Why We Fear the IRS

Lisa Bennett was at home on an ordinary afternoon when she received a call from Officer Jason Dean of the Investigative Office of the Treasury. He told her that an arrest warrant had been issued for failing to respond to the three IRS CP503 notices that had been sent to her, that her phone lines were being traced, and that she should not attempt to leave the city. When she protested that she had received no such notices, he responded with the high-handed disinterest of a powerful bureaucrat: “We’re only calling you as a courtesy to inform you that you will be arrested and charged with failure to meet federal taxation requirements, malicious conduct, and theft by deception. You will be arrested within the next two hours and held in custody for six months pending an investigation.”

Then he softened: There was someone who might be able to help her, but he could make no guarantees. He transferred her to another agent, who said that if he could get a 1099-C form for out-of-court restitution for cancellation of debt, he might be able to call off the police, whose calls were already showing up on her cell phone. But there was not much time. Soon she was racing to the bank with her teenaged son in tow, afraid to hang up the phone lest the arrest team descend.

It was a scam, of course. These were not IRS agents. Form 1099-C is not for cancelling your debts, but for reporting debts you’ve had cancelled by others (which the IRS quite properly regards as income). And while there are people who go to jail for tax evasion, you have to work pretty hard at defiant non-payment to actually get sent to the pokey. Also, agents of the IRS are not going to make it hard to verify that they are agents of the IRS -- for instance if you want to call them back at an official number.

Thankfully, Bennett ultimately didn’t fall for it. She came to her senses when she was asked to send money … somewhere. But these tricks are successful often enough to continue.

What’s interesting about this scam is that it’s a departure from classic confidence schemes. Think about something like the Nigerian e-mail scams, and how they draw their victims in: greed for a lucrative finder's fee in exchange for doing something that sounds maybe a little bit shady, but maybe sort of noble too. The victim is then strung along by playing to the greed, and kept from talking to others who might point out the scam by because they think they are complicit in something legally questionable.

The IRS scam, on the other hand, works entirely by fear. It takes people who haven’t done anything wrong, and makes them afraid that they have. That’s a pretty hefty achievement. Imagine trying to extort money from someone by, say, claiming that they had murdered someone. You might elicit laughter, or bewilderment, but you’d rarely elicit much cash.

Which raises the obvious question: How did we get into a situation where it’s so easy for people to believe that the IRS is about to arrest them for a crime they weren’t even aware of having committed?

You guessed it: The IRS is incredibly powerful, and the tax code is incredibly opaque.

Like many journalists, my husband and I pay someone to do our taxes. We have to. The year we married, I realized that with two journalists who both had salary and non-salary income, home offices, various business expenses, and a new home purchase, our taxes had finally passed the point at which I was even marginally competent to do them. Before then, I had always done my taxes myself, and filed them with a sort of wistful hope that I had done them correctly. At this point it seems worth pausing to note that:

I have an MBA.

I write about tax policy for a living.

These things are surprisingly little help. Filling out your taxes is not a matter of being good at math, or accounting, or even knowing how various provisions of the tax code interact in revenue projections. It is entirely a matter of knowing what can be deducted, and how. And because our tax code is so complex, that doesn’t mean “read the statute”; it means “read the statute, and the case law, and develop a sense over long experience of how agents are likely to interpret this or that during an audit.” The only people who can do that are tax professionals; the rest of us are too busy earning a living in our own professions.

There’s no perfect measure of tax complexity, but consider one quick-and-dirty metric: the number of lines on a typical tax form, and the length of the accompanying tax booklet. Quartz did just that a while back, and found that the complexity had been steadily increasing.

Legal complexity does not accumulate linearly; it accumulates exponentially. When you have one law on the books, and you add a second, the new law may (or may not) have some unexpected interaction with the old law. This would be one complexity point for regulators to manage. But with each new law, the number of potential interactions grows quickly, until it passes the ability of any layman to grasp it (and eventually, surpasses the professionals as well, which is why they’re increasingly specialized in narrow areas). We are long past that point with the tax code.

The obvious answer is “tax simplification.” Other countries do not have quite this tangled mess, after all; the annual ritual where everyone in the country panics over getting their taxes in seems alien to folks from many other places.

And yet getting there won’t be easy, because the dirty secret of tax simplification is that the stuff creating all the complexity is stuff people like. “Tax complexity” sounds terrible, particularly as April approaches. But what about IRAs? Tax deductions for dependent children? Deductibility of excess health expenses? Educational tax credits? Home mortgage interest deduction? All those things sound great, don’t they? And if we try to get rid of all that great stuff that people love, taxpayers would scream.

There’s more than one reason that the U.S. tax code is so complicated, but a big one is simply that we give tax deductions where other countries use subsidies. There is no way to have a simple, comprehensible tax code that offers the wide array of deductions and credits that the U.S. does. And so we have the paradox of U.S. tax policy: Everyone wants things to be simpler, but no one wants to get rid of the things that make it complex.

This leaves us vulnerable, not just to scams, but to a pervasive sense that the government may descend at any moment to punish us. But apparently, we’d rather have that than lose our mortgage interest deduction -- or admit what our tax policy is doing, and offer straightforward subsidies for the things we want to encourage.

Copyright 2016 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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