Hamill: Mom, I have something nice to say about the IRS!

Like most kids of my generation, I got most of my moral guidance from my mother. She was a great role model and had a calm demeanor.

One thing mom said was, “If you don’t have anything nice to say, then don’t say anything at all.”

My basic nature, combined with a desire to follow mom’s advice, was why people often said, “Jim is so quiet.”

There is a part of me that wants to criticize the poorly funded and undermanned IRS for aggressively pursuing an issue that affects few people.

Yet here I am writing about it. Perhaps I should say nothing at all. But upon reflection, I think that the IRS deserves some kind words on this issue.

What am I talking about? Well, that requires a walk down memory lane. Or for the young, a brief history lesson.

In 1977, a self-employed person was required to pay 7.9% of their earnings as “self-employment,” or SE, tax.

This was a 7% tax for Social Security benefits and a 0.9% Medicare tax. Both taxes capped out at $16,500 of SE income.

So, the highest earner would pay no more than $1,304 in SE tax. Adjusted for inflation, that is $6,970 in 2026 dollars.

Today, the tax rates are 12.4% and 2.9%. The Social Security portion is capped at $184,500. The Medicare portion has no limit.

That’s quite an increase in tax burden. Even inflation-adjusted. The almost 50-year comparison leads to a basic economic lesson.

In 1977, people didn’t mind paying SE tax. In 2026, they mind. A lot. Tax laws can often incentivize people to behave in certain self-interested ways.

Some people do not pay Social Security taxes. Not now. Not then. This includes certain public employees covered by their public retirement plan.

Many of those not covered by Social Security in 1977 wanted to be covered. The tax paid was a small price for the potential benefits.

“Promoters” found a way to meet the desires of the public employees (and those who simply did not work).

Partnership tax law said that if the partnership had business income, each partner had SE income and must pay the SE tax.

Paying the SE tax also meant “covered quarters” for future Social Security benefits. These promoters sold limited partnership units to people wanting to pay SE tax.

As limited partners, these investors were passive. They paid a tax intended to be paid by businesspeople producing income. They wanted to do this.

As usual, Congress saved the day! A new law was passed in 1977 to say that limited partners did not have SE income. They could not pay the tax.

There was only one exception. If the limited partner provided services and received a separate payment, they would pay the SE tax on that payment.

Problem solved! Yay Congress! Then, things changed. Social Security and Medicare needed to be made more solvent.

Again, comes Congress! They raised the tax rate and the amount subject to the tax. If you can’t depend on Congress, who can you depend on?

But now, no one wants to pay the tax. They found their own solution. Why not just make yourself a limited partner?

Large hedge funds, private equity and investment firms formed as limited partnerships. Owners became limited partners.

Still, they had to provide some services, so a separate payment was designed to compensate for their services. But it was a fraction of their total income.

Hundreds of millions of dollars of profit were removed from the SE tax base. And that’s just for one partnership.

The IRS fought back. It recently won two cases in Tax Court. Another partnership chose to bypass the Tax Court and head right to the Fifth Circuit.

The two losers also appealed, one to the First Circuit and the other to the Second Circuit. Tax people are waiting for three appellate decisions.

Limited partnerships make up about 10% of all partnership filings. LLCs make up 77%.

So, this limited partnership thing is a minority of partnerships. And the fight is about guys making hundreds of millions of dollars.

A minority times a minority. But the dollars are huge. And the basic principle is important. Why should only the small guy pay SE tax?

So Mom, if you’re still watching over me, the quiet kid has something to say. Yes, it is nice. And it’s about the IRS.

Jim Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.