For millions, today isn't tax deadline 'Cross section of America' skips filing each year

April 15, 1996|By LOS ANGELES TIMES

WASHINGTON -- Charter Hughes was known around Santa Barbara, Calif., as an adept tax attorney, but he had an unusual strategy for his own federal return: He just didn't file one.

When Internal Revenue Service agents caught up with Hughes in 1994, he owed $38,727 in back taxes. Hughes pleaded guilty to federal charges, was sentenced to 36 months' probation and again is practicing tax law.

Although the IRS has a reputation as a pit bull when it comes to pursuing tax cheaters, about 6.5 million Americans -- including a large number of professionals such as Hughes -- ignore the federal tax collector every year.

"People tend to only think of the subculture -- drug dealers -- but it goes far beyond that," said Frederick Daily, a San Francisco tax attorney. "It goes from the butcher to the baker to the banker. It is an amazing cross section of America."

How can so many Americans avoid filing tax returns without running afoul of the IRS for years at a time? Tax officials acknowledge that they don't have the resources to round up all the scofflaws. Moreover, the agency's outdated computers have hobbled efforts to smoke out more nonfilers.

Federal prosecutors also complain that legal penalties for not filing a tax return are too weak to intimidate would-be scofflaws.

Evading taxes by falsifying a return is a federal felony, which carries a maximum sentence of five years in prison, as well as civil penalties of up to 47.5 percent of back taxes owed and accrued interest.

For nonfilers, the maximum sentence is one year in prison.

IRS Commissioner Margaret Milner Richardson insists that her agency is doing an effective job of collecting taxes and that the nation's system of voluntary compliance -- the government collects an estimated 86 cents of every dollar owed -- is the envy of the world.

Although the IRS has recently put greater emphasis on identifying and catching nonfilers, the problem seems to be growing for a variety of reasons, including an increase in the underground economy, the economic squeeze on the American middle class and a renewed tax protest movement.

The IRS has files on 6.5 million individuals and businesses who the agency knows do not file returns. But it is clearly missing many others who operate in a booming underground economy that includes nannies, tree trimmers and musicians -- not to mention the illegal sector of drug dealers, prostitutes, car thieves and other criminals.

IRS policies emphasize gently herding nonfilers back into the tax collector's fold. The IRS regards the vast majority of nonfilers as congenital procrastinators or luckless deadbeats, not criminals.

The IRS system begins with mailing reminders to taxpayers who stop filing returns. Typically, those reminders are sent one to two years after the first failure to file. Ultimately, the IRS has a right to prepare a tax return -- a "substitute-for-return form" -- for individuals who continue to refuse to file. Then the collections division can begin dunning the individual for taxes owed.

It may be years later that the IRS finally sends a criminal investigator after the scofflaw.

Hardly anybody is prosecuted for not filing. In the 1994 tax year, just 240 people or businesses were convicted -- less than four of every 10,000 known nonfilers. As a result, many nonfilers have apparently come to regard the IRS with little or no fear.

IRS officials have noticed a jump in cases involving high-income nonfilers -- people who earn at least $100,000 a year. The agency identified 138,717 such cases in the 1994 tax year, up 39 percent from 99,693 the year before.

"We have more attorneys under investigation than I have ever had before," said Richard Speier Jr., chief of the IRS criminal investigation division in Los Angeles. "I am very active in the investigation of crimes involving doctors and lawyers."

Professionals can escape notice most easily if they are self-employed and their income is not reported independently to the IRS on W-2 forms. By avoiding traditional investments that yield interest or dividend income, which is also reported to the IRS, they can drop out of sight.

Of the 6.5 million nonfilers, various types of businesses account for about 2.3 million and individuals account for about 4.2 million, according to the IRS. Their ranks include bank presidents, fading actresses, surgeons and accountants, according to the attorneys who represent scofflaws.

Ronald Rhodes, director of the IRS' tax collection division, said the agency was not sure how much it loses to nonfilers, but an out-of-date estimate in the early 1990s set the figure at $10 billion a year.

Though a huge sum, it's just a fraction of the $150 billion to $400 billion (enough to balance the federal budget) that tax cheating costs the government every year, according to Rep. Jim Ross Lightfoot, an Iowa Republican, who is chairman of the House Appropriations subcommittee that controls the IRS budget.

Pub Date: 4/15/96

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