US joins Gordon Brown’s clampdown on tax evasion

US joins Gordon Brown's clampdown on tax evasion

The chancellor is clamping down on tax evasion and squeezing UK plc for every penny he can get, but he is not the only one. Here, we report on the situation in the US

For millions of Americans the impending arrival of April 15 – the last day on
which they should file their annual income tax returns – will this year mean
even more worry than usual.

The reason is that the Internal Revenue Service is promising even tougher
action to hunt down tax cheats.

The agency has estimated that in 2001 – the last year it fully analysed –
American scofflaws underpaid the income taxes they owed by a staggering $345bn.
For a country with trillions of dollars worth of debt, the possibility of an
infusion of that much cash into the nation’s coffers is a salivating prospect.

Last year the IRS audited 1.2 million tax returns, up 20% from 2004. While
that sounds a lot it was only .93% of filers, up from .79%.

This year the service wants to increase those numbers, and it has even found
a friend in president Bush. His latest budget proposal calls for a $137m
increase in the IRS’ $47.3bn budget, with the extra money being earmarked mainly
for enforcement efforts.

Interestingly, the IRS is likely to be targeting more Republican voters for
audit, as it says it will focus more of its investigations on people with
incomes of $100,000 or more. Main targets are self-employed business people whom
the IRS reckoned underpaid their taxes in 2001 alone by $68m.

The IRS likes to bring a few tax cases to trial each year to remind the
population of the hazards of evasion. It usually wins, but suffered a setback
recently when a co-founder of the infamous Hooters restaurant chain, which
specialises in buxom waitresses, convinced many on a jury that the $11m he
didn’t report was his accountant’s fault. The jury was hung and the IRS decided
against a retrial. The accountant is facing 30 months in prison.

The IRS was more successful against the first winner of the US version of
Survivor. He did not declare his $1m winnings and is likely to be sentenced to
at least three years in prison. Sentencing is April 28.

Pundits are awash with advice to Americans on how not to attract the
attention of the IRS computers and generate a ‘Discriminate Index Function’
(DIF) which can trigger an audit. Large entertainment expenses and claims for a
home office deduction are major DIF attractors.

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