Senators scold IRS for proliferation of tax scams

Tax fraud has long been a problem, but the Internet has elevated the problem to an entirely new level, costing the U.S. Treasury several billion dollars per year--and the Internal Revenue Service is not doing enough to stop it, the Senate Finance Committee was told in a hearing Thursday.

The Internet "creates a high-tech snake-oil salesman who has a worldwide reach," making the fraud more pervasive, said Robert Sommers, a California attorney who runs a Web site devoted to exposing tax fraud.

IRS Commissioner Charles Rossotti estimated the annual tax revenue loss to the U.S. Treasury due to tax scams, many of which originate over the Internet, at $70 billion. The government could afford a larger tax cut, deal with Medicaid funding issues and tackle other issues if the IRS could better address the problem, Sen. Max Baucus, D-Mont., said of the revenue loss.

But panelists said the ubiquitous nature of the Internet, the ability to transfer funds without being tracked and the ability for Web site operators to appear and disappear without a trace all make Web-based tax scams in particular hard to combat.

The Internet is "a free-wheeling environment," so passing more laws to combat Internet fraud would not be effective, said Joseph Hodges Jr., an attorney in Colorado, but quickly acting to shut down the sites and prosecuting the people running tax scams would help.

Aaron Bazar, a former tax scammer, said the complaints he filed against the group he worked with went unheeded. Another panelist said that two years after she investigated a tax-scam Web site and gave the information to the IRS, the site is still operating.

"I am worried about claims that the IRS is the dog that doesn't bark--or perhaps bark enough--about this Internet tax fraud," said Senate Finance Committee Chairman Charles Grassley, R-Iowa.

Rossotti said the IRS is working to educate the public and has spearheaded public education campaigns. He also said the agency is increasing criminal investigations for tax scams, having won 117 convictions so far this year, with 135 pending investigations.

Yet the IRS must be mindful that its efforts "are focused on effectiveness and fairness. We can't get so focused on action that we forget about the rights of the taxpayers," Rossotti said.

But Baucus said he feared that past criticism of the IRS as overzealous led the agency to curtail audits, diminishing the fear of tax evasion. "Now the pendulum has swung too far" in the other direction, he said.

To better combat tax fraud, Sommers recommended that the IRS create a strike force of about 10 people, including computer programmers and lawyers.

JJ MacNab, a financial planner and tax-scam watchdog, also suggested that a safe haven be created for taxpayers who are duped into participating in the scams because they believe the scams are legal means to avoid taxes. More people would be willing to blow the whistle if they would not be criminally prosecuted, she said.