Commentary

The Latest IRS Scare Campaign

Most years, the IRS launches a huge scare-the-taxpayer campaign as April 15 approaches. This time the IRS has decided to target American taxpayers who use credit cards issued by foreign banks, demanding that Visa turn over millions of confidential records. Is this because it is illegal for Americans to have credit cards issued overseas? No, the IRS admits that this is legal. Is this because the IRS has proof that these American credit card holders are tax evaders? No, the IRS has no proof of illegal activity.

But the IRS apparently does not care about due process and civil liberties. The IRS is on a fishing expedition. It is demanding that credit card companies violate the privacy rights of their customers because the IRS thinks that some taxpayers might be using their cards to access money in foreign bank accounts — -money that some taxpayers might not be reporting to the IRS.

In other words, the IRS is undermining the Constitution’s guarantee that government cannot investigate our private affairs unless it has sufficient evidence to obtain a warrant from a judge. Moreover, the IRS is making a mockery of the Constitution’s presumption that people are innocent until proven guilty. Indeed, the IRS already has received 1.7 million records from American Express and MasterCard that involve more than 230,000 credit cards issued by banks in the Bahamas, the Cayman Islands and Antigua. Now the agency is targeting Visa. The IRS wants the names, addresses, Social Security numbers, and telephone numbers of American cardholders with accounts in 30 countries.

The IRS apparently assumes that anyone with an offshore credit card is somehow involved in tax evasion. But that’s false. It is not illegal to hold an offshore account in a tax-free Caribbean country. And it is not against the law to use a credit card issued on that account in the United States. The IRS handbook for special agents says that most taxpayers use havens to avoid taxes and for tax-planning purposes—not to evade taxes. The IRS is blowing smoke when it assumes that the credit cards are used to evade taxes. Records provided by MasterCard show that the IRS placed only a few hundred cases under investigation. And when the IRS obtained thousands of records of one bank in the Cayman Islands, the agency said it found 1,500 cases of tax evasion. But the IRS ended up convicting fewer than 70 people. By and large, the IRS is snooping.

Tax evasion is a crime. But the IRS has an obligation to respect the Constitution. The current IRS scare is an abuse of power because most of the low-tax countries targeted have signed “tax information exchange” deals with the United States. Those countries also provide bank records once an individual is under investigation for tax evasion.

Regrettably, the IRS’s hunger for information threatens what is left of our financial privacy and our individual liberty. What will happen to innocent people whose records have been turned over to the IRS? Will the records be destroyed once a person has been cleared? History shows that the IRS does not always make the best use of the records it collects. According to Shelly Davis, a former IRS historian, the IRS keeps a list of selected American citizens for no reason other than their political activities, and has used taxpayer records to persecute persons on that list. In 1995 hundreds of IRS agents were caught illegally snooping through tax records of thousands of Americans. And in 1997 hundreds of agents were caught prying again. Why should we give the IRS access to even more information?

Instead of blaming tax havens and financial privacy for tax evasion in America, IRS officials should try to understand the reason why some taxpayers might engage in this activity. The tax burden today is excessive and tax rates are too high. In 1999 taxes at all levels already consumed nearly 38 percent of the average dual-income family’s income, and taxes today may be consuming an even greater share of the economy’s output.

Adding insult to injury, the tax code is more complicated and unfair (45,662 pages that require taxpayers to choose from 703 different forms), which drastically increases the cost of compliance. High taxes - and a tax code that punishes saving, investment, and work - give taxpayers an incentive to shift their activities to low-tax countries. That is the problem we should fix. But the IRS has no interest in tax reform because tens of thousands of bureaucrats would lose their jobs if we had a simple and fair flat tax.

Veronique de Rugy is a fiscal policy analyst at the Cato Institute.