Sunday, July 23, 2006

Are your tax records safe? Good question.

The Treasury Department last month admitted investigating thousands of cases of IRS employees improperly snooping through taxpayer records. And although this led to 1,600 “adverse personnel actions” and 126 criminal prosecutions, Treasury officials concede “there has not been a noticeable decrease” over the last eight years in the number of IRS bureaucrats who gain unauthorized access to confidential data.

Earlier in the year, the Government Accountability Office outlined similar problems. The GAO report “identified a number of internal control issues that adversely affected safeguarding of tax receipts and information.” These included “enforcement of IRS contractor background investigation policies” and “procedures for handling taxpayer receipts and information by couriers.”

According to GAO, the IRS even had problems “safeguarding sensitive systems and equipment in lockbox banks.”

The IRS’ inability to protect taxpayer information is troubling, to say the least. In an age of growing identity theft, sophisticated criminal enterprises have a big incentive to exploit the sloppy practices of the tax collection agency. Every tax return has all the information needed to bilk an unfortunate victim, through the use of phony credit cards or other scams. (U.S. taxpayers, though, are fortunate compared to their Latin American counterparts, who have family members kidnapped for ransom when bureaucrats sell confidential info to criminal gangs.)

Yet IRS bosses have displayed a rather cavalier attitude about the behavior of their employees. One former commissioner told the Wall Street Journal that, “So long as income-tax returns are filed, with all the inviting details they provide, some curious people — and some with worse motives — are going to try to look at them.” I guess this means the rest of us should shrug our shoulders and allow our privacy to be violated.

The IRS’ current commissioner has even less regard for taxpayer privacy. He actually wants to give IRS information to other government agencies. Fortunately, this radical proposal has made little headway. Other government agencies, such as the Securities and Exchange Commission, seem uninterested, and even the IRS’ National Taxpayer Advocate opposes the scheme.

Bureaucrats who rummage through private tax records should be vigorously prosecuted, and senior-level IRS officials who seek to increase the vulnerability of taxpayer information should be dumped in the unemployment line. But these actions would merely address the symptoms. The real problem is the tax code.

Specifically, the code requires the collection of far too much personal information by far too many people (there are more than 100,000 IRS employees), dramatically increasing the likelihood that dishonest people will enjoy access to our private information.

This is one of the reasons fundamental tax reform is such a good idea. Imagine if America had a simple and fair flat tax. Not only would this boost economic growth and make the U.S. more competitive in the global economy, it would dramatically reduce the information we’re forced to divulge to the IRS.

The hundreds of forms required by the current tax code would shrink to two postcard-sized forms, and individual taxpayers would need to tell the government only the size of their household and the amount of labor income they earned. (Capital income such as dividends and interest would be subject to withholding tax at the business level, so there would be no need to report that income on the individual postcard.)

Equally important, a flat tax would allow a dramatic downsizing of the IRS. Instead of 100,000 employees (bigger than the CIA, FBI and DEA combined), the tax collection agency could operate with a skeleton staff. The Tax Foundation estimated several years ago that a flat tax would reduce compliance costs by more than 90 percent. Assuming that IRS staffing needs were similarly affected, the number of bureaucrats would drop to fewer than 10,000.

A simple tax code and fewer bureaucrats would not completely eliminate problems at the IRS, to be sure, but it would be a big step in the right direction. Blocking unauthorized snooping and protecting against identity theft may not be the biggest reasons to adopt a flat tax. Other factors — global competitiveness, reducing political corruption, fairness — surely matter more.

But improving the security of our private information is a nice fringe benefit to fundamental tax reform.

Daniel J. Mitchell is the McKenna Senior Fellow in Political Economy at the Heritage Foundation.

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