like that part of the story.

Now back to the nasty IRS. As a divorce lawyer for 40+ years I got to see a lot of income tax returns of all stripes. And early on I was shocked to see how self-employed people and business owners love to evade taxes. I saw the busy physician who deducted his lawn mowing, pool maintenance and delivered meals as business expenses because those conveniences allowed him to earn more money. Section 215 of the tax law doesn’t really allow that any more than it lets the electrician working overtime deduct his lawn service or his Grubhub expenses. There was the dentist who paid her kids to amuse patients in the waiting room because it helped “calm” the patients. Also not supposed to be deductible. The highlight of chutzpah was the personal injury lawyer who deducted his boat on the Chesapeake as client development expense. People suffering from the pain associated with broken limbs or spines compacted by accidents are not likely candidates to spend days floating on a boat which rocks back and forth constantly. That lawyer deducted nearly half of his income as “client development expense” yet as opposing counsel I really couldn’t find any aspect of those expenses that were business related (e.g., advertising) let alone calculated to produce clients who had been injured. I could go on about the scrap dealer who told the court he needed a Rolls-Royce to show the world that he was a “playa” in his trade.

Tax evasion has a gentler name. It is called white collar crime. It is illegal to file a tax return that deducts expenses not reasonable and ordinary to the trade or business you work in. It is also illegal to not report the income you receive unless it is gifted to you. “White collar” people don’t really understand that these are crimes. Everyone does it, right?

The term white collar crime was coined by a criminologist named Richard Sutherland in 1939. He defined this as crime committed by people of “respectability” and “status.” But as commentators Richard Ney and Ferdinand Lundberg would point out in the 1960s, the only difference between “street crime” and “white collar crime” was that respectable people could steal more money using the checkbook and a balance sheet than the average Joe could score robbing a bank or a couple on the street. White collar criminals typically steal without ever having to leave the office. Just deduct the Rolls-Royce or the Bayliner payments or season baseball tickets as car and truck expense or travel or “deductible meals.”

We have 1.25 million police officers to chase down our much-vilified street criminals. In fact, the federal government itself employs 137,000 federal police officers. Some of the federal ones are looking at crimes committed on paper including federal health insurance and procurement fraud. But otherwise, the IRS is the only place besides state departments of revenue that ever looks to see whether all your income is reported or inquire whether you really need a Gulfstream G550 to get between your offices in Pittsburgh and Sarasota when Pittsburgh turns cold.

The plain truth is that when you defund the IRS through staff reductions the message is that we will vigorously prosecute the street criminal but we don’t much care about criminals who are smart enough to get jobs in office buildings. They can work quietly and don’t need weapons other than a computer. In fact, cybercriminals are estimated to steal $8 trillion a year without ever stepping foot on our celebrated soils. And then there is a fellow alleged to have not reported $350 million of income he received from our own government for fuel supplied in Afghanistan.  You can reasonably bet that when the tip about this was received the Justice Department reached out to the Treasury Department to see what the tax returns showed.

We get all worked up about defunding the police. But unless you are OK with your fellow taxpayers stealing from the government while deficits and debt climb, perhaps we should re-think defunding the IRS.

What is this doing in a divorce blog? We recently reported on a case where a lawyer with 30 years experience was reporting income averaging  $13 an hour. Perhaps true. But this writer would like to see the records to show how that happened. Even uneducated street criminals can do better than that although they do have some issues with reporting what they steal on their Forms 1040.