The Honorable Eric Solomon
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue, NW
Room 3120
Washington, D.C. 20220
Dear Mr. Solomon:

The Administration's Fiscal Year 2008 Revenue Proposals contain two proposals that can best be described by the German word, gemein (cruel, mean, nasty, wicked). I urge they be dropped as presently proposed, and more humane approaches developed, as I will explain.

Prisoners have discovered that filing fraudulent returns claiming EIC means easy money. IRS doesn't bother prosecuting prisoners serving long sentences. As a result, blank tax forms are now contraband in prison. Any prisoner caught with a blank tax form is subject to discipline.

Under current law, IRS could easily make prison officials aware of potential tax violations by inmates simply by prosecuting prisoners who file fraudulent tax returns. That creates a public record. Instead, IRS seeks to disclose potential tax violations by inmates so that inmates can be "punished" with a wink and a nod. What happened to "due process"?

Current tax law sets out punishment for filing fraudulent tax returns, upon conviction. It is rather easy to obtain a conviction because of the lax standard for "willfulness" in jury instructions. But instead of providing due process, this Treasury proposal seeks summary judgment. Anyone familiar with treatment of prisoners knows that punishment can be harsh. While there may be little meaning in seeking a fraudulent tax return conviction against someone serving a life sentence, better IRS diligence with returns filed by prisoners would minimize this problem. EIC is a major compliance problem even without the prison issue, and I understand that IRS already maintains a database of those serving prison time.

This is a very harsh and unfair solution to a problem resulting from poor IRS surveillance and refund policies. Besides, without due process, another criminal (or even a prison guard) could file a false tax return in the name of a prisoner he wanted punished.

The Administration's proposal to change failure to file tax returns for multiple years from a misdemeanor into a felony is an attempt to overturn Spies v. U.S., 317 U.S. 492 (1943). This attempt should be discredited for the same reasons that Justice Robert Jackson gave in overturning the Roosevelt Administration's prosecution and conviction of a hapless taxpayer who was convicted of willfully failing to pay a tax and willfully failing to file a tax return. It was an Administration attempt to turn two misdemeanors into a felony.

His appeal turned on the district court refusal to instruct the jury that an affirmative act was necessary to constitute a willful attempt. The court instructed the jury: "Attempt means to try to do or accomplish. In order to find an attempt it is not necessary to find affirmative steps to accomplish the prohibited purpose. An attempt may be found on the basis of inactivity or on refraining to act, as well."

Regarding willful failure, Justice Jackson wrote in his opinion:

Mere voluntary and purposeful, as distinguished from accidental, omission to make a timely return might meet the test of willfulness. But in view of our traditional aversion to imprisonment for debt, we would not without the clearest manifestation of Congressional intent assume that mere knowing and intentional default in payment of a tax where there had been no willful failure to disclose the liability is intended to constitute a criminal offense of any degree. We would expect willfulness in such a case to include some element of evil motive and want of justification in view of all the financial circumstances of the taxpayer.

In my experience as a practicing tax accountant, I am frequently contacted by hapless taxpayers who have failed to file tax returns for several years. Usually, this occurs because of some life event such as divorce, death, or financial instability causing him to fall many years behind in his tax filing obligations. It would be too easy for a nonfiler to face felony charges under this Administration proposal. Jury instructions defining "willful" would make defending against such charges nearly impossible.

Regarding failure to timely file a tax return, the 1989 "Executive Task Force Report On Civil Tax Penalties" (Commissioner's Penalty Study, Internal Revenue Service), concluded:

[T]he severity of penalties in this group appears to be a reasonable deterrent to non-compliant behavior. However, since there are approximately 4 to 5 million delinquency penalties assessed each year, IRS should gather data to determine the rate of recidivism and the reasons why approximately 4% of the returns filed are delinquent, (p. VI-33)

[S]ection 6651(a)(1) [should] be amended to provide for a minimum penalty for failure to file a return. The penalty should be set at the same level as the current minimum failure to file a taxable return, $100. Such a penalty would recognize that a statutory requirement exists for filing returns, and that a degree of harm to the tax administration system results from failure to file a refund return. (p. VI-35) [This proposal was never enacted.]

There are additional sanctions that might be considered, such as denial of earned income tax credits for returns filed more than one year past the original due date. Georgia prohibits claiming a state Low Income Credit on original or amended returns filed more than 12 months after the close of the year (eg, after 2007 for the 2006 tax return). The list of denied tax benefits for chronic late filers could be expanded, but that might be counter-productive. Nonfilers can't pay the taxes they owe. That's a major reason they fall further behind.

One of the main hindrances in filing several years of delinquent returns is that a large amount of tax may be owed. Increasing penalties or sending violators to prison won't improve compliance. Sending a letter after April 15 to everyone who filed in the immediately preceding year but failed to file a current year return or extension request, would go a very long way toward increasing compliance. It's simple and cost-effective.

I hope you will consider my objections and drop these proposals in favor of further study on more humane approaches to the problems. Seek solutions where due process and proportionality are considered, with the goal of improved compliance rather than punishment.

I would be very happy to work with you to develop alternative solutions.

Sincerely,

Jay Starkman,
Atlanta, Georgia

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UPDATE: Unfortunately, the first proposal to permit disclosure of prison tax scams was enacted as The Inmate Fraud Prevention Act of 2008 (P.L. 110-428, adding Internal Revenue Code Section 6103(k)(10)). It was introduced by Rep. Jim Ramstad (R-MN) with only one co-sponsor, reknown civil rights leader Rep. John Lewis (D-GA). Shame upon them.

Created: July 23, 2007; Last updated: November 25, 2008