New plan to uncover small-time tax cheats could turn into big-time mess

June 21, 1993|By New York Times News Service

WASHINGTON -- The IRS has long suspected that lots o service businesses -- cabbies, electricians, plumbers -- are hiding income from the government. But it has never had the resources to prove it.

Now the Clinton administration, ever in search of revenue, has hit on a way to find out: Deputize every company in America to track the money down.

Getting businesses to inform on their peers to help the IRS find tax cheats is the aim of an obscure provision in the budget package that the House passed and the Senate will take up this week.

It would require all businesses to report money they spend on one especially suspect group -- service corporations -- and to send annual reports to the IRS. In duplicate.

The IRS says this would be a minimal inconvenience. Business groups, of course, disagree. They and a slew of tax experts say it would force companies to collate billions of transactions with millions of companies -- airlines, hotels, taxi fleets, bicycle messengers, print shops, you name it. Much of the information, they say, would be useless.

That is because many of the nation's service companies -- airlines and car-rental companies, for instance -- are major-league corporations, rigorously audited by the government and not suspected of squirreling away income.

Millions of reports on such mammoth companies effectively would be tossed into the computer equivalent of a landfill.

And the data on small service businesses, where the problem lies, would provide such an incomplete picture of their income that only the clumsiest evaders would be caught, the critics say.

"The problems are legion," said Paula Porpelia, a Maryland accountant who sits on an IRS advisory board that studied the proposal this spring and recommended that it be sent back for an overhaul. "There are tremendous problems. And nobody I know of, including the IRS, has a solution to those problems."

Not so, said John Devlin, the head of information reporting for the agency, who asserted that most companies would be able to comply with the new law with merely a few twists in their computer software.

"We've done a lot of discussion with industry groups about this," he said, "and after we explain it there has been an awful lot of support."

Neither side in this red-tape tug-of-war disagrees that the government should do more to find small-business tax cheats, who thrive in the current tax-collecting regime.

According to the General Accounting Office, small corporations -- about 80 percent of the nation's businesses -- voluntarily reported only 61 percent of the taxes they owed in 1987, down 25 percent from 1980. Among service companies, the compliance rate is even worse.

But how much money the proposal would raise is in dispute. The administration estimated the plan would bring in $6.1 billion through 1998. Congress has whittled that down to $400 million and change.

Opponents of the plan, dubbed SINC for the name Service Industry Non-Compliance, say its results would not begin to compensate for the costs, the inefficiencies, the bureaucratic pain and the indignity of dragooning businesses into snitching on one another.

The IRS concedes some of their points. But it says the mere spectacle of millions of reports on income flowing into government computing centers will frighten many tax-skirting businesses into paying in full.

The IRS and a core of supporters in Congress and the General Accounting Office have been mulling the idea for several years. In fact, SINC is a whittled-down version of BIRP, or Business Income Reporting Plan, a proposal that would have extracted a broader range of financial data on all companies but was dismissed as too unwieldy.

By comparison, SINC would aim only at incorporated service companies, and even then only at companies that sell more than $600 in services to any one customer.

Using a car service as an example, here is how the new program would work: Each time a business paid for a cab ride across town, its accountants would tally the payment and the cab company's Taxpayer Identification Number, or TIN, in its ledger.

At year's end, the TINs that provided more than $600 in cab rides over 12 months would be culled out and recorded in duplicate on IRS Form 1099. One 1099 would be mailed to the IRS. Another would go to the taxi company, largely as a friendly reminder that the government has been told all about these particular rides.

For its part, the IRS says, it would plug the data into its computers, and compare the income reported on Form 1099 with the income that each service company declares on its tax return. When there is a mismatch between the two, bingo -- a tax cheat has been flagged.

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