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Enforcing Tax Laws Works. Go Figure.

This article was written by in Taxes. 27 comments.

Earlier this Fall, the IRS was offering an amnesty program for offshore tax cheats to come forward and admit their wrongdoing, thereby getting a more lenient punishment.

Nearly 15,000 Americans who knew they were cheating came forward and admitted their bad behavior. From Reuters:

While IRS officials were still analyzing the amount of offshore assets declared in the amnesty program, Shulman said, “we are talking about billions of dollars coming into the U.S. Treasury” from the new disclosures.

This is not the end of the story. Combining these (perhaps) brave souls to the 4,450 accounts which are forcibly being turned over from the Swiss bank UBS, there are just under 20,000 leads that the IRS is now following. For example, they may find that some of the largest account holders were advised by the same unscrupulous high-powered tax adviser. And now we know his or her name, and we can investigate, and find even more cheaters.

This is happening on a State level, as well. According to the Wall Street Journal:

This year, 12 states had amnesties, up from the annual average of two or three. Another 10 or 15 are likely to follow suit in 2010.

If you live in a State with a State Income Tax, and you suspect you might be guilty of tax evasion, I’d recommend you set up a news alert for “[state name] tax amnesty” so that you can have plenty of time to weigh your options.

The Editorial Part

On a personal note, this will probably end up being my favorite story of the year. It takes the cynical view that if you’re wealthy enough, you can buy the power needed to keep more than you’re supposed to, and makes a big ol’ dent in that belief.

We have a big budget deficit, and I believe that’s because the previous administration’s ideas didn’t work out the way they were supposed to. Many people fear that their taxes will be raised as a result, though the only plans I’ve seen to raise taxes will affect maybe 5% of Americans. Amazingly, some people think that their taxes have already been raised (these people are either getting their news from some untrustworthy sources, or their paychecks are coming with a free mirage).

Happily, sometimes you don’t have to raise taxes; you just have to be serious about collecting them.

Nearly 15,000 Americans admit offshore tax cheating, Kim Dixon, Reuters, 17 Nov. 2009
More States Jump on Tax-Amnesty Bandwagon, Arden Dale, Wall Street Journal, 19 Nov. 2009

Published or updated November 20, 2009.

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About the author

Smithee formerly lived primarily on credit cards and the good will of his friends. He is a newbie to personal finance but quickly learning from his past mistakes. You can follow him on Twitter, where his user name is @SmitheeConsumer. View all articles by .

{ 9 comments… read them below or add one }

avatar 1 Anonymous

According to the Reuters story you link to, the total value of the USB accounts turned over was AT ONE TIME $18 billion. The Federal deficit for the just ended fiscal year was $1.42 trillion and is expected to be even more than that next year. So even if the government can collect every cent of every one of those USB accounts, we are still talking only about 1% of the current deficit.

While I am all in favor of making people pay what they owe, and am glad that the IRS is getting serious about catching these cheats, it’s quite a stretch to say that this will make a meaningful dent in the astronomical deficits created by both the prior & current administrations.

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avatar 2 Smithee

They’re being very coy so far about the amounts contained in these accounts, but mostly yes, I was assuming that over time, as the IRS gets better at following leads and enforcing the law, a dent will be made.

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avatar 3 Anonymous

It really ticks me off that so many people get by with cheating on their taxes.

However, any hope for this being used to make any noticeable dent in the deficit is something I have very little hope for. It’s like the promise of paying for health care reform by eliminating the waste fraud and abuse in medicare. So are we to believe that there is waste fraud and abuse just sitting there that is straight forward to eliminate but up until now no one has bothered to try to do so? If that is true I am pissed. DAMN PISSED. But alas, no worry, its not true. There is waste all over the place. But the way things are structured it is far from easy or straight forward to eliminate it. It would likely result in drastic changes to how the program is administered potentially excluding some valid claims. It would likely result in changes that would have all kinds of consituencies up in arms and lobbying about why rule change x,y, or z unfairly singles them out and discriminates against them or takes services away from them or any number of things. And if you could clear those hurddles, the system would likely have enough other holes (think there are only a couple or maybe thousands), that the fraudsters simply adjust how they abuse the system and the leaks just find the path of least resistence to the next hole.

Anyone who believes any significant savings will occur by just eliminating said problems apparently lives in a very happy place.

This is the same issue with the IRS. So this was a one time shot at all fraudulent accounts for who knows how long that has uncovered 18 billion dollars in hidden accounts (which would presumably be taxed at no where near 100%). Getting these people to all follow the rules next year will not generate anywhere near 18 billion in new taxable funds. And now that they know this method of “cheating” is no longer viable, they can adust to a different cheat or even to a legal means of tie-ing up the money that makes it less available to them but keeps the tax man at bay.

It truly is the case that the rich have access to means and counsel (some of it shaddy, some of it legal and very shrude) that allows them to “protect” or defer their taxable income and assets to keep it working for them without paying taxes on it now. And this game just keeps continuing.

It is not reasonable to expect any kind of even detectable surge to the treasury from tax law enforcement. Again the same rule as the medicare savings applies here. If its that easy to spend 1 dollar on tax enforcement and reap 3 dollars in new tax revenue, why wouldn’t the IRS step up its investigation and enforcement divisions. And if nothing else, if there is concern about public perception, go after the big returns with the potential for big dollars. Heck, order a full audit of every return over 1 million dollars every single year if it is so obvious that enforcement reaps increases to the treasury that impact the budget.

The problem is that its not that simple and doing so will not make a meaningful difference.

I really wish it would, cause I pay my taxes and it ticks me off that others aren’t paying what they should. And I know how fast and lose some business people run their taxes. I would like to report them to the IRS myself. But if the incidence of infraction isn’t significant enough the IRS doesn’t even want to hear about it.

I am very saddened by the fact that the budget is in the shambles it is and I really wish I saw a good way out of it but I don’t see any way out other than raising taxes and doing so on nearly everyone eventually. The idea that we can cut taxes from here is rediculous. The idea that we can drastically trim spending to close the gap is also rediculous. No one is going to stand for the cuts in services that would require let alone the SS/Medicare liabilities that are going to swamp the budget.

No I am pretty sure any responsible politician has to start talking about fair and proportional adjustments to the tax code to support the type of government system we are running. I wish enforcement of existing tax laws would do it, but if you could draw the tax receipts on a graph and then randomly increased enforcement at some point, you would not be able to see the jump on the graph, it would be just noise.

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avatar 4 Anonymous


very well said. You expressed the doubts & frustrations about deficit trimming through IRS enforcement much better than I did.

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avatar 5 Anonymous

They should definitely increase IRS funding for enforcement.

But its not a simple matter of the IRS failing here. IRS budget is approved by congress. The IRS needs money to increase enforcement. They can’t just start doing enforcment and let it pay for istelf, since they don’t keep the money. The IRS operational budget and tax revenues are very separate (as they should be). Congress won’t fund them to increase the enforcement since that costs money and its not politically popular. In fact congress tried outsourcing debt collection of a lot of IRS debts to private firm(s) which failed and ended up costing us more than they brought in.

Yes this is all short sighted and stupid. But few people think that added enforcement, auditing is a high priority and most people don’t look at it as a way to save money by spending money.

Unfortunately its politics. You don’t get votes by spending money now to improve things long term. And nobody likes the IRS, so funding it isn’t popular. Think of it this way: How many votes will a politician lose if they are the ones calling for increasing the IRS budget and giving the IRS more power and doing more tax audits? A lot of people hate the IRS. Voters want to see the IRS be LESS agressive and more “gentle” in their enforcement. Do you want an IRS audit? Probably not. So its easy to favor cutting IRS power and enforcements as an individual. Unfortunately making the IRS kinder to the population in general also ends up hurting their ability to enforce the laws and find the real criminals.

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avatar 6 Anonymous

I am going to have to strongly disagree with this comment.

Although I definitely believe everyone should pay their fair share of taxes and I am glad they are going after off-shore bank accounts, the IRS was way out of control during the last recession in the ’90s and had to be reeled back in. In fact, their “enforcement” was getting so ridiculous some in Congress were talking about eliminating the IRS all together and replacing them with a new agency.

In case you missed the drama, there were widows and secretaries crying in front of Congress about how they were hounded and ruined by the IRS, for taxes that weren’t even theirs. There were massive mistakes by the IRS, which assumed people owed money they didn’t. And, there were highly questionable auditing techniques, such as “lifestyle audits” that were later banned.

Now that the government is broke again, taxpayers can expect new and equally unfair enforcement strategies. Instead, the government should concentrate on waste and fraud within their own ranks, before shaking down Americans who have already paid their fair share of taxes. After all, taxpayers didn’t create the budget deficit, the Government did.

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avatar 7 Anonymous

Would better IRS enforcement make a big dent? No. Even if the IRS was perfect in enforcing law and collecting all debts it would probably not increase revenue by more than 5% or so. But they should certainly step up enforcement and debt collection where practical. If spending a little more on enforcement would increase tax revenues from tax cheats then why not?

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avatar 8 Anonymous

In the end how much will the IRS really get; 10% maybe 20% of all this money? And how much will we spend collectively in actual dollars and indirectly with all our public employees and politicians and legal system battling back and forth with the Swiss.

As so eloquently stated above, now that this trap door has been shut, people will not start digging around until they find the next loophole.

Meanwhile, last year over 9.2 million U.S. taxpayers were delinquent. Of those, 44,000 file for IRS offers in compromise. While not all were accepted the IRS gave up .80-.90 cents of every dollar that was due. In 1998 businesses owed over $50 Billion and the latest figure I found for U.S. Government employees showed they owed a combined $3 Billion. When times are tough it makes good press to go after the big fish, and they should. But what about all the other cheats that are costing you, me and our children?

Certainly there are a few situations where overwhelming hardship (terminal disease or debilitating accident) are understandable. But if a person doesn’t have the money to pay their taxes today, why should they ever be let off the hook. You cannot discharge a student loan in a bankruptcy, so why can taxes be discharged via an offer in compromise?

What we need is a complete revision to our taxation system. Something simple that does not require thousands of people and millions of documents. It may be a flat tax, a consumption tax or a derivative of these ideas, either way; the method we have now will never make sense and is destined to be filled with waste and fraud.

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avatar 9 Anonymous

The IRS usually finds the pattern tax cheats anyway. Might as well surrender and make the deal with them. It’s better.

John DeFlumeri Jr

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