Since taking office, the Bush administration has repeatedly promised to get tough with tax cheats, saying it has ended a long slide in enforcement of tax laws. But an independent analysis of new Internal Revenue Service data released today shows that tax enforcement has fallen steadily under President Bush, with fewer audits, fewer penalties, fewer prosecutions and virtually no effort to prosecute corporate tax crimes. The audit rate for the 11,200 largest corporations, which pay nearly all corporate income taxes, has fallen by almost half over the last decade, as has the audit rate for unincorporated businesses. David Burnham, a director of the Syracuse University research organization that reviewed the government data, said that "President Bush and the I.R.S. commissioner have been running around talking about how they are going after corporate scofflaws, but the I.R.S. data suggest that the effort against corporate scofflaws is continuing to decline."
Today, the I.R.S. has about half the law enforcement resources for each tax return that it did in 1988, the Syracuse researchers said. The university's Transactional Records Access Clearinghouse will post the data at trac.syr.edu. President Bush has maintained a hard-line stance on white-collar crime, which typically involves tax cheating. In September 2002, he said that his administration was sending "a clear message to every dishonest corporate leader: you will be exposed and you will be punished." A few weeks ago, he said his administration had responded strongly tocorporate crimes, saying "we're not going to tolerate dishonesty in the boardrooms of America."
The I.R.S. data reviewed at Syracuse showed that in the 15-month period that ended on Dec. 31, 2003, convictions had been obtained against six corporate officers in five cases in which the I.R.S. was the lead investigative agency. That was barely more than one-half of 1 percent of such cases, indicating that the law enforcement focus remains on individuals. Separate data from the Justice Department show a long trend down in federal tax prosecutions. The department, citing United States court records, says that total federal tax prosecutions declined to 483 in 2003 from 1,431 in 1981.
Rod J. Rosenstein, a deputy assistant attorney general who supervises tax prosecutions, said that in 2003, the number of investigations and the filing of criminal tax charges both increased for the first time in years. "It often takes two years or more for a criminal tax defendant to be convicted and sentenced, so the increase in new cases is not yet reflected in completed prosecutions," he said.
Mark W. Everson, who became tax commissioner last May, said that changes he had made to increase enforcement would not show up until statistics for the current year become available next spring. He also said that the increase would happen only if Congress fully funds the I.R.S. in fiscal 2005.
Congress typically appropriates slightly less money than the president seeks, which has not been enough to keep up with the growing number of taxpayers and the increasing complexity and procedural rules of the tax system, resulting in a sharp decline in enforcement especially against corporations and wealthy individuals, whose returns are more difficult and expensive to audit. Mr. Everson said that while he had no dispute with the data, "I disagree with the characterization" of the Bush administration as having allowed tax law enforcement to slide. "Am I overall satisfied?" Mr. Everson asked. "No. I am not satisfied with the enforcement numbers. We do need to do more and that is particularly why we have asked for a large enforcement" budget increase for fiscal 2005.
The increase Mr. Bush requested is 4.8 percent, all of which may end up going to incremental costs for the existing I.R.S. staff. The I.R.S. Oversight Board, a panel of business experts Congress created to monitor the agency, wants an increase of more than double that amount, warning that enforcement will otherwise continue to dwindle to the detriment of honest taxpayers.
Mr. Everson said that when he took charge, "I reversed the standing operating instruction, which was when you have a funding shortfall you take it against enforcement." He said audit figures should now start rising, though corporate audits would likely be the last to show improvement because of the time it takes to examine the tax returns of the largest corporations.
He also noted a change in tactics at the Justice Department, which has been obtaining civil injunctions against people who deny the legitimacy of the tax laws and promote tax evasion. Judges have ordered the arrests of more than a half-dozen business owners who have not complied with civil orders to file returns and pay taxes, including Walter Thompson, the former owner of Cencal Aviation Products in Lake Shasta, Calif. Mr. Thompson, known as Al, is a leader in a movement that claims the tax laws are a trick. He stopped paying personal income tax in 1999 and stopped withholding income tax from his employees' paychecks a year later.
Civil actions are far less costly than criminal prosecutions. In addition, the civil orders can be used against those the Justice Department does prosecute to show that they were on notice that taxes are mandatory, not voluntary. Mr. Burnham said he was skeptical that any increase in tax law enforcement would occur this year or next. If reports by the General Accounting Office, the investigative arm of Congress, and by the I.R.S.oversight board are correct, he said, "the administration has not asked for sufficient money and staff, so law enforcement will continue to decline." Mr. Burnham also expressed doubt that the I.R.S.could do more law enforcement with the same or fewer resources. He noted that data for the first four months of the current fiscal year, which began Oct. 1, show continuing declines in tax law enforcement. Among the largest corporations, the 11,200 with more than $250 million of assets, the audit rate in fiscal 2003 was 29 percent, compared with 33.7 percent the year before and more than 50 percent before 1996. The overall audit rate for corporations of all sizes was 7.3 percent, down from 8.8 percent a year earlier and 29.7 percent in 1993. The severe drop in audits of corporations raises questions about corporate income tax receipts, which have fallen to historically low levels when counted as a portion of the economy. In 2003, thereceipts were a little more than 1 percent of the economy. From 1996 through 2000, no corporate taxes were paid by 60 percent of large corporations, according to a report two weeks ago by the General Accounting Office. Audits of partnerships and other entities that are not themselves taxable, but whose profits are taxable to their owners, also slipped. The audit rate for fiscal 2003 was 32 for each thousand returns, down slightly from a rate of 33 the year before and 55 in 1993.
Among large taxpayers, only in audits of high-income individuals was there any increase in scrutiny of tax returns in fiscal 2003 and it was only a slight rise. Among people reporting more than $100,000 of income, the I.R.S. audited four returns of every thousand, up from 3.8 returns in fiscal 2002 but still less than one-half of 1 percent. This tiny increase was more than offset by a slip in auditing returns of sole proprietorships, which file a Schedule C tax return, to 11 of every thousand returns, from 11.4 in 2002. Nina E. Olson, the I.R.S. taxpayer advocate, said in January that Schedule C businesses represent one of the best opportunities for tax cheats. The data showing a continuing erosion of tax law enforcement come days after it was disclosed that the Bush administration rejected an I.R.S. request for an additional $12 million, a 50 percent increase, in its budget for investigating the financing of terrorist organizations like Al Qaeda and Hamas. The White House declined requests to explain the rejection but noted that it did ask for a 16 percent increase in the $46.8 million overall federal spending this year to track terrorist finances.
The I.R.S. Oversight Board noted that President Bush's proposed budget for fiscal 2005 is "the fourth year in a row in which the administration has called for I.R.S. staff increases while not covering pay raises or required expenses."
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