Audits drop, fraud concern rises

r The IRS is striving to lighten its image and be nicer. But some say tax compliance is slipping as a result.

A few years ago, powerful members of Congress were painting the Internal Revenue Service as something akin to a terrorist organization, with taxpayers as the target.

Stop, the legislators demanded of the agency's nearly 100,000 employees. Be nice to taxpayers. Treat them as customers. Answer the phones. Help them with information needed for their returns. Don't be so nasty in your tax-collection efforts.

The drive to subdue the tax-collecting agency worked - perhaps too well.

Today some tax experts see the IRS as becoming more like a garden club, less able or willing to intimidate taxpayers into signing the checks that keep the wheels of government turning. While some critics still don't think the agency is doing enough to gently shepherd people through their 1040s, its diminished role as tax cop is raising fundamental questions about the level of fraud that may be going on.

"Enforcement activities have dropped to a dangerous level, giving the impression that it's easy to get away with cheating," Larry Levitan, chairman of a nine-member IRS Oversight Board that Congress set up in 1998, warned last week.

Next day, The New York Times reported that one-third of the 3 million Americans who are behind on paying their taxes have had their cases sent to an inactive file since June 1999. Short of staff, the IRS decided last year to in effect write off $2.5 billion in taxes owed.

Taxpayers are expected to file 130 million returns this year. About 36 million are pushing the deadline, trotting to the post office or tapping a computer keyboard to file electronically in the last two weeks.

Were they honest? Did they report all their income, not exaggerate their deductions?

Debate is building in Washington and among experts as to whether tax compliance is slipping as a result of a sharp decline in the number of audits and other enforcement measures of the Internal Revenue Service.

There's always those silicon watchdogs

Senate Finance Committee Chairman Charles Grassley (R) of Iowa believes the agency is being an effective watchdog. He argues the IRS's increased ability to use computers to match information on income-reporting documents with actual tax returns reduces the need for other tougher compliance measures. "Tax cheats should not rest easy - the IRS is on the job," he says.

But is it? "Clearly, the enforcement indicators are all down," says Susan Long, co-director of Transactional Records Access Clearinghouse, a research group at Syracuse University. "A huge question is what is the impact of this on taxpayer behavior?"

She and others cite a litany of numbers:

* For taxpayers with incomes of more than $100,000, the odds of a face-to-face audit is 1 in 204, down from 1 in 9 in 1989.

* In 2000, only 31 percent of corporations with $250 million or more in assets were audited. The figure was 55 percent in 1992.

* Civil suits filed by the IRS against recalcitrant taxpayers dropped from 2,519 in 1992 to 641 in 1999.

Critics say IRS agents were demoralized by congressional hearings and a subsequent 1998 law giving taxpayers new rights in dealing with the IRS. Some agents see their jobs as threatened if they take tough measures to collect delinquent levies.

Though the vast majority of Americans do pay their taxes honestly, if reluctantly, experts are concerned that the laxer enforcement will increase the ranks of those who don't. In particular, more sophisticated taxpayers, often with higher incomes, may take more risks.

"They will talk with cheating neighbors," says Charles Davenport, a law professor at Rutgers University in Newark, N.J. "This could have a snowball effect."

Uncle Sam will collect about $2 trillion in revenues this year. In the past, experts have estimated that about 18 percent of US taxes legally due is never collected - representing more than $250 billion. While that is a huge sum, proportionately it is less tax evasion than occurs in almost any other nation.

Indeed, some experts don't see any reason for concern. "I actually think Congress and the IRS are on top of it," says Eugene Steuerle at the Urban Institute in Washington. "It has not risen to crisis proportions."

Don't get too complacent

He and others expect more enforcement efforts by the IRS in the future. The Bush budget for 2002 calls for a 6.6 percent increase in the IRS budget to $9.42 billion. That would provide extra money for improving the agency's inadequate computer system and increase the number of face-to-face audits by 28 percent. Even so, the IRS Oversight Board finds that funding level insufficient. It would like Congress to provide $10.26 billion.

"It is well known that the IRS is broken," says Mr. Levitan. "The agency's computer systems are completely outdated, while the number of IRS employees continues to drop while the workload increases."

To a considerable degree, tax experts see Congress as the source of many of the IRS's problems. In the past decade, the legislators have passed bills complicating the tax system. This adds not only to the burden of taxpayers, but of IRS agents who must also figure out the arcane provisions.

Moreover, in part because of the past "demonizing" of the agency in Congress, the IRS has had trouble recruiting new agents on college campuses. On top of that, the agency is undergoing a major reorganization. "I don't know what I am doing," an IRS lawyer in a regional office told Mr. Davenport. "No one at the IRS knows what he or she is doing."

(c) Copyright 2001. The Christian Science Monitor

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