Apparently the financial sleuths at the Internal Revenue Service—long hailed as the government's most-sophisticated fraud detectives—didn't get the call from the White House to participate in President Bush's Corporate Fraud Task Force (CFTF) when it was formed in July 2002. That may be one reason why cheating on taxes is on the rise while the number of criminal tax investigations and prosecutions by the IRS have hit an all-time low.
Tax prosecutions resulting from IRS investigations are about half of what they were 10 years ago, according to new research released yesterday by Syracuse University's Transactional Records Access Clearinghouse (TRAC). In 1993 the IRS was the lead agency for 1,064 tax prosecutions. By 2002 that number had shrunk to 512. The report notes that if current trends continue, the number of annual tax prosecutions for 2003 is likely to fall to 360—the number of civil suits filed by the IRS dropped even further: from 2,172 in 1993 to 575 in 2002.
As for corporations that spent time in the penalty box: that number has dropped, too. According to the research, 2,376 negligence penalties were assessed against corporate violators in 1993. By 2002 only 22 such penalties were slapped on companies. The total number of corporate fraud penalties assessed in 2000, according to the IRS, was only 159—down from 555 in 1993, says the TRAC report.
A decline in tax investigations mirrors the falloff in prosecutions and suits. Last year 2,500 probes were launched by the IRS, compared with 4,000 investigations in 1992. TRAC uses data from the Justice Department, the Internal Revenue Service, the U.S. Office of Personnel Management, and court records to compile its analysis.
The report's authors point out that the drop in criminal enforcement by the IRS is worrisome when viewed against the backdrop of high-profile corporate scandals such as Enron, WorldCom, and HealthSouth. The authors question why the IRS was not included as a member of the CFTF, given that Presidents have been using IRS agents as crime stoppers since the 1920s, when President Herbert Hoover called in Elliot Ness to squelch syndicated crime boss Al Capone.
The IRS balked at the TRAC report, issuing a preemptive strike with its own data on Friday. As reported in the New York Times, the tax agency data claims its investigators launched twice as many criminal cases as TRAC reported. Furthermore, an IRS spokesperson asserted that the TRAC report is based heavily on Justice Department data, which is unreliable.
The IRS administrator didn't elaborate on why the tax agency considers DoJ data sub-standard, although the Attorney General would no doubt like to hear more on that score.
Despite the IRS's assertion that the TRAC study is flawed, the tax agency's own data still showed a precipitous drop in enforcement. Most notably, the IRS admitted to a 50 percent fall in recommendations for tax-crime prosecutions in the past 10 years. But the revenue service took the sting out of that admission by noting that the number of criminal investigations only declined 1.6 percent during the decade.
The Times also reported that Nancy J. Jardini, a criminal-investigations deputy director with the IRS, claimed the long-term trend was misleading. Reportedly Jardini noted that since the agency reorganized its criminal-investigation division in 2000, the number of tax investigations has actually risen 38 percent.
Jardini admitted that the "prosecutions, indictments and sentences, despite being many more in number than the TRAC data indicate, continue to trend down." But she added that the nature of the tax fraud is more complex than it was a decade ago, as the crimes now involve trust schemes, offshore accounts, and multilayered partnership arrangements. Tracking down fraud in complicated financial setups takes more time to investigate and sort out, she argued.
WorldCom Changes Name, Hires Turnaround CFO
On Monday, management at bankrupt—and scandal-ridden—telco WorldCom Inc. officially announced the renaming of the company to MCI. WorldCom acquired MCI in 1998 for $40 billion and kept the well-known brand name for its long-distance services.
The company's management also announced it is moving Worldc...er...MCI headquarters from Clinton, Mississippi, to Ashburn, Virginia. The Clinton location is close to former founder and CEO Bernard Ebbers's home.
The MCI board and CEO Michael Capellas further distanced the telephone and data-services company from the past regime by naming Robert T. Blakely executive vice president and CFO. Blakely will permanently replacing stand-in CFO Victoria Harker.
As you may recall, Harker stepped in when former CFO Scott Sullivan was fired after his alleged involvement with what could turn out to be the largest accounting fraud case ($11 billion) in U.S. history. Sullivan, who awaits trial, maintains his innocence.
Blakely, a 30-year corporate finance veteran, retired as CFO of Lyondell Chemical in June 2002. He is best known for restructuring, and thinning out, the conglomerate Tenneco Inc. Reuters reports that Blakely helped pare down Tenneco into a leaner company through spin-offs and asset sales, successfully navigating unwieldy debt structures and lopping off unprofitable business units.
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