April 15, 2004

BY TODAY'S end, the vast majority of Americans will have dutifully complied with the Internal Revenue Service's annual deadline for slogging through their tax calculations and mailing off their returns to the federal government, accompanied by payments of more of their hard-earned cash if necessary.

But a rising share of taxpayers - one in five overall and almost one in three younger workers - now believe it's OK to cheat on their taxes, surveys show.

Even more problematic, more corporations appear to be embracing much the same ethos: Their share of tax revenues keeps falling - by means legal, illegal and undetermined - with many firms paying little or nothing.

As a result, the federal tax system's leakage - the amount lost to underreported, evaded or uncollected taxes - is now estimated at more than $300 billion a year, more than half this year's federal budget deficit and about equal to the annual cost of President Bush's historic tax cuts.

There's little wonder why tax compliance is losing ground. The IRS, its resources growing more slowly than its challenges, has been lagging badly on enforcement. A Syracuse University study released this week finds the agency's audit rates continued to trend down last year for all businesses, partnerships and the largest corporations; the biggest firms' rate now is just about half that of a decade ago. Moreover, the numbers of criminal prosecutions and civil penalties for tax matters also are falling.

This picture of an overburdened agency dovetails with another recent study, by the Government Accounting Office, showing 61 percent of America's corporations didn't pay any taxes in the boom years of 1996 to 2000 and 94 percent paid less than 5 percent of their total income (despite a corporate tax rate of 35 percent). Corporations provided 40 percent of federal tax revenues during World War II; that's now down to 7.5 percent - with workers' payroll taxes for Social Security and Medicare filling the gap.

In recent weeks, top IRS officials have vowed to crack down on tax fraud. The audit rate for individual filers has been increasing in recent years - largely from more mail audits generated by computers - even as the business rate has been falling. Last year, individuals were three times more likely to be audited than businesses, even though corporate taxable income totals three times that of individuals. The misplaced focus may stem from the increasing sophistication of corporate tax shelters.

Insufficient enforcement rests on insufficient IRS funding. In the late 1990s, the agency was hammered by Republicans for being too aggressive; for four straight years now, the Clinton and Bush administrations have proposed budget increases to step up hiring, but these have largely gone to pay raises and other expenses. Since 1988, IRS permanent staff has shrunk by 31 percent, while the number of individual returns has swelled by 26 percent and business returns have grown at an even higher rate.

There is, of course, a pitched ideological battle going on in this country over tax rates, but at a time of war and deficits, everyone on all sides of that debate loses if the IRS is so toothless that filers, particularly large corporations, are increasingly willing and able to sidestep their legal obligations.

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