***As a result many businesses and individuals are breaking the law because their risk of detection is small and even if they are caught they are unlikely to be punished or even made to pay the taxes.***
October 20, 2003
Crackdown on Tax Cheats Not Working, Panel Says
By DAVID CAY JOHNSTON
n Tuesday the Senate Finance Committee will hold hearings on tax shelters that, committee aides said, will feature testimony that tax cheating continues unabated and that the numerous crackdowns announced over the past two years by the Internal Revenue Service have had almost no impact.
The committee's leaders, Senators Charles E. Grassley, Republican of Iowa, and Max Baucus, Democrat of Montana, have been frustrated by their inability to get Congress to finance a serious assault on tax cheats, aides said yesterday. This hearing, which will feature a witness hidden behind a screen with his voice altered, is intended, in part, as a well-aimed kick in that direction.
In the aftermath of corporate scandals that emerged two years ago, Congress enacted changes and increased by a third the Securities and Exchange Commission enforcement budget, but it did not pass any laws to attack abusive tax shelters or finance a serious hunt for tax cheats.
A consultant's report, prepared for the I.R.S., but kept secret by the agency until now, is expected to show that corporate tax cheating in 2000 cost the government $14 billion to $18 billion.
Witnesses will tell how auditors have been driven from their jobs at the big accounting firms for refusing to go along with crooked corporate tax schemes and how some rich individuals were lured into frauds by big accounting firms that sold tax shelters that they promoted as perfectly legal.
"Some progress has been made, and some are starting to get religion, but numbers of cheats are great and the odds of being detected are small,'' one aide said.
As a result many businesses and individuals are breaking the law because their risk of detection is small and even if they are caught they are unlikely to be punished or even made to pay the taxes.
Instead of voting for more funds to enforce the law, Congress has tightly restricted I.R.S. spending on auditors, criminal investigators, training and new technology while many of the agency's most qualified auditors have left in the past five years. The I.R.S. is budgeted for 6.6 percent more funds for all of its law enforcement activities this year, compared with a 38 percent increase for suppression of fraud at the Securities and Exchange Commission and a 49 percent increase for the federal government's corporate fraud task force.
Typically Congress gives the I.R.S. about 1.5 percent less money than the president's budget proposes, Mark W. Everson, the I.R.S. commissioner, said this month.
"Unlike the S.E.C. and other enforcement agencies, our budget doesn't get topped off,'' said Mr. Everson, who said he believed that the sharp drop in prosecutions, especially high profile prosecutions, had emboldened many tax cheats.
About eight of 10 known tax cheats are let go without having to even pay the taxes, interest or penalties. The former commissioner, Charles O. Rossotti, said the agency needed 29,000 more auditors and investigators to curtail cheating.
The crackdowns on abusive tax shelters, offshore accounts and promoters who claim they have found legal ways to eliminate taxes are "funded by moving people from one unit in the I.R.S. to another, by robbing Peter to pay Paul,'' one aide said.
The consultant's estimate of up to $18 billion of abusive tax sheltering may be conservative because it is based on indicators of tax cheating that could be detected through statistical analysis, rather than active investigation of cheating that is designed to slip past I.R.S. computer screening programs. For example, the major accounting firms have sold tax shelters that use multilayered partnerships so that the figures that flow from the bottom layer onto corporate or individual tax return appear proper. The I.R.S. only audits one in 400 partnership returns, making them an efficient vehicle for tax cheats, especially when used in layers.
One witness is scheduled to appear behind a screen, his voice altered, a tactic usually reserved for Mafia turncoats, spies and in 1997 for some I.R.S. agents who feared the loss of their jobs for speaking out. The leasing expert is being shielded because of fear by security advisers to the committee that "if his name became public it would not be healthy for him.''
Whether that is hyperbole, or some of the clients he has worked are willing to do more than cheat on their taxes, it is sure to create a dramatic scene for television cameras and focus attention on issues that the two senators want their colleagues to treat more seriously.
Another accountant, Michael Hamersley of Los Angeles, is also expected to testify that when he refused to certify a client's books after seeing what he thought was a fraud, he was fired by KPMG, the big accounting firm.
"Despite KPMG's stated 'Core Value' of 'Open and Honest Communication,' such commentary was not often well received by Tax practice management,'' according to a lawsuit Mr. Hamersley filed in June in Los Angeles County Superior Court. "In fact, individuals expressing doubts about the technical merits of a tax shelter or the specific circumstances under which it was implemented were routinely chastised for not being a 'team player.' " An important issue at the hearing will be whether he names the client company, which is not identified in his lawsuit.
George Ledwith, a KPMG spokesman, said yesterday that the firm thought that "the work for the client referred to in the complaint was performed in accordance with professional standards, and we firmly stand behind it.'' He characterized Mr. Hamersley as someone with "limited audit engagement experience.''
The lead witness will be Senator Carl Levin, the Michigan Democrat who serves on the Senate Permanent Investigations subcommittee. He will introduce a bill next week that would prohibit accounting firms from selling tax shelters to publicly traded companies whose books they audit. Senator Levin says selling shelters to audit clients poses a conflict of interest because the auditors have no interest in disavowing the tax cheating that is enabled by their shelters.
Senator Levin said yesterday that this week's "hearing ought to provide a real boost to the finance committee's critically needed legislation strengthening federal law against the peddling of abusive tax shelters.''
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