economy

On the Future of American Tax Collection

by Ivan Syritsyn

“Nothing can be said to be certain, except death and taxes.”

-Benjamin Franklin


The Internal Revenue Service is an organization as mysterious as it is necessary. Without the $3.3 trillion in revenue that the IRS collected in 2015, the United States would come to a halt as different sectors such as that of energy, science, education, etc. would lose a great portion of their funding. However, the power and use of the IRS lies in more than collecting and distributing funds. With each return submitted to the IRS there is information of not only how much money was spent, but also where it came from and where it went. Since money is a necessity for people’s life in a capitalist economy, if a person has someone’s tax returns he would be able to tell all of that person’s major interactions in a society.

Recently this power of the IRS has come into the forefront due to the controversy over Donald Trump’s refusal to release his tax returns during his Presidential campaign, something that hasn’t been done since the custom began with Richard Nixon. Several commentators called for the Federal Government to release the returns without Trump’s permission citing security concerns over his potential contacts with Vladimir Putin through Russian oligarchs. The government released nothing and now that Trump is President there is no chance that the actual returns (which should be at least several hundred pages) will ever come to light. However, this fiasco has some people asking whether the role of the IRS should be expanded in the future.

I won’t deal with the implications of should or should not. The role of the IRS is inevitably going to be expanded. The simplest reason is that America isn’t wealthy enough to fund all its activities. We want a life that is free from care and drudgery, i.e. the leisurely life. Unfortunately, since this is a material world leisure can’t be achieved with empty hands. Food, healthcare, education, etc. are increasingly seen as basics for the standard of human living. Basics aren’t free. Also, people don’t want to have gotten by just scraping the barrel all their lives. No one wants to simply survive, but to thrive. This desire to thrive, expressed through continually seeking more privileges and opportunities, will be more of a dominant theme in American politics than it is now. It is to fulfill this desire that the IRS will become a more important, even if not a more public role.

The increased role will also come as a reaction after years of cuts which have forced the resources of the IRS to an abysmal level. For example, the enforcement of liens has become more difficult due to staff cuts. Whereas before it would take a year to begin the review process for a case that has raised some warning flags, it may presently take as long as two years. This might be financially beneficial to individuals, but is a bad policy for the state. This is only for enforcing a case once it has been noticed. Discovery of such cases through random reviews is expected to decrease as well after IRS resources are forced to even lower levels. Unfortunately, this will continue the argument that the IRS is inefficient and, more likely than not, lead to an even further decrease in funding. I am not sure how far this is going to continue to spiral. One thing is certain though: all systems, including the IRS, have a breaking point. Whether the reaction will occur before the breaking point or not awaits to be seen.

Once the reaction occurs, the IRS will not only return to its regular operating levels but will show the effects of an antifragile system. As with the swing of a pendulum all the arguments which were used to cut down the IRS will become anathema. Their opposites, in varying degrees will be implemented in practice. It will be the prevalent opinion that a government branch which is responsible for gathering government revenue should have all unnecessary impediments removed to accomplish that goal. The IRS’s role in investigations and enforcement will become stronger either along the lines of HM Revenue and Customs, which deals not only with federal but gubernatorial and local tax issues, or on the more decentralized but just as pervasive French model. There are two paths due to the prevalent issue of the balance between federal and state jurisdictions. If the need for efficiency will not be recognized, then there will not be a greater increase in direct IRS authority. Instead the IRS will be forced to cooperate with the Department of Revenue of each state to cause an overall improvement of tax efficiency.

What does this mean in practical terms for the American citizen? The increased centralization will result in stricter and increased regulations. Tax software and unprofessional preparers will phase out of existence as efforts are made to erase more than $21 billion worth of yearly tax refund fraud. This fraud is mostly the result of false information being put into thousands of small returns by tax filers and preparers. Legally it is difficult to determine on whom the burden of proof lies. Did the person provide false information or was it the preparer? To combat this the IRS has created the unique license of Enrolled Agent, somebody who can serve as the representative for a filer and the IRS without being restricted by state jurisdiction or any other administrative level. The creation of an EA license serves a twofold purpose. One is that an EA will be able to correctly interpret the complex language of the tax code. The second is that an EA is held responsible for whatever they file. If an EA doesn’t file per what he could prove is true then he risks the revocation of his license, fines, and prison. These incentives force an EA to serve as a de facto agent of the IRS. It is obvious that the IRS will benefit greatly from ensuring that only properly licensed agents can file returns on behalf of the public.

Considering all this, it would be good for everyone interested in their money to take this advice: enjoy what you have while you can, but prepare for the future. Find somebody knowledgeable who can ensure that you get the most out of what you earn and own. It is better to prepare now rather than having to deal with the hassle when the inevitable changes will come. When they will come is uncertain, but that they will is only logical.

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