IRS: The World’s Most International Government Agency

The US Internal Revenue Service (IRS) is arguably the world’s most well-known tax collection agency and certainly the only one that has ever played the leading role in a Hollywood movie. In Stranger Than Fiction, Will Ferrell plays a tax auditor who bemoans, “I’m an IRS agent. Everyone hates me.”

Well, at least Al Capone was not a fan of the IRS. Al Capone could tell you a thing or two about that. The legendary mob boss never filled out a tax return his entire life, being of the opinion that “they can’t collect legal taxes from illegal money.” The IRS could, though, and in 1931 Al Capone was arrested, but not by the police, drug enforcement agents, or the FBI. No, it was the IRS that put him behind bars for 11 years on charges of tax evasion.

Al Capone is just one of many famous tax evaders. The list of celebrity tax cheats also covers the entire spectrum of show business, including prominent names like Chuck Berry, Nicolas Cage, and Martha Stewart. The IRS itself makes sure that the public is in the know about high-profile tax enforcement cases. It has a Twitter account that it uses to publicize spectacular cases and to post the top 10 at the end of every year. “The investigative work of 2021 has all the makings of a made-for-TV movie,” the IRS criminal investigation chief comments in boulevard press style. “Embezzlement of funds from a nonprofit, a family fraud ring that stole millions in COVID-19-relief funds, and a 1 billion US dollar Ponzi scheme used to buy sports teams and luxury vehicles.”

The IRS publicizes these cases as a deterrent to stress that anyone caught perpetrating tax fraud will be prosecuted to the full force of the law as a warning to others. Although the IRS audits relatively few tax returns – less than 1% –, its penalties for tax arrears are draconian, as the Al Capone example illustrates. It’s not for nothing that famed rapper Dr. Dre once said, “The only two things that scare me are God and the IRS.”

Tax collection agencies generally do not rank among the world’s most exciting institutions. The IRS’s international renown stems from its spectacular tax enforcement cases and its world-spanning operations. The IRS, for example, was instrumental in getting Swiss banking secrecy vis-à-vis the USA repealed. The Foreign Account Tax Compliance Act, better known as FATCA, is a unilateral set of US regulations that applies to almost every country worldwide. It has been in force in Switzerland since 2014. FATCA requires foreign financial intermediaries like banks, insurance companies, asset managers, etc. to disclose information on US accounts or to levy a tax on them. Just last year the IRS once again demanded the release of account details from 29 banks in Switzerland.

Moreover, the USA is the only industrialized nation that determines the obligation to pay taxes by nationality and not by domicile – Eritrea is the only other country that engages in the practice of taxing people on the basis of their place of birth and not their place of residence. An estimated nine million US citizens live abroad today, and they own approximately 3.7 trillion US dollars worth of reportable assets, according to congressional testimony by an IRS official. But many “accidental Americans” are not even aware that they are subject to taxation by the USA: they, for instance, were born in the USA, but have lived in a different country since childhood or adolescence. Only those who formally renounce their US citizenship – a process that is more expensive than in any other country around the world – are freed from US taxation.

But the IRS’s international reach doesn’t stop there. The IRS even taxes non-US citizens who do not reside in the USA if they happen to own US securities that generate dividends, as required under Section 871(m) of the Internal Revenue Code (IRC). And yet another international paragraph will be added to the IRC effective as of January 1, 2023: IRS Section 1446(f) (see box in blue).

The roots of the IRS stretch back to the US Civil War. To cover the high war expenses, in 1862 President Lincoln temporarily levied a 3% tax on annual incomes between 600 and 10,000 US dollars and a 5% tax on incomes above that. In 1913, shortly before the outbreak of World War I, the power of the federal government to levy income taxes was enshrined in the US Constitution. The federal tax collection agency was given its current name, the Internal Revenue Service, in 1953. Despite its long history, the IRS has always stayed in step with the times. It took aim at crypto exchanges, for example, in as early as 2016. It has since won a number of court orders against Coinbase, Kraken, and Poloniex for the purpose of identifying and taxing owners of cryptocurrencies.

The IRS itself estimates that 441 billion US dollars of owed taxes go unpaid each year in America. It calls this the “tax gap.” On the basis of this figure, the IRS infers that 83.6% of taxes are paid voluntarily and on time. Tax morale is a variable that’s hard to measure, but a somewhat older study (from 2006) shows that the tax morale of US citizens actually is the highest in the world, ahead of that of taxpayers in Switzerland and Austria.

The tax morale of country music legend Willie Nelson in the 1990s was nowhere near that level. He got caught, but was unable to pay his tax debt because he had squandered his money on bad investments and was left penniless. As part of his tax arrears payment plan, Nelson was forced to record an album and cede all of its sales revenue to the IRS. “The IRS Tapes: Who'll Buy My Memories?” was praised by critics, but only grossed 3.6 million US dollars in sales. But Willie Nelson was now back in the public eye and was soon able to pay off the remaining 9 million US dollars of his tax debt to the IRS.