story in Money Section: USAToday 4-13-07
IRS is taking fewer tax cheats to
By Kevin McCoy, USA TODAY
The IRS is seeking fewer criminal prosecutions of
suspected tax cheats, raising questions about the
agency's announcements of renewed enforcement
success, a USA TODAY analysis shows.
IRS referrals of tax fraud and other financial cases
to the Justice Department fell for the last two
years, the review of the agency's data found.
The decline was even more pronounced when measured
by prosecution referrals in which the Justice
Department designated the IRS as the lead
investigative agency. There, recommendations for
criminal tax fraud prosecutions fell in three of the
last four years, the analysis showed.
The trend is a reversal from earlier in the decade,
when IRS prosecution referrals for tax crimes rose
as the agency emerged from a major reorganization.
The shake-up came after a 1999 review concluded the
IRS Criminal Investigation division had "drifted
from its primary mission" of pursuing criminal tax
Contributing to the downward trend is a decline in
special agents at the IRS Criminal Investigation
division. Their numbers declined in three of the
last four years amid an average of 150 retirements
annually that thinned the ranks of experienced
investigators, the IRS said.
The Senate Finance Committee, concerned that the
Justice Department may be processing an
"insufficient number" of IRS criminal referrals,
asked the IRS for information about the issue in a
Feb. 1 letter. "We are concerned that this leads to
increased criminal tax behavior because taxpayers
know the chances of being criminally sanctioned are
low," wrote Sen. Max Baucus, D-Mont., the committee
chairman, and Sen. Chuck Grassley, R-Iowa, the
ranking minority member.
IRS Commissioner Mark Everson said the tax agency is
preparing a response.
Testifying at a House Ways and Means subcommittee
hearing in March, Everson cited a 2006 IRS Oversight
Board report that said, "Performance on enforcement
has improved considerably, and real progress has
been achieved over the past six years."
But, asked by USA TODAY about the contradictory drop
in criminal prosecution referrals, Everson said, "I
do know that some of the numbers, as you're
indicating, have gone sideways there. That is an
area that hasn't continued an increase in the exact
Several private-sector attorneys who specialize in
criminal tax cases credited the IRS for pursuing
high-profile criminal prosecutions against marketers
of illegal tax shelters and other alleged tax
violators. Indeed, the IRS and Justice Department on
Wednesday charged Joseph Francis, creator of the
Girls Gone Wild videos, with evading taxes on
millions of dollars hidden in an offshore bank
account. Still, the lawyers said, the drop in
prosecution referrals and special agents undermines
the IRS' tax enforcement mission.
"They've been claiming they're back in the general
tax-crime business, but their numbers are down.
That's a problem," said Steven Harris, a Miami
attorney and specialist in criminal tax law.
The IRS sends criminal referrals to the Justice
Department, which decides whether cases should be
filed by prosecutors in Washington and around the
nation. USA TODAY's analysis of IRS data found the
tax agency's annual criminal prosecution
recommendations for alleged tax crimes and other
financial wrongdoing dropped from 3,037 in fiscal
year 2004 — the highest since the reorganization —
to 2,720 in fiscal year 2006. That's a 10.4%
The data included all criminal referrals in which
the IRS had an investigative role, even if other
agencies were involved.
Criminal tax prosecution referrals in which the
Justice Department designated the IRS as the lead
investigative agency fell in four of the last six
fiscal years, according to federal government data
provided to USA TODAY by the Transactional Records
Access Clearinghouse (TRAC), a research organization
affiliated with Syracuse University. The 338
referrals recorded in 2006 represent a 71.3% drop
from the recent high of 1,178 four years earlier,
the data show.
Present and former IRS officials contend the TRAC-supplied
data, which originate at the Executive Office of
U.S. Attorneys, is not a true measure of the tax
agency's performance because it does not include all
cases the IRS recommended for prosecution.
Recently launched IRS tax investigations appear to
be up, said Ian Comisky, a specialist in criminal
tax law at the Philadelphia office of Blank Rome.
"We're seeing it at the bottom end, but not (in
criminal prosecution referrals) at the top end,"
Nancy Jardini, who recently stepped down as IRS
Criminal Investigation director for a private-sector
job, said the IRS has launched new tax
investigations that should eventually generate
criminal prosecutions. The average tax investigation
lasts more than 500 days, she said, theorizing that
those probes could boost the number of IRS
prosecution referrals for 2007 or 2008.
Former IRS deputy commissioner Mark Matthews said
the tax agency has focused on pursuing more-complex,
time-consuming cases designed to serve as
high-publicity deterrents for would-be tax
Recent successes include the case of Walter
Anderson, a telecommunications entrepreneur who was
sentenced in March to nine years in federal prison
for failing to pay $170 million in federal taxes in
what the IRS said was the largest criminal case of
tax evasion by an individual in the agency's
The IRS also cited the $456 million in fines,
restitution and penalties paid by KPMG after the
accounting giant admitted criminal wrongdoing in a
tax shelter investigation, as well as the case of
former Digital Consulting CEO George Schussel, who
was convicted in a tax evasion scheme that diverted
millions of dollars of unreported company income to
a Bermuda account.
However, the ranks of special agents responsible for
investigating and helping prosecutors during the
trials of such cases dropped to 2,804 in fiscal year
2006, down 11.2% from a staff of 3,158 in fiscal
year 1997, IRS data show. "Lots fewer boots on the
ground," said Jardini, who, like Matthews, said she
and other IRS officials had been concerned about the
Despite the high-profile prosecution successes, the
decline in investigators has prevented the IRS from
mounting a sustained effort against tax evasion
schemes that cost the government millions of
dollars, argued Robert McIntyre, director of
Citizens for Tax Justice, a non-profit research
group often critical of the Bush administration's
McIntyre, who estimated that corporations and
individuals evade as much as $100 billion in federal
taxes annually by shifting assets offshore, told a
news conference Monday "that seems to me one place
we ought to start looking, but the IRS doesn't have
"We seem to have at least a substantial criminal
population in this country among the better-offs who
will do it if the chances of getting caught are
low," said McIntyre.
Everson, while conceding the number of special
agents assigned to criminal cases "may be down just
a hair," said he felt the IRS had halted the
Explaining why the tax agency had not pushed for
dramatic increases in special agents, criminal
investigations and prosecution referrals, Everson
alluded to the IRS-Justice Department and case
management decisions questioned by the Senate
"I'd like to do more, but we need to make sure that
if we're going to do more … then, ultimately, in the
pipeline at Justice, that they're going to have the
capacity to deal with it," said Everson. "The U.S.
Attorneys have to run balanced programs, and,
obviously, with the focus on terrorism and other
areas, some of the resources are given higher
priority than the tax" prosecutions.