IRS Spin on the Corporate Income Tax

The IRS recently made a series of public statements outlining its distaste with the corporate income tax system.  The purpose of these public statements is to encourage Congress to reduce the corporate income tax rate, in exchange for reducing corporate tax breaks.  The interesting part of this story is why the IRS – an entity which is supported by public tax monies – is openly stepping into the political/legislative arena.

The IRS’s stated position is that a lower tax rate would help keep US businesses competitive in light of slightly lower corporate tax rates enjoyed by corporations in many other industrialized nations.  The IRS cites the corporate research and development tax credit and the low-income housing tax credit as examples of corporate “tax breaks” that should be eliminated.

The other – yet unspoken – side of this one-sided IRS debate is that the corporate research and development and low-income housing credits present Congress with a means of incentivizing certain corporate activities, i.e., keeping the US economy competitive by spurring research and development and by encouraging corporations to provide housing to the poor. 

One can’t help but wonder why the executive office that is tasked with collecting taxes is taking the time to push for legislative reform in an effort to look out for the overall American economy (and why this agency apparently doesn’t like US-based research and development or housing for the poor)? 

The answer can be found by examining how the IRS is going about making these public statements.  The IRS’s most recent efforts consisted of holding a widely publicized meeting with the executives of many large US companies.  The IRS used the mainstream media to publicize quotes from several large US company CEOs who attended the IRS meeting and who indicated that they favored reducing the corporate tax rate in exchange for eliminating corporate tax breaks. 

What’s the problem with this?  First, I would guess that not one of the CEOs who were quoted actually understand the ramifications of what they were agreeing to.  I did not examine the public records for the CEOs who responded in this manner to see how the CEO statments would impact any one company, but I would guess that the tax department leaders for these corporations would not support the statments made by the CEOs. 

Second, and most importantly, almost no large US corporation pays ANY US federal income taxes (with a few exceptions, such as Exxon – see, e.g., the chart on page four here http://www.ctj.org/corpfed04an.pdf).  Why would the IRS hold a meeting with corporations who do not pay the tax in order to ask their opinion as to whether the tax rate should be reduced in exchange for eliminating corporate tax breaks?  Why would the IRS not invite the smaller US corporations that actually pay the federal income tax?  Could it be that those corporations that actually pay the federal income tax would not be so ready to give up tax breaks that allow them to continue operating in the US in light of increased foreign competition and the availablity of cheaper (research and development) labor forces abroad? 

With this in mind and with a bit more understanding of IRS enforcement efforts, it is apparent that the real reason that the IRS has stepped into the political/legislative arena to oppose corporate tax breaks is that the IRS is simply not able to administer the corporate income tax system.  Tax practitioners and those who follow the IRS enforcement efforts know that over time the IRS has made it clear that it is fighting a losing battle with the corporate income tax. 

The crux of the problem is that corporate tax departments document and report on billions or even trillions of transactions in any one tax period.  It is nearly impossible for the IRS to detect, examine, and determine that these billions or trillions of transactions are correctly reported for tax purposes.

So what the IRS is now saying is “hey, reduce the corporate tax breaks so that it will make our job easier.”  I can respect this position, although I do not necessarily agree with it (as explained below).  

I do not agree with the manner in which the IRS is opting to reach its desired result.  If the IRS is having a problem enforcing the corporate income tax, the IRS should just say so and ask Congress to help. 

The IRS should not be in the business of maintaining a public propaganda campaign to encourage legislative changes to the tax code (if the IRS were a 501(c)(3) not-for-profit, it would have to revoke its own tax-exempt status for such activities).  The IRS should not contrive an argument that our economy would benefit if we eliminated corporate tax breaks and reduced the corporate tax rate.  Personally, I feel that it is necessary (given our current economic/political system) for Congress to provide some tax incentives to encourage American corporations to do what they would not otherwise do – such as conducting research and development activities here in the US and not overseas and providing housing to low-income individuals. 

Is there a better way for handling these issues?  Perhaps.  But absent a major overhaul of our tax and political system Congress has to work with what it has – and what it has is a tax system that allows it to encourage businesses to act in ways that Congress deems appropriate.  Congress, as our elected representative body, is in the business of determing what is best for our country and establishing law pursuant to these determinations.  The IRS is merely in the business of enforcing the law that Congress makes.  The IRS may have an interest in informing Congress about changes it deems necessary for the efficient administration of our tax laws, but it has no place in trying to build public sentiment via publicity stunts to encourage Congress to change our tax laws.

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