Now, fewer tax cheats in IRS net

The United States tax collector has become something of a wimp.

That may be a relief to millions of Americans preparing their last-minute taxes this weekend. Their likelihood of being audited has tumbled decidedly since 1998, when the Internal Revenue Service, painted as thuggish at a Senate Finance Committee hearing, backed off the number of returns it examined as a result.

But what's good for an individual's peace of mind may not be beneficial to a nation. Mortimer Caplin, an IRS commissioner in the early 1960s, estimates that the IRS misses collecting $100 billion in due taxes each year because of tax fraud. That's enough to cover nearly a third of the nation's defense bill.

Donald Alexander, another former commissioner, guesses that Uncle Sam fails to collect $500 billion. That's a quarter of what the IRS brings in overall.

Though hard to measure, tax fraud is apparently growing.

"When there is a period of largely ineffectual, almost nonexistent tax enforcement, some people will take advantage of it," says Mr. Alexander, now a tax lawyer with Akin, Gump, Strauss, Hauer & Feld in Washington.

Honest taxpayers have reason for concern. "Every time the guy down the street cheats, you pick up the tab," says Mr. Caplin.

The IRS's reluctance to enforce their system of "voluntary tax compliance" stems, perhaps, from attacks on the agency from Washington politicians – particularly those on the right, led by the former Republican speaker in the House, Newt Gingrich, five years ago. Enforcement agents were portrayed as hamfisted hoodlums knocking on the doors of defenseless taxpayers.

But the mood has changed over the past year. The shift in the federal budget from a huge surplus to a growing deficit has made an enhanced ability of the IRS to raise extra revenues more attractive to Congress.

"It changes the political winds a little bit," says Joel Slemrod, a tax economist at the University of Michigan Business School in Ann Arbor.

Yesterday, instead of berating the IRS, the Senate Finance Committee held hearings on "schemes, scams, and cons" to duck taxes. The session featured penitent tax dodgers – not the so-called IRS victims of 1998 hearings many of whom, subsequently, were found to be phonies.

The hearings reflect a concern that enforcement of the tax code has fallen recently. Stung by Congress's criticism of its poor service to taxpayers, the agency had spent the past few years shifting its personnel resources to answering the questions of taxpayers trying to figure out the complex system created by Congress.

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