Author Archives: Taraleigh Gray

2016 Changes in IRS Collection Practices

Accounting Today notes the following significant changes in the way IRS collects taxes:

  1. PRIVATE COLLECTORS. IRS is starting to use a group of four private debt collectors (CBE Group, Conserve, Performat and Pioneer) to collect any tax accounts that the IRS is no longer chasing. In light of the serious problems that IRS has with scams and fraudulent tax returns, the introduction of these private debt collectors is going to create a lot of confusion. Telephone contacts should be preceded by a letter explaining what is going on.
  2. PASSPORT CONTROL. The government is restricting passports for people who owe “seriously delinquent tax debt”. In cases where taxpayers owe tax bills of more than $50,000 and have not made arrangements with the IRS to pay, IRS sends a list of tax debtors to the State Department, which restricts passport usage. It is best to deal with your tax problems prior to traveling so you don’t show up at the airport and find out it will take a few months.
  3. DELINQUENT RETURNS/OFFERS IN COMPROMISE. In the past IRS has processed offers without all delinquent returns being filed. It changed that procedure and now if an offer is filed with returns outstanding, IRS keeps the 20% down payment and rejects the offer. I don’t understand why anyone would think about filing an offer before filing returns, because as a practical matter unassessed taxes cannot be compromised.
  4. UPDATED COLLECTION FINANCIAL STANDARDS. In early April 2017, IRS updated the collection financial standards that it uses to determine a taxpayer’s ability to pay a tax debt. The expense numbers have generally increased.
  5. STREAMLINED PAYMENT AGREEMENTS. In October 2016, the IRS piloted a test program to allow taxpayers with balances between $50,000 and $100,000 to enter into streamlined installment agreements with terms of 84 months without filing a financial statement. Liens will still be filed. Have they decided to make this test project permanent? We don’t know yet, but it seems the appropriate procedure for people that fall within the $50,000-$100,000 range and who can make the required monthly payment, is to apply for the streamlined installment agreement and see if the IRS asks for more or enters into the agreement.
  6. PAYOFF FIGURES. IRS transcripts are a poor source for payoff amounts because they don’t always display accrued penalties and interests. One way to deal with this is to overpay the account and allow any surplus to be refunded or offset against other outstanding balances. Another way is to call IRS and to endure the wait on line. Also, taxpayers can go online, authenticate their identity and get payoff balances. I favor the slight overpayment approach.

The Trouble With Tax Relief Firms

We are bombarded with advertisements from JK Harris, TaxMasters, Roni Deutch, and a host of other tax relief firms, asking that we let them help with IRS audit and collection problems.  Many give examples of tax debts being settled for pennies on the dollar.  They imply that your case will be handled by former IRS Revenue Agents, CPAs and other tax professionals. These firms are frequent targets of consumer complaints and suits by consumer watchdogs because they often take your money and fail to deliver.  A systemic problem with the tax relief firms is that they spend too much on TV advertising and telemarketers and not enough on tax professionals to do the work on the complicated problems the tax relief firms are hired to handle.  Here is a sampling of Attorney General complaints.

JK Harris

In April of 2009, Texas Attorney General Greg Abbott sued JK Harris and related entities asking that they be enjoined from violating the Texas Deceptive Practices Act.  The complaint alleges that more than 1,000 complaints were received from consumers who had paid for work that was not done; that the JK Harris advertisements represented that tax debts could be compromised when JK Harris well knew that IRS compromises had become extremely difficult to obtain; that JK Harris advertises that it has over 325 offices in the country implying that consumers could sit down with someone who would work on the merits of their case, when in fact, all the work that JK Harris does is handled in a facility in South Carolina and the offices scattered around the country are merely sales offices; that representations were made that cases would be handled by a case manager, but in practice the case managers could seldom be located.  The advertising implies that the work would be done by tax professionals when almost all the work was done by non-credentialed clerical people.

The case was settled and in April 2011 with JK Harris paying more than $1.2 million and agreeing to injunctive relief.  JK Harris has a long history of consumer protection litigation with the state Attorneys General.

TaxMasters

In December 2010 Minnesota Attorney General, Lori Swanson, sued TaxMasters, Inc., a Houston based tax relief company, alleging that the company got consumers to pay advanced fees of $2,000–$8,000 by misstating the help it would provide people with unpaid tax bills.  The Minnesota Attorney General press release states the following:

TaxMasters heavily advertises on late-night television. In 2009 the company spent nearly $14 million on its television, radio and Internet advertising campaigns. Consumers who call TaxMasters talk to a “tax consultant,” who is actually a salesperson. A job ad for this position states: “Previous tax knowledge is not required, but a firm understanding of the sales process and of selling services… is a strong plus.” Salespeople often make unrealistic promises of the company’s ability to help in order to dupe consumers into paying thousands of dollars in advance fees. The company also falsely told some consumers it could put an immediate stop to collection efforts, such as wage garnishments, levies, or liens. The lawsuit alleges that TaxMasters sometimes left people in worse financial shape after paying the company’s advance fees, failing to respond to important deadlines or requests of tax authorities.

Among other things, TaxMasters:

Overstated its ability to reduce or settle peoples’ tax obligations.
Charged consumers thousands of dollars in advance fees for help in reducing tax bills that the company knew or should have known would not be negotiated by the IRS.
Failed to deliver on its promises and sometimes even failed to meaningfully contact the IRS.
Failed to make refunds to consumers who complained that the company did not take the promised action.

Tax Masters is a Nevada corporation with its headquarters in Texas.  The lawsuit was filed in Hennepin County District Court and alleges that the company engaged in consumer fraud and deceptive trade practices.  It seeks restitution for consumers, injunctive relief, and civil penalties.

This lawsuit is the latest in a series of nationwide enforcement efforts in recent months against tax relief companies that charge consumers thousands of dollars in advance fees based on inflated promises. In May, 2010 the Texas Attorney General filed a lawsuit against TaxMasters, which is pending.  In October, 2010 the Federal Trade Commission filed a lawsuit against another tax relief company, American Tax Relief, LLC. In August, 2010 the California Attorney General filed a lawsuit against another large tax relief company, Roni Deutch.

http://www.ag.state.mn.us/consumer/pressrelease/101216taxrelief.asp

Roni Deutch

The backtaxeshelp website reports:   

Months after being sued by California Attorney General for $34 million, Roni Deutch has closed her law firm and surrendered her license.  The “Tax Lady” has made it into the news many times since last August when the court prohibited Deutch from destroying evidence and she proceeded to shred millions of pages of documents at her firm.  Then on April 20th 2011 the California Attorney General asked the court to hold Deutch in contempt of court and imprison her up to 5 days for each violation. In addition to shredding documents, she also violated a preliminary injunction by not issuing $435,000 in refunds to her clients.

 

Shopping for Professional Help

Here are some questions to ask before hiring anyone to handle your case:

Who will handle my case?
In what state are they licensed to practice as an attorney or CPA?
What is their CAF number? (That is the number issued by the IRS to indicate they are enrolled to practice before the IRS and subject to discipline by the IRS.)
Where is their physical office located?
What are my problems?
What will you do for me to solve each of my problems?
What will it cost?
How long will it take?
What exactly are we trying to achieve?
Do you feel confident about being able to achieve these goals?

If you cannot get straight answers to these questions, keep looking. As a minimum the professional should be able to define the problems, outline the steps necessary to solve it and suggest a cost range for their work.

When do you need help with a tax problem?

You need help when you cannot understand the problems and work them out by yourself.  There is no shame in asking for help.  We have a painfully complicated tax system and people whose exposure to it is filing a tax return once a year simply find it confusing.  The people who work for IRS find it confusing. But with work the problems can be figured out and solved.

Audits.  If you have an audit notice, it is because the IRS has determined that there is something wrong with your return. The IRS is going to take your financial life apart and look at it in great detail. You will be confused and under a lot of pressure. You need to be represented by someone who can review your returns, determine the extent of your exposure, and negotiate the best outcome for you.

Collections.  If you have collection notices from IRS, you should start with a review your returns for accuracy.  If the IRS had made up returns for you, it will not have given you credit for the cost of sold, for expenses of a business, or for itemized deductions or exemptions to which you may be entitled. Accurate returns may need to be prepared.

After the questions about accuracy have been answered and the extent of the liability established, you need someone to represent your interests in negotiating how the debt will be handled.  Most of the IRS collection activity is handled by the Automated Collection System (ACS), a computerized collection program staffed by people in call centers all over the country. The ACS people assume your account to be accurate and their sole mission is to collect at the lowest possible cost. They will not ask you about the accuracy of your returns or anything else that might benefit you. They will extract collection information from you and make an arbitrary determination of what you can pay. Their job is to collect the account, not to represent you.  You need a competent representative who can determine the accuracy of your accounts, who can obtain time needed to work through the problems, who can set up a plan for resolving the accounts that works for you, and, most importantly,  who can stand between you and the IRS.

Who can help you with the tax problem?

I outline below some of the professional credentials of the main players in the area, but the most important question in selecting a representative is whether the person you are talking to someone has a history of bringing cases like yours to a successful conclusion.  You need to find someone who works your kind of case on a consistent basis and who should be able to solve your problem at a reasonable cost.  Look at their advertising material.  Do they routinely do the kind of work you need?

Start with me.  If you are here you have read my website.  Email me at kemblewhite@cox.net or call me (805) 682-6165.  I will evaluate your case and give you a proposal for handling it. There is no charge unless we agree on terms and you hire me.

Lawyers.  Lawyers are licensed by states to practice in state courts after they have graduated from law school and passed a bar examination.  A law license qualifies a person to practice in some courts and before the IRS, but does not by itself suggest competence in tax matters.  How does a lawyer become competent in the tax area?  It is normally through a combination of taking tax courses in undergraduate and law school and of work experience in handling tax matters for or against the IRS.

Accountants.  Certified Public Accountants (CPAs) are licensed to practice and hold themselves out as CPAs after having passed all parts of the state CPA examination and having completed the required practical experience. The accounting profession does not have special graduate schools as do lawyers or doctors.  Experience generally comes from work in accounting firms, businesses and government. In addition to CPAs there are also accountants who are not certified and these are often referred to as public accountants.

Enrolled Agents.  The IRS has special examinations for people who do not qualify to practice before the IRS by virtue of being a lawyer or a CPA.  People that take the test and pass are given a CAF number and are authorized to practice before the Internal Revenue Service.  They are described as enrolled agents.

Geography.  With the arrival of the electronic office, geography has diminished as a barrier in the search for professional services.  I like it when clients can come into my office and see me face to face, but I have for a number of years been working with an employee benefits company that sends me clients from all over the country.  It has worked out well.

Pricing.  You may think that you cannot afford a tax lawyer to handle your case.  I have worked on a number of cases in which tax representation firms have done prior work and I have been surprised to find that my price structure is lower than that of the TV advertisers.  Beyond that, I do my own work, I answer phone calls and emails in a timely manner, and I do not have a history of professional complaints.

April 2013 Postscript:

J.K. Harris filed for a Chapter XI bankruptcy in January 2012.  That case has been converted to Chapter 7 (liquidation) and the trustee is trying to recover almost $5 million allegedly looted by Harris.  Here are the links to a Wikipedia article on J.K. Harris and Company (http://en.wikipedia.org/wiki/JK_Harris_%26_Company) and to an article by Stephen Dunn entitled Tax Resolution Scams 101 (http://www.forbes.com/sites/stephendunn/2010/09/07/tax-resolution-scams-101/).  If you need help please contact me.

Kemble White

Voluntary Disclosures

The IRS has long had a voluntary disclosure policy which enables taxpayers who want to clean up problems that expose them to criminal prosecution to make a voluntary disclosure through the Criminal Investigation Division and to negotiate an agreement under which their problems can be settled without criminal prosecution. In recent years that policy has been formalized and much used to resolve the problems that have arisen with discovery of formerly secret accounts in Swiss and other bank secrecy countries. In 2009 the IRS announced the first Offshore Voluntary Disclosure Initiative (OVDI) under which qualified U.S. taxpayers could follow the procedure and avoid criminal prosecution and pay civil penalties that are well below what the U.S. tax authorities could, by law, otherwise seek to collect.  This initiative had an expiration date, but it was succeeded by a second program in 2011 and a third program in 2012.  Under these disclosures the IRS obtained information on foreign financial institutions, specific bankers, and financial advisors and other persons who aided and assisted U.S. taxpayers in maintaining undisclosed foreign accounts.  This has given the CID a huge backload of work. OVDI is not available for cases involving illegal source income. Many states have similar programs.

Trouble In The Legal Industry

August 7th, 2013

I recently saw an interview of Steve Harper, a former Kirkland & Ellis lawyer (a big international law firm) who recently published a book titled The Lawyer Bubble:  A Profession in Crisis.  Points made in this book are:

  • There are only jobs in the industry for approximately one-half of the lawyers who are being turned out by law schools each year.
  • US News & World Report ranks law schools based on what they spend to produce a lawyer.  This tends to give the deans of law schools incentives to spend and not control costs.  It makes a legal education extremely expensive and leaves graduates burdened with unacceptable debt levels.
  • Hourly billing is a serious problem.  Law firms rate their people based on profitability and many impose minimum annual billings of 2,000 hours which creates a sweatshop environment that has associates working 60–70 hours/week.  There is an average of 3.5 associates per partner and there is an 80% attrition rate.
  • The large firms are not particularly stable.  Lateral moves by business centers are common and major firms fail with some frequency.  One of the causes of failure is that a large lateral move or the loss of a major client may leave a firm with a long-term lease which it is obligated to pay and no way to fill the space.

 

Update: 10/25/13

The October 14, 2013 New Yorker Magazine has a long article by James Stewart titled “The Collapse”, which analyzes some of the problems that come with the merger of law firms.  There are two dominant cultures in the legal industry.  One is the Cravath model, which is a true partnership in which financial risks and rewards are shared equally.  Associates are hired from top law schools and partners are chosen from the associates, all of whom are steeped in the firm’s culture and traditions.  Partners are paid largely on seniority.  The opposing culture I will call “eat what you kill,” in which compensation is based upon origination of work and production.  In this culture lawyers focus on their individual bottom line and there is much less firm loyalty.

In Stewart’s article he analyzes a merger between Dewey Ballantine, an old line New York firm, ran on the Cravath model, and LeBoeuf, Lamb, Greene & MacRae that was organized more on the eat what you kill model.  These firms merged in 2007 to create a firm with 1,300 lawyers.  The problem started when the dominant Dewey partner was given an overly generous guaranteed contract.  The pattern of large guaranteed contracts followed with subsequent lateral hires when the grand recession of 2008 came corporate clients cut work and cash flow was insufficient to pay the guaranteed contracts.  Partners started jumping ship and the firm would up in bankruptcy.  The take away from this article seems to be that firms following the Cravath model have more stability than do eat what you kill models.  The challenge is to get hard driving type-A personalities to sign up for a one for all, all for one culture.

Another problem that often comes with migrating lawyers is that the remaining firm may be stuck with long term lease obligations on empty space.

U.S. Offshore Account Enforcement Issues

This is a digest of presentation made to the 2013 NYU Tax Controversy Institute by Scott Michael of Kaplan & Drysdale in Washington.

Since 2008, IRS has been aggressively moving against thousands of taxpayers who maintain foreign bank accounts that do not get reported on their tax returns.  There is a growing trend of agreements among governments to share information that will lead to an eventual transparency of personal financial account information.

Enforcement starts with reporting requirements.  U.S. taxpayers (this includes citizens and residents) are required to report and pay tax on their worldwide income.  Schedule B requires filers to check a box answering the question of whether they have signatory authority or financial interests in any foreign accounts.  Additionally, they have to answer a question as to whether they are required to file a foreign financial account form, TD F 90-22.1(FBAR) and if they have interests in specified foreign assets. Additional forms must be filed to report these.  Failure to comply creates criminal exposure and serious penalties.

The FBAR penalties can be assessed and collected against third parties who aid and assist U.S. taxpayers in their failure to declare accounts.  This means that the foreign banks, which used to conspire with U.S. taxpayers to hide money and evade U.S. taxes, will be forced to get out of that business and will be turning over information on their customers.

Foreign gifts and bequests and distributions from and relationships with foreign trusts are reportable on Form 3520.  Ownership of a foreign company is reportable on Form 5471.  Certain other foreign assets must be reported on Form 8938.  Failure to file these forms creates criminal exposure and exposure to significant penalties.

Beyond voluntary compliance by taxpayers, the IRS learns about foreign accounts through whistleblowers and other informants who turn over information in hopes of obtaining a reward, criminal investigations of financial institutions, civil summonses, requests under tax treaties and mutual information exchange agreements, and voluntary disclosures by other taxpayers seeking to avoid criminal prosecution.

In 2006 the Whistleblower Office at IRS was revamped and a legal industry has emerged in which practitioners represent whistleblowers for contingency fees based upon rewards paid.  The Whistleblower Office recently paid Bradley Birkenfeld $104M for information he furnished concerning Swiss banks.  In the typical prosecution of a financial institution, the government starts with questioning lower level employees and gets them to flip in order to avoid prosecution.

In settlement of cases against them, many Swiss banks have disclosed names and personal information of thousands of their employees to the U.S. government. This is in addition to the disclosure of account information on thousands of formerly secret accounts.

When taxpayers make a voluntary disclosure and negotiate a settlement with the IRS, part of the deal is that they tell the full story and name all parties who assisted them or advised them.  This is resulting in numerous follow-up investigations.

John Doe summonses have been very effective in uncovering the identity of U.S. taxpayers with undisclosed bank accounts.  When the IRS turns up a pattern of a foreign bank having accounts for U.S. taxpayers that don’t get reported on returns, it can go into a district court and force the bank to identify U.S. taxpayers with accounts in the bank.  The banks fold because if they don’t they would be held in contempt and subject to unacceptable fines.  The leading case on John Doe Summonses involves UBS, which provides the template for how these cases will be handled in the future.

John Doe Summonses have been particularly effective because they can be served on correspondent banks in the U.S.  A correspondent banking relationship is one in which. With such a relationship a foreign bank can conduct transactions for its customers in the US through its correspondent US bank.  John Doe Summons can force the U.S. bank to disclose all the information about transactions conducted for the customers of the foreign banks.

IRS Criminal Investigation

Criminal investigations at IRS are handled by the Criminal Investigation Division (CI) that operates through approximately 2,600 special agents.  Cases investigated by CI are reviewed by attorneys with the IRS Chief Counsel Office and then forwarded to the Department of Justice for further review and prosecution.  CI is the gateway for the IRS offshore voluntary disclosure program that offers qualifying taxpayers the ability to apply for a voluntary disclosure with the IRS and to settle their cases without criminal prosecution.  Activity in this area has increased greatly with dramatic IRS success in getting through foreign bank secrecy.

In 2012 CI initiated 5,125 investigations, it recommended 3,701 prosecutions and it obtained 2,637 convictions.  This is a 93% conviction rate.  It has offices in offshore locations and works with the tax agencies of foreign governments under Simultaneous Criminal Investigation Program areements that have been negotiated with six foreign governments.

The main objective of criminal prosecution is to demonstrate that the law  has teeth.  There is a big surge of prosecution recommendations in April 2013, which are highly publicized.  Additionally, signification convictions are advertised with press releases.

The biggest categories of cases are general fraud and money laundering.  Additionally, there are prosecutions involving abusive tax return preparers, abusive tax schemes, bankruptcy fraud, corporate fraud, employment tax, financial institution fraud, gaming, healthcare fraud, insurance fraud, mortgage and real estate fraud, narcotics, non-filers, public corruption and questionable refunds.  Non-filer investigations are expected to increase in coming years.

Immigration Tax Problems

Before 2013 is over we will probably have comprehensive immigration reform. The political talk is that to become a citizen it will be necessary to file un-filed tax returns and pay any taxes owed. Until we see the final legislation we won’t know what sort of compliance will be required, but I would anticipate 3 possible approaches to the problem:

  • Returns should be filed for each year of residency in the United States.
  • We would arbitrarily limit the requirement filing to the last 6 years because IRS does not retain wage and income tax data for more than 6 years back, or some other alternative. However the legislation winds up, if you have been living in this country for a long time and have not filed tax returns, it is not too soon to start working on the preparation and filing of delinquent returns to get you in compliance and enhance your chances of removing any tax barriers to citizenship.

Reporting Foreign Income and Interests in Foreign Entities

June 19th, 2013

An article by Richard Satran in the 05/10/2013 US News, reports “The Internal Revenue Service relies on technology more than ever to sniff out tax cheats using robo-audits and data mining – but so far it has caught a lot of minnows and the big fish are still eluding detection.” Without much public notice, the IRS is starting to access credit card information, social media, and medical records for use in its audits. To date, robo-audits have been used most extensively on the tax returns of low-income taxpayers who claim the earned income credit. The Service is using sophisticated data matching and pattern recognition technology developed by IBM to go further up the income ladder. Taxpayers most likely to feel the effect of this are small business people, who file Schedules C. IRS has long used a system of scoring returns to select ones that likely have errors and will be easy for the IRS to audit and obtain adjustments.

The article points out that at the high end of the income spectrum, this data mining may not do much. The article cites a report by McKinsey & Company to the effect that 100,000 super rich individuals worldwide have $9.8 trillion stashed in offshore accounts. It reports testimony by U.S. Treasury Inspector General for tax administration Jay Russell George to the effect that “a large portion of the $15 trillion of U.S. investment in global economy generates income that is increasingly out of reach of U.S. tax authorities”. George told Congress that global tax dodges are not targeted because “identifying hidden income in international activity is very difficult and time consuming”.

Another side of this story is that the IRS has aggressive enforcement programs to uncover foreign income. See a related blog on Reporting Foreign Income. A few years ago Swiss bank employees turned over the names of many bank clients that resulted in an extensive voluntary disclosure program by which the rich tax cheats clean up their problems by paying taxes owed plus penalties on a somewhat predictable basis. This type of enforcement will continue in the future especially as wiki leak-type disclosures get prosecutors reliable data.

There are nevertheless many tax havens with huge amounts of U.S. investor money and the efforts of the taxing authorities of industrialized nations to uncover those will go on.

Swiss Banks Cave on Bank Secrecy

A 05/28/2013 article in the New York Times reports that:

The Swiss government said on Wednesday that it would allow its banks to disclose information on American clients with hidden accounts, a watershed move intended to help resolve a long-running dispute with the United States over tax evasion.

The decision, which comes amid widening scrutiny in Europe of tax havens, is a turning point in what has been an escalating conflict between Switzerland and the United States.

Eveline Widmer-Schlumpf, Switzerland’s finance minister, said the move would enable Swiss banks to accept an offer by the United States government to hand over broad client details and pay fines in exchange for a promise by United States authorities not to indict any banks.

Disclosure of actual client names and account data, which American authorities have been aggressively seeking, would take place under a taxation treaty between the two countries that the American side has not yet ratified. Banks under criminal scrutiny that agree to cooperate with the decision could still face deferred-prosecution or non-prosecution agreements, a lesser punishment than indictment.

The effect of this development will be to require potential U.S. defendants with undisclosed money in Swiss bank accounts to negotiate settlements in pay fines to avoid indictment and prosecution.

In addition to Switzerland, which has a long history of bank secrecy that has attracted deposits from wealthy tax evaders and dictators, there are many other smaller tax havens that have bank secrecy laws. There is no reason to think that the U.S. Justice and Treasury Departments will not expand their efforts to force disclosure of accounts in these other jurisdictions.

This development together with WikiLeaks-type disclosure of these accounts puts U.S. taxpayers with unreported accounts in the cross hairs. U.S. taxpayers with undisclosed deposits need to act quickly to understand the extent of their exposure and to develop a plan to clean up their problem.

I note the following from this lengthy New York Times article.

Also in 2009, Switzerland and the United States signed a protocol amending a 1996 tax treaty governing exchanges of information on Americans suspected of avoiding taxes. While the protocol has been approved by the Swiss Parliament, it has been held up in the United States Senate, blocked by Senator Rand Paul, a Republican from Kentucky. The protocol makes it easier for American authorities to seek client and account data from Switzerland.

Why is Rand Paul trying to hold up this protocol? It would seem his campaign contribution list would be scrutinized by Treasury and Justice for the identification of wealthy tax evaders who have made substantial campaign contributions to block legal measures that would expose them.

Problems at the IRS

In its May 25, 2013 edition, The Economist has an article about the IRS scandal, which is entitled “Who Will Tame the Taxman?” The part that interested me was not the discussion of alleged targeting of conservative organizations by the exempt organizations group, but its summary of other problems the IRS lives with. I quote The Economist’s description of these problems at length:

By its own admission, the service the IRS provides to taxpayers has been getting worse. Last year, it failed to reply to correspondence within the time specified by its own rules almost half the time. Between 2004 and 2012 the proportion of calls on its toll-free line it managed to answer fell from 87% to 68%, and the average wait rose from 3 minutes to 17. This year it is doing even worse. On April 15th, the day tax returns are due, it only answered 57% of calls. That matters, since “voluntary compliance”, as opposed to chasing delinquent taxpayers, brings in more money at less cost. The IRS is also doing less chasing (although few will lament that): the odds of an individual receiving a full audit are now just 1 in 360.

Money is part of the problem: since 2010, the IRS’s budget has been cut by 8%, as has its staff. To help make the required savings, the IRS is shutting up shop on five days over the summer. By the end of the year it will also have cut its training budget by over 80%. As the Taxpayer Advocate, an ombudsman, points out, cutting the IRS’s budget to reduce the deficit is misguided, since the more the agency spends, the more money it brings in.

In spite of the shortage of manpower and cash, much of the IRS’s time is devoted to inconsequential tasks. In the case of the applications for 501(c)(4) status, it seems to have dwelt on the submissions of small, local outfits, while waving through those from much bigger national groups. A recent drive to root out fraud in claims for tax credits related to adopting children is barely worth the effort, complains the Taxpayer Advocate. The IRS audited 69% of claims for this credit, yet of the $668m taxpayers said they were entitled to in 2011, it disallowed only $11m, or 1.5%. Adoptive parents, it turns out, are not the sinister conspiracy against the public purse that everyone imagined.

Lawmakers write the loopholes

The main reason why Americans dislike dealing with the IRS is not, however, the bureaucrats’ fault. Congress keeps making the tax code more complex. It is now 4m words long, and has been changed over 4,000 times since 2001 (see table). Americans spend 6.1 billion hours a year complying with it—enough work to keep over 3m people employed full-time without producing anything. Nearly 90% of filers pay for help with their returns. The cost of all this is equivalent to 15% of the tax raised, the taxpayer advocate reckons. This too, is self-defeating, in that it discourages compliance.

Politicians from both parties have long talked about simplifying the code by eliminating credits and deductions and using the proceeds to lower rates dramatically. Committees in the House of Representatives and the Senate have been working diligently on just such a plan. The Republican-controlled House would like to reduce corporate and personal income-tax rates to 25%. Democrats would rather use some of the revenue raised to pay down the deficit.

Some congressmen speak of a “grand bargain”, in which Republicans concede revenue increases in exchange for cuts to government health care and pensions, but there is little sign that the leaders of either party are prodding lawmakers towards such a deal. Politicians usually balk at taking on the myriad vested interests which all ferociously defend their favorite tax breaks, says Bill Gale of the Brookings Institution, a think-tank. For that reason, he argues, “tax reform is always the bridesmaid and never the bride”.

The biggest problem IRS has is the incredible complexity of the body of law it has to administer. When I practiced in Texas I enjoyed getting problems associated with state taxes because I found that when I had a problem I could make a call and talk with someone at the office of the Controller of Public Accounts and found that invariably they were able to nail any question I had. IRS can’t do that. What is the difference? It is that the controller of public accounts had a small body of law to administer. Their people could understand it and administer it effectively. IRS will never be able to do that. The problems are too complicated. Unfortunately, as The Economist article points out, this is unlikely to change.

This creates huge frustration, which I have observed being vented by numerous members of congressional committees investigating the IRS piling on and taking cheap shots at former Commissioner Shulman. Congress has created the problems; it refuses to do any of the simplification that is so badly needed and it refuses to be in any way accountable for the mess it has created.