IRS Tax Fraud Prosecutions Decrease

A USA TODAY analysis reveals that the Internal Revenue Service is seeking fewer criminal prosecutions of tax fraud suspect, calling into question the agency's claims of renewed enforcement success.

A review of IRS data reveals the agency's referrals of tax fraud and other financial cases to the Justice Department fell for the last two years.

The decline appears even greater when measured by prosecution referrals in which the Justice Department designated the IRS as the lead investigative agency. There, recommendations for criminal tax fraud prosecutions fell in three of the last four years, the analysis showed.

The trend is a reversal from earlier in the decade, when IRS prosecution referrals for tax crimes rose as the agency emerged from a major reorganization. The shake-up came after a 1999 review concluded the IRS Criminal Investigation division had "drifted from its primary mission" of pursuing criminal tax violations.

Contributing to the downward trend is a decline in special agents at the IRS Criminal Investigation division. Their numbers declined in three of the last four years amid an average of 150 retirements annually that thinned the ranks of experienced investigators, the IRS said.

The Senate Finance Committee, concerned that the Justice Department may be processing an "insufficient number" of IRS criminal referrals, asked the IRS for information about the issue in a Feb. 1 letter. "We are concerned that this leads to increased criminal tax behavior because taxpayers know the chances of being criminally sanctioned are low," wrote Sen. Max Baucus, D-Mont., the committee chairman, and Sen. Chuck Grassley, R-Iowa, the ranking minority member.

IRS Commissioner Mark Everson said the tax agency is preparing a response.

Testifying at a House Ways and Means subcommittee hearing in March, Everson cited a 2006 IRS Oversight Board report that said, "Performance on enforcement has improved considerably, and real progress has been achieved over the past six years."

But, asked by USA TODAY about the contradictory drop in criminal prosecution referrals, Everson said, "I do know that some of the numbers, as you're indicating, have gone sideways there. That is an area that hasn't continued an increase in the exact numbers."

Critics say the drop in prosecution referrals and special agents undermines the IRS' tax enforcement mission.

"They've been claiming they're back in the general tax-crime business, but their numbers are down. That's a problem," said Steven Harris, a Miami attorney and specialist in criminal tax law.

The IRS sends criminal referrals to the Justice Department, which decides whether cases should be filed by prosecutors in Washington and around the nation. USA TODAY's analysis of IRS data found the tax agency's annual criminal prosecution recommendations for alleged tax crimes and other financial wrongdoing dropped from 3,037 in fiscal year 2004 -- the highest since the reorganization -- to 2,720 in fiscal year 2006. That's a 10.4% decrease.

The data included all criminal referrals in which the IRS had an investigative role, even if other agencies were involved.

Criminal tax prosecution referrals in which the Justice Department designated the IRS as the lead investigative agency fell in four of the last six fiscal years, according to federal government data provided to USA TODAY by the Transactional Records Access Clearinghouse (TRAC), a research organization affiliated with Syracuse University. The 338 referrals recorded in 2006 represent a 71.3% drop from the recent high of 1,178 four years earlier, the data show.

Present and former IRS officials contend the TRAC-supplied data, which originate at the Executive Office of U.S. Attorneys, is not a true measure of the tax agency's performance because it does not include all cases the IRS recommended for prosecution.

Recently launched IRS tax investigations appear to be up, said Ian Comisky, a specialist in criminal tax law at the Philadelphia office of Blank Rome. "We're seeing it at the bottom end, but not (in criminal prosecution referrals) at the top end," said Comisky.

Nancy Jardini, who recently stepped down as IRS Criminal Investigation director for a private-sector job, said the IRS has launched new tax investigations that should eventually generate criminal prosecutions. The average tax investigation lasts more than 500 days, she said, theorizing that those probes could boost the number of IRS prosecution referrals for 2007 or 2008.

Former IRS deputy commissioner Mark Matthews said the tax agency has focused on pursuing more-complex, time-consuming cases designed to serve as high-publicity deterrents for would-be tax criminals.

Recent successes include the case of Walter Anderson, a telecommunications entrepreneur who was sentenced in March to nine years in federal prison for failing to pay $170 million in federal taxes in what the IRS said was the largest criminal case of tax evasion by an individual in the agency's history.

The IRS also cited the $456 million in fines, restitution and penalties paid by KPMG after the accounting giant admitted criminal wrongdoing in a tax shelter investigation, as well as the case of former Digital Consulting CEO George Schussel, who was convicted in a tax evasion scheme that diverted millions of dollars of unreported company income to a Bermuda account.

However, the ranks of special agents responsible for investigating and helping prosecutors during the trials of such cases dropped to 2,804 in fiscal year 2006, down 11.2% from a staff of 3,158 in fiscal year 1997, IRS data show. "Lots fewer boots on the ground," said Jardini, who, like Matthews, said she and other IRS officials had been concerned about the trend.

Despite the high-profile prosecution successes, the decline in investigators has prevented the IRS from mounting a sustained effort against tax evasion schemes that cost the government millions of dollars, argued Robert McIntyre, director of Citizens for Tax Justice, a non-profit research group often critical of the Bush administration's tax policy.

McIntyre, who estimated that corporations and individuals evade as much as $100 billion in federal taxes annually by shifting assets offshore, told a news conference Monday "that seems to me one place we ought to start looking, but the IRS doesn't have the resources."

"We seem to have at least a substantial criminal population in this country among the better-offs who will do it if the chances of getting caught are low," said McIntyre.

Everson, while conceding the number of special agents assigned to criminal cases "may be down just a hair," said he felt the IRS had halted the erosion.

Explaining why the tax agency had not pushed for dramatic increases in special agents, criminal investigations and prosecution referrals, Everson alluded to the IRS-Justice Department and case management decisions questioned by the Senate Finance Committee.

"I'd like to do more, but we need to make sure that if we're going to do more ... then, ultimately, in the pipeline at Justice, that they're going to have the capacity to deal with it," said Everson. "The U.S. Attorneys have to run balanced programs, and, obviously, with the focus on terrorism and other areas, some of the resources are given higher priority than the tax" prosecutions.


Already a member? log in here.

Editor's Choice

Upcoming CPE Webinars

Dec 18In this presentation Excel expert David Ringstrom, CPA focuses exclusively on how to perform repetitive tasks more efficiently in Excel.