The Wall Street Journal - The IRS Out of Control


We knew the Internal Revenue Service's tax-collection arsenal included, among other things, the legal right to audit, sue and penalize tax cheats. But until last week we didn’t know the agency had license to gratuitously humiliate innocent taxpayers in the process.

On Friday, the Journal reported on page one that the IRS has disclosed the names of hundreds of citizens engaged in what amounts to tax planning. These individuals—many of them prominent businessmen—are accused of no wrongdoing. Their only sin is that they are clients of KPMG, the accounting firm currently doing battle in court with the IRS.

Last week the Justice Department sued KPMG on behalf of the IRS. The government alleged that some of KPMG’s tax shelters are illegal and requested the names of clients who had inquired about them. The accounting firm complied, providing the names in a so-called "privilege log" to protect their identities. The IRS promptly went public with the names, blithely smearing the reputations of innocent third-party individuals in an effort to strong-arm its court opponent and embarrass its clients.

This is a dangerous and outrageous precedent. To begin with, not all tax shelters are illegal, and a court has to rule on the ones in question. Nor is it against the law to minimize one’s tax burden. In fact it’s common sense, and private citizens shouldn’t be smeared in government press releases or news leaks for trying.

But the real potential damage here is to the assumption of privacy among taxpayers. Our tax system works because people are willing to disclose highly confidential information regarding investments, charitable contributions, estate planning and so on. That willingness is linked inextricably with an understanding that these disclosures will be kept secret. Keeping, this confidence encourages compliance. Abusing it in the manner of the IRS’s KPMG disclosures can only have the opposite effect. "This is unprecedented and it’s fundamentally wrong," says Kathryn Keneally, a tax expert at the American Bar Association.

Section 6103 of the tax code is the basic provision that protects the privacy of tax returns. And in the past, the IRS has interpreted 6103 as "broadly inclusive" and "sweeping in nature." When groups like the Landmark Legal Foundation and even Members of Congress have sought the identities of tax-exempt organizations or audit targets, the IRS has argued that it was duty-bound to protect taxpayer identities.

But protecting privacy apparently is no longer a concern when the IRS is a plaintiff. These days, the agency would have us believe that publicly shaming a target’s clients is fair game in establishing a case against the target.

Tax experts are debating whether the IRS disclosures are in fact illegal, but Donald Alexander, a former IRS commissioner, says it doesn’t matter. "Even if releasing these names is permissible under law, it’s still inadvisable," says Mr. Alexander. "You do not release names of individuals to the public unless there’s an overwhelming reason to do so, and I find that reason lacking here."

The IRS has also left itself naked to charges of political partisanship. Justice’s lead litigator on this matter is Stuart Gibson, a well-known Democratic activist in Virginia. Among the names disclosed last week was William Simon Jr., a Republican who happens to be in the middle of a gubernatorial race in California. Mr. Simon’s opponent, Democrat Governor Gray Davis, immediately pounced on the disclosure. A major Bush campaign contributor and a recently appointed U.S. ambassador also were sideswiped. Respecting the confidentiality of tax returns is a good way to avoid the appearance of political bias.

Not long ago, Congress was curtailing IRS abuses. Perhaps post-Enron, the tax man feels as if he can once again get away with anything, even harassing honest Americans. The agency falls under the purview of Treasury Secretary

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