The Daily - How the I.R.S. Became a Political Boogeyman

Episode Date: April 18, 2023

Earlier this month, the Internal Revenue Service unveiled an $80 billion plan to transform itself into a “digital first” tax collector focused on customer service and cracking down on wealthy tax evaders.Today, on the day that taxes are due in the United States, Alan Rappeport, who covers economic policy for The Times, explains how the plan could result in the agency repeating a set of old mistakes.Guest: Alan Rappeport, an economic policy correspondent for The New York Times.Background reading: I.R.S. unveiled their $80 billion plan to overhaul tax collection this month.Here’s how tax season felt inside the I.R.S. last year, after decades of neglect.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Michael Barbaro. This is The Daily. On the day that taxes are due in the U.S., we look at how a plan to give the Internal Revenue Service billions of dollars in new money could result in the agency repeating a set of old mistakes that hurt everyday Americans. Today, my colleague Alan Rapoport explains.

It's Tuesday, April 18th. For some reason, it's the 18th. I filed mine a week ago. I want to know if you have filed. Mine are in as well. Happy tax day to you, Michael. It's a big day for the country and for the IRS especially. Yeah. Wait, but this is really important. Why isn't it the 15th anymore? It's a calendar quirk. It depends how holidays line up. Sometimes it has been delayed over the years as well when there have been sort of technical issues with the IRS and other things going on. So usually it's around the 15th, but this year people get an extra weekend to cram. Right, right. So we are not here to talk about who filed when, but instead to talk about why the Biden administration has decided that the IRS, this agency that literally makes our government work by collecting our taxes,

why it needs changing. And President Biden, along with Democrats, passed a major piece of legislation just a couple of months ago to make some pretty meaningful changes to the IRS. And it's only now that we're starting to understand what those changes are going to look like and what kind of battle they may instigate. So talk to us about these changes and what has motivated them. Well, the biggest change is that the IRS is getting an infusion of $80 billion, which is the largest sum of money that it's gotten basically in its entire history. For years,

the IRS, in most New York Times stories actually, has usually been associated with the adjective as beleaguered. And for years and years and years, it's been underfunded. It's barely been able to do its job, which is to, as you said, collect taxes and revenue for the U.S. government to make the whole country run. And it's really kind of one of the most important cogs in the whole economy. And for so long, those gears were not working properly. important cogs in the whole economy. And for so long, those gears were not working properly. Well, let's talk about that. I mean, how badly have these gears been working? How underfunded exactly has the IRS been? In the last decade, the IRS's funding has dropped by about 20%. Its staffing has dropped by about 20%. So this has led to all kinds of problems for the agency, from a shortage of staplers to piles and piles of millions of backlogged tax returns that agents and

staffers have been trying to sift through. It's led to long delays for people getting their refunds, and people just can't even get through to the agency when they call and try and ask for help. I have to pause, however, on a stapler shortage. The IRS doesn't have enough staplers. That's right. It's kind of amazing to think about that the tax collection agency for the most powerful and richest country in the world is lacking in office supplies, but this is true. But as you said, the IRS is about to get this huge amount of money, $80 billion. In fact, so what exactly will that money go towards besides those long-needed staplers? It's going to go to a lot of things. And the Biden administration has been focusing

primarily on how it's going to improve customer service for taxpayers so that they are going to be able to get through to people on the phones to get their questions answered. And it's going to be a lot more customer service friendly, as they like to say. But in reality, more than half of the money is actually going to go towards enforcing the tax code, which is sort of the part that the White House doesn't like to talk about as much. They're going to be hiring thousands of new revenue agents who are going to be focused on cracking down on rich taxpayers and big companies to make sure they're paying what they owe. And the administration estimates that over the next decade, under the current system, $7 trillion of tax money that it's owed to the government is actually not going to go collected

because of tax evasion schemes and just the fact that the agency can't really conduct the kinds of audits that it needs to conduct. So this is a big opportunity and strategy for them to change that and start tripping away at this so-called tax gap. Right. And my recollection from previous episodes of The Daily is that for Biden, this isn't just a lot of trillions of dollars he'd like to have. He's banking on it. I mean, he has in various pieces of legislation said, I'm going to pay for this by making the IRS better at collecting taxes, right? Exactly. This has been a huge part of the Biden administration's agenda because Democrats,

as much as they talk about wanting to raise taxes on the rich and others, they didn't have the votes to do that. And when they wanted to raise tax revenue to pay for some of the things that they wanted to accomplish, like climate change legislation, changes to reduce drug costs for senior citizens, all these progressive priorities, they weren't going to be able to pay for them by raising taxes on the rich directly. But they were able to convince enough Democrats to go along with increasing funding for the IRS so they could collect tax money that the government's already owed and by enforcing the tax code that already exists. Right. And very importantly, you said that this is the part of this reform, the enforcement part, the new agent part,

that the Biden administration doesn't want to talk about. And my sense is that that's because of what Republicans will say about hiring that many new agents. Yes, and Democrats are right to be worried about that. Hiring 87,000 new agents, doubling the size of the IRS, I don't know who thinks that's a good idea, does not improve the quality of information. Republicans have already been seizing on the IRS money to attack Democrats.

It will only increase the number of audits, most often on innocent small businesses and individuals. They're designed to come after small businesses and working families across this country. Saying that President Biden is trying to install a shadow army that's going to be shaking down small businesses. They want to use that money that they squeeze out of hardworking taxpayers to pay for their big government socialist agenda.

And they're going to go after everybody in America to suck you dry. And knocking on doors with guns in the middle of the night to get taxpayers to pay more money. Are they going to have a strike force that goes in with AK-15s already loaded, ready to shoot some small business person in Iowa? small business person in Iowa. Right. And this is a very longstanding and familiar line of attack from Republicans, characterizing the IRS as like the ultimate embodiment of an overreaching, overzealous government. You're saying that has reached a fever pitch since Biden proposed this money,

but it's been around for a while. That's right. And it's not entirely without justifications. There's some real history of the IRS getting things wrong and doing things wrong and of people trying to use the IRS to weaponize its resources against their opponents politically. Okay, tell us that story because I'm not aware of it. Hmm. Okay, tell us that story, because I'm not aware of it. It really goes back all the way as far as the 1930s. FDR famously ordered his Treasury Secretary, Henry Morgenthau, to have the IRS initiate an investigation into Huey Long, who was a senator from Louisiana.

I myself would be indeed happy to see our share of wealth program enacted into law. Who had been critical of Roosevelt's New Deal policies, and appeared to be contemplating a presidential run of his own. Interesting. Yeah, exactly. The IRS, at Roosevelt's direction, had probed whether members of Mr. Long's political operation were taking kickbacks for state contracts in Louisiana. And some of those people were actually indicted and prosecuted for tax evasion. And that's because the IRS,

at the president's direction, decided just to have a look around. That's right. And Long wasn't the only one that FDR used the IRS to go after. FDR was kind of smitten with the power of the IRS, and he ended up trying to use it against other political opponents and critics. He later went after William Randolph Hearst, the publisher of the Hearst Newspaper Group, who suddenly found his empire under investigation and scrutiny from the agency, after its newspapers had been critical of FDR and its coverage. Decades later, it came up again with the Nixon administration in the 70s. In my possession is a memorandum that was requested by me to prepare a means to attack the enemies of the White House.

We learned in the Watergate hearings that the Nixon White House had transmitted a list of 600 enemies to the IRS, basically to have them look at their financial records and make their lives more difficult. The goal of the briefing paper was where perhaps the IRS itself, on its own, wouldn't have done this, and perhaps didn't do anything wrong, but it's clearly being abused, or it's attempting to be abused by the presidents above it who oversee it. Exactly. It raised a lot of concern that there was the possibility that the IRS could be used against people for political reasons. And it made people a lot more scared that this agency, which was supposed to be a tax collector, could be something a lot more and something a lot more

scary. So what is the next big moment in this saga of the IRS? The next big moment came in the 1990s when Republicans retook power in Congress, and a lot of the animosity was targeted at the IRS. In particular, there was a lot of discussion about a provision known as the Earned Income Tax Credit, which actually allows lower income people to pay no taxes at all or even get money back from the IRS. Republicans thought this provision was ripe for fraud and abuse because people could potentially make up how little money they were making. Right. So they wanted to scale back this tax credit dramatically. That was going to be a big problem for President Clinton politically. So President Clinton and House Speaker Newt Gingrich struck a deal where the earned income

tax credit would be protected. But in exchange for that, the IRS would have more leeway to audit low-income people in exchange for protecting that tax credit. Got it. So Republicans attack the earned income tax credit, which in a sense is them attacking the IRS. And Clinton comes in and the deal that gets struck makes the IRS a bigger player in making sure the earned income tax credit is not going to be abused. That all sounds pretty constructive, actually. In theory, it sounded like a reasonable compromise, but Republicans were far from done beating up on the IRS. three days of oversight hearings into the tactics, management, and inner workings of the Internal Revenue Service. And there was a lot more criticism to come. The awesome power of the

IRS looms like the sword of Damocles over the heads of taxpayers. And as chairman of the Senate Finance Committee, I want to know why. In 1997 and 1998, they launched a series of public hearings to try to discredit the agency. This is a responsibility I take seriously. Some of the most memorable testimony from the time came from regular Americans who were sharing horror stories. When the raid occurred at my home, the front door was torn from the hinges. My dogs were impounded. ...about Gestapo-like tactics that the agency had used. If you had told me that 64 IRS agents would storm my office with sidearms holstered

and boot heels trampling my civil rights and my business reputation, I wouldn't have believed you. For thousands of other taxpayers, there is no help. The IRS is judge, jury, and executioner, answerable to none. There was also really vivid testimony from IRS revenue agents. If the true number of incidents of taxpayer abuse were ever known, the public would be appalled. Sitting behind screens screens who were speaking

with their voices altered so they could speak more freely. Taxpayers deserve a consistent and fair policy. And they explained that they were directed to audit poor taxpayers who were unable to really fight back against the IRS because they didn't have the resources to do so. Senator, they have less resources at their disposal as far as attorneys or accountants, and they're intimidated by the IRS. There was live television coverage of this at the time. It was front page news, the cover of magazines. And the IRS itself, which is governed by some privacy laws, wasn't really able to properly defend itself. So the agency pretty much was sitting there quietly while it was getting bashed all over the TV and across the country. Right. So if you're an American watching these hearings at home or reading about them in the newspaper,

and from what you're saying, it would be very hard to miss these hearings as a regular news consumer. The message you're absorbing is that the country's tax authority is coming down hardest on these regular people with the least resources to deal with these audits. And it's scary. Exactly. And this just inflamed the fears that people already were feeling about the agency. But Alan, didn't that deal struck between President Clinton and House Speaker Newt Gingrich, didn't that deal encourage the IRS to do exactly what it's being accused of in that moment, which is to more rigorously audit lower income Americans? Well, yeah, but the program wasn't really in effect just yet. It was just getting underway as these hearings were getting going. But at the same time,

the IRS already had been going after lower income Americans. That's definitely true. They were easy targets because they couldn't really fight back against these audits, which were very time consuming and expensive. And the IRS basically saw them as the low hanging fruit in the economy that they needed to go after this revenue that they desperately were trying to collect. And so after all this, there was pretty much bipartisan agreement that there needed to be big changes at the IRS. In 1998, Congress passed a Restructuring and Reform Act

that was passed unanimously in the Senate with the goal of making the IRS more user-friendly. It wasn't going to come after people and attack them anymore. It was going to be a friendlier, more warm and fuzzy IRS. There was even a new mission statement that said that the IRS was now intended to help taxpayers understand and meet their tax responsibilities, as opposed to the old statement, which said it was there to collect tax revenue. Right. We're here to help you not bust into your safe. So the meaning of all of this, just to cut through it, is that there's now a bipartisan consensus that the IRS should be less powerful. And this legislation is defanging it, in a way. hearings. In fact, it found that some of the claims that were made publicly were either exaggerated or unfounded. But the damage to the IRS's reputation had pretty much been done anyway. So some of the most inflammatory elements of those hearings turned out to be perhaps not quite true.

That's right. One of the taxpayers who made the allegations that the IRS agents had seized his safe and ransacked his house tried to file a lawsuit against the IRS, but his case fell apart in court, illustrating the fact that some of these claims were wildly inflated. And yet, the IRS has been totally overhauled because of the inflammatory claims made in those hearings. So how does all of this end up impacting the IRS's ability to do its job? It made the IRS's job a lot harder. The 1998 legislation made a lot of revenue agents feel hamstrung because it allowed taxpayers to more easily file complaints against them. They were worried about losing their jobs. And that was a good thing for rich taxpayers and

small businesses because they could afford to stand up to the IRS. But at the same time, the agency was required under that Clinton and Gingrich deal to more rigorously audit low-income taxpayers who got the earned income tax credit. So what it all resulted in was that by the year 2000, data showed that poor Americans were disproportionately being audited compared to anyone else. Hmm. Fascinating. So by the time the IRS is being publicly called out for auditing lots of non-rich Americans,

and especially poor Americans, and you would think that the IRS would perhaps try to avoid doing that. Its hand is being forced by that Clinton-Gingrich deal. And it kind of has to be auditing those people, those with the least ability to handle an IRS audit or to fight back against it. That's right. And yet, the problems for the IRS are about to get even worse. We'll be right back. We'll be right back.

So, Alan, when and how do things get even worse for the already beleaguered IRS? The IRS started coming under a lot of pressure again around 2013. I bet most Americans don't know that almost all of the taxes that we give... Republicans and their crusades against taxes were on the rise. It takes the wealth away from the working people of America. You will be at the Tea Party, and you bring in your family, you bring in grandma, you bring in grandpa. The Tea Party movement had been ascendant. We're protesting the excessive spending within the government. Which God only knows where the money is going to.

And a lot of conservative groups were starting to form. And while they were forming, they were applying to the IRS for tax-exempt status as nonprofits so they wouldn't have to pay any tax. The IRS around that time, which was struggling to keep up with all these applications, started applying an extra layer of scrutiny to these groups to make sure that they were actually eligible to be receiving the special status. And they started including in their system search terms like Tea Party and Patriots to search for applications that they thought might not actually be eligible. Which I have to say makes a certain sense if you're the IRS and you're trying to figure out which organizations might be abusing the tax code. Because after all, Tea Party groups are very anti-tax.

And in fact, their name comes from the most famous American tax avoidance, which is the Boston Tea Party. There's definitely a certain logic to that that makes sense. But, you know, they raised complaints. The Treasury Department's inspector general launched an internal investigation and it found that, in fact, some things were done wrong and that improper search criteria were being used that was targeting these conservative groups. At that point, the whole thing blew up.

This is the most corrupt and deceitful IRS in the history. Republicans were up in arms, and it was a huge political problem for the Obama administration. And here's the other thing. The president keeps saying it didn't happen, but Lois Lerner admitted it happened. She said that they targeted based on names and policy positions. Which was being accused of weaponizing the IRS against its political opponents. But it's his IRS that's done this, and they should be held accountable. Right. against its political opponents. But it's his IRS that's done this, and they should be held accountable. Right, and suddenly,

we're dealing with a situation that, I remember this well, starts to feel like it's hearkening back to the FDR and the Richard Nixon days of a presidential administration using the IRS for political purposes to go after their enemies. It was no secret in this moment

that the Tea Party's biggest target was Barack Obama and his Democratic Party. That's right. It was history repeating itself in some ways. If, in fact, IRS personnel engaged in the kind of practices that have been reported on. It was a big political problem for President Obama. Then that's outrageous. And there's no place for it. There were public apologies from IRS officials

and the IRS commissioner at the time was fired for what happened. Wow. But in 2017, another report showed that the IRS had actually been doing the same thing to Democrats using search terms that were focused on liberal groups. But this was four years later. And at that point,

the IRS's reputation had already been tarnished some more, and nobody really cared about that later report. And once again, the IRS found itself in a much weakened and depleted state. Budget after budget, the agency saw its resources depleted, mostly led by Republicans, but Democrats, who were not always in power, usually had to go along with it. And that led to even fewer audits and less tax revenue for the federal government. So at this point, I much better understand the roots of this characterization, however hyperbolic it is, that the IRS is an overreaching agency prone to having its enormous

power abused. And I think that brings us to where we are right now, which is Biden saying, we have to find a way to strengthen the IRS and make sure that it can do its actual job, especially when it comes to going after the rich. So his message is, the rich. So his message is fund the IRS properly. And I promise you, it will focus on the real abusers. And those are people with money, not the poor. Yes, the Biden administration is very aware and sensitive of all this history. That's why President Biden has made this pledge that none of the money is going to be directed at increasing audit rates for people who make under $400,000. That's going to be really challenging for the IRS in a lot of ways to try to implement in practice. But it's putting

the message out there that this money is directed at companies, large corporations, and the wealthiest taxpayers. And why is it going to be hard for Biden to keep that promise if you've got all these billions of dollars and all these thousands of new agents? Why can't they successfully focus on going after the rich and after businesses to make them pay what they actually owe? Well, one is that it's difficult for the IRS to figure out who's making less than $400,000 a year if you're not auditing them. And then in terms of targeting all these additional resources at the rich, well, the issue is that it's really difficult to audit the rich sometimes and big companies. They've got armies of accountants, lawyers, their tax situations

can be really complicated because the tax system has gotten so complicated. So it's going to be difficult for the IRS to also hire people who are qualified to do this. The agency has been so beleaguered, as we've said over the years, and badgered that it's not necessarily the most attractive place where top tax talent wants to work. Right. If you are the smartest actuary in the country, you may not want to be working for the IRS. But that's what the IRS will need to penetrate these exotic tax schemes that we are constantly reading about in the pages of our own newspaper that allow the ultra wealthy to hide money or move money, sometimes in ways that may be perfectly legal and might take an army of IRS specialists a very long time to prove

aren't legal. Right. And as one former IRS commissioner used to joke, a lot of kids don't really, you know, say when they grow up they want to be IRS agents. So what Biden is doing is theoretically giving the IRS a fighting chance at pursuing the kind of hard tax cases that I think most Americans want the IRS to be focused on, involving rich taxpayers and big companies. But it sounds like you're saying that there's a risk here that even with these new agents and all this new money, the IRS is going to find that it can't actually do that work. It's just too hard. And it's possible that once again, as happened in the 90s, the IRS kind of accidentally ends up becoming the very thing, this boogeyman to regular Americans that politicians have accused the IRS of being all along. It's definitely possible that could end up happening because there's a lot of headwinds that the Biden administration and the IRS are still facing. Republicans in the House have already tried to scale back some of the money. There's going to be very vigorous oversight and scrutiny of how it's being deployed, and more congressional hearings are to come.

And so what a lot of people fear is that could lead the IRS to being unable to live up to what the Biden administration wants it to be. It's going to be a huge challenge for the IRS to bring in all these billions of dollars of tax revenue to fund progressive priorities without being able to ramp up audits on Americans making under $400,000. Well, Alan, thank you very much. We it it's my pleasure thank you michael we'll be right back. Here's what else you need to know today. On Monday, the violent battle for control of Sudan expanded, killing at least 180 people and injuring more than 1,800, according to a United Nations official.

The conflict between supporters of the country's two top generals has resulted in terrifying scenes of fighter jets firing into the country's capital city and now risks drawing neighboring countries like Egypt into the battle. The immediate future lies in the hands of the generals who are engaged in this fight, and we call upon them to put peace first. As the fighting has intensified, Western leaders, including the U.S. Secretary of State and the British Foreign Secretary,

have called for an immediate ceasefire and peace talks between the two sides. But so far, the two generals have shown little interest in negotiation, and for the moment, it's unclear who, if anyone, controls the country. Today's episode was produced by Mary Wilson and Michael Simon-Johnson, with help from Claire Tennesketter. It was edited by Rachel Quester, contains original music by Marion Lozano and Alisha Ba'itu, and was engineered by Chris Wood.

Our theme music is by Jim Brunberg and Ben Landferg of Wunderli. That's it for The Daily. I'm Michael Barbaro. See you tomorrow.