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Cracks In The IRS Crack Down

Chalk up another win for IRS Commissioner Mark W. Everson's drive to boost tax enforcement. On July 11 the Internal Revenue Service announced that 95 executives had agreed to pay taxes -- plus interest and penalties -- on $500 million in stock option income they diverted into a complex tax shelter. On top of that, the agency said it has collected $4 billion from 1,300 individuals who used another scheme.

Great numbers -- for now. But Everson's crackdown could soon hit its limits. The assault on abusive shelters marketed by big accounting and financial firms has driven the shelter biz underground, making the next generation of schemers much tougher to root out. With an $85 billion surge in federal revenues, pressure for tougher enforcement could ease. And the agency remains haunted by its own history. Congress, which traded on lurid tales of jack-booted and incompetent auditors in the 1990s, is slashing President Bush's request for an 8% boost in IRS enforcement funds in half.

Everson, who has headed the agency since 2003, says he's "disappointed that Congress has not fully funded the enforcement we've asked for in recent years." Yet he insists his tactics are working. The IRS has boosted its enforcement ranks by 800 since 2003, bringing the total to 9,800. "We've got a lot more resources than we had," Everson says.

Maybe, but a decade ago the IRS had 14,000 agents looking for abuses. Its diminished force of tax cops is another sign that there's less than meets the eye to this crackdown. While audit counts have risen from rock-bottom, they're still far below '90s rates. According to the Government Accountability Office, only about 1% of individuals are audited -- half the rate of a decade ago. Also falling short: audits of partnerships and Subchapter S corporations, structures that are popular with shelter creators. In 2004, the IRS audited only 2.2 of every 1,000 returns filed by these outfits, according to Syracuse University's Transactional Records Access Clearinghouse (TRAC), which follows IRS enforcement. "The IRS is always going to be behind the eight ball," says Ronald A. Pearlman, a former Assistant Treasury Secretary for tax policy. "They don't have the numbers, and they never will."

Slip-Sliding Away

While abusive tax shelters are a top enforcement priority, the IRS still misses many scams. The IRS Oversight Board, an independent panel created by Congress, reports that in 2004 the agency pursued only 18% of known cases of abusive tax shelters and failed to collect at least $447 million, in part because it can't afford to battle more miscreant taxpayers in court. And negligence penalties against corporations have plummeted from 1,234 a decade ago to just 25 in 2004, according to TRAC.

Congress has given the agency new tools to fight shelters, but the IRS isn't making much use of them. Promoters who mass-market tax dodges now must disclose their deals and customers' names. But agency officials concede that, despite the new reporting requirements, they still don't have a handle on the abuses. "We have not figured out how things are changing," concedes a top IRS official.

Give the agency credit for ending the days when national accounting firms and white-shoe law firms sold abusive shelters like so much Tupperware. But as scamsters go underground and their deals get more complex, the IRS is going to have to work a lot harder to keep its enforcement drive from stalling.

It's not often that manufacturers and big insurers march in lockstep with trial lawyers. But a plan to create a $140 billion trust fund for asbestos victims has these longtime adversaries singing from the same hymn book. Such insurers as Liberty Mutual, Hartford (HIG), Nationwide, Chubb (CB), and AIG (AIG) are recruiting small manufacturers for a coalition to oppose the Fairness in Asbestos Injury Resolution Act, which they call a $140 billion tax on business. The fund, designed to protect companies from bankruptcy and clear tens of thousands of asbestos suits from the courts by paying victims directly, would be financed by companies and insurers. Critics say it shifts the cost of asbestos liability from large corporations such as Honeywell International (HON) and W.R. Grace (GRA) by extracting inordinately large payments from smaller outfits. The upshot: A bill meant to help business could bankrupt hundreds of small companies, claims the new Coalition for Asbestos Reform.

Despite criticisms of the bill by Republicans on the Senate Judiciary Committee, Senate Majority Leader Bill Frist says he will bring it to the floor this month. And President Bush, a backer of asbestos reform, has dispatched Chief of Staff Andrew Card to help curry support. With business bickering, however, odds are that yet another fix for the asbestos mess will go down in flames.

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