Tax Analysts Blog

Probable Cause?

Posted on Jul 14, 2009

The deficit smashed through the trillion-dollar barrier this week on its way to a projected total of $1.825 trillion for the 2009 federal fiscal year ending September 30. As the Chicago Tribune points out: "A deluge of debt, looming on the horizon, threatens to wreak frightful damage on our economic future." Even without expanding heath insurance coverage, demography dictates painful spending cuts and tax increases in the not-too-distant future.

As we at Tax.com, Howard Gleckman at Tax Vox, and -- most recently -- the Wall Street Journal editorial page have pointed out, raising tax rates, as most recently proposed by Ways and Means Committee Chairman Charlie Rangel, is an awful solution to the problem -- damaging to both the economy and the tax system itself. Meanwhile, in the trenches, guys like IRS employees John McDougal and Daniel Reeves are doing the hard work of exposing tax cheats.

If it was up to the Journal, we would just throw the heroic efforts like those of McDougal and Reeves into the trash can. Complaining about the IRS "fishing expedition" -- the John Doe summons requiring Swiss banking giant UBS to disclose the identities of 52,000 account holders to the IRS -- the WSJ makes legalistic arguments: "The American system of justice contains probable cause and reasonable search requirements precisely to prevent law enforcement from rounding up everyone who might conceivably be guilty of some crime." And later: "the government's request for so broad a swath of information could well run afoul of the Fourth Amendment's protections against unreasonable search." In today's Financial Times, the Swiss Bankers Association echoed these arguments: "the Americans are asking for a list of names without giving any indication that these clients have done anything wrong."

I'm no James Madison or Barack Obama, but I do know this. The interest on my checking account deposited at the local Sun Trust branch is reported to the IRS every January on a Form 1099. And to help me not forget to report this on my tax return, the bank sends the identical information to me. But if I make the same deposit in a Swiss or Cayman bank, the interest is not reported to the IRS or any government, and there is no friendly reminder from the bank to remind me tax might be due. In other words, the IRS has to trust me to report the income.

Does the government need to show "probable cause" when it monitors my domestic account down to the penny? Is the government violating my Fourth Amendment rights when it takes reasonable enforcement measures to keep that trillion-dollar deficit in check?

The IRS has near perfect compliance with domestic accounts. In contrast, all indications are compliance is very low with foreign accounts. So for all the chumps like me who patriotically deposit their money in domestic banks I say to hell with any rights of U.S. depositors in Swiss banks. We know a lot of them are cheating big time, and the innocent will suffer nothing.Tax authorities requiring disclosure of tax information is not unreasonable or a violation of privacy. Save all that legal mumbo jumbo for really unreasonable acts by authorities, like the strip search of a 13-old girl in Arizona.

Update: See James K. Stewart's piece for the WSJ "Offshore Tax Evaders Deserve No Sympathy."

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