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
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
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
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
J. Mitchell, Ph.D., is the McKenna senior fellow
in political economy at The Heritage Foundation (www.heritage.org),
a Washington-based research institution.
Distributed nationally on the Knight-Ridder Tribune wire.