An Outgunned IRS
Tax cuts and a sluggish economy have helped reduce corporate federal tax receipts, as a share of the economy, to Depression-era levels. But increased corporate cheating also plays a big role. Since Congress weakened oversight in 1998, the Internal Revenue Service has been outmanned and outgunned in the war against tax evasion. A recent General Accounting Office study reports that corporate cheating is soaring, while the IRS struggles to improve its performance.
The GAO estimates that at least $40 billion a year is lost in offshore tax shelters alone -- enough to pay for much of federal homeland security spending. The IRS audits 148,000 mid-sized companies only lightly because it lacks the manpower to go over their books carefully. The latest executive tax dodge is to put stock options in the names of children, who are in a lower tax bracket.
The IRS is also hampered by former top officials quitting to advise industry on tax policy. As the Washington Post reported Monday, Senate Finance Committee leaders Charles E. Grassley (R-Iowa) and Max Baucus (D-Mont.) are investigating a case in which high-level IRS attorney Sean F. Foley went from director of IRS negotiations with multinational companies to principal at accounting firm KPMG last January, advising companies how to deal with IRS regulation he had drafted a few weeks earlier. Congress should restrict such immediate job hops.
The IRS has belatedly taken steps to stop the most egregious tax frauds. As The Times’ Kathy M. Kristof reported Tuesday, it has begun scrutinizing the salaries and fringe benefits of top executives at dozens of big companies for dubious accounting maneuvers that may be costing the federal Treasury hundreds of millions of dollars. The IRS is also trying to speed corporate audits, which last an average of 38 months. Mid-sized companies are audited, on average, only once every 20 years.
In all of these collection efforts, the IRS is hobbled by a lack of staffing and equipment. Its computer system dates to the 1960s. The 6.6% increase granted to the IRS enforcement budget by Congress this year isn’t enough. Finally, Congress needs to keep the GAO monitoring the IRS’ performance so that it can track whether the agency is improving enforcement efforts.
An economy on the mend will result in higher tax receipts. But with a projected $500-billion federal deficit for 2004, the Treasury can ill afford to have corporations shirk legitimately owed taxes.
