BY GREG MERMEL, C.P.A.
There are rough times ahead. A prediction about the American economy? Perhaps. But the rough times ahead that I foresee are for tax administration.
Government officials, while in office, are expected to be "team players." Policy disagreements are supposed to be kept quiet, not leaked to the press and certainly not discussed openly with Congressional committees. This is why all administrations–Democratic and Republican alike–get so worked up about leaks to the press.
But when they leave office, dissenters do not always leave quietly. Consider Charles O. Rossotti, the former Commissioner of Internal Revenue whose term (which lasted five years) ended on Nov. 6. A day before his departure, he told Times’ reporter David Cay Johnston that "the tax system continues to grow in complexity, while the resource base of the IRS is not growing and in real terms is shrinking. Basically, demands and resources are going in the opposite direction. This is systematically undermining one of the most important foundations of the American economy."
Under Funded, Underpaid, Understaffed, Under Water
Most tax professionals have thought this for years. We swap horror stories on the subject during coffee breaks at tax seminars. Now this information is coming from the true source, the single person in the world with the best knowledge of the facts, Rossotti.
When I finished graduate school, starting salaries in public accounting were about 10 percent higher than at the IRS. Unlike public accounting, the government did not expect 80 to 100-hour work weeks during tax season. IRS workers had great job security with better benefits and retirement plans, and received top-notch ongoing training. Many of the best and brightest accounting graduates chose careers in government service over public accounting.
Now, starting salaries at the IRS are one-third less than in public accounting and informal word from inside the IRS is that training budgets have been cut to half of what they were 20 years ago.
Things could be worse. Rossotti was specifically recruited from outside the government to revitalize an agency that was both dysfunctional and dispirited. An abusive, authoritarian management style was banished, a major reorganization broke up old fiefdoms, and an attitude of "work with the public, not against it" was put into place.
Nevertheless, the basic problems persist. At times, Rossotti must have felt like the ancient Israelites forced to make bricks for the Pharaoh without straw.
The Only Change Is In Your Pocket.
So what’s the Bush administration going to do about it? Pretty much nothing. An unnamed Bush spokesman, cited in the Times article, said that they recognize that tax cheating is widespread, but that the IRS is "getting the right amount of money." Rossotti–and I–disagree. In a legally-required report to a Congressional oversight panel, Rossotti wrote that the IRS needs its enforcement budget increased by 51 percent, or $1.9 billion, and that it needs to hire another 29,000 enforcement personnel. Senior officials at the Office of Management and Budget were furious, and claimed that the 4.8 percent increase this year is more than adequate.
That means–at least during Bush’s term of office–we can expect only a slow, continuous degradation of the IRS. So far we have seen only smoke and mirrors with some high publicity enforcement cases and some lashing out at critics. Unfortunately, this only makes matters worse. If what little enforcement they can muster is used to single out only the most obnoxious and obtrusive (instead of the biggest tax revenue losses), we have abandoned a fundamental principal of fairness and equality before the law. Worse, it signals open season for tax cheating. And I don’t mean the individuals who claim they drove 500 more business miles than they actually did. Rather, some large businesses and extremely wealthy individuals are using highly sophisticated partnership and off-shore schemes to evade taxes. Remember the complex schemes Enron used to bamboozle the auditors and investors and increase earnings? Similar programs can be used in reverse to hide income.
And Then There’s The State
The Illinois Department of Revenue has its own problems. Their notices are often difficult to follow (to the point that I sometimes wonder if it is deliberate), and their regulations and rulings are often unusually opaque. And dealing with the Illinois Department of Revenue is about to get a lot worse.
When Illinois first instituted a state income tax in 1969, the Department of Revenue swelled to several times its former size. A large cluster of people were hired about the same time–all about the same age–and will all start retiring at about the same time. This means losing the most knowledgeable people, the ones who can tell you not only how something is done, but why it is done that way. Worse, the state is offering an early retirement program as a way of balancing the budget. In other words, inducing highly-paid senior people to leave the payroll and replacing them with low-paid beginners in order to save money. Did I mention the hiring freeze?
No Good Answers
What can you do, and what should you do? They are not the same. Poor tax administration is an open invitation to cheating. Don’t do it. You are an honest person, so stay in character.
The other thing you should do is to stay calm and be patient if you have to deal with the IRS or the Department of Revenue. Responses will take longer, and the odds are high that person on the other end of your call or letter will be overworked and undertrained. If you are reasonable and pleasant, and even make them laugh about the weather or the tediousness of the work, you will be the caller they remember and try to help.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area).
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.