The Tax Collector and the Criminal

"Taxes are what we pay for civilized society."
--Oliver Wendell Holmes, Jr., Compania de Tobaccos v. Collector

At tax time it is always fun to get away from numbers and instead reflect on news from the IRS that is invariably more interesting than a bunch of numbers would be. The recent news comes from two sources: those who reside in the penitentiary and those who, but for the penuriousness of Congress, would join them.

Those who are already there have made news because of their ability to turn their prison tenancy into a financially productive tenure through creative use of the tax system. In December 2014 it was reported that over $1 billion in tax refunds had been requested by occupants of assorted penitentiaries around the country. This is not, of course, because those engaged in the production of license plates have had excess amounts of taxes withheld from the prison wages to which their work entitles them. It is because some of those in prison who are sophisticated have engaged in tax related activities that pay considerably more than other penitentiary occupations.

The December report disclosed that some inmates have spent time filing bogus claims for tax refunds. In 2012 the $2 billion in claims for refunds originated by prison inmates was four times the amount claimed in 2009. In 2012, 138,000 inmates filed claims for refunds. The IRS, however, was on top of things and caught most of those claims before they were paid. It paid out only about $70 million in bogus refunds, a trivial sum in the overall scheme of things, less than 10% of the amount claimed and slightly more than 1/2 of what had been paid out the preceding year. (It was, however almost twice as much as had been paid in any year since 2007.) Many of those filing fraudulent returns, used the social security numbers of their prison colleagues. The inmates filing these returns are not all run of the mill bank robbers and murderers. A fair number of them are people who got to be where they are by committing crimes involving tax fraud of various sorts. One prisoner who was caught had a bank account with 7,654 claims associated with it. He was hoping to get $30 million in refunds. An Alabama inmate who used social security numbers of his colleagues was caught and sentenced to an additional 66 months in prison and ordered to pay back $788,280 that he had earned with his scheme. So that is the bad news. The good news, it turns out, is not all that good except for the headline.

The headline said: "IRS Opened 19% Fewer Criminal Cases in 2014, Report Says." The report explains that IRS agents had initiated 5,314 criminal investigations in 2013 and only 4,297 in 2014. The kinds of investigations being conducted involve questionable refunds, money laundering, tax fraud, etc. The inference to be drawn from that headline is that more people are stepping up to the plate and paying the taxes that they owe. That, sad to state, is not the case. It turns out that the apparent good news has nothing to do with pricked taxpayers' consciences but a great deal to do with a penurious congress.

Congress collectively, has no concept of the economics of the IRS. In 2010 the Treasury Secretary explained to his dim-witted listeners in Congress that every dollar invested in the IRS has a return of $5 in collections from non-compliant taxpayers. In a time when Republicans believe the country is in financial distress the logical thing to do is to provide more money to enable the IRS to collect from the intransigent. That, however, is not how Republicans work. In FY 2010 Congress gave the IRS $4.5 million less than it requested thus insuring there would be more than $20 million in uncollected taxes from non-compliant taxpayers. In 2015 the IRS will receive 10 per cent less than it got in 2010. The 2015 budget is about the same as the 1998 budget when 30 million fewer returns were being filed.

In fairness to members of Congress it must be pointed out that there is a method to their madness. They want to punish the IRS for activities conducted by some of its rogue employees in failing to act in a timely fashion on requests by conservative organizations that they be granted tax-exempt status. By decreasing the funding received by the IRS to conduct its routine operations, members of Congress think they are punishing the agency. If they were a bit brighter they'd realize that they are punishing the entire country by depriving the IRS of the additional revenue adequate funding for the agency would enable it to collect. Republicans, however, know that they can make up for the lost revenue by cutting benefits received by the needy such as food stamps, Pell grants, Medicaid and similar programs. It's a win-win for the Republicans-punish the IRS and give the greedy needy the incentive to get jobs. It's only the country for which it's a lose-lose.