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Published: Wednesday, 3/30/2005

Tax dodgers costing Treasury billions, IRS says

BY ANN McFEATTERS
BLADE WASHINGTON BUREAU CHIEF

WASHINGTON - With the April 15 tax return deadline a little more than two weeks away, the Internal Revenue Service yesterday said the difference between what taxpayers should pay and what they actually pay when their taxes are due is increasing - to now more than $300 billion a year.

And despite what it says is beefed-up enforcement, the IRS manages to recoup only about $55 billion of that.

The Treasury Department yesterday released another report showing that hundreds of millions of dollars are lost to the government each year because IRS computers are not programmed to automatically figure interest due on penalties for unpaid taxes. That means some taxpayers pay interest but thousands don't, which taxpayer groups said is unfair. That report by the independent inspector general for the Treasury Department as a way to oversee activities of the IRS, concluded the calculation error costs taxpayers $817 million in 2002.

Every March, in an effort to scare rebellious Americans who don't want to pay all the tax that's due, the IRS releases details of tax fraud cases.

This year, it cited details of the case against a man the government claims is the biggest known tax cheat in U.S. history - Walter Anderson, a long-distance telephone businessman and promoter of private space travel. The IRS says he failed to pay taxes on $450 million in income. Mr. Anderson has pleaded not guilty.

The IRS also this month provided details about the Son of Boss tax shelter, which operated for more than a decade. Just last week it said it had collected $3.2 billion from taxpayers who were lured into using it. "For those who didn't come forward [to say they owe more taxes because of using the shelter], we know who they are. We are coming after them," the IRS said.

As part of the ongoing crackdown, the IRS is obtaining from accounting firms, lawyers, and other marketers, the names of those who used improper or potentially improper tax shelters.

Sources of information include the Chicago office of Jenkens & Gilchrist PC, which helped Toledo businessman David K. Welles, Sr., former owner of Therma-Tru Corp., Maumee, set up a tax shelter similar to Son of Boss, according to IRS court filings.

In 2000, the Welles family sought the tax shelter, which lawyers told them was proper, to reduce federal taxes owed on a partial sale of Therma-Tru.

Their tax savings are unclear, but IRS court filings say they were trying to reduce taxes on expected gains of at least $200 million. The family's remaining interest in Therma-Tru, along with shares held by the new owner, were sold three years later for $925 million to publicly traded Fortune Brands Inc.

Julie Simpson, a family spokesman, said the Welleses are working with the IRS but haven't reached a settlement.

Taxpayer groups point out that if the charges by the IRS about lucrative tax shelters are true, the IRS essentially admitted that it let the Son of Boss scam continue for four years after it called it "abusive."

IRS critics also said the new reports show enforcement is still lax.

The IRS' press release on what it calls the nation's "gross tax gap" said the report shows that "the vast majority of Americans pay their taxes honestly and accurately."

The IRS, which spends about $550 million a year on enforcement, says it has hiked its audits of taxpayers earning more than $100,000 to 195,000 in fiscal year 2004, double that in 2001. Every year, the IRS said yesterday, it audits one million taxpayers.

Yesterday's report is part of a three-year study, based on 46,000 taxpayer audits for 2001, which focused on underreporting of income, underpayment of taxes, and nonfiling of returns. The final study is to be ready at the end of 2005. So far, the IRS says, underreporting of income is a much more serious problem than overstated deductions.

The 2001 tax gap, the difference between taxes owed and taxes paid on time is from $312 billion to $353 billion for all taxes. Overall, the noncompliance rate is from 15 percent to 16.6 percent of true tax liability. The old estimate, derived from compliance data for the 1988 tax year, was 14.9 percent.

Contact Ann McFeatters at:

amcfeatters@nationalpress.com

or 202-662-7071.



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