Unpaid Taxes Tough to Recover

Some Democrats, eager to find ways to pay for favorite government programs while offering middle-class tax breaks, say the IRS can squeeze as much as $100 billion a year out of tax cheats. Olson and others agree it could probably be done. "But not quickly and not easily," said former IRS commissioner Charles Rossotti. "And not without doing things people may not be willing to accept."

The IRS, of course, has a history of doing things people are not happy to accept. For years, the agency's chief tool for assessing the tax gap was a vast system of random examinations derided as "audits from hell." The surveys, last conducted in 1988, were discontinued in the mid-1990s after grass-roots anger flared over taxes and aggressive IRS enforcement. The 1988 survey remains the most recent source of detailed information about the tax-paying behavior of corporations.

In 2001, the IRS introduced a new compliance tool called the National Research Program. The first round focused on 46,000 individual taxpayers, including 21,000 sole proprietors with business income. Those results, combined with a re-estimate of the 1988 corporate data, make up the government's current understanding of the tax gap.

According to the IRS, taxpayers paid about $1.8 trillion on time in 2001, leaving an estimated $345 billion outstanding. (The IRS estimates that it will collect $55 billion through routine enforcement.) Those who didn't file returns or under paid accounted for $60 billion. But the biggest loss came from underreported income: $30 billion from corporations, $54 billion from employers and $197 billion from individuals.

For individuals, more than half the loss -- $109 billion -- was the result of unreported business income, the IRS found.

Agency officials say some underreporting is unintentional, though no one knows how much. Another portion may be caused by unscrupulous tax preparers, an emerging focus of concern.

Earlier this month, the Justice Department moved to shut down 125 offices of Jackson Hewitt, the nation's second-largest tax preparer, after discovering evidence of "massive" fraud. In Chicago, according to one complaint, Jackson Hewitt employees received kickbacks for accepting phony W-2 forms and generating fraudulent refunds.

The company has declined to comment on the action but noted in a statement that it is "limited to one franchisee, whose entities . . . represent about 2 percent" of the company's total revenue. "Jackson Hewitt remains committed to providing accurate, quality tax preparation," the statement said.

Volunteers who assist low-income taxpayers say they are routinely victimized by preparers who plump up their refunds and persuade them to take out refund-anticipation loans at high interest rates. Some preparers set up shop in car dealerships or rental furniture outlets where the loans can be put to immediate use.

The IRS has resisted efforts to regulate tax preparers, but Olson said lawmakers are considering the idea. A Senate committee plans a hearing on the tax gap later this week.

Of course, some cheating tax preparers act at the behest of cheating taxpayers. The IRS has consistently found that cheating is concentrated where there is opportunity, meaning no paper trail. Wage earners, whose taxes are withheld and whose income appears on W-2 statements, tend to understate their tax bill by 1.2 percent. But sole proprietors, farmers, renters and "informal suppliers" such as sidewalk vendors and housekeepers pay just 46 percent of the taxes they owe, according to IRS research.

The courts are rife with examples of unreported business income. Just this year, prosecutors say: