I.R.S. to Cut Tax Auditors
I.R.S. to Cut Tax Auditors
By DAVID CAY JOHNSTON
The federal government is moving to eliminate the jobs of nearly half
of the lawyers at the Internal Revenue Service who audit tax returns
of some of the wealthiest Americans, specifically those who are
subject to gift and estate taxes when they transfer parts of their
fortunes to their children and others.
The administration plans to cut the jobs of 157 of the agency's 345
estate tax lawyers, plus 17 support personnel, in less than 70 days.
Kevin Brown, an I.R.S. deputy commissioner, confirmed the cuts after
The New York Times was given internal documents by people inside the
I.R.S. who oppose them.
The Bush administration has passed measures that reduce the number of
Americans who are subject to the estate tax which opponents refer to
as the "death tax" but has failed in its efforts to eliminate the
tax entirely. Mr. Brown said in a telephone interview Friday that he
had ordered the staff cuts because far fewer people were obliged to
pay estate taxes under President Bush's legislation.
But six I.R.S. estate tax lawyers whose jobs are likely to be
eliminated said in interviews that the cuts were just the latest moves
behind the scenes at the I.R.S. to shield people with political
connections and complex tax-avoidance devices from thorough audits.
Sharyn Phillips, a veteran I.R.S. estate tax lawyer in Manhattan,
called the cuts a "back-door way for the Bush administration to
achieve what it cannot get from Congress, which is repeal of the
Mr. Brown dismissed as preposterous any suggestion that the I.R.S. was
soft on rich tax cheats. He said that the money saved by eliminating
the estate tax lawyers would be used to hire revenue agents to audit
income tax returns, especially those from people making over $1 million.
Mr. Brown said that civil service rules barred the estate tax lawyers
from moving over to audit income taxes. An I.R.S. spokesman said that
the agency had asked for permission to allow such transfers twice, but
that the Office of Personnel Management had not responded.
Estate tax lawyers are the most productive tax law enforcement
personnel at the I.R.S., according to Mr. Brown. For each hour they
work, they find an average of $2,200 of taxes that people owe the
Mr. Brown said that careful analysis showed that the I.R.S. was
auditing enough returns to catch cheats and that 10 percent of the
estate audits brought in 80 percent of the additional taxes. He said
that auditing a greater percentage of gift and estate tax returns
would not be worthwhile because "the next case is not a lucrative
case" and likely to be of relatively little value.
That is a change from six years ago, when the I.R.S. said that 85
percent of large taxable gifts it audited shortchanged the government.
The I.R.S. said then that it would hire three more lawyers just to
audit taxable gifts of $1 million or more.
Over the last five years, officials at both the I.R.S. and the
Treasury have told Congress that cheating among the highest-income
Americans is a major and growing problem.
The six I.R.S. tax lawyers, some of whom were willing to be named, all
said that clear evidence of fraud was pursued vigorously by the
agency, but that when audits showed the use of complicated schemes to
understate the value of assets, the I.R.S. had become increasingly
reluctant to pursue cases.
The lawyers said that the risk analysis system the I.R.S. used to
evaluate whether to pursue such cases gave higher-level officials
cover to not pursue tax cheats and, in the process, emboldened the
most aggressive tax advisers to prepare gift and estate tax returns
that shortchanged the government.
"This is not a game the poor will win, but the rich will," said John
Hruska, another I.R.S. estate tax lawyer in New York who, like Ms.
Phillips, is active in the National Treasury Employees Union, which
represents I.R.S. workers.
Colleen M. Kelley, the national union president, said: "If these
lawyers are not there to audit the gift and estate tax returns, then a
lot of taxes that should be paid will go uncollected, and that impacts
every taxpayer who is paying their fair share."
- And now take a look at what Teddy Roosevelt thought about taxing the
wealthy exactly 100 years ago. His vision for America makes Bush look
backwards and regressive.
In his 1906 message to Congress, President Theodore Roosevelt asked
lawmakers to enact a federal estate tax. He also endorsed an income
tax but acknowledged the constitutional challenge posed by the Supreme
Court's 1895 Pollock decision. As a Progressive, Roosevelt supported a
more activist revenue policy than most of his colleagues in the
Republican party. Congress chose to ignore his suggestions, leaving
fiscal innovation for a later administration.
The question of taxation is difficult in any country, but it is
especially difficult in ours with its Federal system of government.
Some taxes should on every ground be levied in a small district for
use in that district. Thus the taxation of real estate is peculiarly
one for the immediate locality in which the real estate is found.
Again, there is no more legitimate tax for any State than a tax on the
franchises conferred by that State upon street railroads and similar
corporations which operate wholly within the State boundaries,
sometimes in one and sometimes in several municipalities or other
minor divisions of the State. But there are many kinds of taxes which
can only be levied by the General Government so as to produce the best
results, because, among other reasons, the attempt to impose them in
one particular State too often results merely in driving the
corporation or individual affected to some other locality or other
State. The National Government has long derived its chief revenue from
a tariff on imports and from an internal or excise tax. In addition to
these there is every reason why, when next our system of taxation is
revised, the National Government should impose a graduated inheritance
tax, and, if possible, a graduated income tax. The man of great wealth
owes a peculiar obligation to the State, because he derives special
advantages from the mere existence of government. Not only should he
recognize this obligation in the way he leads his daily life and in
the way he earns and spends his money, but it should also be
recognized by the way in which he pays for the protection the State
gives him. On the one hand, it is desirable that he should assume his
full and proper share of the burden of taxation; on the other hand, it
is quite as necessary that in this kind of taxation, where the men who
vote the tax pay but little of it, there should be clear recognition
of the danger of inaugurating any such system save in a spirit of
entire justice and moderation. Whenever we, as a people, undertake to
remodel our taxation system along the lines suggested, we must make it
clear beyond peradventure that our aim is to distribute the burden of
supporting the Government more equitably than at present; that we
intend to treat rich man and poor man on a basis of absolute equality,
and that we regard it as equally fatal to true democracy to do or
permit injustice to the one as to do or permit injustice to the other.
I am well aware that such a subject as this needs long and careful
study in order that the people may become familiar with what is
proposed to be done, may clearly see the necessity of proceeding with
wisdom and self-restraint, and may make up their minds just how far
they are willing to go in the matter; while only trained legislators
can work out the project in necessary detail. But I feel that in the
near future our national legislators should enact a law providing for
a graduated inheritance tax by which a steadily increasing rate of
duty should be put upon all moneys or other valuables coming by gift,
bequest, or devise to any individual or corporation. It may be well to
make the tax heavy in proportion as the individual benefited is remote
of kin. In any event, in my judgment the pro rata of the tax should
increase very heavily with the increase of the amount left to any one
individual after a certain point has been reached. It is most
desirable to encourage thrift and ambition, and a potent source of
thrift and ambition is the desire on the part of the breadwinner to
leave his children well off. This object can be attained by making the
tax very small on moderate amounts of property left; because the prime
object should be to put a constantly increasing burden on the
inheritance of those swollen fortunes which it is certainly of no
benefit to this country to perpetuate.
There can be no question of the ethical propriety of the Government
thus determining the conditions upon which any gift or inheritance
should be received. Exactly how far the inheritance tax would, as an
incident, have the effect of limiting the transmission by devise or
gift of the enormous fortunes in question it is not necessary at
present to discuss. It is wise that progress in this direction should
be gradual. At first a permanent national inheritance tax, while it
might be more substantial than any such tax has hitherto been, need
not approximate, either in amount or in the extent of the increase by
graduation, to what such a tax should ultimately be.
This species of tax has again and again been imposed, although only
temporarily, by the National Government. It was first imposed by the
act of July 6, 1797, when the makers of the Constitution were alive
and at the head of affairs. It was a graduated tax; though small in
amount, the rate was increased with the amount left to any individual,
exceptions being made in the case of certain close kin. A similar tax
was again imposed by the act of July 1, 1862; a minimum sum of one
thousand dollars in personal property being excepted from taxation,
the tax then becoming progressive according to the remoteness of kin.
The war-revenue act of June 13, 1898, provided for an inheritance tax
on any sum exceeding the value of ten thousand dollars, the rate of
the tax increasing both in accordance with the amounts left and in
accordance with the legatee's remoteness of kin. The Supreme Court has
held that the succession tax imposed at the time of the Civil War was
not a direct tax but an impost or excise which was both constitutional
and valid. More recently the Court, in an opinion delivered by Mr.
Justice White, which contained an exceedingly able and elaborate
discussion of the powers of the Congress to impose death duties,
sustained the constitutionality of the inheritance-tax feature of the
war-revenue act of 1898.
In its incidents, and apart from the main purpose of raising revenue,
an income tax stands on an entirely different footing from an
inheritance tax; because it involves no question of the perpetuation
of fortunes swollen to an unhealthy size. The question is in its
essence a question of the proper adjustment of burdens to benefits. As
the law now stands it is undoubtedly difficult to devise a national
income tax which shall be constitutional. But whether it is absolutely
impossible is another question; and if possible it is most certainly
desirable. The first purely income-tax law was passed by the Congress
in 1861, but the most important law dealing with the subject was that
of 1894. This the court held to be unconstitutional.
The question is undoubtedly very intricate, delicate, and troublesome.
The decision of the court was only reached by one majority. It is the
law of the land, and of course is accepted as such and loyally obeyed
by all good citizens. Nevertheless, the hesitation evidently felt by
the court as a whole in coming to a conclusion, when considered
together with the previous decisions on the subject, may perhaps
indicate the possibility of devising a constitutional income-tax law
which shall substantially accomplish the results aimed at. The
difficulty of amending the Constitution is so great that only real
necessity can justify a resort thereto. Every effort should be made in
dealing with this subject, as with the subject of the proper control
by the National Government over the use of corporate wealth in
interstate business, to devise legislation which without such action
shall attain the desired end; but if this fails, there will ultimately
be no alternative to a constitutional amendment.