After IRS Revamp, Focus Is on Tax Cheats

It’s all about enforcement.

Six months into his five-year term as commissioner of the Internal Revenue Service, Mark W. Everson says his administration has three themes:

* Reinforce and build on the restructuring efforts that have significantly improved the agency’s historically dismal customer service record.

* Fix technological problems that have dogged the agency despite the billions of dollars spent to modernize its systems.

* Aggressively pursue tax cheats.

But when pressed, Everson noted that both the restructuring and the technological efforts have had an effect on the goal to reduce cheating. And cheating is a paramount concern, he says, because it undermines the entire system.

“When people think that they don’t need to pay, there’s an erosion in the rule of law,” Everson said. “The stakes are really high.”

There are roughly 130 million individual taxpayers in the U.S. who pay a total of around $1 trillion in federal income tax each year. No one has a clear picture of how many tax cheats are out there, or how much their cheating costs the government. But nearly everyone agrees that both run-of-the-mill underpayment and outright fraud have soared in the last half a dozen years, after an IRS restructuring effort geared at creating a “kinder and gentler” tax collector.

Restructuring Effort

The restructuring effort was necessary, Everson said. It was brought about partly as the result of congressional hearings in which taxpayers testified about IRS inaccuracies and enforcement abuses. However, by shifting the agency’s focus, the restructuring has dramatically reduced the number of IRS examiners and has led to a steady decline in audit rates.

Less than one-half of 1% -- 0.48% to be precise -- of 2001 returns were audited, down from 1.4% in 1995.

“All categories of employees on the enforcement side fell by 28% to 30%,” Everson said. “That happened at the same time as we were seeing a decline in auditing standards at major accounting firms and a real problem with corporate governance. That’s a dangerous cocktail.”

Many experts believe that far more taxpayers started “playing the audit lottery” simply because the odds of getting caught were so slim. A recent survey showed that the percentage of Americans who think it’s OK to cheat on their taxes climbed in the last five years to 17% from 11%, Everson said.

The chance of getting caught is still slim, agency officials acknowledge. But it’s rising fairly rapidly. There are several reasons.

The restructuring effort that started before Everson’s tenure has allowed the IRS to become smarter about which taxpayers to go after and how, experts noted. Previously, the IRS was structured along geographic lines, with agency examiners and collection agents largely unaware of what was going on in other parts of the country.

Now, the IRS is organized along business lines. The agency has developed a specialist system in which agents all over the nation are trained to work with particular types of taxpayers. Agents also are encouraged to communicate with their counterparts in other regions, discussing regional and national trends, which helps them better identify problem areas, said Dale Hart, a deputy IRS commissioner in charge of the small-business group. As a result, when agents launch an audit, they’re frequently more focused and more efficient, tax experts said.

The agency recently hired 800 examiners and plans to add another 800 in June, Hart said. Thanks to the slow economy, the IRS is getting some of the best and brightest college graduates -- those who in better times were recruited by big accounting firms, she added.

The IRS also has redirected its own criminal investigation staff to better concentrate on tax fraud, said Richard Speier, the agency’s acting deputy director of criminal investigation. In the past, the agency’s examiners frequently were pulled off tax crimes to help other agencies, such as the FBI, follow the money trail in drug deals, securities fraud and health-care and bankruptcy fraud cases, he noted.

But a 1999 study said the result of spending so much time tracking down other financial crimes had caused IRS criminal enforcement to suffer “mission drift,” which reduced its effectiveness in dealing with tax fraud.

‘Emphasis Has Shifted’

“We have refocused our resources,” Speier added. “Our emphasis has shifted to tax crimes.”

Everson hopes to hire more examiners and agents in fiscal 2004. In the meantime, he is shifting other employees to enforcement. That’s largely where the focus on technology has helped, he said.

As the agency improves technologically, it is getting more electronically filed returns. That reduces the need for the IRS to have hundreds of employees doing little more than opening envelopes and typing taxpayer numbers into computers, he said. The resources no longer needed in administration are paying for audits and examiners, he added.

The IRS also launched a massive effort to ferret out offshore accounts used by U.S. citizens to illegally avoid tax. That effort -- along with a successful “voluntary initiative,” which allowed taxpayers who had cheated to avoid certain penalties if they came clean -- has given the agency a wealth of information about promoters and their scams, Everson said.

“The actions we have taken and the resolve we have shown to pursue tax evasion are making an impact,” Everson said. “We are not going to go away on this.”

Importantly, congressional leaders, who had been highly critical of the IRS in the past, appear to be giving Everson some support.

“The IRS should be able to enforce the tax code and respect taxpayers’ rights at the same time,” said Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee. “I’m pleased that Commissioner Everson recognizes this dual role. We can’t have people abusing the tax code, and we can’t have the IRS abusing taxpayers. It’s as simple as that.”

Everson said he wanted to make the IRS more agile. The agency’s computers need to be updated and capable of matching income and deductions more effectively to speed accurate tax processing. Both individual and corporate audits take too long, he added. The agency also needs to proactively communicate what the rules are and how they work, before taxpayers go out on a limb with an aggressive -- or abusive -- tax strategy, he said.

“Speed counts,” Everson said. “If I were to make an observation about what we are lacking, I would say it is that we are neither speedy nor agile.

“We need both of those qualities because those who seek to circumvent the tax laws are very crafty.”

Kathy M. Kristof welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes .com.