As previously published in Forbes by Jason B. Freeman.
On Tuesday, the Commissioner of the Internal Revenue Service, Charles Rettig, testified before the Senate Finance Committee. His message was a clear one: He is an enforcement-minded commissioner and “the IRS is committed to pursuing those who . . . intentionally evade their tax obligations.” Mr. Rettig did not mince words. His IRS will “aggressively pursue non-compliant taxpayers . . . [with] visible civil and criminal enforcement efforts.” But the message, though a stern one, is also one of fairness: Honest taxpayers need to believe—to feel confident—that others are paying their fair share, whether voluntarily or through enforcement efforts.
And Mr. Rettig is absolutely right. The dirty little secret is that our tax system is built upon—indeed, depends upon—a fundamental principle: voluntary compliance, a principle that (if we are honest) often conflicts with natural human impulses. An income tax system that imposes the obligation on each taxpayer to “voluntarily” calculate their taxes and pay their fair share simply doesn’t work if it operates in a culture that rewards or incentivizes intentional non-compliance. For example, if taxpayers believe that there is very little chance that they will be audited, they will—on the margin, at least—take riskier positions or even commit outright fraud. In some cases, their actions might even be viewed (by some) as economically rationale. But as it turns out, even a very small change in behavior along these lines equates to billions in lost revenue when operating on a scale of more than 140 million taxpayers. In the end, honest taxpayers bear the burden of this behavior by paying more than their fair share—and often receiving less than their fair share back in return. And that was much of the subtle, behind-the-scenes premise behind the Commissioner’s stern message.
Based on what we know about human nature, it’s probably safe to assume that voluntary compliance doesn’t spontaneously arise from our collective human psyche or broad altruistic tendencies. It has to be cultivated. That’s code for: The obligation to pay taxes has to be enforced, vigorously—an admittedly ironic means to achieve the somewhat euphemistic concept of “voluntary compliance.” And that’s the reason that the whole push to decrease IRS funding has long been—when wielded in the hands of many, at least—short-sighted, misguided, or outright irresponsible. The IRS is probably the only federal agency that garners a return on investment (“ROI”). This past year it collected some $3.56 trillion in taxes and generated almost 96 percent of the federal government’s funding. Its overall ROI is about $5 for every $1 invested. Pretty good. In fact, investments in many areas, like enforcement, garner a substantially higher ROI. Most investors, if presented with historic returns like that, would ask one question: Where do I sign? And, to dig just a bit deeper, those figures don’t account for the softer, less-measurable returns, like fostering “voluntary” compliance—returns that would pad the financial stats even more, but that also have a positive cultural impact that is very real.
While he probably wouldn’t have put it all quite like that, the general sentiment is precisely why the Commissioner is so emphatic about his IRS’s enforcement initiatives, which included the following:
· Technology. As the Commissioner briefed the Senate Finance Committee, he described a much more technologically savvy Internal Revenue Service: “the IRS must emphasize the use of technology to develop new enforcement tools.” Its “advanced data and analytic strategies allow [the IRS] to catch instances of tax evasion that would not have been possible just a few years ago.” Expect to see enhanced IRS enforcement capabilities on this front.
· Offshore Tax Evasion. The Commissioner verified that offshore tax reporting enforcement remains one of the IRS’s absolute top priorities, assuring the congressional committee that “the IRS will continue to pursue offshore tax noncompliance by all available methods.” There is no surprise here, as international tax compliance and enforcement has been atop the IRS’s list for years now. It will not be slowing down anytime soon.
· Syndicated Conservation Easements and Micro-Captive Insurance Shelters. The IRS has homed in on what it views as abusive conservation easements and micro-captive insurance arrangements. The Commissioner made clear his commitment to continue that enforcement focus.
· Cryptocurrency and Virtual Currency. It may come as no surprise that the IRS believes there is massive underreporting and non-compliance by cryptocurrency and virtual currency holders. Indeed, the Service’s estimates in that regard are staggering. The Commissioner ensured lawmakers that the IRS will continue to target virtual currency tax non-compliance.
· High-Income/High-Wealth Taxpayers Who are Non-Compliant. Surprise, surprise. Go where the money is. The IRS Commissioner signaled a new initiative—one that I anticipated in a recent article—to pursue non-compliant, high-income taxpayers, which include those with income levels above $100,000.
So expect to see ramped-up tax enforcement efforts in the months and years ahead. Indeed, many of us who knew Rettig prior to his jump from the friendly confines of private practice to heading up the IRS, know that enforcement is at the very core of this Commissioner’s philosophy—and that focus comes from a good place. In many ways (to turn yet another euphemistic phrase on its head), an enforcement-minded IRS is the softer, kinder IRS that we have long been promised—to those who practice voluntary compliance, at least.
For those who prefer an oral digest, several of The Freeman Law Project podcast episodes cover the IRS’s current enforcement initiatives.
