The USA Today reports today that the IRS sent out $1.6 billion in incorrect tax refunds during the 2006 and 2007 tax filing season. The information was released in a recent report from the Treasury Inspector General for Tax Administration (TIGTA). The TIGTA investigation found that the IRS has low-balled their initial estimate of the fraudulent tax refunds in 2006 and 2007 and that the agency has insufficient resources to adequately detect and stop these refunds from being dispersed.

In addition, the IRS made key decisions not to pursue hundreds of thousands of returns they knew to be fraudulent. This is worse than having insufficient resources (or will) to pursue people and corporations who don't pay all the taxes they owe - it's knowingly sending out federal resources to those who don't deserve the money in the first place. From the TIGTA report:

The CI [Criminal Investigations] Division and Examinations functions agreed to limit the number of fraudulent return referrals to ensure that examination resources were available to address other areas that are also critical to compliance enforcement. Therefore, the CI Division focused on identifying those returns with higher dollar values and higher data-mining scores, which precluded more than 500,000 potentially fraudulent returns from entering the Centers' screening process. Had these returns been included, we estimated that the Centers would have identified an additional potential $742 million in fraudulent refunds.

Obviously, more resources at the IRS would help a great deal - something we've argued repeatedly this year. Yet there are a few quotes in the USA Today article from IRS officials which had me scratching my head. This one in particular:

Many suspicious returns involve small sums and would produce a "relatively low dollar return" if the agency pursued deep investigations of each one, said IRS spokesman Terry Lemons, adding that the result would be a "loss for the nation's taxpayers."

So if I'm reading this right, the IRS is okay with sending out refunds to people who don't deserve it so long as those amounts are small, because trying to prevent that would end up costing more money than it saves? Yet the IRS (and many misguided legislators in Congress) are perfectly happy to continue a private tax collection program to pursue people who owe small amounts of back taxes despite overwhelming evidence that this outsourcing program costs more money than it brings in.

Wonder if that could have anything to do with the fact that the private tax collection program benefits private companies? And that those private companies are based in two locations with powerful leaders in Congress who not only originally drafted the program into law, but continue to support it? Hmmm...

If anything, the collapse of the nation's financial markets has forced even the staunchest of believers in the Free Market^® to consider the possibility that sometimes the "market" doesn't know best.

Testifying before the House Oversight and Government Reform Committee, free market high priest Alan Greenspan expressed "shock" at the current economic situation.

Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief....I've found a flaw [in my ideology]. I don't know how significant or permanent it is. But I've been very distressed by that fact.

Good on Greenspan for admitting flaws in his ideology. Hopefully the frame of the debate will shift from whether or not the government has a role in the economy to what kind of role the government should play.

But revealing is this statement:

I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.

It shows precisely why Free Market^® policy usually ends up not really working out as planned. Organizations do not have self-interest. The people that run corporations, however, do. And when executives are rewarded handsomely (AIG, Lehman, Merrill Lynch, etc.) even when their leadership ruins the firm, then one should hardly be shocked when executives engage in the sort of risky behavior that ultimately destroys the business and trashes shareholder equity.

Image by Flickr user mattyp_ used under a Create Commons license.

Update: Bloch was fired by the White House yesterday. From CongressDaily ($):

Scott Bloch, the embattled head of the U.S. Special Counsel, was fired today in a meeting with White House officials, according to several sources...On Monday Bloch announced plans to resign on Jan. 5. OSC employees said Federal Protective Service employees barred Bloch from his office today. The agency has an all-hands meeting at 4 p.m.

Embattled (to understate it) Office of Special Counsel Scott Bloch has announced that he will resign, effective Jan. 5, leaving the post vacant until the next president can appoint a successor.

BudgetBlog readers will correctly surmise that we, in the Budget Brigade, will feel his absence. He's given us some good blogging material over the past year. But, if you missed our coverage, you can read in our archives:

• Bloch catches the eye of OSC investigators after he hired Geeks On Call to erase his hard drive so thoroughly that it would meet Defense Department data-security standards.
• The FBI raids Bloch's home and offices - two posts, here and here
• Bloch's deputy resigns in protest saying that Bloch's continued employment puts the "very existence of the Office of Special Counsel...at risk."
• And my personal favorite: It was revealed that Bloch ordered a subordinate to post flattering comments of Bloch on blogs and news websites.

Of course, as Laurita Doan has taught us, resignation is not the end of the road.

On Tuesday, President Bush issued one of his infamous signing statements for a bill that will improve the independence of inspector general (IG) offices within the federal government. Since IG offices monitor efficiency, waste, and fraud in the government, but are also housed within the federal government, Congress saw fit to enact new measures to insulate IG offices from political pressures. (More on the bill here.)

Bush objects to a part of the bill that attempts to stem political interference in the work of IG offices. If administration officials find an IG particularly vexing, they can slash the IG's budget in order to reduce their capacity to uncover government fraud and waste. Since the budget process is not transparent, the administration can claim its request is all the IG needs — without revealing the intra-administration conflict.

The bill requires the president to include in his annual budget request to Congress a separate line item for each agency's IG. More importantly, it requires the president to submit the IG's original request for funds, that is, what each IG believes he or she needs to carry out the functions of the office.

In the signing statement, Bush basically makes the claim that the president can ignore this provision. He complains, "[T]he bill includes provisions that purport to direct or regulate the content of the President's budget submissions, including provisions that purport to direct the President to include the comments of Inspectors General with respect to those submissions."

Actually, upon Bush's signature, the bill does not "purport" anything. Bills passed by Congress and signed a president become law. They set rules and conditions of behavior for the government and society. Mr. Bush would do well to consult a dictionary for the meaning of both words.

Bush goes on to state, "The executive branch shall construe section 8 of the bill in a manner consistent with the President's constitutional authority to recommend for congressional consideration such measures as the President shall judge necessary and expedient."

Of note, the bill does not require the president or Congress to actually abide by the IG's request; it merely requires greater transparency so that Congress and the public have access an important bit of government information. As it is, nothing in the bill impedes a president's ability to carry out any function.

Luckily for inspectors general, and for the prospects of good governance, Bush won't be submitting any more budget requests to Congress.

In a stark reversal of Monday's vote, the House approved the Senate-passed version of a financial market rescue bill. By a vote of 263 to 171, the House passed a $700 billion plan to buy up troubled financial assets, patch the AMT for a year, and extend dozens of expiring tax cuts (some for a year, some for two). While the final cost to taxpayers of the bailout is impossible to estimate, the tax portion of the bill will reduce revenues by $107 billion.

Moments after passage, President Bush signed the bill into law.

President Bush signs the Emergency Economic Stabilization Act of 2008 in the Oval Office after the House passed the $700 billion financial bailout bill at the White House in Washington, Friday, Oct. 3, 2008. (AP Photo/Charles Dharapak)

Great news from the technology trade pubs today - FedSpending.org has been selected by PC World Magazine as one of the top five sites out there that will raise your political awareness. Woohoo!

Below is the screenshot of the article:

Read the full article: 5 Sites That Will Boost Your Political Awareness

Neil Gordon blogs over at the Project on Government Oversight about a troubling provision in the current debate over a bailout proposal for Wall Street that would give Secretary of the Treasury Hank Paulson the ability to waive provisions and requirements of the Federal Acquisition Register (FAR), the set of regulations that govern how the feds run government contracting. Gordon points out a very disturbing irony of this provision:

This would have enabled the Treasury Secretary to award billions of dollars in sole-source contracts to private asset managers firms and financial consultants, even those with a direct financial interest in the bailout. In addition, the Secretary could waive other FAR provisions that protect taxpayers.

Gordon also points out the fascinating analysis released Monday from the Center for Responsive Politics which showed a relationship between campaign contributions from the finance, insurance, and real estate sectors and the way House members voted on the bailout on Monday. The data might shock you - it shocked me, although I suppose after so many years working in Washington, these things should stop surprising me.

It seems that House members who voted for the bill on Monday have collected about 51 percent more in campaign contributions from the affected industries (finance, insurance and real estate) than those who voted against it. Among Democrats, that discrepancy between bill supporters and opponents is an even more astonishing 88 percent.

I wonder if any of those contributions came from companies who may gain from a government contract to fix this mess? Gulp!

If Monday's Wall Street bailout bill, which the House failed to pass, was, as House Minority Leader John A. Boehner (R-OH) called it, a "crap sandwich," then the Senate's latest offering is a crap sandwich platter: a crap sandwich served with a heaping side of tax cuts and an FDIC deposit limit increase for desert.

The Senate will vote on a package today that includes the bailout legislation rejected by the House on Monday, a Senate-approved bill containing some $120 billion in tax cuts, and an increase in the FDIC-insured deposit limit from $100,000 to $250,000 through the end of 2009, with premium increases funded by the governemnt. The tax language in the new financial rescue bill will come in the form of an amendment that replicates a Seante-passed tax package (HR 6049) that contains an AMT patch and an extension of dozens of expiring tax cuts. The move is intended to entice more House Republicans to vote for the bailout. House Democrats, however, object to the tax bill because the cost of extending the expiring tax cuts remains only partially offset, but like Winnie the Pooh and honey, Republicans just cannot say "no" to a tax cut.

The text of the bill can be found here.

The Washington Post: Lawmakers Revise Rescue Plan
CQ Politics: Financial Rescue Vote Set for Wednesday in Senate
AP: Hoyer, Blunt hopeful of progress on rescue bill
Roll Call: Senate to Move Next on Bailout

Image by Flickr user disneyandy used under a Creative Commons license