Hoping to send a message to taxpayers as this year's filing deadline nears, the heads of the Internal Revenue Service and the Justice Department's Tax Division said yesterday that their agencies really do enforce the tax laws. And they handed out a list of jailed offenders to prove it.
IRS Commissioner Mark W. Everson and Assistant Attorney General Eileen J. O'Connor acknowledged that enforcement fell after Senate Finance Committee hearings in 1997 and 1998, highly critical of the tax agency, led to a diversion of auditing resources to customer service. That has now changed, the officials said, and tax cheats and promoters of abusive shelters now face a real risk of being caught, prosecuted and sent to jail.
IRS Commissioner Mark W. Everson said tax cheats and promoters of abusive shelters now face a higher risk of being caught and sent to jail.
(Dennis Brack -- Bloomberg News)
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"We have arrested the decline" in enforcement, Everson told reporters at a briefing at the Justice Department. The Bush administration is seeking increased funding for the IRS to boost the agency's efforts to pursue high-income cheats and corporate evaders even more vigorously, he said.
The dozen successful tax prosecutions the two agencies cited included that of a Florida golf course designer who hadn't filed a return since 1977 and who evaded more than $5 million in taxes and penalties; he was sentenced to more than 10 years in prison.
An Illinois promoter of tax-fraud schemes that purported to hide clients' income through trusts was sentenced to nine years and received a $150,000 fine.
And a Beverly Hills, Calif., lawyer who helped clients use offshore accounts and fraudulent bankruptcy filings to dodge more than $12 million in taxes received 32 months in prison and a $598,381 fine.
IRS officials later said that the agency now has 830 tax-shelter promoters under investigation. And as part of its new program to work with state tax authorities, the IRS has forwarded the names of some 20,000 taxpayers to those agencies for investigation.
A key premise of tax enforcement is that well-publicized enforcement cases not only take the perpetrators themselves out of circulation, but also frighten other taxpayers and promoters into obeying the law.
"I'm hopeful we're reaching the tipping point on tax-scam promotions," O'Connor said. She acknowledged that the Internet sometimes allows scams to proliferate more rapidly than in the past, but technology can also allow agents to track down promoters' internal communications.
One of her colleagues says "e-mail is God's gift to prosecutors," she said.
In addition to stepping up prosecutions and seeking a budget increase, Everson said, the IRS is:
• Studying a sample of 46,000 returns to upgrade its understanding of which taxpayers are more likely to cheat and how they go about it. This research project is a replacement for the Taxpayer Compliance Measurement Audits, which were outlawed by Congress in 1998 as too invasive. In that program, the agency picked out a sample of 100,000 returns and audited every line in every one, challenging each taxpayer to justify everything on the return. Everson said the new project should begin generating useful information "towards the end of the year."
• Working on tightening the rules governing attorneys, accountants and other tax professionals who advise taxpayers on what they can and cannot do. The agency is also bringing cases against professionals, including lawyers, who it believes are involved in abusive tax shelters.
• Trying to speed up audits of large corporations in an effort to understand why more corporations don't pay taxes. Asked about a recent report by the General Accounting Office that found that more than 60 percent of companies paid no income taxes between 1996 and 2000, Everson said audits now take so long that the abusive schemes can spread before agents realize they exist.
• Moving to "clean up" its collections system following a report by the Treasury Department's inspector general for tax administration that millions of dollars in judgments and back taxes go uncollected, in some cases because the IRS never contacted the taxpayer.
Everson also said that after a budget increase, tougher penalties are his top legislative priority.
"Penalties, particularly in the area of promoters, need to be dramatically strengthened," he said. Senate hearings last fall "clearly demonstrated business decisions . . . by some of our finest [law and accounting] firms as to whether they would comply with the law. That's shocking and not acceptable," he said.
