New York Times  [Printer-friendly version]
April 14, 2003


By David Cay Johnston

Investigations and prosecutions of suspected tax criminals have
fallen by half over the last decade, even as cheating has

New data also show a continuing shift of tax burdens away from
businesses and onto individuals. Last year, corporations paid
10.5 percent of all the taxes collected by the Internal Revenue
Service, down from 16.4 percent in 1973.

Since 1973, corporate income taxes have risen 75 percent as
fast as corporate profits. By contrast, individuals' income
taxes rose 21 percent faster than adjusted gross incomes.
Social Security taxes, which apply to the first $87,000 of pay,
together with Medicare taxes, grew 82 percent faster than

The number of tax investigations initiated by the I.R.S. fell
37 percent, to nearly 2,500, last year from nearly 4,000 in
1992, the agency said.

Actual prosecutions for tax crimes fell by half, to about 500,
last year from more than 1,000 a decade earlier, according to a
report issued yesterday by Syracuse University's Transactional
Records Access Clearinghouse, or Trac. The report estimated
that the number of prosecutions would fall sharply again this
year, to about 360.

What is more, the I.R.S. is concentrating on relatively minor
cases, the Syracuse organization said in its annual assessment
of I.R.S. performance. The organization contrasted major I.R.S.
tax prosecutions, like those of Al Capone and Vice President
Spiro T. Agnew, with recent prosecutions of little-known
citizens, saying the agency seems to be going after little fish
instead of prominent Americans.

David Burnham, co-director of the clearinghouse, said the
conclusion that the I.R.S. was not pursuing big fish was
buttressed by a Syracuse examination of every criminal tax case
filed in January.

He also questioned whether the Bush administration was serious
about corporate tax cheating, noting that "the centerpiece of
President Bush's plan to combat what many believe was a
business crime wave was the creation of a new Corporate Fraud
Task Force," but that the I.R.S. was not part of the effort.

Mr. Burnham and the I.R.S. both say that the I.R.S. has the
government's most sophisticated financial crimes investigators.

The I.R.S. issued its own data on Friday in an attempt to
discredit the Syracuse report, which relies heavily on Justice
Department data that the I.R.S. considers unreliable.

The I.R.S. data showed roughly twice as many criminal tax cases
as the Syracuse group reported, but it also showed the same
long-term trend of sharp declines in enforcement, including a
50 percent decline in recommendations for tax crime
prosecutions over the decade through last year. Yet the number
of criminal investigators declined only 1.6 percent over those
years, the I.R.S. said.

Nancy J. Jardini, I.R.S. criminal investigations deputy
director, said the long-term trend was misleading. Since 2000,
when the I.R.S. reorganized its criminal investigations
division, the number of tax investigations has risen 38
percent, she said. And she said that many more cases would be
brought in the years ahead as a cadre of young agents developed

"We don't deny that prosecutions, indictments and sentences,
despite being many more in number than the Trac data indicate,
continue to trend down," Ms. Jardini said.

She said tax investigations were on the rise partly because the
I.R.S. was pursuing fewer narcotics and other nontax cases.
Developing criminal tax cases takes years, she cautioned.

Ms. Jardini added that the nature of tax frauds had changed
with the spread of abusive trust schemes, offshore accounts and
multilayered partnership arrangements that take longer to
investigate. "We are looking at much more complex cases than we
were 10 years ago," Ms. Jardini said.

The I.R.S. Oversight Board, created by Congress in 1998 to
monitor the agency, warned last week that in civil cases, the
decline in enforcement was even greater than in crimi nal

In the last decade, the number of tax returns has grown 12
percent, I.R.S. data show, but the number of I.R.S. revenue
agents to audit them has fallen by a quarter, to fewer than
12,000 from 16,000.

"Particularly vexing to the Oversight Board is the number of
potential examination and collection cases the I.R.S. has
identified but cannot pursue due to lack of resources," one
board member, Karen Hastie Williams, told a House Ways and
Means subcommittee.

In many categories of cheating, the I.R.S. has enough
collections officers to pursue only 20 percent to 30 percent of
known tax cheats. The rest get away without paying about $280

Extra money that Congress approved for investigations and
audits in recent years has instead been used to cover routine
increases in operating costs, which were not fully financed,
the General Accounting Office, the investigative arm of
Congress, said in a report last week. The I.R.S. concurred with
that assessment.

The I.R.S. last year cut audits of the working poor who apply
for the Earned Income Tax Credit, mostly those who make less
than $25,000 a year, reducing such audits by a fourth, to
297,000, or about one in 64 applicants. The I.R.S. said it
stepped up audits of high-income taxpayers, those who make more
than $100,000 annually, auditing 61,000 last year, up 11,000
from 2001.

The decline in criminal enforcement comes as promoters of tax
frauds grow increasingly bold in declaring that no law requires
the payment of taxes and that people are tricked into paying

One leader of the "tax honesty" movement, Larken Rose, a
medical transcriptionist in Philadelphia, has repeatedly
challenged the Justice Department to prosecute him for not
paying taxes since 1997 under an argument known as the 861
position, after a section of the tax law.

The Justice Department has brought numerous 861 civil fraud
cases and won all of them. Mr. Rose says Attorney General John
Ashcroft will not indict him out of fear that a jury would
acquit him. Both the I.R.S. and the Justice Department say Mr.
Rose's claim that Congress has exempted most wages from tax is
nonsense, but decline to comment on why Mr. Rose has not been

Not one of the small-business owners who boasted more than two
years ago that they did not pay taxes and did not withhold them
from their workers' paychecks has been prosecuted or had assets
seized to pay those taxes.

The I.R.S. has identified 1,500 companies that refuse to pay
taxes under various tax protester theories, according to I.R.S.
documents filed in a Florida tax case. One Congressional report
estimates that there are 6,000 more such businesses that the
I.R.S. does not know about.

In the meantime, Congress has shifted some of the tax burden
away from businesses and onto individuals other than the very
poor and the very richest.

The result of this long-term shift is that corporations keep 7
cents more of each dollar of profit after taxes while
individuals keep 7 cents less of each dollar's earnings after
paying income and payroll taxes.

After paying their federal income taxes, Americans had 3 fewer
cents of each dollar to spend in 2000, the latest year for
which detailed information is available, than they had in 1973.
The overall individual income tax rate in 2000 was 18 cents on
the dollar, up from 15 cents in 1973, the Syracuse report

Add Social Security and Medicare taxes and the average
effective tax rate was nearly 28 cents on each dollar of income
in 2000, up from slightly more than 21 cents in 1973.

The opposite was true for corporations. Their effective income
tax rates fell to 25.8 percent in 1999, from 32.4 percent in
1973, a decline of nearly 7 cents on the dollar.

That decline was concentrated among the largest corporations.
Corporate profits are officially taxed at 35 cents on the
dollar, but the 10,000 largest companies actually pay only
about 20 cents of tax on each dollar of profit. Most of the tax
savings, academic studies and Senate Finance Committee reports
show, come from tax shelters that range from the perfectly
legal to frauds so complex that I.R.S. auditors cannot
understand them.

At a time when the I.R.S. is presenting itself as a customer
service organization, it has scaled back sanctions on
corporations. Last year, the I.R.S. assessed just 159 civil tax
fraud penalties against more than 2.5 million corporations,
down from 555 in 1993, the Syracuse study found. Corporate
negligence penalties fell to just 22 last year from 2,376 in

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