[American revenue officers are just as tough as Indian ones, but their salaries come out of the budget approved by Congressmen, many of whom are rich taxpayers. So they have to behave themselves. This column was published in Business Standard of 3 March 2000.]
Ups and
downs of the IRS
My
experience of our income tax department is almost entirely sour; and I would
like to meet an honest taxpayer whose experience is not. There are enough like
us in America; and there is enough democracy here for them to put their income
tax services in a squeeze. This is the story of what happened next.
Our income
tax department gets whatever money it wants; after all, it belongs to the
finance ministry, which has all the money, and which takes all that the income
tax department collects. In the US, however, Congress decides on the budget of
its income tax department, called the Inland Revenue Service. The President has
to ask Congress for the money, and Congress has to approve it. And Congress has
members who depend on taxpayers for votes. Taxpayers complain to their
Congressmen about bullying and harassment by IRS officials. So Congress is not
very friendly to the IRS. It has squeezed the budget of the IRS; as a result,
the IRS, which used to employ 98000 people seven years ago, is now down to
82000. Congress also passed legislation that gave taxpayers better protection
against income tax collectors.
But the President did not meekly accept the budget
squeeze. He brought in a new IRS commissioner – equivalent to our chairman of
Central Bureau of Direct Taxes. It was not a promoted IRS bureaucrat; it was a
wealthy businessman called Charles O Rossotti. The first thing he did was to change the mission statement of the IRS. It used to be “to collect the proper
amount of tax due”; he changed it to “provide America’s taxpayers top quality
service by helping them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness for all.” Today, 300 auditors
sit at phones answering inquiries from taxpayers. As in India, most of the
inquiries would be about tax returns mislaid, tax refunds unpaid, tax status of
various receipts etc. But let alone phone the income tax department, even if
you went in person to the income tax office in Bombay or Calcutta you would not
get a reply. Here you can call at any time and get a reply on the phone. But
the people who answer the phone have to be reliable, experienced and competent;
they answer phones round the clock when they could be chasing tax evaders. To
make sure that the officers on the phone are giving good service, the calls are
often monitored. Congress made 1200 administrative changes, and introduced
checks in the tax auditing process to ensure that taxpayers are not maltreated.
All these measures to improve service have absorbed the equivalent of 3000
employees.
As the American economy has boomed, incomes have soared.
The number of tax returns has risen by 11 per cent in the last 5 years; the
number of families reporting incomes over $1 million is doubling every three
years, and will reach 250,000 this year. At the same time, the service
improvements have absorbed manpower that could have been used to collect taxes;
as a result, tax collection efforts have slackened. In India, an income tax
officer both assesses a taxpayer’s income and issues a demand. Here there are
three classes of employees. There are about 70,000 general clerks who receive, process and file tax returns. Then there are about 11,000 auditors who check
the returns and pursue those where tax appears to have been underpaid; these
are the equivalent of our ITOs. But they do not issue demands or collect taxes.
For that there are tax collectors; their job is to pursue taxes due. Managers
oversee all the three services.
As a result of the squeeze on the budget, the auditing
and tax collection efforts have slackened. Two decades ago, one out of every 63
returns was audited; today it has come down to one out of 300. As in India,
high-income earners are more likely to be chased. Three years ago, one out of
40 returns of people with incomes over $100,000 was likely to be audited; today
the rate has come down to one out of 131. The IRS collected $38 billion by pursuing tax
evaders in 1996; last year it collected only $33 billion.
It is not only the auditing that has come down. Thanks to
the signal from Congress that it expects the IRS to treat taxpayers well, tax
collectors have also become cautious. So it often happens that an auditor would
follow a case conscientiously and get together strong material for a demand,
but that his tax collectors would back away from seizures or levies on bank
accounts. In 1991, the income companies reported to the tax authorities was 91
per cent of what that they reported to their shareholders; by 1998, the
proportion had come down to 70 per cent.
So
Commissioner Rossotti has decided that a change of gear is necessary. He called
the tax collectors to a three-day meeting in Chicago and told them that just
because they had to be nice, it did not mean that they did not have to collect
taxes. And President Clinton has asked Congress for more money: he wants an
increase of $723 billion on the $8.1 billion budget Congress approved for IRS
last year. Part of it will be used to hire 33 more tax collectors, 633 auditors
and about 1000 other people. Here they do not have to be recruited from
20-year-olds by competitive examination with reservations for scheduled castes
and tribes; they can be hired from the open market – and fired if they prove
slack or corrupt.
Unlike in
India. Suppose that instead of promoting an income tax officer, we appointed
the collection officer of Citibank car loans as our chairman of CBDT. Suppose
20-year-olds were hired to do clerical work and experienced chartered accountants
taken on five-year contracts to do tax scrutiny: do you think income tax
collections would improve or worsen?
