November 20, 2002

November 20, 2002 | Commentary on Taxes

ED112002:  Good Riddance, Rossotti

When Charles Rossotti became commissioner of the Internal Revenue Service five years ago, taxpayers hoped this marked a new beginning. Unlike all the tax lawyers who preceded him, Rossotti came from a business background. Presumably, he understood the need to end some of the abuses taxpayers had come to associate with the agency.

But by the time Rossotti resigned on Election Day 2002, the prevailing sentiment was more or less: "Good riddance."

Consider a few of his accomplishments. On his watch, the IRS reinstated its infamous "lifestyle audits." It began hounding credit-card companies to compromise the privacy of their clients. And it sought to help foreign governments tax their citizens on money kept in American banks.

All things considered, Rossotti demonstrated an unwelcome urge to pry, a disturbing disregard for the protections afforded by our Constitution and immoderate indifference to the impact of his actions on the U.S. economy. (You know the situation's bad when it seems you'd be better off with a lawyer.)

Few initiatives in the history of the IRS have prompted as many complaints or as much anger as the "lifestyle audits." Auditors come into taxpayers' homes, examine their possessions, investigate their real-state holdings, bank accounts and credit cards and interrogate their employers and neighbors -- all to ensure their "lifestyle" is possible on the income they reported. The agency need not have the slightest shred of evidence of wrongdoing to undertake such an audit, and investigators have been known to pay neighbors to snitch if their information leads to increased collections.

The outcry against lifestyle audits grew so loud several years ago that Congress scaled back the program. But under Rossotti, they re-emerged as part of a "national research program." Everyone understands the IRS must enforce the law. But no one understands why this requires such police-state tactics. And it was Rossotti, not Congress, who approved the practice.

Lifestyle audits are just the tip of the iceberg. In the final days of the Clinton administration, the IRS proposed a regulation to help foreign governments tax some of the $1 trillion or so deposited by foreigners into American banks. A study commissioned by the Florida Bankers Association suggests at least a third of this money would flee to other jurisdictions, a drain on capital that would hurt the stock market and make it harder for Americans to get loans.

But the real outrage is that this regulation would undermine democracy. Elected officials passed these laws to attract capital to the U.S. economy. It's not the IRS' place to use regulatory edicts to overturn them.

And so long as it is legal for Americans to obtain credit from foreign banks, it's not the IRS' place to scrutinize these dealings without evidence of wrongdoing. Yet, federal prosecutors, acting on the agency's behalf, have begun trying to force CompuServe, the Ohio-based Internet service provider, to hand over the names of customers who purchased their Internet service with MasterCards issued by banks in the Caribbean.

The IRS says it has account numbers of 237,000 people with cards issued in the Bahamas, the Caymans, Antigua and Barbuda, and it wants the names of those cardholders. It suspects some may be Americans who use the accounts to hide income. But the agency doesn't know which ones, so it basically seeks to conduct a fishing expedition through all 237,000 accounts. This is profiling -- not by race but by where one's bank is located -- and it is equally odious.

How do we stop this? Tax reform may be the only answer. If income were taxed only once, the IRS would have no reason to snoop into our bank accounts.

Under a flat tax, for instance, taxpayers need tell the IRS only the size of their families and the amount of their wages (a figure readily found on W-2 statements), and their tax liability could be determined easily. Lifestyle audits -- ahem, national research program audits -- would be completely unnecessary.

Rossotti's dismal performance proved especially frustrating because, in view of his background, many taxpayer advocates hoped he would rein in the IRS' 100,000 bureaucrats and put an end to abusive practices. Unfortunately, things became even worse on his watch. He personifies why America needs tax reform. The IRS takes advantage of the nightmarish complexity of the tax code to abuse power. Eliminate the complexity, and most of the problems disappear automatically.

Daniel J. Mitchell, Ph.D., is the McKenna senior fellow in political economy at The Heritage Foundation (www.heritage.org), a Washington-based research institution.

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

Related Issues: Taxes

Distributed nationally on the Knight-Ridder Tribune wire.