April 17, 1995
Section: PHILADELPHIA BUSINESS
IRS TRIES TO IMPROVE ITS RATE OF COLLECTION ACCORDING TO EXPERTS, WHERE THERE'S A TAX, THERE'S A WAY TO CHEAT.
Julie Stoiber, INQUIRER STAFF WRITER
Today is tax day. Listen to how easy it was for one man to rip off the Internal Revenue Service:
My Company filed a total of 9,000 returns in 1992, for tax year I 991, which netted my customers approximately $8 million in total refunds. Of that total, I would guess that roughly half of the returns contained false information about dependents, wages, or filing status. That year . . . I recognized how easy it was."
Richard M. Hersch, a tax preparer from Ardmore, kept his scheme going for two years.
Testifying this month before a U.S. Senate committee, Hersch gave a glimpse of the opportunities for fraud just in the IRS's electronic filing system: "In all modesty, it would take several hours for me to share with you the virtually endless possibilities."
Hersch is a big fish in the murky pond of tax deception. He has plenty of company, and they come in all sizes.
Tax cheats inhabit every neighborhood and economic stratum, and they have endless ways of paying less than they owe. They are your doctor, your neighbor, your lawyer, your favorite waitress at the corner tap. Even your Aunt Betty is ripping off Uncle Sam.
"The number of criminal prosecutions is rising. The number of cases we are working is rising," said Steven J. PeterseII, a Criminal Investigation Division chief in the IRS's Philadelphia office. "One could assume there is pIenty of it."
The tax gap - the difference between what the government collects and what it is owed - runs about $127 a year, according to IRS estimates. A 100 percent collection rate for just one year could make a big
The federal budget deficit, which stands at $200 billion.
Not to mention what it could do for the legions of honest taxpayers: If everyone woke up tomorrow and deckiec~ to play it straight with the IRS, Congress could cut tax rates across the board.
Peter R. Merrill, an economist in Price Waterhouse's Washington office, concluded that rates could go down by as much as 10 percentage points. He came up with that number by dividing the tax gap by the amount the government would collect if everyone suddenly started paying his or her fair share. human nature being what it is, though, that is not likely to happen.
"I think most people are honest - and most people practice tax avoidance," said Jeffrey M. Miller, the Center City lawyer who represents Hersch. "Most people try to pay as little tax as they can."
Miller declined to discuss Hersch, who pleaded guilty and is to be sentenced later this month. But he was willing to share observations gleaned during seven years in the U.S. Attorney's Office and 17 as a criminal defense lawyer. Tax avoidance takes all forms, Miller said. "Some are legal, some are illegal, and some are questionable."
* A man buys a house at the Shore with four bedrooms. In one of them, he puts a desk - and writes off one-quarter of the cost of the house as a business expense.
* A video shop owner makes a deal with her workers to pay half their salary in cash; nobody declares the full amount, and both employer and employees get a break on their taxes.
* A waitress, on her feet till 2 in the morning, earns $150 in tips. She has three kids at home with their noses pointed toward college. For income tax purposes, those tips become $15.
*A contractor withholds taxes from his workers' pay, but puts the money back into his business instead of in the mail to the IRS. At tax time, his workers file for refunds - and get them - even though their boss never actually paid taxes on their behalf.
Mom and Pop at the deli down the block take in $7,000 cash a week, and tell the IRS it is $4,000.
"Next time you go into a store and buy something, see if it gets rung up," said Martin Enterlin, another criminal investigation chief at the IRS. "If not, that's a pretty good indication it's not going to get reported."
Penalties for those who get caught range from fines to jail time.
And the IRS, some say, is not bad at catching them.
Marc Durant, a Center City lawyer who represents white-collar criminals, said the IRS's criminal investigators are competent and well-trained, with strong accounting backgrounds.
John B. Stine 2d, a tax partner at Price Waterhouse, said that the IRS's computer programs are increasingly sophisticated, and that, as a result, the reporting of stock sales, real estate sales, on-the-side income and dividends and interest has improved.
But the tax gap suggests that there are plenty of evaders out there, particularly those in cash businesses.
Durant, like Miller, worked as a prosecutor in the U.S. Attorney's Office before switching to criminal defense.
"Economic sociopaths" is what he calls the big tax cheats, the schemers. "They will steal from anybody at any time. The rest, he said, "are really basically just regular people."
And many of them don't think of themselves as criminals.
In a country jaded by tales of government waste, fat-cat favoritism, and crooked congressmen, taxation based on the honor system is a tough sell.
"The system depends on taxpayers' willingness to comply," Durant said. "The whole sense of the public . . . That the government does not deserve their faithful compliance.
"I'm near certain that the incidence of tax evasion in World War II was a . . . fraction of what it is today," he said. "I'm certain, intuitively, that there is more tax evasion today. During World War II, people felt the country needed the money."
Today, they are more likely to feel that the government will throw it away on $600 toilet seats or some congressional perk, like the publicly subsidized hair salon for legislators that only recently was eliminated.
"People are struggling," Durant said. "I think they feel that the money goes to better use to them than to the government."
He remembers one case in which a business owner kept two sets of books - one with actual revenues, the other with what he reported to the government - for the sheer joy of knowing how much he was getting over on the IRS.
When he got caught, the evidence was overwhelming.
"I don't want to sound like an apologist for these people," Durant said. "I'm not an apologist. I'm just telling you the kinds of things I hear."
Miller hears the same thing.
"Everybody who pays taxes thinks about the guy who is not paying taxes."
And they come up with ways to keep more for themselves.
The IRS, in its efforts to stop them, devises new measures to detect cheaters. And just as quickly, the tax cheats come up with ways to circumvent them. "Fraud perpetrators . . . adapt continuously to new fraud controls," IRS Commissioner Margaret Milner Richardson recently told Congress.
Hersch, the Ardmore tax preparer, rode to riches on electronic filing and the Earned Income Tax Credit, a refund for the working poor, which he dubbed "Easy Income for Tax Cheats."
Big-time schemers like Hersch are often brought down when a relationship goes awry. Someone with an ax to grind - disgruntled employee, ex-spouse - goes to the IRS.
"Despite how straightforward my schemes were, I was caught only because several employees of my company became informants and went to the authorities," Hersch told his Senate audience. "I am confident that if the employees had not turned me in, the IRS would never have caught on and that I would still be in business today."
1. Martin Enterlin (left) and Steven J. Petersell, employees of the IRS Criminal Investigation Division, at the Philadelphia office.
2. Marc Durant, a Center City lawyer, says IRS investigators are well-trained and have strong accounting backgrounds. He said big tax cheats are "economic sociopaths" who "will steal from anybody at any time." The rest "are really basically just regular people," he said.
(The Philadelphia Inquirer VICKI VALERIO)
Copyright (c) 1995 The Philadelphia Inquirer