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February 3, 2004
Historical Perspective: APA Program Highlights IRS Struggle to Balance Privacy and Secrecy
Joseph J. Thorndike

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The IRS has a tendency to confuse privacy with secrecy. Critics have for years charged the agency with fostering a full-fledged culture of secrecy, using legitimate privacy concerns to escape public scrutiny.

Without question, IRS officials have sometimes used privacy arguments for their own purposes; eager to avoid the harsh light of public examination, they've hidden in the convenient shadows of section 6103.

To be fair, the agency is caught between a rock and a hard place. Statutory restrictions make it difficult to develop a reasonable disclosure policy. And many well-intentioned officials have tried to strike an uneasy compromise, balancing accountability and privacy.

But secrecy, no matter how well-intentioned, always comes with a price. It fosters public distrust and opens the door to corruption. In the case of the IRS, it even complicates staff retention. Recent disclosure debates over the Advanced Pricing Agreement Program have thrown these problems into sharp relief. When lawmakers decreed in 1999 that APAs were not disclosable, they effectively thwarted public oversight of the program. Worse, they made no provision for any other form of regular, meaningful supervision.

Historically speaking, that's a recipe for disaster.

As early as 1865, the Bureau of Internal Revenue (BIR) (as the IRS was then known) faced accusations of taxpayer mistreatment. Opponents of the Civil War income tax had derided the agency for its "army of officials," charging that heavy-handed, unsupervised enforcement was inconsistent with American notions of limited government.

Those charges stemmed, at least in part, from the broad powers delegated to BIR officials. Federal assessors enjoyed wide discretion in establishing tax liability, and collectors wielded equally broad power when people refused to pay. In most cases, decisions were made by field staff, with limited oversight from Washington. As economist Edwin Seligman later pointed out, the result was predictable: "In some cases, [officials] abused these powers unmercifully, while in others they succumbed to the danger of bargains or compromises with taxpayers."

Congress responded by repealing the income tax. But when the tax returned in the 20th century, secrecy problems came with it. In the 1920s, Michigan Sen. James Couzens lambasted the BIR for cutting private deals with corporate taxpayers. A maverick Republican who served his constituents with some distinction and much hyperbole, Couzens never minced words. "Laxity and corruption in the enforcement of the laws," he contended, had "allowed wealthy taxpayers to settle too cheaply and escape their fair share of taxation."

Gross Discrimination

As they had during the Civil War, BIR officials enjoyed considerable latitude in establishing tax liability. But in the 1920s, guidance and decisions were routinely kept private, leading to what Couzens described as "the grossest kind of discrimination among taxpayers." In a series of hearings before the Select Committee on Investigation of the BIR, Couzens established that BIR officials had granted to various American companies "secret" refunds totaling $600 million. The refunds were wrong, he insisted, not because they were illegal -- which they weren't -- but because they were unpublicized. The Couzens committee decried the BIR's fondness for bargaining with taxpayers. "There has been a great deal of evidence tending to show that it is the policy of the bureau to fix taxes by bargain rather than by principle," the panel noted. "The best and most persistent trader gets the lowest tax and gross discrimination is the inevitable result of such a policy."

Committee members acknowledged some privacy concerns, but they held fast to their call for accountability. "While the objections to throwing the records of the Income Tax Unit open to the public are recognized," lawmakers explained, "the necessity for . . . some outside scrutiny is imperative."

Secret bargains also exacerbated the BIR's staffing problems. Since its inception, the agency had struggled to attract and retain talented employees. As the nation's first commissioner, George Boutwell explained archly in 1863: "It is of importance to the government that the assessor should be a man of intelligent business capacity and unfaltering integrity. The compensation provided by law is not adequate for the services of men who possess these qualifications."

Indeed it wasn't, and over the next 60 years the BIR never managed to solve this problem. It was unreasonable to expect the agency to compete with private industry, but secret rulings and unpublished guidance made the problem worse. As The Nation magazine later observed, "this practice established a special class of practitioners who traded in a knowledge of the secret methods and practices of the Bureau's Income-Tax unit." Such knowledge made BIR employees extremely valuable to corporate taxpayers, fostering a damaging rate of turnover.

"To secure the benefit of unpublished precedents," concluded the Couzens committee, "taxpayers are forced to employ former employees of the income tax unit to advise and represent them in tax cases. Their exclusive possession of information as to the unpublished precedents and practices of the income tax unit has placed an artificial premium upon the value of the services of ex-employees which enables them to demand and receive immense fees for information which should be freely available to everybody."

In 1952 secrecy problems surfaced again, this time amid a genuine corruption crisis. Investigators had discovered not just the appearance of impropriety, but its reality as well. Numerous tax officials lost their jobs and several went to prison, including a former commissioner and an assistant attorney general heading up the tax division.

Lawmakers again called for greater openness, citing the need for published decisions. "Their availability to public scrutiny," a House panel pointed out, "should serve as a deterrent to favoritism and enable the public to satisfy itself as to the impartiality of tax administration." The newly christened IRS made a decent stab at complying, but the issue was not so easily resolved.

Secrecy Breeds Suspicion

"Give me control of the Bureau of Internal Revenue," Couzens reportedly declared, "and I will run the politics of the country." A fascinating, frightening, and typically overstated claim, it speaks to a deep American wariness of the nation's tax collector. Secrecy has aggravated this suspicion, making a tough job much harder. A limited, clearly defined policy of nondisclosure is appropriate for some types of information. In the case of APAs, there are several good reasons to keep them private, not the least of which is that taxpayers entering into this voluntary program seem likely to demand it.

But when disclosure is impossible, oversight must be vigorous. As the Couzens committee concluded in 1926: "Congress, in imposing a system of taxation the administration of which necessarily involves the exercise of so much discretion, assumes some duty to the public to see that such discretion is not abused."

The Senate Finance Committee's recent interest in the APA program provides just the sort of scrutiny the program needs. But as Tax Analysts' founder Thomas F. Field recently argued in these pages, the program requires more regular and systematic oversight. (See Tax Notes, Jan. 19, 2004, p. 419.) Perhaps, as Field suggests, the Joint Committee on Taxation can play that role. (It was Couzen's investigation that prompted Congress to create the panel in 1926.)

But even vigorous oversight won't solve the revolving door problem. The IRS can't pretend to compete with private industry. Today, as always, there is an unspoken deal with well-heeled taxpayers: We'll train your tax professionals for a few years at substandard salaries, and then you can compensate them adequately -- even richly -- once they bolt.

The IRS shares this problem with many other agencies, but because tax law can be lucrative, both for practitioners and their clients, the problem is particularly serious at the IRS. In all likelihood the problem can't be solved, but secret law and inadequate oversight only make it worse.