Budget-poor IRS chasing fewer tax-evasion cases

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 headscratching 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, said at a New York University tax conference in June.

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.

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 — he pleaded guilty to lying on his tax return. For 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. 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.

One clear priority for both the IRS and the Justice Department is going after money Americans stash overseas without reporting it to the federal government. But there is at least one reason Manafort, who hid his money in places like Cyprus and St. Vincent and the Grenadines, might still have escaped detection: Swiss banks have been the primary target for the past 10 years.

While the IRS worked to deal with the problem of Swiss accounts, the money has flowed out of Switzerland and into other foreign tax havens.

Under settlements made with several Swiss banks, the IRS allowed Americans with foreign accounts to voluntarily disclose them and pay a smaller penalty than they would have if they had been caught hiding the information. About 56,000 people participated, netting the government $11.1 billion.

For all this success, there has been little change in the amount of wealth stashed abroad. Americans have about $1.2 trillion of personal assets in tax havens, according to data compiled by researchers.