IRS to more actively seek those that hide income
WASHINGTON — The Internal Revenue Service plans to focus more attention on high-income individuals and those involved in tax avoidance schemes such as credit cards issued by offshore banks.
The intent of the new audit strategy announced Thursday is to uncover methods taxpayers use to avoid taxes and hide income from the IRS, rather than simply checking returns that are filed for mistakes or relatively simple omissions.
IRS Commissioner Charles Rossotti, while insisting the agency is "not giving anybody a free ride," said the aim is to free up auditors to focus on such things as tax shelters, offshore credit cards used to hide income, wealthy people who fail to file returns and other major problems.
"The real world is such that we have limited resources," Rossotti said. "We are trying to figure out as best we can where is the most threat to the system."
The IRS estimates the nation's "tax gap," the difference between income taxes that should be paid and what is actually collected, at $207 billion annually. Not all of that lost revenue is due to cheating, but evaders do make up a significant portion.
Much of the unpaid tax bill comes from income that is never reported to the IRS. To get at this problem, the IRS has developed a new statistical method of selecting returns with a high probability of unreported income.
Rossotti said the previous formula used "did not focus on what was not on the return, on income that might not have been reported at all."
Among the tax avoidance schemes to be targeted for audits are promoters of nonexistent slavery reparations, who make frivolous arguments to avoid filing returns, abusive tax shelters and trusts and employment schemes such as paying in cash and filing false payroll tax returns.
Rossotti said the IRS already has 150 ongoing audits of tax shelter promoters, with another 150 in the beginning stages of an audit.
Focusing more audits on higher-income taxpayers would also alter the perception that the IRS pays greater attention to the modest-income people than to the rich. While calling that perception unfair, Rossotti did say that because 60 percent of income taxes are paid by those earning $100,000 an up, it was important to concentrate on them.
The move also comes as the IRS struggles to increase the number of returns it audits, which rose slightly to 732,000 last year — about 1 in every 173 — but remains far below the 1.9 million audited in 1996. The IRS is in the midst of a project, its first since 1988, of randomly auditing about 50,000 of this year's returns to gather research on tax filing and errors.
"The really big point is that we're trying to maintain the faith that the honest taxpayer has in the system," Rossotti said. "We know that when people abuse the system, it tends to reduce that faith."