Why the IRS Scandals Make It Hard to Fix the IRS

Susan Walsh/AP file photo

Two damning Treasury Department reports, ongoing congressional hearings, and one criminal investigation remind Americans how much they dislike the tax man—and not just on April 15. Which means they probably need less convincing now than at any other time in recent years that the tax code needs to change. But even if the scandals increase the desire for reform, they make getting it done harder than ever.

On the momentum question, the top tax writers seem to agree that all the attention can finally make their longed-for issue a priority, and they are trying to keep it going. “A simpler, fairer, flatter tax code would certainly take [away] some of this ability of the IRS to just kind of go on fishing expeditions,” Rep. Dave Camp, the Republican chairman of the House Ways and Means Committee, said during a May 17 appearance on CNBC. “This really might focus the American public on the need for tax reform, which is something I’ve been working on for a couple of years now.”

Sen. Max Baucus, the Democratic chairman of the Senate Finance Committee, also tried to yoke the IRS melee to legislative reform. At a recent hearing, he argued that any big examination of the tax code should look into the provisions for tax-exempt organizations known as 501(c)(4)s. (The first inspector general’s audit showed that the IRS improperly targeted conservative groups organized under this section of the code.) Bruce Bartlett, who was a Treasury official under President George H.W. Bush and a domestic-policy adviser to President Reagan, says, “The scandal slightly improves the odds of tax reform for the simple reason that both parties will want to pass some kind of legislation to fix or deal with the IRS problem, and I think they’ll want to do it this year.”

But even if the IRS ruckus enhances the political argument for tax reform, it also complicates the process from a policy perspective. Huge congressional investigations, like the ones being undertaken by the House Ways and Means and the Senate Finance committees, require tons of preparation by the policy staffers and the members grilling the witnesses. “When there is a nationally televised hearing with that kind of attention, it’s all hands on deck,” says Alex Brill, a former policy director for Ways and Means and a research fellow at the American Enterprise Institute.

This diverts top tax specialists from meetings and brainstorming sessions about rewriting the code and plunges them into the hunt for information about goings-on at the IRS. Both tax-writing committees have dedicated staff members for oversight hearings and long-term investigations, but Brill says it becomes tricky to wall off such experts when the political stakes are so high. For instance, Mark Prater, one of the most experienced tax aides on the Hill and Sen. Orrin Hatch’s chief tax counsel, has been tasked, among his many other duties, with working on the IRS investigation, according to two lobbyists familiar with the committee.

Both Camp’s and Baucus’s press shops insist this is not the case. “The staff that is conducting the investigation is completely different than the staff working on tax reform. The IRS issue will in no way slow down efforts,” says Sean Neary, communications director for the Senate Finance Democrats. The Ways and Means Committee similarly pointed to their separate tax and investigations staffs. But opportunity costs are real:

The IRS scandals open up new terrain for tax reform, and new territory equals lots more work. It’s all well and good to announce, as Baucus did, that lawmakers should examine provisions surrounding tax-exempt groups, but it’s a lot harder to incorporate that into the workload. Already, staffers are mired in detailed technical questions surrounding the taxation of financial products, small businesses, and companies that file through the individual side of the tax code, not to mention the appropriate tax rate for multinational companies. Adding tax administration and compliance to this lengthy To Do list could delay the timing of a bill—even if it also offers new opportunities. Or, as Brill put it, Camp has promised to move a tax-reform bill out of his committee by the end of the year; Baucus has not committed to any time frame.

Finally, the IRS scandals give lawmakers all of the cake and none of the vegetables in talking about the tax code. They allow members to pontificate on television about what should be done without having to take any tough or politically damaging votes, as they will inevitably have to do with any tax-overhaul legislation. (Just wait and see how popular reformers are if and when they try to nix such tax goodies as the mortgage-interest deduction.) Until then, lawmakers simply get to bash the IRS—an agency that no one loves anyway.

Still, even as the IRS rumpus makes the path to reform increasingly difficult, it also suggests it is increasingly necessary by highlighting the massive range of policy the federal government delivers through the agency—from doling out tax breaks to implementing the Affordable Care Act to policing political organizations. “The IRS is really stretched beyond its capacity,” says Michael Graetz, a professor of tax law at the Columbia University Law School and a former Treasury official. “There is administrative difficulty and a high cost of compliance. Tax reform done right is an opportunity to bring it back under control.” And getting the IRS under control may simply mean asking the agency to do less.

This article appears in the June 8, 2013, edition of National Journal as "Mixed Blessing."

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