IRS Budget Cuts Creates More Tax Cheats

Over the years, wealthy taxpayers have found countless ways to game the system, and every time the Internal Revenue Service has moved to plug a loophole, the code has become more and more complicated.

And it doesn't help that Congress (mostly Republicans) have de-funded the IRS so much that they can't hire more tax auditors to investigate massive tax evasion.

I was watching MSNBC's The Ed Show tonight when Ed Schultz was interviewing a man named David Cay Johnston about IRS budget cuts. It got me to thinking why so little is ever mentioned about this, especially with all the talk about the debt ceiling, the fiscal cliff, annual deficits and the national debt.

And I also wondered why no one in Congress ever talks about it whenever they're being interviewed on all the cable news shows? Nowadays they have immigration reform and gun control as their diversions.

Over six years ago David Cay Johnston, a Pulitzer Prize winner and a Reuters columnist wrote, "The federal government is moving to eliminate the jobs of nearly half of the estate tax lawyers at the Internal Revenue Service who audit tax returns of some of the wealthiest Americans, specifically those who are subject to gift and estate taxes when they transfer parts of their fortunes to their children and others."

Six I.R.S. tax lawyers had said in interviews at the time that the cuts in the I.R.S.'s budget were just the latest moves behind the scenes to shield people with political connections and complex tax-avoidance schemes (e.g. Mitt Romney and his off-shore bank accounts),

Back then, Sharyn Phillips, a veteran I.R.S. estate tax lawyer in Manhattan, called the cuts a “back-door way for the Bush administration to achieve what it cannot get from Congress, which is repeal of the estate tax.” Republicans call this the "death" tax.

Officials at both the I.R.S. and the Treasury have told Congress that cheating among the highest-income Americans is a major and growing problem.

And the I.R.S. tax lawyers said that when audits showed the use of complicated schemes to understate the value of assets, the I.R.S. had become increasingly reluctant to pursue cases. (Note Mitt Romney's 500 page tax return. Oh, and the rich get amnesty for committing felonies; but working Americans have their paychecks garnished.)

The I.R.S. tax lawyers had also said that the risk-analysis system that the I.R.S. uses to evaluate whether to pursue such cases gave higher-level officials cover to not pursue tax cheats, and in the process, emboldened the most aggressive tax advisers to prepare gift and estate tax returns that shortchanged the government.

A year ago David Cay Johnston wrote, "Congress will spend a trillion dollars more than it levies this year. So how do Washington's politicians respond to the 11th consecutive year of federal budgets in red ink? They plan to shrink the IRS."

The national taxpayer advocate, Nina Olson, had said in an annual report last year, "Congress needs to ensure that the IRS continues to be effective; either by reducing the IRS workload, or by providing adequate funding to enable it to accomplish its assigned mission."

Instead of cutting tax auditors, we should be expanding the revenue-generating IRS staff because there is plenty of tax money to be had, even in this economy. David Cay Johnston notes that "it makes no economic sense to trim the ranks of auditors who generate more than a hundred times their annual salaries. Keep in mind the IRS costs just a half penny for each dollar of tax collected."

On the whole, ordinary working Americans do not cheat on their taxes because their incomes are easily checked through W-4 reports by employers. Yet, according to David Cay Johnston, middle-class Americans are much more likely to be audited than the super-rich.

The winners in budgets cuts to the IRS will be the tax cheats among sole proprietorships and other business owners, who are subject to far less verification (like hedge fund managers). According to the IRS the tax gap report estimated that just one percent of wages escapes taxes, while 56 percent of "amounts subject to little or no" verification do so ($385 billion a year in lost revenue due to tax evasion)

America's biggest corporations, those with more than $250 million in assets, will also escape some tax if the IRS budget is cut --- about 86 percent of corporate income taxes.

From 2005 to 2009, hours spent auditing the biggest corporations declined by 33 percent. Two decades ago, when the economy was a third smaller, the IRS staff numbered about 118,000. Now it down 20% with 95,000 staff members --- and it's going lower. The likelihood of a big corporation being audited has plummeted 50 percentage points, from 72 percent in 1990 to 22 percent in 2010.

In 2007 Chris Edwards, director of tax policy at the Cato Institute, a libertarian research and advocacy group in Washington, said that Congress is driving the need for more audits. Since 1995, he said, “the Republicans greatly complexified the tax code, contributing to tax evasion and making the I.R.S.’s job more difficult.”

David Cay Johnston wrote, "Whether you like the corporate income tax or think it is an abomination, failing to enforce it with the same rigor as taxes on wage earners is indefensible. IRS budget cuts worsen budget deficits and send a corrosive signal that only chumps file honest tax returns."

Nine months ago David Cay Johnston also wrote an article about the abuse of a tax loophole that was meant to aid the poor.

But I digress: Why would President Obama and Congress cut the IRS budget? David Cay Johnston says "their actions illuminate the rise of corporate power and values, and the diminishing voice of Joe Sixpack, thanks partly to how we finance election campaigns. Then there is the growing army of corporate lobbyists and the Supreme Court's decision in Citizens United, which allows corporations (and unions, fighting fire with fire) to spend all they can afford on influencing elections."

And let's not forget to blame the Republicans too. David Callahan writes, "The right has been waging a war against the IRS nearly since its founding, and uses every chance they get to take a whack at the agency's budget. As a result, our tax collection system has become a sieve and an estimated $3 trillion has been lost to tax evasion over the past decade alone."

*** David Cay Johnston (at the New York Times) is an investigative journalist and author, a specialist in economics and tax issues, and winner of the 2001 Pulitzer Prize. Since 2009 he has been a Distinguished Visiting Lecturer who teaches the tax, property and regulatory law of the ancient world at Syracuse University College of Law and Whitman School of Management. From July 2011 until September 2012 he was a columnist for Reuters, writing, and producing video commentaries on worldwide issues of tax, accounting, economics, public finance and business. Johnston has been board president of Investigative Reporters and Editors since June 2012. See: "The Fine Print: How Big Companies Use 'Plain English' to Rob You Blind"

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