What The NSA Can Learn From The IRS

Jan 28 2014, 11:37am CST | by

I would guess that a few years ago, few people had any idea what the National Security Agency (NSA) is or what it does. Now, this agency is fodder for conversation around the water cooler and in the blogosphere. Whatever your personal feelings are about the issues, most would agree that the recent revelations about NSA activities have raised the level of national dialogue about the needs of government versus the interests of citizens in privacy. Lost in the in the discussion, however, is another federal agency that arguably intrudes even more into the personal lives of citizens: the Internal Revenue Service. Again, irrespective of your opinions of the appropriateness of the IRS’s reach, most would agree this agency has access to a substantial amount of data about the lives and finances of taxpayers.

Consider how the IRS has both access to information and authority to act on this information. As a business owner, this knowledge can help you avoid an unwanted run-in.

-   Filing: We take filing our taxes for granted, but it wasn’t always such a given. In fact, it took an amendment to the U.S. Constitution 100 years ago to make the income tax a permanent aspect of federal law. The NSA doesn’t expect people to file as a spy, yet most of us understand why the IRS expects income earners to declare their income and tax paid on that income. For most, it’s considered an obligation of being a citizen. In fact, the U.S. is the only country that even requires its non-resident citizens to report and pay taxes on their worldwide income.

-   Reporting: Our tax system has obligations that go well beyond income earners filing their taxes.  Individuals and institutions also are statutorily required to report on income they pay to others; and, failure to report that income can result in stiff penalties. While the NSA can’t require citizens to report others as spies, the IRS requires income providers to file 1099s, W-2s and other statements of income paid. Keep in mind these reporting requirements extend well beyond national boundaries.

  • The U.S. successfully forced Switzerland to disclose the names of wealthy Americans who hid assets in Swiss bank accounts.
  • In the last few weeks, eight jurisdictions – including the Cayman Islands, the Isle of Man and other famous tax havens – signed separate agreements with the IRS to help it implement the Foreign Account Tax Compliance Act (FATCA).  This law was enacted by Congress to uncover tax evasion.

-   Matching:  It is commonly known that the IRS aggressively matches records between those who report income and those who receive that income. I recently had a question where an employer issued a 1099 for a deferred compensation payment in 2013, but the individual did not actually receive that payment until early 2014. The recipient intends to report the income as being received in 2014. Although I didn’t have a definitive answer as to how this discrepancy will be resolved, I was adamant that the IRS will, at some point, detect this mismatch in reporting years and inquire about it.

The opportunity for the IRS to match reportings and filings is one of the reasons Congress has passed laws requiring employers to report on income items even when the income has yet to be paid. Examples include reporting on 401(k) deferrals, business-owned life insurance and other employee-related transactions. This gives the IRS a huge database of information with which to connect the dots.

In the last few years, the IRS has been given other tools to enforce its mandate to collect taxes.

-   Tax Shelters:  Nine years ago, there was a new disclosure requirement for advisors who provide “material aid, assistance or advice with respect to any reportable transaction.” In English, this translates to a requirement that tax shelters must report themselves as tax shelters. The chilling effect of this reporting requirement is exactly what the government intended. A tax shelter promoter can no longer claim caveat emptor when a taxpayer has a tax scheme torn apart on an audit. The promoter potentially will share in the prosecution and penalties. I’d imagine the NSA would love to have enforcement powers of this nature.

-   Tax Snitch: There is formal process known as The IRS Whistleblower Program. This helps catch the cheats that are outside the net cast by normal filing and reporting requirements.  One whistleblower received a payment in excess of $100 million. This program has the potential for finding so many tax cheats (and revenue) that some Senators have complained the IRS is too slow in utilizing this program.

If the federal government is to function, it has long been understood they need to collect revenue from its citizens. Most would agree they want the system to be fair and enforceable. That’s why over 150 years ago President Abraham Lincoln and Congress created the position of commissioner of Internal Revenue.  The IRS has long taken more of a stick-than-carrot approach to enforcement, and generally has been allowed to do so without much other than the predictable grumbling of the citizenry. It will be interesting to see where the national interest takes the NSA debate, but the IRS example demonstrates how policy can become institutional.   

 

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Global entrepreneurship summit boost for SMEs
Marrakech, Nov 22 (IANS) Nine agreements were signed between the Moroccan General Confederation of Enterprises (CGEM) and several small and medium enterprises (SMEs) as well as between major Moroccan banks and start-ups at the 5th Global Entrepreneurship Summit (GES 2014) held in Morocco.
 
 
NASA's flying saucer among 'Best of What's New'
Washington, Nov 22 (IANS) NASA's Low-Density Supersonic Decelerator (LDSD), a spacecraft that aims to facilitate the safe landing of future Mars missions, has earned a place in the the Popular Science magazine's "Best Of What's New" list.
 
 
Indian helping to light up Gambia (Diaspora Feature)
Banjul (Gambia), Nov 22 (IANS) Like many Indians who are proving to be philanthropists around Africa, Ram Mohan has set up a social business called Comafrique Intelizon Initiative and has embarked on the replacement of candles in villages in the Gambia with solar lights from India.
 
 
Leopards in human areas not conflict animals: Study
New Delhi, Nov 22 (IANS) Leopards in human areas are not always "stray" or "conflict" animals but residents with strategies to thrive in human dominated areas, says the first GPS-based study of leopards in India.
 
 
 

Latest from the Network

Davis Cup final: Switzerland nudges ahead with doubles win
Lille, Nov 23 (IANS/EFE) Superstar Swiss duo of Roger Federer and Stanislas Wawrinka put their country ahead in the Davis Cup final with a 6-3, 7-5, 6-4 victory over the French pair of Richard Gasquet and Julien...
Read more on Sport Balla
 
Former police official arrested over students' disappearance in Mexico
Mexico City, Nov 23 (IANS/EFE) A former deputy police chief and suspected member of the Guerreros Unidos ("United Warriors") drug cartel, that allegedly, is involved in the disappearance of 43 students in Mexico...
Read more on Politics Balla
 
Iran to allow UN inspectors access to Marivan nuclear site
Tehran, Nov 23 (IANS) Iran decided to allow UN nuclear inspectors access to its Marivan nuclear site, Atomic Energy Organisation of Iran (AEOI) said Saturday. "We are ready to provide a controlled access to the...
Read more on Politics Balla
 
Kendall Jenner feels she is like Hannah Montana
Los Angeles, Nov 23 (IANS) Model Kendall Jenner, who is seen in a reality TV show "Kourtney and Khloé Take The Hamptons", says she feels "like Hannah Montana" while juggling between fashion and TV. Hannah Montana,...
Read more on Celebrity Balla
 
Iran nuclear issue: Kerry holds talks with Gulf foreign ministers
Vienna, Nov 23 (IANS) US Secretary of State John Kerry held talks with the foreign ministers of UAE, Kuwait, Qatar and Bahrain on the Iranian nuclear issue Saturday. Earlier, Kerry delayed his departure from Vienna in...
Read more on Politics Balla
 
Professor Green not ready for kids
Professor Green and Millie Mackintosh are not ready to have children. The 30-year-old rapper - who is married to the former 'Made in Chelsea' star - has revealed they do not want to have a baby yet because their dogs...
Read more on Celebrity Balla
 
Taylor Swift's midriff mystery
Taylor Swift doesn't want people to know she has a belly button. The 'Blank Space' hitmaker admitted she chooses not to wear tops which reveal her midriff because she wants to keep her fans guessing as to whether she...
Read more on Celebrity Balla
 
Wilko Johnson: 'I shouldn't be here'
Wilko Johnson believes he ''shouldn't be here'' after battling cancer. The 'Game of Thrones' actor was given the all clear in October following a 17-month battle with pancreatic cancer, and has recalled the ''marvellous...
Read more on Celebrity Balla
 
Penelope Cruz joins Ben Stiller in 'Zoolander 2'
Los Angeles, Nov 23 (IANS) Actress Penelope Cruz is all set to star with actor Ben Stiller in the film "Zoolander 2". According to Deadline magazine, details of Cruz's role in the sequel of "Zoolander" has not been...
Read more on Celebrity Balla
 
No general election in Pakistan before 2018: Nawaz Sharif
Islamabad, Nov 23 (IANS) Pakistan Prime Minister Nawaz Sharif said Saturday that a general election would not be held in the country before 2018. He thus rejected the demands by the opposition Pakistan Tehreek-i-Insaf...
Read more on Politics Balla