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In January, House Ways and Means Chairman Dave Camp came forward with a bold idea to change the way financial derivatives are taxed.
Under the Michigan Republican’s proposal, all derivatives used to make speculative bets would be subject to “mark to market” taxation, meaning their increase in value would be treated as ordinary income even if they weren’t sold. Meanwhile, derivatives purchased by businesses to hedge against risk would continue to be taxed as they had in the past.
The distinction would be worth huge sums of money, and the law would present a challenge for the IRS. The agency would have to sort derivatives into two categories, either as bets or hedges, based on the seemingly vague concept of the motivation of their owners.
Committee staffers argued that the IRS would be up to the job.
These days, such a confident assertion about the tax-collecting agency is hard to imagine, and it illustrates how lawmakers have relied on the IRS to sort out the critical details of tax legislation.
Now, of course, the IRS is at the center of major political controversy, having apologized for improperly screening conservative organizations applying for tax-exempt status. Far from trusting the IRS to handle difficult assignments, Republicans such as Camp are taking aim at the agency, portraying it as a symbol of government overreach and incompetence.
“This is a problem of the IRS being too large, too powerful, too intrusive and too abusive of honest, hardworking taxpayers,” Camp said at a May 17 committee hearing.
There is little doubt that IRS bashing is back in vogue on Capitol Hill. Less clear is where the outrage will lead. Ways and Means Republicans may make subtle adjustments to the tax overhaul legislation that they plan to finish by the end of the year. But, according to experts, there is only so much they can do to limit the power of the agency, which will always be needed to enforce and interpret laws in a complex economy.
As lawmakers look more closely at the IRS and, during calm moments, consider ways to improve it, some see a risk of overreaction.
“I think this institution is basically sound,” said Donald Korb, a former IRS chief counsel who now practices law at Sullivan & Cromwell LLP. “For the most part, they’re good at what they do.”
There is evidence to support that view.