Jim de Bree | The Troubling Story of the Secret IRS Files

Jim de Bree
Jim de Bree

On June 8, ProPublica published an article entitled “The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax.” While the apparent intended purpose of the article is to point out inequities in our tax system (more on that later), the article also brings to light several troubling aspects about the security of our private information. 

The article starts by stating that ProPublica has obtained “a vast cache of IRS information” and the article is part of an ongoing project. The article reports on detailed information contained in the tax returns of some of the wealthiest Americans including Jeff Bezos, Warren Buffet and Bill Gates. 

The article fails to mention how ProPublica obtained this highly confidential information. 

There are two plausible ways — either the IRS was hacked in a cyberattack, or an IRS employee provided the information. 

Neither is very comforting. 

If the IRS was hacked, then none of our information is safe. Our tax returns include Social Security numbers, a listing of investments and perhaps even bank account information. 

Does the IRS have adequate controls to protect this information from being hacked? 

Based on my recent professional and personal experiences with the IRS, it appears to be an organization in turmoil. Its budgets have been slashed, it has fewer employees than 10 years ago and it appears to be technologically challenged. 

It may be popular to defund the IRS, but not if the cost is that our information is compromised, and we become victims of cyber theft.  

According to the IRS website, Section 7213 of the Internal Revenue Code specifies that willful unauthorized disclosure of returns or return information by an employee or former employee is a felony. The penalty can be a fine of up to $5,000 or up to five (5) years in jail, or both, plus costs of prosecution. 

An IRS employee would have to be pretty disgruntled in order to risk severe punishment for doing so — unless perhaps someone was paying them to do it.  

For its part, the IRS has launched an investigation into this matter. 

But what about ProPublica? Did it cross a journalistic boundary? 

ProPublica claims they do not know the identity of the party who sent them the information and they wrestled with whether they overstepped boundaries when they published confidential personal tax information.  

In an age when data is routinely harvested for profit (sometimes illegally to harm others), should limits be placed on journalists? 

I don’t know the answer, but this is likely to become an increasingly controversial issue.  

Furthermore, there is another problem with the article — it takes facts out of context to overemphasize a point. The article examines the personal financial situations of several billionaires, comparing their increase in net worth to the taxes they paid.  

Our tax system does not tax changes in net worth. If your house appreciates in value, you are not taxed on the incremental value until you sell your house. That is the way the system works for everyone. 

Attempting to tax changes in market value of assets is administratively complex, placing an undue burden on both taxpayers and the government. Instead, we tax those value changes when the asset is sold, gifted or bequeathed.  

So why is ProPublica comparing overstated economic attributes that are subject to tax? To answer that question, let’s look at the information they presented concerning Warren Buffet’s tax return.  

Apparently, between 2014 and 2018, Mr. Buffet reported taxable income of $125 million and paid tax of $23.7 million. He paid taxes equal to about 19% of his taxable income. 

While that is lower than the effective tax rate (i.e., taxes divided by income) paid by many middle-class households, it is still a substantial amount. However, if you consider the increase in his net worth during that period and add that to his taxable income, his “income” balloons to $24.3 billion. 

When you compare that amount to the taxes he paid, he only paid 0.1% of the increase in his net worth. Claiming a 0.1% effective rate sounds considerably more abusive than paying tax at a 19% rate.  

The article then compares the billionaires’ effective tax rates to that of a hypothetical wage earner whose net worth increased by only $65,000 from 2014 to 2018. The article claims that the increase in net worth is the result of his home appreciating in value. 

The article further states that this imaginary person paid about $62,000 in taxes.  

What the article fails to explain is, if Mr. Buffet monetizes his investments, he will be subject to capital gains taxes of approximately 24%, or if he dies, his estate will be subject to a 40% estate tax. The wage earner will not likely pay any tax on the sale of his home, nor will he pay estate tax.  

The ProPublica article is troubling on so many fronts. 

Jim de Bree, a semi-retired CPA, resides in Valencia.

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