Trump can improve the IRS by making it admit its mistakes

Greg R. Lawson Jul 30, 2019

This opinion piece appeared in the Washington Examiner.

Perhaps the only sure things in life really are death and taxes, but taxes and the federal agency that collects them should not be the untimely death of small businesses.

Earlier this month, President Trump signed the Taxpayer First Act that Congress passed unanimously to reform civil asset forfeiture rules that allow the IRS to confiscate private property and assets without filing criminal charges against would-be defendants. The new law’s structural reforms are long overdue, but they take a solid first step toward improving things at the IRS.

Trump can take at least two more steps forward by directing the IRS to change its draconian rules for seizing and freezing business accounts, and he wouldn’t need a single vote in a deeply divided Congress to do it.

First, the president can and should require the IRS to make sure that the investigated taxpayer has actually broken the law before it seizes the taxpayer’s business assets. Second, Trump can and should direct the IRS to streamline and expedite its process for returning any assets that the agency has impounded mistakenly.

The Trump administration has professed its desire to pursue pro-growth, pro-Main Street policies that will help fuel the economic engine that makes America great: small businesses. These two regulatory rule changes would hasten that pursuit.

Consider what happened under the current regulatory regime when the IRS erroneously confused a New Jersey pizza shop with a trust created by “Larry,” the owner of a small manufacturing business. The IRS suspected the pizzeria of payroll tax violations, but mistakenly sent Larry’s bank a “Notice to Levy” his corporate checking account. Before contacting Larry, the IRS wrongly identified Larry’s trust as the payroll tax violator and froze his manufacturing company’s operating bank account.

Adding insult to Larry’s injury, current federal tax law gives the IRS latitude to hold onto assets even after it knows they have been wrongfully levied, and IRS regulations impose a cumbersome process that requires innocent parties such as Larry’s manufacturing firm to petition the agency to return mistakenly confiscated assets. The complicated, needlessly bureaucratic process puts a significant burden on unsuspecting small businesses at best, but more likely puts their entire operations at risk as they wait for bank accounts to be unfrozen or impounded funds to be returned.

Trump’s IRS can and should rewrite its rules for returning assets to innocent parties. In fact, the IRS already has a model for such a fix — an existing rule allowing for the expedited (10-day) return of tangible business property to business owners who owe back taxes. If the IRS can find a way to return tangible property in 10 days so that tax cheats can resume paying taxes, then it should be able to use a similar process to return wrongfully seized or frozen assets to law-abiding small business owners. After all, it was never Uncle Sam’s property in the first place.

The Trump administration knows that businesses, whether on Main Street or Wall Street, are taxpayers. And just like any other taxpayer, businesses rely on cash and other assets to cover expenses, meet payroll, repay loans, pay the rent, and cover mortgages on their property. The mistaken freezing of assets makes that harder, if not impossible.

So, as Trump looks for new ways to help small businesses and ease the burdens that Big Government continues to lay upon their calloused shoulders, he would do well to improve upon the bipartisan, unanimous reforms of the Taxpayer First Act, and promulgate new rules for the IRS to follow when the IRS errs. Everyone makes mistakes, even federal agencies. Everyone should own up to them, especially the IRS.

Greg R. Lawson is a research fellow with The Buckeye Institute in Columbus, Ohio.