Now, fewer tax cheats in IRS net

The United States tax collector has become something of a wimp.

That may be a relief to millions of Americans preparing their last-minute taxes this weekend. Their likelihood of being audited has tumbled decidedly since 1998, when the Internal Revenue Service, painted as thuggish at a Senate Finance Committee hearing, backed off the number of returns it examined as a result.

But what's good for an individual's peace of mind may not be beneficial to a nation. Mortimer Caplin, an IRS commissioner in the early 1960s, estimates that the IRS misses collecting $100 billion in due taxes each year because of tax fraud. That's enough to cover nearly a third of the nation's defense bill.

Donald Alexander, another former commissioner, guesses that Uncle Sam fails to collect $500 billion. That's a quarter of what the IRS brings in overall.

Though hard to measure, tax fraud is apparently growing.

"When there is a period of largely ineffectual, almost nonexistent tax enforcement, some people will take advantage of it," says Mr. Alexander, now a tax lawyer with Akin, Gump, Strauss, Hauer & Feld in Washington.

Honest taxpayers have reason for concern. "Every time the guy down the street cheats, you pick up the tab," says Mr. Caplin.

The IRS's reluctance to enforce their system of "voluntary tax compliance" stems, perhaps, from attacks on the agency from Washington politicians – particularly those on the right, led by the former Republican speaker in the House, Newt Gingrich, five years ago. Enforcement agents were portrayed as hamfisted hoodlums knocking on the doors of defenseless taxpayers.

But the mood has changed over the past year. The shift in the federal budget from a huge surplus to a growing deficit has made an enhanced ability of the IRS to raise extra revenues more attractive to Congress.

"It changes the political winds a little bit," says Joel Slemrod, a tax economist at the University of Michigan Business School in Ann Arbor.

Yesterday, instead of berating the IRS, the Senate Finance Committee held hearings on "schemes, scams, and cons" to duck taxes. The session featured penitent tax dodgers – not the so-called IRS victims of 1998 hearings many of whom, subsequently, were found to be phonies.

The hearings reflect a concern that enforcement of the tax code has fallen recently. Stung by Congress's criticism of its poor service to taxpayers, the agency had spent the past few years shifting its personnel resources to answering the questions of taxpayers trying to figure out the complex system created by Congress.

The drop off in audits has been dramatic. Decades ago, when Caplin was commissioner, the IRS audited about 5 or 6 percent of returns. But, in 2000, IRS agents nationwide audited the returns of one out of 435 taxpayers making $50,000 to $100,000 in adjusted gross income; one out of 455 for those making $25,000 to $50,000; and one out of 145 for those making $100,000 or more.

The difference in auditing rates for different income brackets has led some critics to complain that the auditing that is being conducted is neither equitable nor fair. The rich are audited less than the working poor – those eligible for the Earned Income Tax Credit – one out of 47 of whom faced an audit.

In response, Alexander explains that Congress became concerned when it was found that the working poor were cheating widely in their applications for the tax credit – partly because they didn't understand the complex system, partly because it was seen as easy money.

They had help from some tax professionals. "Tax preparers cheat like mad," Alexander says.

For the most part, the IRS is still reluctant to play hardball to squeeze money from tax cheats.

A rare action, seizure of properties, numbered 10,090 in 1997. By contrast, there were only 255 confiscations last year. Instead of such hard measures, the IRS more often bargains with taxpayers on what should be paid.

The number of "offers in compromise" has skyrocketed. The General Accounting Office estimated that IRS collection-field-staff hours devoted to working on offers increased from 728,000 hours in fiscal 1997 to about 1.6 million hours last year. National Taxpayer Advocate Nina Olson says its even more – a quarter of the collection hours.

But the IRS has moved in the direction of more tax compliance recently. "I'm very pleased," says Caplin.

For instance, early this month it made a more serious attempt to deal with frivolous arguments about the legality of the income tax. Speaking of "unscrupulous promoters" trying to enrich themselves with schemes that recruit others to avoid taxes, IRS Commissioner Charles Rossotti declared: "There's no legal basis for this bad advice, and there's a real danger in following it."

There are other signs that the tax collection agency is feeling more confident about turning the screws on truant taxpayers than it did a few years ago.

One of the agency's tough tools for collecting outstanding taxes had been the enforcement of liens on property, preventing their sale until settlement of unresolved tax issues. Use of this measure had fallen from 750,225 instances in fiscal 1996 to 167,867 in fiscal 1999.

But they more than doubled to 428,376 last year as the IRS, reflecting the changed sentiment in Congress, became firmer in its tax actions. Similar trends have also occurred in levies, such as the garnishment of wages.