Expatriate Owl

A politically-incorrect perspective that does not necessarily tow the party line, on various matters including but not limited to taxation, academia, government and religion.

Tuesday, March 21, 2006

Tax Evasion in the News

It has been over two weeks since the last blog entry. Lots of things have been and will continue to be taking up my time and energies, and this has kept me off the streets and out of trouble. This will likely continue for a while, what with the holidays coming up, et cetera.

We are, of course, in the thick of Income Tax Filing Season, which the IRS officially opened as of 3 January 2006. It is no coincidence that the various US Attorneys, in conjunction with the IRS, are springing indictments for tax evasion (and, more importantly, reporting the same in the news media).
And yes, I have filed our tax returns. The IRS is making a concerted push to get taxpayers to file their tax returns electronically. This I find somewhat ironic, given the IRS's institutional aversion to the use of modern computer technology, no doubt a result of its using a computer infrastructure that dates back to the 1960's. But according to Section 2001(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, the IRS has been tasked to achieve 80% of tax return filings through electronic means by the year 2007 (that's next year).

But I have not helped the IRS achieve its goal. My tax returns (Federal and New York State) were filed the old fashioned way, through the United States Postal Service. This is not because I am a Luddite or other technophobe, but because, according to the IRS's own promotional material, if I e-file my tax return, the IRS sends me an official acknowledgment within 48 hours. By sending my tax returns via Certified Mail, I was immediately given the mailing receipt by the Post Office window clerk, which, if the question is ever asked, would prove that I timely filed my tax returns. No waiting for 48 hours for the receipt! When the IRS can update its antiquated computer systems to start giving instantaneous filing receipts, then I will consider entering the camp of the e-filers.

During my IRS days, there were a number of cases under my cognizance where the Service was set to penalize the taxpayer for late filing, but the taxpayer ended the conversation by producing a Certified Mailing receipt. I obviously will not speak identifying details of the cases, let alone post them on this blog, but knowing that the IRS is far from infallible in keeping track of the returns the taxpayers send in, my preference is to let the Postal Service keep the IRS honest. It's all part of the American system of checks and balances in government.


The tax evasion sentence of William A. Ellis has been upheld on appeal. Ellis, former bishop of the Apostolic Pentecostal Church in Morgan Park, Illinois, was snagged on a tax evasion charge. His attorneys tried to get the 18-month sentence reduced (if you have mp3 capability and 15 minutes, you can listen to the oral arguments before the 7th Circuit Court of Appeals). The appellate panel said "Go To Jail, Do Not Pass Go!"

[The URL for the Court's website is unstable, but the case can be cited as United States v. Ellis, 440 F.3d 434 (7th Cir. 2006).]

In addition to his $109,000 salary, plus perquisites such as a church credit card, and probably (though not mentioned in the Court's opinion) the tax-free parsonage allowance, Ellis was skimming $1,000 per week from the Church's collection plate.

This gives ALL houses of worship a bad name, and invites further governmental scrutiny into the affairs of the individual congregations. It also does little to encourage the faithful from supporting their congregations, and gives plenty of fodder for the anti-religionists. Let Ellis do his time in the pen, where the inmates, no doubt, might benefit from his pastoral counseling.


Of greater concern than Ellis, however, are the government contractors who are not paying to the IRS their income taxes and/or the payroll withholding taxes they collect from their employees. The Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security & Governmental Affairs held a hearing last week about GSA Contractors who are delinquent in their taxes, but the Subcommittee's website is very out of date. Fortunately, the Government Accountability Office has published the testimony given at the hearing by its cognizant people. It is not a pretty picture! GAO estimates $1.4 billion in unpaid taxes by GSA contractors. That's $1.4 billion which the law-abiding taxpayers must carry on their backs.

This is more than a deficiency in the Federal fisc! Those contractors who effectively operate tax-free are given an unfair advantage over the law-abiding contractors who do timely pay their taxes.

Even prior to my prior life with the IRS, I had incarnations as a Contracting Officer and an Analyst with the Department of Defense, so I think I have a reasonably good idea of how the dynamics of the procurement system operate. Many of the cases that were under my cognizance were safety-critical items whose failure would result in a crashed airplane, immobile truck or sunken ship. Quality assurance was obviously a very salient issue, and more than a few contractors attempted to cut corners with quality. I've had telephone calls from the staffs of several Congresscritters who wanted to know why their constituents were not awarded the contract, and I had to tell them that there were quality problems with the products purveyed by their boys and girls, and that I'd rather take flak from Congresscritters with disappointed business constituents than from widows, orphans and Gold Star Mothers.

But the contractors expect the government to run a level playing field. If, for example, one contractor cheats by using foreign-made materiel when the spec calls for American-made materiel (and undercuts the competition in doing so), this does not sit well with the law-abiding contractors. And while a majority of the contractors, when confronted with a competitor who is cheating, will continue to abide by the law, there is no doubt in my mind that every single one of them will at least think about similarly cheating, unless they see that the Government is taking sure and swift and definitive action against the cheater. In one particular case where I was instrumental in catching a cheat using foreign materiel, the competitors personally congratulated me when the indictment was announced.

There is very little functional difference between a government contractor having an unfair advantage by cheating with cheaper or inferior materiel, and a government contractor gaining unfair advantage by cheating on his/her/its tax obligations. Which means that it is not a very long leap for a contractor, knowing that their competitor is getting away with tax evasion, to rationalize cutting production costs by using inferior below-spec materiel.

Never mind what the insurgents in Iraq are doing to our men and women in uniform! If the Government does not keep a level playing field in its procurement policies, the lives of our military members are threatened.

But implementing a solution will be problematic. It will add to the bureaucracy. I only hope that the cost of this new bureaucracy will be less than the unpaid taxes that will be collected on its account.

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