IRS steps up hunt for tax cheaters

Enforcement staff hired, expect more audits of wealthy filers, chief says

17% think it's OK to lie on 1040

April 02, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

More taxpayers say they are willing to cheat, and the Internal Revenue Service is fighting back by hiring more enforcement staff and beefing up audits of high-income individuals, IRS Commissioner Mark W. Everson said yesterday.

A survey last year of taxpayers found that 17 percent believed it was OK to cheat on their taxes, up from 11 percent in 1999, Everson said in a telephone conference.

(The study was commissioned by the IRS Oversight Board, a group established by Congress to provide the agency with guidance.)

"We really have to get after that. We can't let our system degrade," he said.

The gap between what taxpayers owe and what the IRS collects has grown to $250 billion a year, Everson said.

Part of the problem is that the IRS backed away from enforcement in the late 1990s, said Everson, who became commissioner last May. Between 1996 and 2003, the number of IRS auditors, tax collectors, criminal investigators and other staffers fell 25 percent.

"This was a bad time to disengage," said Everson, explaining that the reduced oversight contributed to accountants and lawyers pushing questionable tax shelters.

When individuals do fudge their taxes, they tend to inflate expenses, create tax deductions and under-report income, particularly cash, said Eric Hayes, who was an IRS special agent in the 1990s and now is a senior tax analyst with TaxBrain, a California online tax service.

One reason taxpayers might be more comfortable with cheating is a cultural shift, said Steven Isberg, an associate professor of finance at the University of Baltimore.

"We live in a very aggressive society. Part of that is creating an attitude that you should go out and take what you can get. If you get away with that, it's OK," Isberg said.

On top of that, people are seeing some high-profile business leaders being exposed as cheats, he said.

Taxpayers might conclude that if others are taking advantage of loopholes, "`why shouldn't I push the envelope to get as much as I can get? All I really am doing is playing the same game that everybody else is playing. It's OK to cheat up to a limit,'" Isberg said.

"That limit is getting pushed, and pushed and pushed farther."

The IRS has already stepped up its audits of taxpayers making $100,000 or more. Last year, 139,379 audits were done on filers with six-figure incomes, a 24 percent increase over 2002 and a 52 percent more than in 2001. Audits of all taxpayers last year rose to 849,296, a 14 percent jump over 2002.

And the proposed federal budget for the fiscal year beginning this October includes additional funding to permit the IRS to hire 5,000 more auditors, investigators, tax collectors and other staff.

Another way to improve compliance is to shape the tax law so filers view it as fair and easy to understand, Everson said. Some current tax rules don't meet that test.

A good example is the alternative minimum tax. It was designed decades ago to prevent wealthy individuals from escaping taxes but now is snagging more middle-income households because the tax hasn't been adjusted for inflation.

The AMT has only increased taxpayer confusion, said Everson, who said he was surprised to discover one year that he owed AMT.

He said he hopes Congress will seriously address the AMT and tax simplification in a couple of years.

The IRS has been able to divert more employees recently to chasing errant taxpayers because the growing proportion of taxes filed electronically has reduced the agency's clerical workload.

The IRS has been encouraging consumers to file online, saying that electronic returns have fewer errors and refunds can be processed faster. Everson said corporations might be required to file online in the near future, although the rule probably won't apply to individuals.

Electronic filing is still growing fast. At the end of last week, 45.8 million tax returns were filed online, a 12 percent increase over online filings for a similar period last year. That's nearly 35 percent of the 134 million returns expected to be submitted this year.

More than 2.6 million of those returns were filed using the agency's Free File, an increase of 24 percent from a year ago.

Free File is a three-year partnership between the IRS and private tax companies to provide electronic filing to the majority of filers at no cost. The program, available through, attracted 2.8 million filers during its first tax season last year.

Even with the upswing in electronic filing, it's doubtful the IRS will meet its goal of having 80 percent of tax returns filed electronically by 2007, Everson said. "The 80 percent [figure] may very well be a good number, but it's not clear when it will be reached." he said.

A recent survey by the Conference Board in New York found that 57 percent of online consumers are reluctant to give up paper and pencil for electronic returns.

"Security is a very major barrier that exists because people do not want their personal financial information on the Internet," said Lynn Franco, director of the Conference Board's Consumer Research Center.

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