The IRS Isn't the Enemy -- You Tax Cheaters Are

How widespread is tax evasion in the United States? We have only guesses, but the IRS estimates that tax swindlers make off with $1,000 for every man, woman and child in the U.S. That's enough money -- $280 billion -- to reduce the federal deficit by more than half, maybe as much as 75%. That's also enough cash to pay for national health insurance.

Put another way, the underreporting of income, falsification of deductions, inflation of credits and the refusal to file tax returns mean that between 15% and 17% of taxes owed go unpaid, according to independent researchers and the IRS. Thus, if you played it straight with your country this time, up to two months of your annual tax bill compensates for other people's fraud.

Behind this dirty state of affairs, there's at least one note of good news on the tax collection front this year.

You can hear it in Nancy Jardini's voice. She is deputy chief of criminal investigations for the IRS. "We're refocused," she told me. "We're going after the high-profile cases, the important cases

By the agency's count, freshly opened criminal investigations are up 38% since 2000. Among the targets are notable corporate schemers as well as flamboyant anti-tax charlatans.

If this new spunk expressed by the IRS is a welcome turn, it's also way, way overdue. The uptick in criminal investigations follows a decade in which anti-tax, anti-government zealots and bandwagon politicians in Congress incrementally defanged the IRS, one of the worst fads ever to sweep the Capitol. A study by Syracuse University found that "criminal enforcement of the nation's tax laws by the IRS has plummeted to an all-time low." Prosecutions were down by half in just the decade from 1992 to 2002. IRS civil suits against less-egregious offenders dropped even more steeply.

Need we remind ourselves that this was the decade of greed, a decade when tax avoidance -- either by aggressive use of loopholes or by outright tax fraud -- became an essential part of many corporate profit strategies and, of course, key to many executive "compensation" schemes? For those with money to burn, this was the decade of the offshore charge card and the blue-chip tax shelter. And why not? Last year, the chance of being audited fell to a minuscule 58 out of 10,000 tax returns, transforming the tax system into an inviting "lottery" for anyone of a mind to cheat, as University of Michigan economist Joel Slemrod put it.