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We’re losing the war. Worse, our top general warned us that we’re losing. Worse still, the administration ordered the general to “zip it.” I’m not talking about the flagging war on terrorism. Nor the suddenly overshadowed war on drugs. Not even the newly minted war on Wall Street weasels. No, I’m talking about a front we’re conceding to the enemy. We’re getting our bottom lines royally kicked by tax cheats, and that may be the war to end all wars. The erosion of tax compliance (legalese for rampant tax cheating) threatens our already shaky budget, and a shrinking budget imperils our efforts against terrorists, drug cartels, business baddies and whoever else makes the hit list of the day. Recently retired Internal Revenue Service chief Charles Rossotti raised the alarm in the midnight hour of his tenure. After five years at the helm of the embattled agency, Rossotti belatedly turned his attention to the tax enforcement crisis. His warning, though valid, may have come too late. Congress isn’t ready to release its chokehold on the IRS. Despite a modest increase in funding this year, the IRS has suffered under a virtual hiring freeze for almost a decade. Faced with a burgeoning number of tax filers (and nonfilers) and with increasingly complex tax shelter schemes, the agency has fewer employees today than it did in 1992. Moreover, because many IRS employees have been deployed to customer service and other non-enforcement areas, resources for audits and investigations have declined steeply. As a result, tax dodgers are back big time. With the IRS overtaxed, more cheats are willing to run the risk of filing false returns or not filing returns at all. For example, though the IRS has identified more than 82,000 taxpayers who evade taxes through offshore accounts, it has the resources to investigate only about one in five of the cheats. The loss to the government from offshore evasion alone has been pegged at $70 billion annually. The boom in tax fraud not only places an undue burden on honest taxpayers but also threatens our system of voluntary compliance. How long will citizens continue to pay their fair share if the odds of getting caught and punished are only one in 10? One in 100? One in 1,000? Suckers play the lottery every day with far worse odds of winning. OUT OF LAW ENFORCEMENT In fairness to Rossotti, he took over the agency during its darkest hour. In 1997 and 1998 the Senate conducted a series of IRS-bashing hearings. Rossotti faced a hard choice — ride into Little Big Horn with his troops or play rope-a-dope. He played rope-a-dope and succeeded in getting the IRS out of the headlines. Unfortunately, he also largely succeeded in getting the IRS off the crime pages and out of the law enforcement business. The shell-shocked agents emerged from the hearings badly demoralized. Tax investigations withered, especially those involving wealthy and sophisticated taxpayers — those with friends on Capitol Hill. The mantra of risk averse agents became big cases bring big problems; small cases bring small problems. In addition, Rossotti devoted much of his attention and resources to his vaunted restructuring of the agency, no longer dividing it geographically but by types of taxpayers (large and medium-size corporations, small businesses and self-employed, wage-earning individuals, and tax-exempt organizations). It’s too early to assess the long-range affects of the restructuring, but in the short term, it hasn’t boosted morale. In fairness to Congress — scratch that — can’t use Congress and fairness in the same sentence. Congress (not the IRS) creates the complexity of the Internal Revenue Code by catering to special interest groups. Congress conducted the drive-by hearings of the IRS in the late 1990s that left the agency busted, disgusted and untrusted. And Congress keeps the agency on life support. The IRS desperately needs an influx of auditors, revenue agents and special agents. Moreover, it needs a pat on the back and a friend in high places. It’s not likely to find such a friend in Washington, D.C. No politician ever lost a vote by bashing the IRS, and no pol ever gained a vote by befriending the agency. Pols love to be photographed surrounded by law enforcement, but a picture of an elected official with an IRS special agent is rarer than a three-martini lunch that’s not written off. If the IRS hopes to find a friend in D.C., it should take Harry Truman’s advice and get a dog. The IRS has the toughest job in law enforcement. It also has the most important job in law enforcement. If that agency fails in its mission, tax collections will plummet, and the tax system will implode from contagious evasion. Tax cheats steal dollars from every initiative of our government — fighting terrorists and drug kingpins, reforming Wall Street, cleaning up the environment, providing health care and Social Security, and so on. The present administration is stiff-arming and stiffing the IRS. These big oily boys are about as unlikely to embrace the radioactive taxman as is Rush Limbaugh to hug Hillary Clinton (a visual I hope to erase from my memory — fast). The current administration hasn’t shown the stomach to take on tax dodgers. Heck, it hasn’t shown the stomach to talk about taking on the crooks. In the war on tax cheats, the administration (dependent on the rich and powerful) is likely to seek an extension until at least 2008. Paul Coggins is a principal in the Dallas office of Fish & Richardson, a national intellectual property, complex litigation and technology firm. He is a former U.S. attorney for the Northern District of Texas. His e-mail address is [email protected]. “The Cutting Edge” appears monthly inTexas Lawyer.

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