THE BIDEN ADMINISTRATION DOESN’T KNOW WHAT A TAX CHEAT IS

Deliberate Deception Inflames Greed and Envy

In his letter to the U.S. Senate (see above), Commissioner Rettig did his part to carry water for the Biden Administration’s push for $80 billion in new funding to his agency. Rettig argued that the IRS does not have “the resources that it needs to ensure the tax laws are enforced fairly and that Americans receive the level and quality of service they deserve.” On the heels of this plea, the Senate passed the Inflation Reduction Act, which the president signed on August 16, 2022.

The IRS will get its $80 billion. As explained, nearly $46 billion is going for enforcement, along with 87,000 new employees.

The commissioner’s letter provides a glimpse into the Administration’s twisted thinking when it comes to tax policy generally, and IRS enforcement in particular.

For example, the commissioner accuses “large corporate and high-net-worth taxpayers” of engaging “teams of sophisticated representatives who pursue unsettled or sometimes questionable interpretations of tax law.” The commissioner insinuates that corporations and the rich simply cheat on their taxes. He says, “[t]his creates a direct revenue loss from evaders and lessens the potential to deter others from pursing a similar path of noncompliance.”

Hence the commissioner’s argument, that a “strong, visible, robust enforcement presence,” is necessary to ensure compliance.

This policy ignores the fact that both the American Bar Association (ABA) and the American Institute of Certified Public Accountants (AICPA) each adopted – decades ago – ethical standards of practice pointed directly at legal and accounting professionals in the tax planning and return preparation businesses.

The ABA standard is expressed in Formal Opinion 82-352. It requires that a position taken on a tax return at the advice of an attorney must be “warranted in existing law or can be supported by a good faith argument for an extension, modification or reversal of existing law and there is some realistic possibility of success if the matter is litigated.”

To be sure, tax pros have an affirmative duty to represent the best interests of their clients. But they also have a duty to follow the law in the process. Failure to do so places that professional’s license—and therefore livelihood—at risk.

The commissioner’s statements suggest that the IRS is the final arbiter on all matters regarding tax law. But that’s not the case. The U.S. courts ultimately decide what the law is, and that is often at odds with IRS opinions. As I document in my book, How to Win Your Tax Audit, the IRS is wrong between 60 and 90 percent of time (depending on the issue) when it comes to its audit results.

The problem is that most people do not challenge IRS audits because of the perception that the IRS must be correct, or that you just can’t fight back. The facts prove otherwise. In 2021, the IRS and U.S. taxpayers settled 19,963 cases that were docketed in the U.S. Tax Court. A total of $4.29 billion in taxes and penalties were at stake in those cases, and they were settled for $1.30 billion. This means that taxpayers owed just 30 cents on the dollar compared to the IRS’s allegations.

Even that number is deceptive because in tax litigation, citizens reach a point where they must make a business decision the IRS never has to make. The agency will litigate over $50. But citizens have to balance the time, cost, hassle, and energy of fighting on against the cost of a settlement. Citizens routinely settle tax litigation for an amount they can live with, but which does not necessarily represent the true amount owed. The IRS knows this, so the agency pushes the envelope.

This is made clear in the disclaimer statement presented in its tax guidance publications. The IRS produces and distributes through its web site hundreds of official publications intended to explain the law in simple and non-technical terms. The IRS boasts that taxpayers downloaded “more than 461.7 million files” from its site, including forms, instructions and publications.

Publication 17, Your Federal Income Tax (2021), is a 140-page guide to tax law compliance for individuals. The “small print” disclaimer reads:

The explanations and examples in this publication reflect the interpretation by the Internal Revenue Service (IRS) of: Tax laws enacted by Congress, Treasury regulations, and Court decisions.

 Now, what happens when certain court decisions are at odds with the IRS’s “interpretation? The answer, according to the disclaimer, is:

This publication covers some subjects on which a court may have made a decision more favorable to taxpayers than the interpretation by the IRS. Until these differing interpretations are resolved by higher court decisions or in some other way, this publication will continue to present the interpretations by the IRS.

It is clear that the agency does not apply “unsettled or questionable interpretations” in a manner most favorable to taxpayers. It sticks with its own interpretation. Yet when taxpayers or their counsel apply “unsettled or questionable interpretations” in their own favor, even when done in good faith, they are said to be tax “evaders.”

Nothing could be further from the true. There is a remarkable distinction between tax avoidance and tax evasion, and that distinction has been recognized by the courts for time immemorial. Tax avoidance is perfectly legal. For example, the act of claiming an itemized deduction for mortgage interest or charitable contributions reduces one’s taxes. That is tax avoidance—the employment of a specific provision of the code to reduce one’s taxes. There’s nothing wrong with that. As the Second Circuit Court of Appeals said in Helvering v. Gregory, 69 F.2d 809 (1934):

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.

Tax evasion is much different. Evasion involves a willful and deliberate attempt to defeat the payment of taxes one knows that he lawfully owes. Compare the person who claims a valid mortgage interest deduction (avoidance) with one who fabricates a claim of mortgage interest which he never paid (evasion).

A person who in good faith takes a position that has some reasonable basis in the law is not “evading” tax. The commissioner and the Biden Administration apparently do not know the difference. Rather, they paint every person with the brush of a tax evader for doing precisely what the agency itself does, but to its own advantage. They paint such persons are “evaders” because it’s easy to arouse the fury of the public against criminals. When it comes to our current tax law, the problem is that anybody can be made out to be a criminal.

The solution to this problem is not more money to the IRS so it can conduct more audits, the results of which are mostly erroneous. The solution is to abolish the Byzantine tax code and the army of IRS officers charged with enforcing it. We have to stop tinkering around the edges with tax “reform.” We must bulldoze the income tax system and start over with a broad-based consumption tax.