IRS cuts back on enforcement

©New York Times

© St. Petersburg Times, published April 14, 2001

The IRS, its staff reduced by a sixth and its mission shifted to customer service, has virtually stopped pursuing more than 1-million tax delinquents and has sharply curtailed other kinds of enforcement action.

More than a third of the 3-million Americans who are behind on paying their taxes have had their cases sent to an inactive file since the IRS decided in June 1999 not to try to collect their debts, according to internal documents provided to the New York Times by an IRS executive opposed to the new policy.

For just last year, the decision effectively wrote off $2.5-billion in taxes owed by 668,018 taxpayers, the documents show. In 1998, by contrast, just 98 taxpayers had their cases sent to the inactive file.

The IRS defined the cases -- some involving as much as tens of thousands of dollars -- as too small to be worth going after, given its current resources, David Mader, IRS assistant deputy commissioner, said Thursday. The criteria used by the IRS to deactivate cases were blacked out from the documents, and Mader declined to discuss them.

Since 1992, IRS enforcement actions have fallen by two-thirds for audits and by 99 percent for seizures of property to pay back taxes.

Thursday, the IRS Oversight Board, created by Congress to supervise the tax agency, issued a report saying that the IRS is seriously underfinanced. The report called for spending of $10.26-billion, or $800-million more than the $9.4-billion in President Bush's budget for the year starting Oct. 1.

"The IRS is broken," said Larry R. Levitan, a retired Andersen Consulting management expert who is chairman of the oversight board. "It doesn't provide good service, it doesn't do adequate enforcement -- and that gives people the impression they can cheat."

Treasury Secretary Paul H. O'Neill, who serves on the nine-member oversight board, issued a statement disputing its report. O'Neill said that the nearly 7 percent budget increase recommended by the president, some $580-million, was adequate.

'Honest taxpayers' get hit

IRS data show that the agency is falling behind in some of its most basic enforcement functions as its staff declined to 97,000 last year from 115,000 in 1992 while the number of tax returns filed rose by 10 percent.

For example, to make sure taxpayers disclose all their income, the IRS matches individual tax returns with reports from employers, banks and investment firms. Last year, the agency pursued just one in six cases in which it found discrepancies, down from four in six cases in 1997.

Another measure, the number of individual tax returns audited by the IRS, fell to one in 204 last year, from one in 67 in 1995. The audit rate for all but the 1,100 largest corporations, which are under constant audit, fell to 1 percent last year, from 3 percent in 1992.

Seizures of property to pay past-due taxes fell to 174 last year, from more than 10,000 annually in the early 1990s.

The oversight board is not alone in criticizing the agency's performance. In interviews this week, 13 prominent tax experts with a broad range of political views said that the agency was overwhelmed.

Because it is focused on trying to help cooperative taxpayers and on fulfilling new mandates from Congress -- including a complete reorganization -- tax evasion and chiseling are spreading, these experts said, as people realize how weak and ineffective enforcement has become.

"The truth is that the enforcement side is sorely lacking," said Sheldon Cohen, who served as IRS commissioner in the Johnson administration. Fred Goldberg, who held the post in the first Bush administration, and Donald Alexander, the commissioner in the Nixon administration, said they agreed that enforcement was too lax. Goldberg added that enforcement efforts needed to be redirected from corporate to individual tax avoidance.

Charles Rossotti, the current commissioner, said the critics were justified in describing the agency's performance from the summer of 1998 -- when Congress first directed the IRS to refocus its efforts on helping taxpayers obey the law -- until the end of last year.

But he said that a year from now, data would show that the IRS hit bottom in 2000 and was now on an upward track in terms of both customer service and enforcement.

"No one can argue with the statistics," Rossotti said. "They have been going down, and if they kept going down that would be untenable. We clearly need to do more in a lot of respects, but the trend is moving in the right direction now."

None of the 13 tax experts concurred.

Kip Dellinger, a Los Angeles accountant who has written two recent books on IRS practices, said that "it is beyond question that no matter how they deploy their resources, the IRS just does not have a sufficient body of resources to enforce the law."

"And as more and more people cheat and evade, the problem gets worse," said Dellinger, who describes himself as a libertarian and fiscal conservative. "We, the honest taxpayers, are all paying for this."

No money for new computers

The experts all said they were astonished that the IRS had not moved forcefully against business owners who have stopped withholding income taxes from employee paychecks since the New York Times reported on the movement on Nov. 19. The IRS has sent some of those employers warning letters, but in the last week alone, 11 more businesses have publicly declared that they have stopped withholding.

Bruce Bartlett, a conservative economist who was a senior Treasury official in the first Bush administration, said that he was troubled by the statistics showing a sharp drop in enforcement activities but that he saw them as part of a decades-long pattern of management woes at the agency.

Charles Davenport, a Rutgers University tax professor who has studied the IRS for years, faulted Rossotti for "telling Congress what it wants to hear, instead of the truth." He said that the commissioner provided details to Congress, but failed to paint the full canvas of the agency's shortcomings.

Rossotti said that he had been forthright.

Levitan, the chairman of the oversight board, said that the commissioner, as a member of the Bush administration, must be restrained in his comments to Congress. By contrast, the oversight board was specifically designed by Congress to be free of such inhibitions, he said.

Levitan said that the president's proposed budget, despite its recommended increase for the IRS, would damage the agency's performance, because no money was provided for routine pay raises, promotions and the growth in tax filings.

The agency is spending hundreds of millions of dollars on new software "that won't run on the laptop and desktop computers the IRS has," he said, "but there is no money budgeted for new computers."

Mader, the assistant deputy commissioner, said that the pullback from pursuing tax delinquents was "a decision that had to be made because of resource allocation issues."

Interest continues to accrue on the accounts categorized as inactive, officials said, and the cases can be reactivated within a 10-year collection period.

Tax statistics

Selected figures from this year's individual tax filing season through April 6 and comparison with the same period last year:

Returns filed

77-million, down 0.2 percent.

Electronic filing

Total, 34.2-million, up 11.6 percent.

Computer, 30.3-million, up 16.2 percent.

Telephone, 3.8-million, down 14.7 percent.

Self-prepared, 5.1-million, up 36 percent.

Tax professionals, 25.2-million, up 13 percent.

Refunds

61.7-million, down 0.3 percent.

Total: $107.3-billion, up 4.9 percent.

Average: $1,740, up 5.2 percent.

Direct deposit: 28.2-million, up 13.7 percent.

Direct deposit amount: $60.9-billion, up 16.2 percent.

Source: Internal Revenue Service -- Associated Press

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