ention the Internal Revenue Service in passing to the average adult American and you might just have ruined his day. He’d probably think of hard-earned money leaving his grasp, hours of early-April paperwork, or impenetrable and fluid rules seemingly designed to drive him mad. Many would also be reminded of the scandal that broke last summer involving the IRS allegedly targeting Tea Party groups for beyond-the-pale scrutiny of their non-profit tax status. That scandal, still under congressional investigation, churns up a lot of emotion that tends to divide along the familiar, polarized lines of American politics. Some wholeheartedly believe the accusations against Lois Lerner, who invoked the Fifth Amendment and then retired; others are equally certain that nothing sinister or illegal took place at all.
I incline to this second view, but retain an open mind pending the assembly and analysis of all the facts. But the overarching fact is that Tea-Partygate is a distraction, a sideshow. There is plenty more to say about the condition of the IRS as an institution in relation to the fuller network of Federal agencies that make up the American state, and it is vastly more important than any single supposed scandal.
know this because I was an IRS agent for 35 years, so I have earned the right to an informed point of view on the subject. And when I say earned, I mean it: It isn’t easy working for the Internal Revenue Service. Children growing up in America dream of becoming cowboys or sports heroes or firefighters or movie actors or rock stars. As they get a little older many aspire to become doctors, lawyers, professors, astronauts, scientists, business tycoons or powerful politicians—maybe even President of the United States. To the best of my knowledge, no even halfway normal American kid has ever dreamed of becoming an IRS agent. Most agents find their way to the IRS after earning an accounting degree at college, and many see IRS employment as an opportunity for paid on-the-job training en route to a high-paying position with a major accounting firm. But others find themselves enjoying the work and its associated challenges, and eventually focus on it as a career.
When I became an IRS agent on October 25, 1977, it fulfilled no childhood dream. I fell into the job after being selected for an interview based on my performance on the now defunct Professional and Administrative Career Examination (PACE). The economy at the time was pretty crummy, so I took the job for its regular salary and decent benefits. It turned out to be far more than that, but even had my IRS career been thoroughly normal—uneventful, in other words—it would still be a source of satisfaction and pride today.
The reason is that while Americans of all political stripes can reasonably debate the structure and relative merits of the current Federal tax system, only kooks and radical ideologues deny that some kind of tax system is essential to ensuring our nation’s stability, security, prosperity and even its basic democratic character. Just about everyone also agrees that whatever the tax laws may be, they should be administered in a fair and effective manner by a professional workforce free of partisan political agendas and pressures. It may not be glamorous or heroic, but being part of a competent civil service is no less patriotic a way to serve the commonweal than being a soldier or a marine. The fact that many countries lack a competent state and suffer administrations riddled with clientelism and kleptocracy at all strata ought to make it easier to appreciate the professional American civil service, of which the IRS is a core part.
In that light, it might seem that recruiting qualified and talented people to the IRS would be an easy task. It isn’t. First, being an IRS agent carries social stigma. You had best prepare yourself for a rant if, at an otherwise harmless social hour, someone learns that you’re an IRS agent. (Early in my career I began telling people that I sold life insurance. That was guaranteed to change the subject in all but very rare cases, like those in which the other person happened to be a life insurance agent with an uncharacteristically sunny disposition.)
Then there is the low starting salary. We regularly hear complaints about those “high-paying government jobs” that “we taxpayers” have to support, but the fact is that most Federal employees are paid less than their counterparts in private industry for the same or similar work. This is especially true in professional and technical positions involving law, finance, science and medicine. In 2013, a recent college graduate with an accounting degree would generally be offered IRS employment at the GS-07 level with a starting salary of $33,979. According to the National Association of Colleges and Employers (NACE), the average starting salary in 2013 for that same college graduate as an accountant in the private sector was $53,300. Extra benefits associated with Federal employment close the salary gap to some extent, but it’s hard to compete for the best and brightest when you can only offer 64 percent of the average salary, especially during periods when private-sector jobs are plentiful.
Despite these disadvantages, over the years the IRS has been able to recruit and retain some of the brightest and most talented lawyers and accountants in the United States by offering them a chance to do difficult yet interesting work in a public service career. During my career with the IRS, I was particularly fortunate to work with many such professionals on a number of fascinating projects, including some of the IRS’s highest profile anti-money laundering and international tax investigations.
After about a decade in the IRS trenches, in the 1990s I was chosen to lead the first investigations of money-laundering in the casino gaming industry. My mandate flowed from the Bank Secrecy Act, and I worked closely with Treasury’s Office of Financial Enforcement and the Financial Crimes Enforcement Network (FinCEN) to develop meaningful currency-transaction and suspicious-activity reporting rules for casinos and card clubs. As legalized casino gambling began to expand, I developed specialized anti-money-laundering training programs for the IRS and traveled with FinCEN throughout the country and abroad to speak and consult about the law at gambling conferences and industry trade shows.
Then, in the 2000s, I guided the development of the IRS’s Offshore Compliance Initiatives program. As part of that effort, I led high-profile investigations into the offshore tax evasion industry that resulted in “John Doe” summonses being issued to UBS AG of Switzerland, HSBC and the Stanford Financial Group. Those investigations, together with the criminal enforcement actions of the Justice Department, opened a window on the secretive world of Swiss banking and offshore financial secrecy. The investigations led to UBS and the Swiss government turning over the identities and account records of nearly 5,000 high-wealth Americans with secret Swiss bank accounts. It also led to more than 39,000 U.S. taxpayers coming forward voluntarily to declare hidden offshore accounts.
During the heyday of the UBS case and other offshore tax investigations, my team and I shifted into a mobile siege mode, characterized by countless nights on the road away from our families, 14–16 hour workdays, flying on cramped airplanes, sleeping in different hotels every few days and eating chain-restaurant pseudo-food, all in pursuit of useful leads and potential witnesses. It was not exactly cloak and dagger stuff; given the bad cuisine and the sleepless nights it was more like choke and stagger. But it was an exciting time, too. We felt engaged in something historic and precedent setting, and the passage of time has shown that we were right.
Obviously, not all IRS agents get to live professional life on that kind of an edge. I remember a senior agent telling me shortly after I was hired that working for the IRS involves long periods of interminable boredom punctuated by brief moments of intense excitement. But that doesn’t make what IRS agents do day in and day out any less important than my high-energy offshore hunting adventures. And that is why, in turn, IRS professionals could do with a lot less of the bureaucratic and political drag they are confronted with today.
ike any large business or organization, institutional, cultural and structural issues sometimes interfere with the IRS’s primary mission, which is to facilitate voluntary compliance with Federal tax laws. That mission depends almost exclusively on tangible statistical data to measure the success or failure of its programs. When you think about it, this is slightly screwy because it’s impossible to view the dark side of the moon, even though you know it’s there. In other words, if a rate of voluntary compliance is what you’re after, how do you get that rate if you need to accurately compare the number of legally required tax returns not filed, or the number of secret offshore bank accounts not reported, with those that are filed and reported? By definition, you can’t, so IRS program managers over the years have taken to focusing on what can be measured, like additional tax assessments and tax collections.
By basing its statistical measures on those who comply with the laws rather than those who do not, the IRS allows peculiar distortions to permeate its subculture. Just prior to the UBS case, I remember a senior manager telling me that the IRS’s offshore programs were in his view not particularly successful because they had not brought in large sums of additional tax dollars. I pointed out that the intense publicity surrounding our offshore enforcement efforts had likely caused thousands of taxpayers to come forward voluntarily to amend their returns, lest they end up in court or in jail, and that those efforts had similarly prevented many thousands of others from going offshore in the first place. The manager replied glibly that he had no way to measure that. I’ve often wondered what that manager would say today given that UBS and the resulting Offshore Voluntary Disclosure Programs have brought in $5.5 billion to date in back taxes and penalties, an amount that is perhaps a third of the total take expected once these efforts are completed.
Sometimes IRS management decisions are imperfect. After news of the UBS case went viral around the world, senior officials decided to move the offshore group from the Small Business/Self Employed (SBSE) division to the Large and Mid-Size Business (LMSB) division so that all cross-border civil enforcement activities could be coordinated through its international program. While the move was well intentioned and certainly made sense on paper, the result was that those of us who were on the cutting edge, identifying and developing the offshore cases for investigation, suddenly found ourselves separated organizationally from the agents who ultimately conducted the resulting investigations. The unintended consequences were more bureaucracy, chains of command that were more cumbersome to maneuver, and more coordination issues between stakeholder groups.
By far, however, the most damaging and far-reaching impediment to the IRS’s ability to effectively carry out its responsibilities is the periodic bashing it takes from certain members of Congress for what appear to be purely political purposes. Of course Congress has the right to oversee all Executive Branch agencies, including the IRS; that’s not up for debate. But when elected officials use the IRS as a political piñata they do enormous harm to employee morale, recruitment, retention and hiring, and through it to our vital national interests.
In 1998, for example, Senator William Roth, Jr. (R-DE) held hearings in Washington on alleged IRS abuses. These hearings were staged for dramatic political effect. Guards searched everyone as they entered the hearing room. Witnesses testified behind curtains while their voices were electronically altered. In the end, virtually none of the accusations thrown around turned out to be true, and the hearings were soon exposed for the smarmy political theater they were. Significant damage was done anyway: IRS budgets were slashed, the agency’s image was tarnished, innocent employees were punished and “reforms” were instituted to prevent future “abuses.” Among these was the development of a list of “ten deadly sins” for which an IRS employee could be immediately terminated.
While the “sins” on that list are indeed proper grounds for dismissal, in practice they simply became a tool used by unscrupulous practitioners to have cases reassigned when an agent started getting close to the truth. All an investigative target, whether an individual or a corporation, had to do was accuse an agent of one or another of these “sins” during an audit, and the case would be immediately reassigned to an agent unfamiliar with the case while an investigation of the alleged incident took place. Quite aside from the fact that an innocent IRS agent’s reputation and professional career could be destroyed in the process, these actions were intended to delay, harass, and increase costs to the government of legal investigations—in effect deterring many of those investigations from proceeding at all.
The negative impact of the post-Roth hearing “reforms” on employee morale, retention and hiring was both instantaneous and protracted, and altogether disastrous. In an agency that conducts adversarial investigations to enforce often unpopular tax laws, agents became fearful of contacting third parties to acquire information, of serving summonses for information or of interviewing witnesses for fear that their reputations, careers and livelihoods would be harmed. For a time, audit assessments dropped dramatically and tax collection actions became almost non-existent. Considering that taxes fund government operations, homeland security and national defense preparations, one can’t help but wonder how Senator Roth and his supporters could possibly have believed these bogus hearings were in America’s national interest. But of course they were in the interest of high-wealth individuals and especially large corporations looking to reduce their exposure to IRS scrutiny.
With the passage of time, the IRS mostly recovered from the fallout of the Roth hearings. It once again began doing the people’s business. Today, however, it is open season once again on the IRS and its employees, and once again political posturing seems to be the primary motivation. First there are the annual budget cuts and the sequester, which have cut the Federal budget and hamstrung the IRS. Congress cut the IRS’s budget by 2.1 percent for fiscal year 2012, the second consecutive year of budget cuts for the agency. Sequestration cut an additional $600 million, a sum that will cost the government multiple billions of dollars in lost revenues. Only in plutocracy-ridden American political circles would one even have the nerve to try to reduce spending and cut deficits by reducing the budget (and inducing furloughs) for the very people who actually bring in the money. If the president of a major corporation were to propose such a solution to a board of directors for reducing corporate costs, he or she would quickly get a boot in the buttocks.
Then there is the advent of significant additional responsibilities even as the employee workforce is decreasing. According to a 2013 report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS lost more than 10,000 full-time positions in fiscal years 2011 and 2012, but has nevertheless had to implement hiring freezes in response to the budget cuts. Yet the IRS has been assigned (unfunded) responsibility for administering and enforcing the new health coverage mandates required by the Affordable Care Act.
And, finally, there are the new “scandals” and hearings. According to the TIGTA, the IRS began targeting conservative political groups, including Tea Party groups, for increased scrutiny with respect to claims for tax-exempt 501(c)(4) status. While early reports suggested that this increased scrutiny of political groups was limited to conservative groups and that it was motivated by political considerations, subsequent investigation revealed that the IRS office involved was simply reviewing applicant names in an effort to identify political organizations, regardless of political affiliation, that may not have qualified for tax-exempt 501(c)(4) status. If at the time a large number of conservative groups sought tax-exempt status, while only a small number of other groups did, the IRS did not necessarily act in a partisan way. But as already noted, the investigation is not over—so I reserve judgment until it is.
But others have not reserved judgment. Certain outspoken Senators and Representatives instantly clamored for heads and aggressively sought out camera time. As if by a chain reaction, absurd demands escalated: abolish the tax code, abolish the IRS and get government “out of the people’s pockets”—all reminiscent of the Roth hearings. As with previous IRS “show” hearings, no rational consideration was given to how the nation would fund necessary government operations. Those who conducted the witch trials in Salem early in our history would have been proud.
Unfortunately, rather than push back with the truth, senior IRS executives and the White House chose to defuse the situation by scapegoating lower-level IRS employees, blaming the so-called partisan targeting on rogue agents in Cincinnati. Subsequent investigation suggested that there were no “rogue IRS agents” in Cincinnati, just employees doing their jobs. But the accusations left a much more vivid memory than any refutation of them, and whether justifiably or not, again, the investigations persist.
Fiscal austerity and political chicanery are contributing to a train wreck just ahead. Talented and dedicated civil servants are retiring or leaving in droves, and that includes IRS professionals. According to the same 2013 TIGTA report on IRS staffing referenced earlier, nearly 70 percent of IRS executives, nearly 50 percent of non-executive managers and nearly 40 percent of all employees at the IRS will be eligible to retire in the next four fiscal years. Under current circumstances, it is hard to see how the IRS can attract quality replacements for these individuals if they are going to be routinely scapegoated by members of Congress and even the Administration for partisan political purposes.
Like it or not, the Federal government cannot execute its many responsibilities required under the Constitution without the necessary revenues. How those revenues are raised is a matter for Congress and the President to decide. Once decided, however, a workforce free of political pressures and motives must administer those laws fairly and efficiently. An IRS able to do its job is much less to be feared than an eviscerated and suborned IRS that cannot. The latter scenario, by a lack of resources, reduced staffing, increased responsibilities and fears of partisan political witch hunts at IRS expense, ought to frighten us very much, particularly those of us who are concerned with the revenue as well as the spending side of the yawning Federal deficit. The fact that most Americans these days are afraid of the wrong scenario is perhaps the scariest thing of all.