Tax Muckraker Offers Ideas on Tax Compliance (2/11/13)

This morning, I was reading Paul Krugman's column titled, The Ignorance Caucus (NYT 2/10/13),  here (which I recommend to readers).  His point is that some influencing how our Government works prefer ideology over evidence.  That is perhaps not a surprise to any observer of the game.  But the phenomenon plays out in tax enforcement.  Some just hate the idea of the IRS, so  underfunding is the priority.  This theme plays out today in an article in Tax Notes.  David Cay Johnston, Law and Order: Tax Squad, 138 Tax Notes 759 (Feb. 11, 2013), here (thanks to Tax Prof Blog, here).  Professor Johnston is a noted tax curmudgeon who likes to burst conventional wisdom and put the searchlight on hypocrisy.

Here is an excerpt for flavor (emphasis supplied by JAT):

My proposal is to significantly increase tax law enforcement. In looking over a pile of IRS data going back to 1992 to see how vigorously our tax laws are being enforced, either of two conclusions struck me as reasonable just based on the numbers. 

One conclusion would be that individuals and corporations are more law-abiding now than they were two decades ago. Criminal tax prosecutions in fiscal 2012 were down 44 percent from 1992, according to Justice Department data posted by the Transactional Records Access Clearinghouse. If you control for population growth, the drop in prosecutions is 54 percent. On the corporate side, additional taxes and penalties recommended after audit are down 11 percent in real terms over the same 21 years.

Generally, whatever the enforcement numbers were then, they are smaller now. 

A logical inference would be that voluntary compliance is on the rise and that respect for the tax laws is increasing at the same time that chiseling and cheating are withering. 

Maybe the data even tell us that the federal government's theory of white-collar law enforcement, known as general deterrence, works. Unlike the local cops, who use specific deterrence to catch every killer, rapist, and burglar they can, the federal government prosecutes a very few in the belief that news of these prosecutions will deter the many. Just maybe, the few, but highly publicized, prosecutions of big turn-of-the-century tax shelter cases were so successful that a lot of would-be tax cheats were scared straight. 

Of course, there is an alternate conclusion. It could be that we are enforcing the tax law with less vigor, expecting the tax police to do more and more with less until they have no choice but to let more tax cheating go undetected, uncorrected, and, in the most egregious cases, unprosecuted. 

It could be that there is not enough tax law enforcement taking place to deter cheats. Consider the odds of this: Out of an average of a quarter-million or so individual returns reporting million-dollar-plus incomes in recent years, the IRS selects 18 annually for intense global high-net-worth audits. If you are inclined to play the audit lottery, those are very good odds -- much less than 1 in 10,000.

Then Professor Johnston gets into the weeds of the evidence and addresses both downright fraud as well as game playing with the complex tax rules.

Here is one more excerpts:

Let's demand studies of who benefits from lax tax law enforcement -- studies that can be done by the Congressional Budget Office, the Congressional Research Service, the Joint Committee on Taxation, and the investigative arm of Congress, the Government Accountability Office. And let's support law enforcement by making it easy to get subpoenas for these studies as well as access to actual tax return data.