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IRS budget problems help tax evaders

US IRS Tax forms

This March 24th, 2006, photo shows US Internal Revenue Service (IRS) tax forms.

The IRS says it will audit fewer people this year than it has in many years. And, in telling us that, it's walking a fine line.

It wants you to know it's tough on tax cheats. It also wants you to know that it doesn't have enough money to be as tough on tax cheats.

"We hear a lot about people going to prison for tax fraud, but at the same time, the IRS needs budgetary resources," says Joshua Blank, faculty director of the Graduate Tax Program at New York University School of Law.

With a smaller budget and staff, the agency says fewer than one percent of returns will be audited this year. The IRS hopes that number will get a hostile Congress to increase its budget.

"A less enforced tax system rewards tax evaders, which in turn hurts everyone else," says Joel Slemrod, a professor at the University of Michigan's Ross School of Business.

Fewer audits means the IRS is also losing the deterrent effects of what happens when someone tells all his friends about his experience, saying something like, "And, here's what they caught me on. They caught me on home office deduction, or they caught me on something else, and I had to write a big check. Geeze, I hope you don't have to go through that," says former IRS acting commissioner Kevin Brown, now with PriceWaterhouseCoopers.

The IRS hopes it can simultaneously scare you, and scare Congress into giving it more money.

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