Global Policy Forum

By David Cay Johnston

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

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 experience.

"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 criminal cases. 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 billion.

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 taxes. 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 indicted.

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 showed. 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 1993.

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