Sunday, March 06, 2005

A Tax Net That Catches Only Minnows


“Last week in Washington, the government indicted a man it said was the biggest known tax cheat in history: Walter Anderson, 51, a long-distance telephone entrepreneur and promoter of private space travel. Mr. Anderson entered a not-guilty plea.

From 1995 to 1999, the government said, he failed to pay taxes on at least $450 million in income - a figure almost as large as the $550 million Congress gives the Internal Revenue Service each year to conduct all criminal tax investigations.

Charles O. Rossotti, says that the I.R.S.'s enforcement strategy winds up scrutinizing ordinary taxpayers much more than the rich and powerful, who do not depend on wage income. In a new book, "Many Unhappy Returns" (Harvard Business School Press), Mr. Rossotti says the agency is "like a police department that was giving out lots of parking tickets while organized crime was running rampant."

Mr. Rossotti, a founder of the information-technology consulting firm American Management Systems whose skill at understanding effective organizations made him wealthy, writes that the I.R.S. "picks on the little guy" over small sums, while "largely overlooking an ocean of money hidden in business entities for which the owners, rather than the businesses themselves, were supposed to pay taxes."

For most taxpayers, there is little opportunity to cheat significantly without detection, because their wages and salaries, interest and dividends are reported independently to the I.R.S. by their employers, banks and brokers, making it possible for the agency's computers to spot discrepancies. So, too, with their biggest deduction, home mortgage interest.

But Mr. Rossotti notes that business owners like Mr. Anderson are largely in control of what the I.R.S. knows about their finances. Congress has not imposed an independent reporting regime on them, as it has on wage earners, in part because of concerns about burdening businesses with paperwork and compliance costs.”

Apparently, it was a tip from the public that put the I.R.S. on Mr. Anderson's trail. Many such tips fail to pan out, but even when one does, prosecuting a criminal tax-evasion case is costly and time-consuming. The investigation that led to Mr. Anderson's indictment took five years and required cooperation among at least seven governments.

Publicly available information about Mr. Anderson - announcements by the companies he owns, filings with securities regulators, news reports quoting him - suggests that he received several times the $450 million of untaxed income cited in the indictment. But the I.R.S.'s computers would never have noticed it on their own, because no other party is required to report that business income to the agency. And they won't notice others doing the same thing.
con·cept: A Tax Net That Catches Only Minnows