U.S. taxpayers can cheat the government routinely out of thousands of dollars each year on their personal tax returns and get caught without being criminally prosectuted, according to confidential Internal Revenue Service guidelines.
The guidelines, which were obtained by the New York-based National Law Journal and reprinted in its weekly edition published today, mark the first time the IRS spelled out specific dollar amounts below which it will not generally recommend the filing of criminal charges against tax cheaters. Before the issuance of the new guidelines last month, the IRS had only informal policies about the type of criminal cases it would recommend be file. The formal guidelines set the threshold for prosecution much higher, however, and had the effect of wiping out scores of ongoing tax investigation, according to one government tax official. For example, a married taxpayer with two children who claims the standard deduction could earn more than $20,000 a year and file no return at all in most instances without risking a criminal prosecution, according to the new standards.
An IRS spokesman refused to confirm or deny the accuracy of the guidelines, but said if the release of the material proved harmful to IRS enforcement efforts "ovbiously we would have to consider " changing any guidelines that might exist. A tax enforcement source independently confirmed the material's veracity,however,
The IRS spokesman, Leon Levine, also warned taxpayers that any individual guidelines might not tell the whole story on IRS enforcement policies and could be taken out of context.
"You could mislead people," Levine said of news stories about the guidelines. "someone following them could get into trouble."
Anyway Levine said, "most people are not going to cheat no matter what they know. American taxpayers generally don't cheat, even though they have the opportunity to do so."
Tax officials also noted that the guidelines obtained by the New York publication pertain only to criminal cases and are not applicable to IRS civil tax enforcement policies. Civil cases can carry penalties as high as 50 percent and make up the bulk of the IRS enforcement effort.
The guidelines obtained by the National Law Journal instruct IRS agents to:
Recommend felony prsecution in the most easily proven tax fraud cases only if they involve underpayments averaging at least $2,500 a year in each of three successive years. A simple tax case would be one in which the evasion is easily proven, such as failing to report income that can be verified form another documentary source.
Recommend felony prosecution in more complex tax evasion schemes only if the total amount of unpaid taxes is at least $10,000, including at least $3,000 for any single year. In these types of cases, investigators check unusually large expenditures or create a "net worth" picture of an individual and compare it to the tax return.
Recommend felony prosecutions for willful failure to file or filing a false return only if the average yearly unpaid tax involved is at least $2,500 over a three-year period.
There are exceptions, of course to the genreal guidelines. These come into play when the taxpayer commits "flagrant or repetitious conduct" that might warrant criminal sanctions no matter what amount is involved.
Those exceptions include allowing recommendations for the prosecution of taxpayers who "seriously attempt" to conceal their fraud by creating documents or bribing witnesses; taxpayers who use a scheme that could spotlight a loophole for other tax cheats, and cases that almost certain to result in conviction.
The guidelines make it clear; however, that the exceptions are to be applied only in a "limited number of situations." Persons who monitor tax prosecutions said those likely would be cases that might be highly publicized -- such as those of politicians and well-known entertainers.
The guidelines are part of the IRS's Law Enforcement Manual, known within the agency as "LEM material." IRS's enforcement code covers many volumes, and the highly-secret LEM material falls within the estimated five percent of those volumes withheld from the public.
Employes who use the material are aware of its confidentiality, said one IRS official, and it is tightly restricted even within the agency.
"We investigate all unauthorized disclosures of LEM material," said IRS spokesman Levine. "we view any unauthorized disclousre seriously."
The National Law Journal covers the legal community on a nationwide basis, and has a circulation of more than 30,000 attorneys and law firms. It has been publishing for two years, and reported the IRS guidelines in an unsigned, copyrighted story.