After budget cuts, the IRS's work against tax cheats faces a "collapse"
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After budget cuts, the IRS's work against tax cheats faces a "collapse"
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After budget cuts, the IRS's work against tax cheats faces a "collapse"
This story was co-published with The New York Times.
Tax evasion is at the center of criminal cases against two associates of the president, Paul Manafort and Michael Cohen. The magnitude of their efforts to avoid paying the government has given rise to a question that echoes: how could they deceive the Internal Revenue Service for so many years?
The answer, say researchers and former government auditors, is simple. The IRS pursues fewer cases of tax evasion less than 10 years ago. As long as you are not a close associate of President Donald Trump, there will never be a better time to be a fiscal cheat.
Last year, the criminal division of the IRS filed 795 cases in which tax fraud was the main crime, a decrease of almost a quarter since 2010. "That is a surprising number," acknowledged Don Fort, the chief of criminal investigations of the IRS, at a NYU tax conference in June.
Presenting cases against people who evade taxes on legal income is fundamental to the mission of the income service. In addition to recovering the loss of income, these cases are supposed to "influence the behavior of taxpayers for the hundreds of millions of US citizens filing tax returns," Fort said. With fewer cases, experts fear that Americans will get the message that it is OK to break the law.
As of 2011, Republicans in Congress repeatedly cut the IRS budget, forcing the agency to reduce its application staff by a third. But that fall does not fully explain the reduction in cases of tax fraud.
Over time, crimes related only to taxes, such as drug trafficking and money laundering, have become responsible for most of the agency's cases.
The IRS loses its bite
As of 2011, budget cuts have reduced IRS compliance staff by a third, and the audit fee has been further reduced.
1.0% 0.80.60.40.200.5% 50mil403020100'08'10'12'14'17'08'10'12'14'1733.200Personal executionIncludes examinations and personal collections as well as special agentsAudit feeIncludes individual and business taxclaimsSource: Internal Revenue Service.
"Due to budget cuts, erosion and a shift in focus, there has been a collapse in the commitment to take on tax fraud," said Chuck Pine, who used to be the IRS's third criminal enforcement officer and is now a manager. Director at BDO Consulting. "I think there are thousands of people who have tax obligations with the US and do not comply with the tax laws of the United States."
The result is huge losses for the government. Business owners do not pay $ 125 billion in taxes every year they owe, According to IRS estimates. That is enough to finance the departments of State, Energy and National Security, with NASA launched to a large extent. Unlike wage earners who have their income reported separately to the IRS, business owners are often in the honor system.
The IRS declined to comment on its compliance efforts.
The Cohen and Manafort cases illustrate different but common types of tax fraud, and how the IRS has struggled to enforce the law. Cohen did not report the income of the national companies. Manafort used exotic foreign places and shell corporations to hide his money.
From Cohen tax evasion schemes They were direct. In addition to paying a pornographic movie star and a former Playboy model in violation of campaign finance laws, he pleaded guilty to lying on his tax return. Whether it's your business income that has taxi medallions, millions of dollars in interest payments on a loan you had given to another taxi operator, or the $ 30,000 you earned when negotiating the sale of a luxury bag, Mr. Cohen simply hid the money from His accountant and the government. For five years, it did not disclose $ 4.1 million, saving $ 1.5 million in taxes.
The IRS generally catches such evasion by auditing taxpayers. In theory, the evidence collected in the audits can be used to initiate criminal cases.
But the rate at which the agency audits tax returns has plummeted by 42 percent since budget cuts began. Criminal references were always rare and are increasingly scarce, decreasing from 589 references in 2012 to 328 in 2016. With the government carrying out 1.2 million audits in 2016, that is a criminal reference for approximately every 3,600 audits.
"The approach of auditors and tax collectors is not to identify fraud, it is to collect taxes," said a special agent, who spoke on condition of anonymity because he was not authorized to speak with the media. Management has set other priorities, he says. "So by default, employees are not doing it."
In addition, current and former IRS agents say audits are not as intensive as they used to be. Because the IRS pressures agents to close audits more quickly, they make fewer requests for records and interviews.
"The quality of those references was also reduced," said Marie Allen, a recently retired auditor who worked at the IRS for more than 30 years doing complex financial investigations. "That's what people popularly think we should be doing, and I'm trying to say it's not like that."
Budget cuts have decreased the criminal investigation division, reducing the number of agents by a fifth since 2010. Recently, the IRS closed four of its 25 field offices, according to Fort. In the state of New York, home to the country's financial industry, the revenue service has been reduced to 161 agents, about a hundred fewer than 15 years ago.
It does not help that many agents prefer to pursue more eye-catching crimes than tax evasion. Rob Warren, an associate researcher at the Catholic University who previously spent a quarter of a century at the IRS, interviewed 30 former special agents. He asked each agent which of his cases had been his favorite. The answers, Warren said, were usually only tangentially related to taxes.
"Usually they were narcotics, Ponzi schemes, some public corruption," Warren said. "The officers loved the Ponzi cases because there was a real victim, an old woman or something."
Federal prosecutors look for special agents for these cases because they are qualified financial investigators. And tax crimes, such as not declaring illegal income from, say, a bribe or the sale of cocaine, may be easier to prove than bribery or the sale of drugs.
In recent years, the IRS has also moved away from the classic cases of tax evasion due to the high rates of identity theft. IRS management assigned agent scores to prosecute perpetrators who used stolen identities to collect tax refunds.
A focus of tax fraud that has been a clear priority for both the IRS and the Justice Department is seeking money that Americans hid abroad without informing the federal government. But there are clear reasons why Manafort, who hid his money in places like Cyprus and St. Vincent and the Grenadines, could have escaped detection.
Switzerland has been the main focus of the Justice Department for the past 10 years, an effort that has resulted in agreements with the giant Swiss banks. UBS Y Credit Suisse, and dozens of small institutions.
The IRS allowed Americans with foreign accounts to voluntarily disclose them and pay a lesser fine than they would have if they had been discovered hiding the information. Some 56,000 people participated., net to the government $ 11.1 billion. The criminal division of the IRS also brought several cases against people for hiding accounts.
Despite all this success, there have been few changes in the amount of wealth hidden abroad. Americans have around $ 1.2 billion of personal assets in tax havens, according to data compiled by Gabriel Zucman, assistant professor of economics at the University of California, Berkeley, and two colleagues. It is not clear which part has been reported to the IRS.
"What has happened in the last 10 years is real progress," Zucman said. "But what the data suggests is that it has not had a dramatic effect on the amount of wealth abroad." The money has left Switzerland and has reached Asian tax havens like Hong Kong and Singapore.
In addition, the IRS has made little use of new weapons in the fight against wealth hidden abroad. In 2010, President Barack Obama signed a law that was supposed to provide a crucial tool for government auditors and prosecutors. That law, the Law on Foreign Account Tax Compliance, required banks with US account holders to report to the United States. Like employers who file W-2 forms on their workers, these reports would force account holders to clarify.
Eight years later, the program continues to take off. Countries around the world have signed agreements and more than 100,000 foreign banks have sent information to the United States. But "there is no ongoing compliance impact of FATCA at this time" According to a report this year. by the inspector general for the IRS.
The report found serious problems with the millions of records collected so far. About half of the records, for example, did not include taxpayer identification numbers, which makes it difficult to compare accounts with specific people. The IRS had not established a process to use the records. The agency said it was working on such a system.
Here, too, the cuts to the IRS budget have had an impact. During the Obama administration, the IRS asked Congress for hundreds of millions of dollars to carry out the program, but received nothing. Since Trump took office, the income service has stopped asking.
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