Trump, time to end outsourcing … at the IRS

Generally the private sector is more effective than government. However, enforcing taxes is one thing that shouldn’t be privatized.

The historical record on this matter is extensive, including research from Cambridge University detailing the tyranny and corruption associated with private tax enforcement in ancient Rome. Yet, under new regulations arbitrarily dictated by IRS, private contractors are actively participating in tax audits. President Trump has stated his commitment to regulatory reform and “draining the swamp.” This should be an obvious place to start. 

{mosads}There are three reasons why private companies shouldn’t conduct audits. First are the conflicts of interest. Private firms conducting audits gain access to the books of other companies. This risks these firms selling secrets or using what they learn to gain a competitive advantage. Think of it as legalized corporate espionage.

Second, private tax collection creates perverse incentives. It’s no secret the private sector is more efficient than government. However, more efficient tax enforcement means more aggressive enforcement. Unleashing companies driven by a bottom-line to collect as much as possible — with little flexibility or authority to reduce tax debts — subjects Americans to added hostility when the IRS alone is ruthless enough.

Finally, while a risk with any government contract, allowing private firms to bid for IRS contracts also opens the door to cronyism. The awards, access, and ability to suck-up to IRS encourages firms to aggressively pursue these contracts. This means is more lobbying and corruption, a.k.a. more muck into the swamp.

Despite these issues, IRS is now allowing private contractors to conduct audits. This began in June, 2014, when IRS hired a law firm, Quinn Emanuel, to help audit Microsoft. This was the first time such contractors directly conducted an audit, including reviewing sensitive records and conducting sworn testimony.

Adding insult to injury, Quinn Emanuel has ties to Microsoft’s leading competitors. In 2009, Quinn Emanuel announced the partnership of David Nelson. Per Law 360, Nelson has represented, “Oracle Corp., Apple Inc., Google Inc.,” and “successfully defended Alcatel-Lucent in a patent suit before the U.S. International Trade Commission brought by Microsoft Corp.” In short, the IRS hired a firm with a partner who represented all of Microsoft’s leading competitors and fought Microsoft in court … to audit Microsoft!

You don’t have to be a Microsoft fan to see this is a bad idea! It’s like hiring Pepsi’s lawyers to audit Coke.

Another red-flag is how IRS authorized the use of contractors. A month after hiring the most anti-Microsoft lawyers they could find, IRS issued temporary regulations authorizing contractors to cover their tracks.

It’s also clear IRS was playing “Whose Line is it Anyway?” with the Code of Federal Regulations because the rules don’t appear to have mattered. IRS issued this temporary rule without notice or a public comment period. Both are standard in the rule-making process. This generated protest from Congress, with the Senate Finance Committee Chairman Orrin Hatch (R-Utah) torching the rogue agency: 

“In a tax system based on voluntary compliance, the integrity of the tax administration process and protection of taxpayer rights is of paramount importance. To those ends, Congress put in place specific restrictions on government action in the examination process.

“One such restriction is the requirement that only Treasury officials carry out certain examination functions. … The IRS’s hiring of a private contractor to conduct an examination of a taxpayer raises concerns because the action: 1) appears to violate federal law and the express will of the Congress; 2) removes taxpayer protections by allowing the performance of inherently governmental functions by private contractors; and 3) calls into question the IRS’s use of its limited resources.”

Despite this shredding from the folks who actually make law, IRS finalized the rule change with a permanent rule. The new rule changed a whopping one word from the temporary rule and still allows for contractors to gain access to taxpayers’ sensitive records.

These IRS shenanigans are exactly why people call Washington “the swamp.” Enough with the behind-closed-doors rule-making that opens a backdoor to abuse. The core of regulatory reform should remind agencies like IRS that they are charged with law enforcement, not law making. You’d be pretty annoyed if a traffic cop made up a rule that your worst neighbor can write you a speeding ticket.

Donald Trump ran on a platform of government accountability and protecting taxpayers, especially following IRS targeting of conservatives under the Obama administration. If his administration wants to “drain the swamp,” repealing this IRS rule allowing outsourced auditing would be a good plug to pull. 

Ken Cuccinelli is a former attorney general of the state of Virginia and general counsel to the FreedomWorks Foundation’s Regulatory Action Center.

The views of contributors are their own and not the views of The Hill.