IRS brings fewer fraud cases amid budget cuts
Tax evasion is at the center of the criminal cases against two associates of the president, Paul Manafort and Michael Cohen. The sheer scale of their efforts to avoid paying the government has given rise to a head-scratching question: How were they able to cheat the IRS for so many years?
The answer, researchers and former government auditors say, is simple. The IRS pursues fewer cases of tax evasion than it did less than 10 years ago. Provided you are not a close associate of President Donald Trump, there may never be a better time to be a tax cheat.
Last year, the IRS’s criminal division brought 795 cases in which tax fraud was the primary crime, a decline of almost a quarter since 2010. “That is a startling number,” Don Fort, the chief of criminal investigations for the IRS, acknowledged at a New York University tax conference in June.
Bringing cases against people who evade taxes on legal income is central to the revenue service’s mission. In addition to recouping lost revenue, such cases are supposed “to influence taxpayer behavior for the hundreds of millions of American citizens filing tax returns,” Fort said. With fewer cases, experts fear, Americans will get the message that it is all right to break the law.
Starting in 2011, Republicans in Congress repeatedly cut the IRS’s budget, forcing the agency to reduce its enforcement staff by a third. But that drop does not entirely explain the reduction in tax fraud cases.
Over time, crimes only tangentially related to taxes, such as drug trafficking and money laundering, have come to account for most of the agency’s cases.
“Due to budget cuts, attrition and a shift in focus, there’s been a collapse in the commitment to take on tax fraud,” said Chuck Pine, who used to be the third-ranking criminal enforcement officer at the IRS and is now a managing director at BDO Consulting. “I believe there are thousands of individuals who have U.S. tax obligations and are not complying with U.S. tax laws.”
The result is huge losses for the government. Business owners do not pay $125 billion in taxes each year that they owe, according to IRS estimates. That is enough to fund the departments of State, Energy and Homeland Security, with NASA tossed in for good measure. Unlike wage earners who have their income separately reported to the IRS, business owners are often on the honor system.
The IRS declined to comment on its enforcement efforts.
Cohen’s and Manafort’s cases illustrate different but common types of tax cheating, and how the IRS has struggled to enforce the law. Cohen failed to report income from domestic businesses. Manafort used foreign locales and shell corporations to hide his money.
Cohen’s tax evasion schemes were straightforward. Besides paying off 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 was income from his business owning taxi medallions, millions of dollars in interest payments on a loan he had made to another taxi operator or the $30,000 he made by brokering the sale of a luxury handbag, Cohen simply hid the money from his accountant and the government. Over five years, he did not disclose $4.1 million, saving himself $1.5 million in taxes.
The IRS typically catches such evasion by auditing taxpayers. Theoretically, evidence picked up in audits can be used to start criminal cases.
But the rate at which the agency audits tax returns has plummeted by 42 percent since the budget cuts started. Criminal referrals were always rare and are becoming rarer still, dropping to 328 in 2016 from 589 in 2012. With the government conducting 1.2 million audits in 2016, that is one criminal referral for roughly every 3,600 audits.