Tax Notes, July 10, 2006.
Tax reporters got a break from the arcane and mundane recently when Congress put two new words in their tax vocabulary: pimps and prostitutes.
A proposal by Senate Finance Committee Chair Chuck Grassley, R- Iowa, that would enlist the IRS's help in policing sex traffickers gave the tax press rare creative opportunities and made national headlines, gracing nightly news broadcasts and the front pages of local newspapers.
Grassley has always had his finger in a lot of legislative pies. Press releases from the Senate Finance Committee in some weeks outnumber those from the House Ways and Means Committee 5 to 1. But Grassley's sex trafficking proposal and its accompanying fanfare still caught many in the tax community by surprise.
The Finance Committee announced the proposal with no fewer than three press releases, preceded by an Associated Press story the night before the proposal was officially announced. Finance Committee aides told Tax Analysts last week that Grassley had heard that the Department of Justice continually struggles to prosecute sex crimes, and Grassley saw an opportunity to use his committee's tax jurisdiction to help.
"This is another tool in the tool belt to go after sex traffickers," one aide said.
But former tax administrators contacted by Tax Analysts criticized the measures for proposing to use IRS resources and personnel on an issue that is only marginally tax-related.
"He hasn't thought it through," former IRS Commissioner Sheldon Cohen said of Grassley. "He's reacted to some problem he's been given with a tax solution. Every problem shouldn't have a tax solution."
At the heart of Grassley's proposal is what committee aides interviewed by Tax Analysts describe as a "pilot program" to authorize the IRS Criminal Investigation Division to spend $2 million to set up a sex trafficking unit. The unit would be directed to work closely with DOJ sex trafficking task forces and would be required to report to Congress on its activities at the end of one year.
Grassley also proposed stiffer penalties on all willful failures to file information returns and even harsher penalties when the underlying income comes from illegal activity. Although the penalty provisions are not aimed solely at sex traffickers, the Finance Committee claims they will relieve CI of the difficult burden of proving how much income a pimp earns in order to prove income tax liability.
"Al Capone was finally put behind bars for evading the tax code," Grassley said in a press release. "The IRS goes after drug traffickers. We can use the tax code to help get illegal sex traffickers, too."
All the provisions were tacked onto a telephone excise tax repeal bill (S. 1321) that cleared the Finance Committee in late June. Grassley said he hopes to move the bill through the full Senate before the August recess, but most of the people contacted by Tax Analysts gave the sex trafficking proposal little chance of enactment.
Pamela Olson, former Treasury assistant secretary for tax policy, called it one of the worst pieces of tax policy she's seen and gave it "zero" chances of survival. Every former tax official contacted by Tax Analysts criticized the proposal, and both Cohen and fellow former IRS Commissioner Don Alexander called it detrimental to good tax administration.
"It doesn't make any sense from a tax policy standpoint," Olson said.
According to Olson, the IRS should not be used as an enforcement arm for other government agencies. She questioned how much the tax laws could help prosecute sex crimes.
"It's got to be at least as easy to prove someone is a pimp than to prove they've got uncollected income from pimp operations," she said.
Chris Rizek, a former Treasury associate legislative counsel, said the proposal represents an "admirable goal" and said he understands how such a provision gets included in a tax bill.
"It's one of those things that's politically irresistible," he said.
But like Olson, Rizek said he worries that it would take CI in the wrong direction. The division is just emerging from years of criticism that it spends too much time and too many resources on nontax crimes, as discussed in a recent report by the Treasury Inspector General for Tax Administration. Cohen said the IRS is tapped for help so often because it's a victim of its own success.
"The IRS is its own worst enemy," he said. "It's still a fairly efficient machine."
But Cohen warned that sending the IRS on enforcement errands comes at a high cost to tax administration and puts the agency on the slippery slope toward local law enforcement.
"Then when do we stop? Why don't we just abolish the rest of the government and let the IRS take over?" he asked.
Finance Committee aides rejected much of the criticism, pointing out that $2 million is a drop in the IRS funding bucket compared with the myriad other appropriation authorizations in the same bill.
"In the grand scheme of things, this is very small," one aide said, noting how much work CI does that is tax-related.
The aide added that the IRS has as much obligation to go after illegal-source income as it does to go after legal-source income and that sex traffickers -- of all criminals -- shouldn't be given a free ride.
"The tax gap is not made up of avoidance only from legal activities," one aide pointed out.
The aides criticized the lighthearted tone taken in some press reports on the proposal, and said that with the problem of sex trafficking seeing increasing publicity and possibly becoming a broader issue, Grassley was compelled to act.
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