The Department of Justice and the Internal Revenue Service put on a bit of a dog and pony show yesterday, holding a special press conference to announce highlights of their work during the past year to enforce federal tax laws.
Since January 2001, the Justice Department has obtained injunctions against more than three dozen tax return preparers, including 18 since January 2006. During the 2006 fiscal year, the department’s Tax Division authorized prosecutions of nearly 1,200 defendants for tax crimes, an increase of more than 34 percent over the number authorized for prosecution in 2001.
Justice said that it has also obtained injunctions against nearly 200 promoters of tax fraud schemes over the past six years, including 66 since January of last year. Those injunctions have stopped promoters from selling tax evasion schemes on the Internet, at seminars, or though other avenues -- schemes that the agency says have cost the U.S. Treasury an estimated $2.5 billion, and have had an estimated 500,000 customers.
And that work doesn’t even include the work of the agencies in pursuing promoters of abusive tax shelters, which the Treasury Department estimates costs the country billions annually. The Tax Division is currently litigating approximately 86 tax shelter cases or groups of cases, including 47 separate cases involving the Son of BOSS tax shelter.
During yesterday’s press conference, the breaking news was the Justice Department seeking to shutter 125 Jackson Hewitt Tax Service locations because of alleged fraud on returns prepared at the outlets -- all owned, or partially-owned, by an Atlanta man.
Jackson Hewitt shares fell nearly 20 percent, to $26.53 on the New York Stock Exchange after the announcement, but probably most interesting to those in the tax-prep business, is that the story has spurred talk about government regulation of paid preparers -- essentially requiring preparers to meet basic training and competency standards and to make it easier for the IRS to punish offenders, two areas that IRS Commissioner Mark Everson has said would place a tough burden on his agency.
Senate Finance Committee Chairman Max Baucus told newspapers that the Finance Committee was already going to return to the issue of regulating paid preparers this year, after a congressional investigative agency found key errors, even cheating, by workers at a few major tax-preparation firms in a review of some firms’ work last year.
The overhaul of an entire industry is no easy feat, and assuming that new educational requirements will stop pervasive fraud -- Justice's term for the problems at the Jackson Hewitt outlets -- is foolish. Those looking to cheat the system will always find a way to skirt ethical concerns. If anything can be learned from the first few years of Sarbanes-Oxley, it’s of the very real need to build solid controls into any accounting system.
But at the same time, as a recent study by the Institute for Fraud Prevention found, most financial statement fraud is orchestrated by an organization’s chief executive, who is usually aided by outsiders in the overriding of internal controls.
Nothing is failsafe. So before wading into further regulation of preparers, Congress should seriously consider whether its time and effort might be better spent elsewhere on the myriad number of issues -- the AMT, meaningful reform, any of a number of tough budgetary decisions -- already looming around the accounting profession.
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