By Jonathan Weisman
Washington Post Staff Writer
Friday, December 19, 2003; Page E01

Abusive tax-avoidance schemes -- especially illegal offshore credit card accounts -- may be proliferating considerably faster than the Internal Revenue Service expected for the last fiscal year, and the agency is not dedicating enough people and resources to combat the problem, the General Accounting Office has found.

The GAO report, to be released publicly today, said the IRS recently told the White House that over the past two years it has linked more than 400,000 taxpayers to tax-evasion schemes that the agency says are likely to be found illegal. That number is considerably larger than the 131,000 the agency reported to congressional investigators this fall.

More than two-thirds of the 400,000 taxpayers have established bank accounts in offshore tax havens and are using debit and credit cards to easily access money that has never been taxed, the IRS has found.

Under one such scheme, a small-business owner such as a dentist sets up a sham company in a tax haven such as the Cayman Islands. The firm then leases the dentist's equipment for a fee that may correspond exactly with his profits. The dentist pays his bill, shifts all of his income overseas without paying any tax on it, then uses a debit or credit card to access the cash at will.

IRS documents cited by the GAO indicated that these tax-evasion techniques and others are depriving the Treasury of up to $40 billion in unrealized taxes per year, more than the annual budget for the Department of Homeland Security.

Yet efforts to shift resources to the problem have slowed considerably, even as the extent of the problem has unfolded. In the fiscal year that ended Sept. 30, the IRS's small-business and self-employment division almost quadrupled the staff targeting such schemes, from 267 workers to 1,020. But even that number fell short of IRS plans "due to overly optimistic workload forecasts," the GAO found. The employee total is rising slightly this year, to 1,154, and the IRS may move workers to this enforcement area from others with histories of significant tax evasion, such as small-business examinations.

"The potential volume of additional work that may be identified . . . [makes] it unclear whether the additional resources and the caseloads will match each other," the GAO concluded.

The report comes at a time of growing congressional interest in curbing tax evasion, a remarkable switch from 1997 and 1998, when a wave of anger at alleged IRS abuses prompted Congress to pass restraints on tax collectors.

"It's important for the IRS to get a handle on the scope of the problem not only out of fairness to taxpayers, but also for allocating resources," said Senate Finance Committee Chairman Charles E. Grassley (R-Iowa).

The committee's ranking Democrat, Sen. Max Baucus (Mont.), said, "After reviewing the GAO's findings, I'm very concerned that the IRS isn't taking all necessary steps to address the problem of deliberate tax cheating."

The GAO is adding its voice to a growing chorus of concern that the IRS is losing the battle against tax evasion. Last year, as then-IRS Commissioner Charles O. Rossotti was preparing to leave office, he disclosed that 60 percent of identified tax debts are not pursued, 75 percent of taxpayers who did not file a tax return are not pursued, and 79 percent of identified taxpayers who use abusive devices such as offshore accounts are not pursued.

Rossotti's successor, IRS Commissioner Mark W. Everson, made no effort to deflect the GAO's concern. Indeed, in letter to the GAO last month, Everson said, "We overestimated our ability to deliver [resources] to the field."

In an interview yesterday, Everson said a "single-minded" push to improve customer service in the wake of the 1998 law had diverted resources from enforcement and sent audit rates and criminal investigations plunging by as much as 30 percent. That coincided with "a real deterioration in taxpayer attitudes" about compliance with tax laws, he said.

Between 1999 and 2003, the number of Americans who said it is all right to cheat on their taxes rose from 11 percent to 17 percent, he said.

"What I'm trying to do is re-center this agency," he said.

By the IRS's own count, instances of tax evasion such as the offshore credit cards number in the hundreds of thousands. To put that in perspective, one senior Senate tax aide said, the uncovering of 300,000 corporate tax shelters in the 1980s provoked such a political fury that Congress passed in 1986 one of the broadest tax-reform acts in the nation's history.

"They've got a huge problem here," the aide said, "and the response is not commensurate."