The IRS is ready to tighten ropes on escape artistry
People who are looking to hide some income from the Internal Revenue Service: Beware. Last year's tax bill gave the IRS a number of new weapons to use against tax evaders. And the service is also trying a number of new tactics of its own to cut down on the ''tax gap,'' or amount of revenue lost through noncompliance with tax law.
The size of the gap is growing rapidly. It tripled in an eight-year period, from $29 billion in 1973 to $87 billion in 1981, according to IRS estimates. And that does not count tax evasion by individuals engaged in crime. The tax gap in the economy's illegal sector grew from $2.5 billion in 1973 to $8 billion in 1981.
''Recently the dollars involved have reached levels which we believe are unacceptable,'' IRS Commissioner Roscoe L. Egger Jr. told Congress last year.
The United States tax system still produces ''the best voluntary compliance anywhere in the world. No one else comes close,'' says Steven F. Holub, a partner in the Washington office of Laventhol & Horwath, an accounting firm.
Individual taxpayers report about 80 percent of the taxes that are actually owed without any enforcement effort, according to IRS statistics. Of course, this ''voluntary compliance'' is encouraged by withholding wages and salaries and by income reporting by banks and others that pay interest and dividends to taxpayers.
In areas where there is neither withholding nor reporting, compliance falls to the 60-to-80-percent range, the government estimates.
That lower level of compliance is one reason the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) expanded withholding to cover interest and dividends. The law covers amounts paid or credited after June 30, 1983. Several bills have been introduced in Congress to overturn this withholding provision.
In addition, TEFRA expands withholding to cover pension and annuity income, unless the individual recipient specifically requests that withholding not take place.
At the same time, Congress broadened the definition of interest payments which the taxpayer has to report to the IRS. And states must now report tax refunds they make.
The IRS then matches these information reports with what a taxpayer says on his return to spot underreporting of income. ''There is a lot more matching going on,'' says Donald C. Wiese, a Washington, D.C.-based tax partner in Touche Ross & Co., another accounting firm.
''They are getting closer and closer to their objective of matching everything filed with tax returns,'' adds Harvey Coustan, a partner in the Washington National Tax Group of Arthur Young & Co., still another accounting firm.
And the risks of substantially underreporting taxes owed increased under TEFRA, which provides a 10 percent penalty for any substantial underpayment. Substantial understatement is defined as one that is at least $5,000 and exceeds 10 percent of the tax required to be shown on the return.
Taxpayers can avoid the penalty, on items that do not refer to tax shelters, if they have ''substantial authority'' for the disputed item or if they disclosed relevant information about the item on their return.
''This puts the taxpayer in the position of policing himself and flagging the IRS on any questionable items that may cause concern,'' Mr. Coustan says.
''It is intended to eliminate audit roulette,'' says Edward D. Maggio, a tax partner in the Washington office of the accounting firm Seidman & Seidman. Audit roulette occurs when a taxpayer hopes he will not be audited and takes deductions he does not think would be allowed in an audit. Accountants note that the chances of being selected for an audit remain slim.
In addition to getting new weapons from Congress, the IRS is also taking a number of administrative steps to improve compliance with the tax laws.
One major effort is to bring in the $20.5 billion taxpayers owe the government but which the IRS has not been able to collect.
This spring the IRS will begin using new, highly automated equipment in its collection division. An agent will sit before a TV-like screen on which a list of taxpayers who owe the government money is displayed. The machine will rank the individuals in order of the amount they owe.
Once an agent selects a taxpayer to contact, the machine will place the call and will redial if the number is busy. After a taxpayer promises to pay by a certain date, the machine will remind the agent to call back on that date if the back taxes have not been paid.
''This equipment spells bad news for (delinquent) taxpayers,'' says Mr. Holub at Laventhol & Horwath.
The IRS is also trying new methods to collect more taxes on capital gains. The agency recently began testing the use of nongovernmental data on real estate transactions to make sure capital gains are being reported on these sales. Tax law allows gains on the sale of a residence to be deferred in certain circumstances. Spotting the gains is tough for the IRS.
But late last year in Dade County, Fla., and San Mateo, Calif., the IRS began buying information on real estate transactions from commercial suppliers of such data.
Meanwhile, it has also begun looking for cash that taxpayers are ''hiding,'' tax accountants say. Typically an audit is triggered when the IRS spots deductions in excess of a certain percentage of adjusted gross income. The service attempts to reconcile the cash an individual handles with the items reported on his return.
''It is an attempt to get to the underground economy,'' says Thomas L. Dunn, partner in charge of tax services for executives at the Ernst & Whinney accounting firm.
Of course, not all of the IRS targets are announced. But its examination guidelines for fiscal 1983 offer taxpayers some insight as to where the agency will be looking. As priorities, the guidelines include tax shelters, illegal tax protesters, W-4 (forms setting up withholding amounts), and unreported income.