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Backpedaling at the IRS

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Message Gene C. Gerard
The New York Times reported this week that the Bush administration is eliminating almost half of the lawyers at the Internal Revenue Service who audit the tax returns of the wealthiest Americans. These lawyers specialize in auditing the returns of those who are subject to gift and estate taxes. Since taking office in 2001 President Bush has consistently lobbied Congress to repeal the estate tax, but he hasn't been able to get Congress to go along with him. Instead, the Bush administration has now decided to force the IRS to backpedal and circumvent the tax laws.

The IRS will cut 157 of the agency's 345 estate tax lawyers and 17 of the support staff personnel assigned to them. Six of the IRS lawyers who are likely to be laid off acknowledged that the cuts were simply the latest moves behind the scenes at the IRS to protect people with political connections and complex tax-avoidance schemes from detailed audits. Kevin Brown, an IRS deputy commissioner, says the agency is auditing enough returns to catch cheaters. But during the Clinton administration, the IRS stated that cheating by affluent Americans was one of its biggest problems.

In April 2000 the IRS released the results of a study on gift tax evasion. When an individual gives gifts exceeding $675,000 in their lifetime, a tax must be paid on each additional gift worth more than $10,000 per person per year. The study determined that more than 80 percent of the 1999 gift tax returns in excess of $1 million that were audited reported an inaccurate value of the gift. On average, the gifts were undervalued by $303,000, depriving the treasury of an additional $167,000. This evasion cost the government $275 million in 1999.

The study also found that IRS lawyers, owing to staffing shortages, only spent about 31 minutes auditing each gift tax return, which typically consisted of dozens of pages. John Dalrymple, then director of IRS operations, admitted that the agency lacked the resources to identify those who were falsifying the value of their gifts, or failing to file their returns. Consequently, the IRS announced that it was hiring three additional lawyers to audit gift tax returns. Yet now the IRS says it has too many of these lawyers.

While auditing fewer gift tax returns will certainly help those of Mr. Bush's affluent ilk, auditing fewer fraudulent estate tax returns will be the real bonus from the IRS layoffs. Currently, only couples with an estate valued at more than $4 million are subject to the estate tax, and the first $4 million they pass on to their heirs is completely tax-free. Mr. Bush has lobbied Congress for the last four years to spare the 0.5 percent of Americans who are subject to the tax by repealing it. But since the Republican-led Congress, surprisingly enough, hasn't been willing to go along with him, the administration will now simply layoff estate tax lawyers. After all, Deputy IRS Commissioner Brown says additional audits aren't worthwhile.

But the agency had a very different opinion under President Clinton. In December 2000 the IRS announced that a study found that cheating on estate taxes was more common than cheating on individual income taxes. And the biggest cheaters were the very rich, those who left $20 million or more to their heirs. The study determined that the actual value of the taxable estates audited was on average 13 percent higher than what was reported on tax returns. Consequently, the government was being shorted $1.5 billion in taxes annually.

Secretary of Health and Human Services Mike Leavitt is almost certainly pleased that there will soon be fewer IRS estate lawyers. He recently admitted that his family has received millions of dollars in tax deductions through a so-called charitable organization it founded. Mr. Leavitt's parents created the charity, worth $8 million, in 2000. But in 2002 and 2003 the charity donated only $100,000, a mere one percent of its total value. Yet Secretary Leavitt has claimed $1.2 million in tax deductions from the charity. And the charity loaned more than $300,000 to the family's own real estate investment firm, which gave an interest-free loan to Secretary Leavitt in 2002 worth at least $250,000.

Since President Bush has failed to coerce Congress to abolish the estate tax, his administration is doing the next best thing. It's forcing the IRS to layoff the very lawyers responsible for catching affluent Americans who cheat. But according to the IRS' own studies six years ago, this is a widespread problem. Perhaps never before in American history have we had a government so completely of the rich, by the rich, and for the rich.
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_______________________________________________ Gene C. Gerard has taught history, religion, and ethics for 14 years at several colleges in the Southwest and is a contributing author to the book "Home Front Heroes: Americans during Wartime," by (more...)
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