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Stiffing Uncle Sam is easy

The Internal Revenue Service tries mightily to put the fear of the Almighty in U.S. taxpayers. But in reality, the agency simply isn't well suited to collect back taxes.
/ Source: Forbes

The Internal Revenue Service tries mightily to put the fear of the Almighty in U.S. taxpayers. In the weeks leading up to the April 15 filing deadline for individual taxpayers, the agency manages to generate a spate of stories highlighting criminal prosecutions of tax dodgers and other tax-code violators.

This buzz helps generate pretty good revenue for tax-preparation personnel and software providers like H&R Block, Intuit and even  Microsoft. The unspoken message: Pay up or be nailed.

But, as it turns out, this really isn't true.

The U.S. Department of the Treasury, of which the IRS is a part, recently admitted to Congress that as of Sept. 30, 2003, it was simply declining to pursue a stunning $16.5 billion of back taxes related to 2.25 million personal and corporate tax returns. The main reason: inadequate collection resources at the IRS. Even considering the gigantic size of the federal government, this is not pin money. The uncollected sum amounts to nearly 2 percent of annual tax collections, more than enough to fund a spate of big agencies.

Small wonder, then, that the feds aren't especially eager to publicize these data, which come from written answers to the Senate Finance Committee by now-Deputy Treasury Secretary Samuel W. Bodman. The Treasury's Web site is full of easy-to-find links to testimony, speeches, reports, presentations and position papers endorsed by departmental bigwigs. For instance, you can find a nice picture of Bodman at a Black History Month Celebration ceremony. But the specific information on tax-collection shortcomings does not appear to be so easily available.

In classic government doublespeak, the 2.25 million deadbeats are classified as being in "deferred status," defined by Bodman as "a case that has been removed from active inventory so that another case with higher priority or higher probability of collection can be assigned and worked by IRS employees." A taxpayer with outstanding taxes from two years would be counted as two cases.

There are about 100 million taxpayers in the U.S., almost all of whom pay their taxes properly. So this means the IRS is giving up the ghost on a huge percentage of people it acknowledges as scofflaws, even though these liabilities are generally undisputed by taxpayers.

According to Bodman's statement, the median size of a typical delinquent account not being chased was $14,001. The median for individuals, who constitute 85% of the uncollected amount, was $16,389; for businesses, $7,428. But one unnamed account topped a whopping $50 million.

In many cases, Bodman said, a taxpayer works out an arrangement to pay back taxes but then doesn't comply, and the IRS doesn't follow up.

How overwhelmed is the IRS? The agency "is unable to continuously pursue each taxpayer with an outstanding tax liability," Bodman said. Plus this: "Many taxpayers with outstanding tax liabilities, however, would make payment if contacted by telephone and, if necessary, offered the ability to make payment of the full amount in installments."

The IRS has been deferring collection on unpaid amounts for tax years since the mid-1990s. The ten-year statute of limitation on collection of tax debts raises the possibility that the agency will simply run out of time.

Every year the IRS vows to go after tax cheats, but with little impact. The Bush Administration has been pushing Congress to authorize the use of private debt collectors in dun for back taxes. Reluctant congressional leaders finally seem willing to give this a try.

Here's another reason why: For the fiscal year ended Sept. 30, 2003, the number of deferred cases actually dropped 12 percent, to 2.2 million from 2.5 million — but the total amount owed went up by 4 percent, to $16.5 billion from $15.9 billion. Better-heeled taxpayers apparently are figuring out how the system really works.