Wanted: Nominees With Clean Tax Returns

Incredibly, the list of Obama nominees with tax troubles keeps growing. The latest is Ron Kirk, the president's pick for U.S. trade representative, who made a host of errors that add up to about $10,000 in unpaid taxes. Kirk looks like he'll be confirmed, as was Treasury Secretary Timothy Geithner, but other nominations have been scuttled over tax issues. (Remember Tom Daschle?)

How can the president keep picking people who have so many problems with their 1040s? Is this an incredible coincidence or is Obama stuck with a bunch of very bad vetters?

It's neither. The tax troubles of so many nominees are symptomatic of two deeper problems, one with IRS enforcement and the other with the tax code itself.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Take the IRS first. Many of the tax errors that have come to light initially got past the IRS. How is that possible? For a while now, the Service has been trumpeting the fact that it's doing more audits. But it depends on what you mean by the word "audit." The increase is in the number of so-called "correspondence exams," where IRS notifies a taxpayer of a discrepancy. You're sure to get notified if, for example, you report a smaller amount for wages than your W-2 shows.

But here's the flaw in that system: The IRS can't match everything. Transactions occur all the time under the radar -- the money you pay a handyman or the rent you collect from a tenant, say -- and so the IRS has to rely on the honor system for folks to own up to that income. The simple fact is that the Service doesn't have the staff or the funds to do enough full-blown audits -- those torturous line-by-line exams -- to make people toe the line.

Does that mean we solve the problem by throwing more money at the IRS so it can do more audits? No, and that's where the second systemic problem comes in: The tax code's complexity. While it's certainly possible that some or all of the nominees called on the carpet for their tax errors knew exactly what they were doing, in many of these cases it's also very plausible that they didn't properly understand parts of the tax law. Compare today's Internal Revenue Code with the way it looked after the Tax Reform Act of 1986, which reduced the number of tax rates and got rid of a lot of breaks in the interest of simplicity, and you'll see how drastically things have changed since then.

The number and breadth of tax problems we're seeing with the Obama nominees should be a sign to the administration that tax reform needs to be a top priority. But it isn't. Office of Management and Budget Director Peter Orszag recently paid lip service to reforming the code and said that while it's an important goal, it ranks below major legislation on energy, health care and education. Given the events of the past few weeks. the president would do well to rearrange his to-do list.