Why the IRS Is Catching Fewer Tax Cheats
Policy + Politics

Why the IRS Is Catching Fewer Tax Cheats

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Last June, nine Florida residents were sentenced to prison after being convicted of stealing almost $2.7 million from the federal government by claiming $11.1 million in false tax refunds. The individuals used personal information from 2,800 unwitting taxpayers to file 1,466 phony returns to get the refunds.

A pair of tax preparers in Atlanta will spend more than six years behind bars following a March 2016 conviction for creating fake, unprofitable businesses to get fraudulent deductions on their clients’ tax returns. The scheme cost the IRS $3.5 million.

A North Carolina man who ran a third-party payroll service was found guilty of stealing money intended to pay for payroll and employment tax on behalf of clients. Instead, he used at least $3.7 million for alcohol, strip club entertainment, jewelry, a Mercedes Benz and a luxury home.

Related: IRS Warns That Scammers Have a New Trick to Get Your W-2 Form

These cases represent just a few of the tax criminals the IRS Criminal Investigation sought to bring to justice in its fiscal 2016, according to its annual report released this week. The agency says it started 3,395 investigations, recommended 2,744 prosecutions and saw 2,699 tax crooks sentenced to federal prison, a halfway house, home detention or some combination of those.

Across the board, though, those totals are down from recent years, with new investigations falling by almost 12 percent from 2015, 21 percent from 2014 and by a third since 2013, when 5,314 investigations were initiated.

The agency says that’s largely because it has had to reduce staff in response to budget cuts going back to 2010. The number of special agents and professional staff fell 4.3 percent and 3.3 percent year over year, respectively, and has decreased by 19.1 percent and 21.7 percent in the past five years. Now, President Trump wants to further cut the IRS’s funding, according to the White House budget outline released this week (though Treasury Secretary Steve Mnuchin has called for increases to IRS funding and staffing).

To compensate for the recent cuts, the IRS focuses on opening only the highest priority cases with the biggest impact on tax administration. Those include:

  • Narcotics (which accounted for 23.2 percent of all new cases)
  • Identity theft (16.9 percent)
  • Questionable returns (14.6 percent)
  • Abusive return preparer (7.4 percent)
  • International operations (6.5 percent)
  • Employment tax (4 percent)
  • Public corruption (2.5 percent)
  • Abusive tax schemes (1.6 percent)
  • Terrorism (1.2 percent)

Related: Why Trump’s Treasury Pick Wants to Increase the Power of the IRS

“While the number of cases we open each year is directly impacted by the size of our organization, the quality and the impact of those cases is significant,” the agency said in the annual report from its Criminal Investigation unit. “Tax prosecutions directly impact voluntary compliance via criminal deterrence and are a critical component of a strong tax system.”

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