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1998-05-18 09:17:49


Breakdown of IRS System, Says Tax Specialist



Vernon K. Jacobs is a long-time newsletter writer. He is a C.P.A. He thinks that the Year 2000 Problem is likely to bring down the Internal Revenue Service.

If he's right, there will not be a familiar political landmark in the United States in 2001, except maybe Mr. Clinton.

* * * * * * * *

Iím speculating that the IRS computer system will self destruct in January, 2000. . . .

As the tax laws get more complex, each new change is like putting a patch on an inner tube. Now we are at the point where we are patching the patches. The Congress calls the patches ďtechnical corrections.Ē . . .

The 1996 and 1997 tax laws are a monumental testament to the desire of the politicians to micro mange our lives through the tax laws. But the tax law has already passed the point where even a tax professional can really understand most of it - let alone all of it. So how in the world is the average citizen going to comply with a law thatís beyond comprehension?

I suspect the answer is fairly simple. Many of them wonít. With federal and state income taxes, payroll taxes, sales taxes and property taxes, the typical middle income family is really paying from 40% to 50% of their income for taxes. For the self employed person, you can add another 5%. These are the people who really donít feel they can afford to hire tax experts who charge $100 an hour - or more. Rather than comply with an incomprehensible law, they will just engage in tax evasion and take their chances. . . .

I feel we are rapidly reaching the point where even the tax professionals are having great difficulty in keeping up to date on the tax laws. . . .

I really donít believe there are any tax experts who really understand the entire tax law in any depth. Weíve been forced to specialize because of the sheer volume of laws, regulations, rulings and cases dealing with different areas of the law. . . .

It seems to me that we are well on our way toward a breakdown of the U.S. tax system.

I canít predict when a massive breakup will occur, but I suspect that January 1, 2000 is a likely time.

Without a precipitating event, the problem could continue to get worse for another ten or twenty years. But there are defensible justifications for predicting that the U.S. tax system will self destruct in about 27 months. . . .

At this time, I wonít go into the dispute thatís raging between those who feel that the problem wonít be solved by the year 2000 and those who feel the problem is greatly overblown. My own view is that both sides are right in some respects and both are wrong in some respects. But it seems to me from the available evidence that the IRS is the most vulnerable to this problem. They have hundreds of absolutely huge programs that are based on old design concepts. They still have vast numbers of old computers that simply donít have the memory capacity to run the programs if the programs are fixed. If the IRS were to implement a massive upgrade from their old computers to the newer ones, they would still have an impossible task of converting all of those old programs into the kind of programs that will run on the newer machines. The critical issue is a shortage of the kind of programmers who have in-depth experience with those old programming languages, many of which are no longer

So what will happen if they donít fix the problem? There will be massive errors and confusion. Some of the computer programs will simply crash - meaning they will freeze up because they donít have any instructions on how to resolve the problem when the year looks like 00 instead of 2000. Most of the programs will just make false calculations. If you think the IRS computers are screwed up now, itís a picnic compared to what we will have in January, 2000 and for some time afterward.

There are some people who might argue that Iíve greatly overstated the case, but there are even more people who will say Iíve greatly understated it. My only effort to offer some justification for my opinion is to point out that Iíve been involved with computers of all sizes since the mid-sixties. For three years, I was the consulting editor for The Journal of Accounting and EDP, which was primarily intended for the financial managers of corporations with large computer systems. I was in the software business for twelve years and Iím presently heavily involved in using the internet. . . .

Iíve heard that the Social Security computer systems and programs are newer and that they have been working on the Y2K problem longer than the IRS, with fewer failures. But how will the SSA pay the benefits if the IRS canít collect the taxes? And most of the information in the SSA systems come from the IRS.

What do you think will happen then? I can only speculate, but the range of choices is from the extreme of a financial Armageddon to a few years of enormous confusion and constant problems between taxpayers and tax collectors. Good will and voluntary compliance with a fair and sane tax system isnít going to be an option, as far as I can tell. How will the government react to widespread evasion, an explosive growth in the underground economy and increased expatriation? Will the government resort to more use of forfeitures to get the resources to pay itís bills? Will they use forfeiture laws to take over the ownership of private industries in the hopes that they can glean some extra cash from direct ownership? Or - will the problem precipitate a real depression as some of the more bearish prognosticators are claiming?

It seems to me that if they get really desperate, they could just scrap the current income tax system and replace it with a very simple national sales tax - at least until the problems get solved. But I also believe that will be a last resort and wonít be done before itís much too late.


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