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Irs toughens on wealthy tax cheats

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   http://www.miami.com/mld/miamiherald/business/personal_finance/taxes/7892220.htm

http://www.miami.com/mld/miamiherald/business/personal_finance/taxes/7892220.htm

Posted on Fri, Feb. 06, 2004
A kinder, gentler... and tougher IRS

By Mark Schwanhausser
Mercury News

The Internal Revenue Service's new boss has revised the tax-collection agency's mission: to be kinder, gentler -- and tougher.

Saying that cheating has jumped alarmingly since the IRS sacrificed enforcement to make the agency more taxpayer-friendly in the '90s, new commissioner Mark W. Everson is heading into his first tax-filing season determined to reverse plunging audit rates, beef up enforcement and scare tax cheats straight.

Honest taxpayers are likely to have more reasons to cheer than to fret about such tough talk. IRS audit rates have plunged dramatically the past decade, and Everson says they might not ever rebound to previous levels. Everson also pledges that putting more cops on the beat won't set back improvements in taxpayer service that earned it a reputation as the ``kinder and gentler'' IRS.

But the new tone could rattle the IRS's top targets: wealthy tax cheats, tax-evading corporations and crooked tax preparers.

``You do need that trooper under the bridge every few miles . . . to deter those folks who would willfully violate the speed limits and to convince others driving lawfully that those who break the law will pay the price,'' said Everson (whose name is pronounced EVE-er-son). ``You can't let people feel like chumps if their neighbor down the street is getting away with something.''

Critics remain skeptical, however. Audit rates and other enforcement activity have plummeted so low, they say, that the statistics have nowhere to go but up. The agency still needs to upgrade its computer systems. And the IRS continues to struggle to attract, train and retain top-notch auditors.

``No matter how aggressive you want to be, if you don't have the horses you can't do it,'' said Robert E. McKenzie, a tax attorney with Arnstein & Lehr in Chicago.

But nine months into Everson's five-year term there's mounting evidence that his get-tough growl could have bite:

• In headlines, the agency has launched pilot audits aimed at offshore tax shelters, the earned-income credit fraud and other suspect tactics. For one, the IRS has selected two dozen corporations to examine how they handle stock options, deferred executive compensation and a variety of other executive pay practices. In addition, the agency has launched more than 100 examinations of tax-shelter promoters, seeking lists of investors it can target.

• In court, the IRS is taking on prominent accounting and law firms that marketed tax-shelter schemes, including KPMG, BDO Seidman and Jenkens & Gilchrist. And last month, it succeeded in disbarring San Jose certified public accountant Joseph R. Banister, a former IRS criminal investigation agent who advised clients that income taxes are unconstitutional.

• And behind the scenes, Everson has moved to reshape the IRS. In January, he unveiled a plan to close or consolidate a number of back-office functions and use the savings to hire more auditors and collection officers. In December, he appointed a tough-minded watchdog to police unscrupulous accounting firms and tax preparers, and doubled that department's budget. And last year, the IRS reached an important pact with California and 41 other states to coordinate the hunt for tax-shelter cheats.

It's too soon to measure the impact of such moves statistically. But many tax-industry experts report that the IRS is ratcheting up audits slightly, chasing unpaid tax bills harder and getting stingier with taxpayers who claim they can't afford to pay their full bills.

``The pendulum has swung in the other direction,'' said Claudia Hill, a Cupertino tax preparer and editor in chief of the Journal of Tax Practice & Procedures. ``The IRS left a lot of money on the table. They've started that process up again.''

Everson's new attitude reflects the changing political climate and increased need for tax revenues, experts say. In contrast, the previous commissioner, Charles Rossotti, was charged with focusing a demoralized agency on taxpayer service during a flush economy. Enforcement scaled back in the wake of withering congressional hearings into IRS abuses, the passage of a taxpayer ``bill of rights'' and an order to root out overaggressive auditors and collection agents. Rossotti's restructuring also focused the shrinking agency on organizational charts, not tax cheaters.

Everson lauds the reforms under Rossotti. Still, he said, ``that drawdown happened at exactly the wrong time'' because it opened the door to Enron-style scandals, an explosion of tax-shelter scheming and a new wave of taxpayers who are willing to risk playing audit roulette.

Amid the upheaval, enforcement plunged. The odds that an individual taxpayer would endure a face-to-face audit dropped 76 percent from 1992 to 2002, according to the most recent figures the IRS has released to Transactional Records Access Clearinghouse. Audit rates for wealthy taxpayers with at least $100,000 of income plunged from 2.9 percent to 0.38 percent.

Saying that wealthy golfers are more likely to get hit by lightning than be prosecuted by the IRS, tax attorney McKenzie joked, ``God is a better shot than the IRS.''

Moreover, the agency's three favorite collection tools fell into relative disuse after the congressional reforms in 1998, IRS statistics show. The number of liens fell off 38 percent by 2002. Levies plunged 75 percent. And the seizure of assets all but stopped -- dropping 97 percent from nearly 11,000 in 1995 to just 364 in 2002.

But the statistic that bothers Everson more than most comes from an IRS opinion survey of taxpayer attitudes. In 2003, more than one of every six taxpayers said they think it's OK to cheat on their taxes, up from one in nine just four years earlier.

``That's a very dangerous trend line,'' Everson said. ``You can't sustain that kind of increase and still fund the government or not suffer a very real erosion of the law.''


--------------------------------------------------------------------------------
Contact Mark Schwanhausser at mschwanhausser@mercurynews.com or (408) 920-5543.



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