ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Tuesday, April 15, 1997 TAG: 9704150051
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: GEORGE RODRIGUE THE DALLAS MORNING NEWS
The IRS lacks the talent to go after sophisticated taxpayers, so it goes after less-affluent ones who are easier to catch, a retired agency economist said.
It is becoming a rite of spring: As Tax Day approaches, politicians say they'll protect people by cutting the Internal Revenue Service's budget and reining in its auditors.
But the likeliest beneficiaries of a weaker IRS would be America's tax cheats, according to government documents, IRS veterans and outside experts.
The chief losers, they argue, would be the vast majority of middle-class wage earners who pay their taxes voluntarily.
Many experts see the nation already sliding toward two separate and unequal systems of tax enforcement.
Over the past decade, small businesses and lower-income individuals faced rising odds of being audited, while audit rates for wealthy individuals and corporations plummeted.
``The IRS just doesn't have the talent to go after very sophisticated and large taxpayers, so it goes after things that are easy to do - after waitresses and people like that who are easy to catch,'' said Berdj Kenadjian, a retired senior IRS economist.
Each year, the service fails to find about $130 billion in taxes due, an amount that is more than the federal budget deficit. Even after it detects overdue taxes, it struggles to collect them. Its debt backlog reached $215 billion at the end of 1996, according to the General Accounting office.
Yale University law professor Michael Graetz compares the IRS to the Wizard of Oz. It is intimidating to outsiders, he said, but not to those who have seen the beleaguered bureaucracy behind the curtain.
Wage earners have few chances to hide income or inflate deductions. Their pay and most deductible expenses are automatically reported to the IRS, which matches that information with tax returns. Employees report more than 99percent of their wages on those returns.
But self-employed people, sophisticated investors and small-business owners ``have considerable opportunities to cheat,'' Graetz said. IRS studies found that small-business owners hide 30 percent to 80 percent of their incomes.
At the same time, large corporations reward accountants and tax lawyers for pushing the Internal Revenue Code to the limit. Of every unpaid tax dollar the IRS' enforcement machinery finds annually, 58 cents comes from large corporations.
Congress has closed some tax loopholes over the years, but it has created other exemptions and credits - sometimes to further social goals, other times to benefit industries or even individual taxpayers.
The net result: an increasingly complex tax code, harder to comply with and harder to enforce.
All this, and Congress cut the service's 1996 budget, despite studies showing that every dollar spent on tax enforcement raises $2 to $12 in extra revenue. It was the first reduction in many years.
In some offices, agents had to check out photocopying paper a sheet at a time. Others were forced to postpone audits requiring travel. Some lacked necessary reference materials. Morale dropped, veterans resigned and standards fell. The IRS ended a requirement that new tax auditors have college accounting credits. It cut training nationwide.
Congress also killed a long-running program to identify methods of tax evasion.
``There were complaints that too many rich people were selected for those audits,'' said former IRS executive Bill Lefbom.
Last week, Rep. Jennifer Dunn, R-Wash, and Sen. Paul Coverdell, R-Ga., called for allowing taxpayers to file civil lawsuits against individual IRS agents for alleged abuse of power.
``That would shut down tax enforcement,'' said Robert Tobias, president of the National Treasury Employees Union, which represents IRS employees. ``Tax protesters already file suits against us all the time,'' but they are dismissed automatically. ``If agents had to fight those suits in court, no one would ever want to do anything that could provoke a suit. And they'd still get sued.''
Despite concessions from defenders that the IRS suffers from massive management problems, the IRS processes more tax returns every year with fewer employees and is receiving fewer complaints. Taxpayers who ask a tax question have a 94percent chance of getting a correct reply, compared with 63percent in 1989. Last year the service set a record for collection of back taxes.
One conservative critic, National Taxpayers' Union spokesman David Keating, said abuse of taxpayers is rare but sometimes breathtaking.
Richard Czubinski, for instance, mixed his low-level IRS job in Boston with an unusual interest: Ku Klux Klan membership and white-supremacist politics. He looked up tax returns filed by his political foes and even by a former girlfriend.
The IRS fired him in 1995, then prosecuted him in federal court. The agency lost, because there was no evidence that Czubinski had ever used the information or passed it to others. So the IRS asked Congress to pass a law making it a crime for employees to ``browse'' tax returns.
This month, House Speaker Newt Gingrich, R-Ga., said the case showed ``how arrogant and how intrusive IRS agents are getting.'' Gingrich's solution: Cut the number of IRS agents by 60percent.
``The federal government cannot stop illegal immigrants. It cannot stop drug dealers. But it can audit every small business in America,'' said Gingrich, who faces an IRS inquiry into allegations that he used tax-exempt foundations for political purposes.
In 1965, the IRS audited 6percent of all individual returns. That fell to 1percent during the 1980s. By 1995, the rate of traditional audits had fallen to 0.7percent.
For complex tax returns there is no substitute for audits, said Lynda D. Willis, tax policy chief for the General Accounting Office, the nonpartisan investigative arm of Congress.
IRS records show that investigations of big taxpayers yield bigger returns. The agency levied taxes and penalties of $1,599 for every hour spent examining returns of taxpayers earning more than $100,000 vs. $983 per audit-hour on those earning under $25,000.
Wayne Thomas, the IRS' research director for taxpayer compliance, defends spreading audits among all groups of taxpayers to deter fraud.
A senior congressional investigator, however, said a shortage of skilled agents leads to slacker supervision of bigger taxpayers.
``They can pretty much go after only the low-hanging fruit,'' he said. ``If this keeps up, they'll only be able to get the fruit that's lying on the ground.''
The IRS could cut its audit rate and remain equally effective if it targeted the audits better, many experts say.
``The CPAs already know that we audit less than 1percent of all returns,'' said John Gasper, a Treasury employees' union steward in the IRS' office in Euless, Texas. ``So if they've got a questionable deduction, what's he going to say? `Take it, because you probably won't get caught.'''
House Majority Leader Dick Armey, R-Texas, said that most of the IRS' problems stem from the complicated laws that Congress asks it to enforce. However, Republican leaders differ on what should replace the system.
Rep. Sam Johnson, R-Texas, wants to repeal the 16th Amendment, which gives the government authority to collect an income tax. Armey and House Ways and Means Committee Chairman Bill Archer, R-Texas, each call for replacing the current income tax system with something they say would be simpler and fairer. Archer favors a national sales tax. Armey backs another form of consumption tax, which he calls a ``flat tax.''
Those options could be simpler, partly because they would end taxes on investment income. Critics, however, say both plans would require cuts in programs like Medicare or tax increases on the middle class.
Regardless of the tax system, someone will have to collect it.
But politically motivated attacks on the IRS are unfair and dangerous, according to Lawrence Gibbs, who served as IRS commissioner under President Reagan.
If the service's staff were cut 60 percent, as Gingrich suggested, ``the people who don't pay their fair share of taxes will find that the IRS is indeed off their backs,'' Gibbs said. ``That will put more of a load on the backs of the people who do pay.''
Honest taxpayers will begin to feel like suckers and become tax cheats themselves. ``And then,'' Gibbs said, ``you'll lose your tax system, and you will lose your government.''
TONIGHT'S THE NIGHT
Midnight tonight is the deadline for filing your federal income tax return. Here are some last-minute mailing tips:
LOOKING OUT FOR YOU
On April 15, the Postal Service cancels every piece of first-class mail that is properly deposited before midnight.
CHECK THE PICK-UP TIME
Before you drop your return in a local mailbox, be sure to check the pick-up time.
MAKE SURE YOU HAVE ENOUGH POSTAGE
If a tax return feels heavier than one ounce, it's a good idea to weigh it at the nearest post office, because the Internal Revenue Service won't pay additional postage and will penalize you for late payment.
POST OFFICES OPEN LATE:
Roanoke main post office - open until midnight.
The IRS will have representatives on hand from 5 p.m. to midnight to help with last-minute questions.
The American Post Workers Union will be giving away postage stamps.
Refreshments served; radio stations will be on hand with live broadcasts and free give-aways.
Blacksburg -open until midnight.
Dublin - open until midnight.
Rocky Mount - will close at 5 p.m., then re-open at 8 p.m. and stay open until midnight.
Salem - open until 9:30 p.m.
Source: U.S. Postal Service
LENGTH: Long : 180 linesby CNB