IRS swings back into old role: enforcer

Uncle Sam's tax collector has started to pump iron again.

"There has been a shift back to tax enforcement," says Mortimer Caplin, a former commissioner of the United States Internal Revenue Service (IRS). "I'm heartened by that."

In recent months, the IRS has been cracking down on some corporate and personal tax shelters and other tax dodges. The agency proclaimed Friday a further expansion of efforts to catch high-income tax cheaters.

One reason is the changed mood in the nation, and especially in Congress. The corporate accounting scandals, the parade of executives getting rich while employees lost their jobs and pension money, the efforts by some firms to avoid taxes by moving their legal headquarters abroad, have given the IRS a green light to get tough.

"Congressional rhetoric has shifted," says Charles Davenport, a tax professor at Rutgers University, New Brunswick, N.J.

In 1998, some key lawmakers painted the IRS as a monster out of control. Former Sen. William Roth (D) of Delaware paraded a host of its supposed victims at committee hearings. Most charges were later proved bogus. By then, though, Congress already had passed a measure that discouraged IRS agents from tackling tax crooks.

Instead, the IRS focused on helping taxpayers fill out complex tax forms.

Now the IRS pendulum has begun to swing back from being "kinder and gentler" with taxpayers to putting greater emphasis on making sure they pay taxes that are due, says Joel Slemrod, a tax economist at the University of Michigan Business School in Ann Arbor.

With the federal budget in deficit, the IRS has turned a bit to hiking revenues.

There are other bureaucratic factors. For the past several years, the IRS has been bogged down in a massive reorganization. Further, its agents were knee deep in settling some 150,000 "innocent spouse" cases – cases where a couple's joint tax return, signed by both parties, resulted in an unfair tax burden on one spouse after a divorce or death.

At this point, the IRS can free more agents to seek out the minority of taxpayers, corporate or individual, who illegally fail to pay a fair tax share.

Rep. Lloyd Doggett (D) of Texas sees a "slight increase" in IRS attention to tax shelters. But this "won't do the job alone. There has to be statutory change."

A member of the House Ways and Means Committee, Mr. Doggett first proposed a bill in 1999 to restrain corporate tax shelters. It was derided or ignored by Republicans. This year, faced by the storm over Enron and other corporate disasters, the chairman of the tax-writing committee, Rep. William Thomas (R) of California, incorporated Doggett's tax reforms, plus huge new tax breaks for corporations, into a big tax package.

But Doggett isn't certain Mr. Thomas will send the bill to the floor for a vote before Congress adjourns for elections.

Doggett rejoices in one victory. In July, the House attached to the homeland security bill a provision that would deny federal contracts to companies locating offshore to escape taxes. More than 100 Republicans voted for the bill.

"Many didn't want to be on the wrong side of this provision," Doggett says. They feared being charged in the election campaign with supporting companies that want the benefits of America's rich economy without paying taxes.

As it is, corporate tax revenues have diminished to just over 2 percent of the nation's gross domestic product, from 5 percent in the 1950s. One in 1,000 Americans earning more than $200,000 in 1999 paid no federal income tax.

Congressional committees have approved a sizable increase in outlays for the IRS. But it has not yet finally passed.

Meanwhile, the IRS is transmuting from pussycat to, if not a tiger, at least a bobcat. In July, it charged accounting firms KPMG LLP and BDO Seidman LLP with flouting tax laws to help hundreds of companies and individuals avoid billions in taxes. It is also forcing leading credit-card firms to release transaction records of as many as 2 million citizens thought to be tapping money hidden offshore with credit or debit cards. And it is investigating four businesses whose owners boast that they do not withhold taxes from workers' paychecks.