June, 2005

I’ve twice in my life wrangled with the Internal Revenue Service and both times we went to court and once I won and once lost. Batting .500, which I guess is pretty good, but the tax system is busted and Griff Witte and Bob O’Harrow Jr. point that out eloquently in Thousands of Non-Defense Contractors Owe Taxes.

The General Accounting Office reports that 33,000 contractors currently working for the government are tax scofflaws to the tune of $3 billion. Part of why the Tax Code’s broken is the fact that they twice pursued little ol’ me all the way through the court system for amounts under ten thousand bucks and haven’t laid a finger on a guy (a health-care services provider) who used $18 million in unpaid payroll taxes to buy luxury properties and vehicles. Another joker, who provided security guards to Homeland Security, transferred his company payroll taxes to a foreign bank account and built a house overseas with the dough.

That's real homeland security!

Both are still doing business with the government, along with their 32,998 additional partners in crime. This GAO report mirrors another from 16 months ago that identified 27,000 Pentagon contractors who owed another $3 bil. Nothing’s been done on that list either.

Oh, I’m sorry . . . that’s not exactly true . . . it depends upon your definition of nothing. The government boasts that collections are on the rise. This year, the government is on pace to save more than $17 million in money withheld from Pentagon contractors. That’s a pretty frantic pace, $17 million is almost one half of one percent of what is (or was) owed. The clock is still running on current delinquencies.

Bad law breeds contempt for that law and leads to widespread abuses. The old 55mph limit on Interstates was bad law and everyone broke it until it was finally repealed. Tax Law is bad law for lots and lots of reasons (see And You Thought Social Security Was a Hard Sell).

One of its failures is that compliance is voluntary, even though penalties are mandatory. Some of us comply and some of us don’t. The IRS is so totally and chronically unable to keep up with that anomaly that they badger some and ignore others, without any real system. That breeds contempt and contempt breeds non-compliance. Lots of breeding going on.

The thrust of the Washington Post article seemed to be a GAO recommendation that would cross-reference abusers and deduct tax delinquencies before government agencies paid the bill. That’s wrong-headed and will merely serve to spoon on another layer of unaccountable bureaucracy. Additionally, it drives a further wedge between voluntary compliance and the well founded and universal belief that the well-connected are getting away with murder. Off-shore tax sheltering and this administration’s persistence in the face of runaway deficits to grant the wealthy further tax relief are just two of the factors undermining compliance.

The third leg of non-compliance rests within the legal and accountancy communities. You and I face our day in court, but those who can afford it sic the dogs of law on the taxman and by so doing either make themselves an unappealing target or negotiate steep compromises. Either way, it’s another dagger directed to the already staggering body of compliance.

Senator Norm Coleman, a Republican from Minnesota and Chairman of the Senate Governmental Affairs’ Committee, issued a statement that contractors failing to pay taxes “cheated not only the American people, but their own employees as well.” Nice sentiment, Norm, but the cheating underlies flaws at the IRS far more than it does governmental contracting procedures. The IRS is prohibited by law (written and approved by Norm's Senate) from disclosing tax information, even to other government agencies. That probably makes good sense for many reasons, but it confirms the IRS as a closed loop. The fix is not in opening the loop, but correcting IRS internal anomalies.

Or shutting the damned place down as an irreparably damaged and special-interest infected bureau no longer worthy of life-support. Replacement by an even-handed value-added tax structure is decades overdue.

Get out of the Archives and read what Jim's writing today