IRS Schemes to Undermine Estate Tax

With a cut to the estate tax looking unlikely in Congress this year, the Bush administration is quietly planning to reduce the number of federal agents who enforce the tax. Critics are calling the move a "backdoor" repeal of the tax on extraordinary inheritances.

Through leaked internal agency documents, the New York Times discovered last week that the government plans to eliminate almost half of the Internal Revenue Service’s 345 lawyers who currently audit the tax returns of those subject to sharing a cut of their estate with the American public upon their deaths. The Times reported the staff reduction will be made within the next few months.

The estate tax is levied on the transfer of massive amounts of wealth to heirs upon death. It does not apply to portions of an estate transferred to a spouse or charitable organization.

Although some politicians and anti-estate-tax groups have launched aggressive campaigns to repeal the tariff, the Senate has so far refused to kill it. In June, the Senate voted 57-41 against repealing it. Last week, House Republicans attached the measure to a minimum wage hike bill in the hopes of winning over Democrats, but Senate Democratic leadership vowed to kill the measure again.

While unsuccessful at repealing or cutting the estate tax through legislation, critics say the Bush administration is effectively gutting the tax by eliminating enforcement staff, and offering a gift to America’s elite in the process.

"For the administration to turn around and say, ‘We’re going to get rid of the people tasked with enforcement of the estate tax,’ certainly looks like an effort at backdoor repeal," Lee Farris, senior organizer of estate-tax policy at progressive United for a Fair Economy, told TNS.

The IRS did not return interview requests made by TNS, but Kevin Brown, an IRS deputy commissioner, told the New York Times that he had ordered the cuts because "far fewer people were obliged to pay estate taxes under Bush's legislation."

The 2001 Bush tax cuts included gradual estate-tax exemptions for wealthy Americans until 2010, when the tax will be temporarily repealed for one year, before being fully reinstated in 2011. But while only around 6,300 people leave taxable estates each year, the Center on Budget and Policy Priorities, a progressive fiscal policy organization, and the Joint Committee on Taxation, an government advisory committee charged with monitoring federal tax policy, estimate that repealing the estate tax would create a $369 billion loss in revenue between 2007 and 2016.

Farris pointed out the irony in how the IRS job cuts coincide with a nearly $100 million increase of tax-enforcement funding included in a newly approved Senate appropriations bill. Given the personnel cut, critics predict the IRS will use the enforcement increases to go after low- and middle-income taxpayers instead of investigating wealthy tax evaders.

A 2006 study already found this trend to be true: taxpayers reporting less than $25,000 in income were six times more likely to undergo IRS audits in 2005 than those reporting earnings of $200,000 or more, according to the public-interest group Transactional Records Access Clearinghouse, affiliated with Syracuse University

At the same time, Brown of the IRS told the Times that estate-tax lawyers are the most productive tax-law enforcement staff at the IRS, finding an average of $2,200 of taxes owed but not paid to the government each hour that they work. The IRS says a significant amount of taxes are never collected from all taxpayers. The IRS reports that the gross tax gap -- the difference between what taxpayers are obligated to pay, and what they actually pay -- surpasses $300 billion every year.

"It’s just really shocking that the administration would be willing to cut off its nose to spite its face," Farris said. "It just seems crazy to cut the staff that are bringing in the most money at the IRS."