IRS In Losing Battle Against Internet Tax Fraudsters

by Mike Godfrey, Tax-News.com, New York

17 April 2001

Late last week, the IRS Oversight Board, a Congressional body which supervises the US tax collection agency, said inadequate financing was preventing the IRS from going after delinquent tax-payers - and by coincidence, on the same day Senator Chuck Grassley (Rep. Iowa), head of the Senate's tax-writing committee, warned Americans to steer clear of hundreds of web sites promoting illegal online tax-evasion. The tax scammers, who operate year-round, use lines such as "The IRS is weak - play the audit lottery" and "It's your 'right' not to pay taxes" to attract unsuspecting taxpayers, according to the committee.

It's not really a coincidence, because Americans are nearing their annual deadline for filing tax returns.

"Tax scams are as old as the tax code," said Mr Grassley. "The internet is giving them new life."

At a recent hearing, the committee learned that hundreds of thousands of Americans are involved knowingly or otherwise in internet-based tax scams.

Mr Grassley has a checklist taxpayers can use to avoid doubtful schemes. For instance, he says, watch out for these favourite pitch lines: "If this were illegal, don't you think the government would arrest me? It hasn't." "Taxes are 'voluntary'. Smart people will not volunteer to pay." "Taxes are unconstitutional. The 16th Amendment was never ratified." "Rich people save money on their taxes with this plan; so can you." "Disguise your income on tax forms. You can't be caught by IRS computers."

The committee recommends that any proposed tax-saving scheme should be checked out by an accountant or tax attorney. The IRS also has a list of warning signs: a promise to reduce or eliminate income and self-employment tax; deductions for personal expenses paid by the trust; depreciation deductions on an owner's personal residence and furnishings; high fees for trust packages, to be offset by promised tax benefits; use of back-dated documents; lack of an independent trustee; and use of post office boxes for trust addresses.

In charge of improving the IRS's performance in detecting tax fraud is its head, Charles R Rossotti. Interviewed by the New York Times, Mr Rossotti recalled saying, just after the Senate unanimously confirmed him as the 45th commissioner of internal revenue in November 1997, that it would take a decade to turn the IRS around.

Early on, he saw that the agency's computers were even older than he had expected. "It was just stunning," he said. "Amazing. I think some stuff dated to the Kennedy administration." He also discovered that a taxpayer calling an IRS office for advice had a good chance of getting a busy signal. "We had 400 million busy signals one year," he said. "More busy signals than there are taxpayers. That's not a good thing."

Not helping Mr Rossotti spruce up the IRS were the Congressional hearings in 1997 and 1998 at which evidence of taxpayer harrassment led to instructions to the agency to ease up on taxpayers, and which caused Congress to withhold or cut back vital funding. It's also no help that the US Treasury is drowning in money from better-than-expected tax collection. In his heart, perhaps Mr Rossotti would like a short, sharp recession!

He has a friend in Mr Grassley, at least, who says that the IRS is well intentioned as regards putting a stop to fraud, but is operating under old rules and old procedures put in place before the Internet arrived. "It's important for the agency to investigate scams more quickly and shut them down before they harm innocent people. The IRS collects taxes, but it also has to protect taxpayers," says the Senator.

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