01:00 AM EST on Saturday, April 2, 2005
Only the little people pay taxes.
-- Leona Helmsley
News item: Americans' unpaid taxes are now topping $300 billion a year, with people who underreport their income the biggest culprits. -- Associated Press
At a time of rising (and well-justified) concern in Washington about the metastasizing federal-budget deficit, most of the solutions proposed these days seem to involve some form or other of cutting spending. Raising taxes remains political heresy, but a lot of us wonder why nobody has seized on doing a better job of collecting taxes, as at least a partial solution.
A recent General Accountability Office report highlighted the opportunity in going after tax shelters. On the definition of tax shelters, the GAO says:
"The Internal Revenue Code has defined tax shelters in various detailed and complicated ways for purposes of having them registered, for applying certain penalties, or for certain tax accounting rules. Although the IRS has no single, authoritative definition of abusive shelters, it has generally characterized them as complex techniques promoted by sophisticated tax professionals that companies and rich individuals use to exploit tax loopholes and reap unintended tax benefits. Tax services include services involving tax compliance, tax planning, and tax advice as described by the Securities and Exchange Commission (SEC)."
According to the report, more than 10,300 individuals and 207 Fortune 500 companies have used tax shelters, accounting for a total tax revenue loss of nearly $129 billion for 1998-2003. That's an awfully large pot of money to go after at a time when revenue is in short supply. Yet, according to the GAO report, the IRS staffing levels in "key occupations" related to compliance were lower in 2002 than in 2000, and "based on past experience and uncertainty regarding some expected internal savings, fiscal year 2004 anticipated staff increases might not fully materialize."
The report further warns that "if IRS carries through with its intentions to increase resources devoted to abusive shelters, it may not have the desired level of resources in other areas of compliance."
Much of the blame can be heaped on the accounting industry, which has grown increasingly aggressive in the art and sale of tax shelters. According to the GAO report, 114 of the Fortune 500 companies and 4,400 individuals using tax shelters obtained the services from an accounting firm.
Meanwhile, a recent report by the Senate Permanent Subcommittee on Investigations found that accounting firm KPMG's revenue from its Tax Services Practice rose from $829 million in 1998 to $1.2 billion in 2001. The report also documented how accounting firms such as Ernst & Young and PricewaterhouseCoopers, banks such as Deustche Bank and Wachovia Bank, and law firms such as Sidley Austin Brown & Wood "developed, implemented, and mass-marketed cookie-cutter tax shelters used to rip off the Treasury of billions of dollars in taxes," as Sen. Norm Coleman (R.-Minn.), the committee's chairman, put it.
Both the Senate Permanent Subcommittee on Investigations and the Senate Finance Committee have been holding periodic hearings on tax shelters for years now, documenting a wide range of abusive practices ripe for regulation. With the budget deficit becoming ever more precarious, a serious congressional crackdown on abusive tax shelters is long overdue.
-- Lee Drutman
http://www.projo.com/opinion/editorials/content/projo_20050402_02tax.1ae8f3a.html
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