IRS Storms the Tax Shelters

The Internal Revenue Service is gearing up for the 2004 filing season by toughening its approach to tax cheats. It just rolled out new rules designed to curb abusive tax shelters - the kind that have no purpose other than to reduce taxes.

One new provision requires taxpayers to alert the IRS that they are using a tax shelter. Another imposes tougher rules on lawyers and accountants who sell written opinions that help taxpayers avoid stiff penalties if the IRS rules a tax shelter invalid.

The latest moves are part of IRS Commissioner Mark Everson's efforts to halt a rise in tax avoidance. At stake, says Assistant Treasury Secretary Pamela Olsen, is a "struggle to preserve the integrity of our self-assessment tax system."

A recent survey cited by the IRS shows that 17 percent of Americans think it is permissible to cheat on their taxes, up from 11 percent five years ago. And several experts say that a decline in corporate tax receipts is due to more than just a weak economy: Tax avoidance played a role, too.

A new General Accounting Office study reveals the IRS has identified more than 400,000 taxpayers who have used illegal credit-card accounts overseas, with a potential tax loss of $20 billion to $40 billion.

One reason cheating seems more attractive is that the chances of being caught have gone down as a result of restrictions Congress placed on the IRS in 1998. The intent was to curb abuse and create a "kinder and gentler" IRS. As a result, the number of IRS employees assigned to enforcement fell sharply. Audit rates for individuals slumped to less than 0.5 percent in 2001.

Even when tax cheats are caught, enforcement is erratic. The agency ignores about 60 percent of tax debts. And IRS enforcement efforts are hobbled by unsuccessful attempts to replace a 1960s-era computer system.

The operations of the IRS need adequate funding, despite its status as the agency voters love to loathe. Its enforcement budget is up only 6.6 percent, compared with a 38 percent hike for antifraud work by the Securities and Exchange Commission.

The nation is not well served when the IRS is abusive. But neither does the public benefit when the tax collection system is toothless - especially when the government runs a deficit.

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