Tax Avoiders Cost About $70 Billion, Senators Are Told

Tax cheats cost the U.S. government as much as $70 billion a year, a Senate panel was told Thursday.

Tax evaders and government officials testified before the Senate Finance Committee as the panel’s top two senators, Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa), introduced legislation intended to stem a tide of U.S. companies moving their legal headquarters to Bermuda to escape taxes.

“We’ve got a problem,” said Baucus, who pointed out that the vast majority of individual taxpayers will do their duty by Monday’s income tax filing deadline. “Everyone should help pull the wagon.... Otherwise, we’ll reach the point where honest taxpayers will feel like chumps.”

The General Accounting Office, Congress’ investigative arm, found that for the 2000 tax year the IRS so far has detected about $5 billion in improper tax avoidance by 740,000 individuals. GAO estimated that another $20 billion to $40billion had not been identified.

Baucus cited an unofficial estimate of $70 billion in losses each year. IRS Commissioner Charles Rossotti said the secretive nature of tax evasion makes concrete estimates difficult but conceded it was in the “tens of billions” of dollars every year.

These schemes take many forms, from bogus “slavery reparation” tax refunds marketed to African Americans to claims that income tax is unconstitutional to complex, multilayered foreign trusts that enable high-income people to hide assets.

One scheme that is beginning to unravel involves credit cards issued by offshore banks that are used by people to live very well while hiding their income behind foreign bank secrecy laws. The IRS is gaining access to these credit card records through court summons and checking them against tax returns. With corporate tax shelters also on the rise, Baucus and Grassley became the most powerful lawmakers to introduce legislation that would remove the tax advantages for U.S. companies that relocate headquarters to Bermuda.

The Baucus-Grassley bill, dubbed the “REPO Act,” would deem the new foreign-based parent as a domestic corporation for U.S. tax purposes in some cases and enhance IRS scrutiny of tax transactions in other cases.