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USA TODAY January 23, 2001, Tuesday,

FIRST EDITION  SECTION: MONEY; Pg. 6B

HEADLINE: IRS puts spotlight on willful tax evaders Criminal investigation division reduces focus on narcotics cases BYLINE: Greg Farrell  

DATELINE: WASHINGTON BODY: WASHINGTON -- Over 70 years, the story of how an IRS agent brought down Al Capone on charges of tax evasion has evolved into a legend, reminding generations of tax collectors that theirs was a noble calling. So it's been a challenge for Mark Matthews, head of the IRS' criminal investigation division, to convince his agents that an obsessive focus on the Capones of today -- high-profile drug traffickers -- threatens their existence. But it does, and that's what he's trying to change at the Internal Revenue Service. The criminal investigation division is adopting a new look for 2001. Out is the focus on narcotics cases, even though they are sexy and often make the front page of local newspapers. In is a determination to identify and punish people whose only crime is willful evasion of their federal taxes. The timing couldn't be better. It's no secret that IRS audits of taxpayers are down in recent years. And according to some tax preparers, the IRS' attempt to change its image from the brutal and bloodless monster that was vilified in congressional hearings in 1998 into a customer-friendly service arm of the government has sent the wrong message to potential tax evaders.

"The message that some taxpayers took away from those hearings was that it's now OK to cheat," says Joe Schwartz of Bourdens Bookkeeping Service in Santa Rosa, Calif. "It's a Catch-22. The IRS is going to have to do some things that are politically incorrect and get tougher on people. I wouldn't want their job for the world." It might be politically less popular to chase mere tax evaders instead of drug kingpins, but it became mandatory after the criminal investigation unit was diagnosed with "mission drift." This came in a review conducted by former FBI chief William Webster in 1999. According to his report, the IRS' in-house cop squad had become so enamored of the swashbuckling opportunities presented by narcotics cases that it had lost focus on its principal reason for being: to enforce compliance among the approximately 200 million Americans who pay taxes each year. Following the Webster Report, IRS Commissioner Charles Rossotti lured Matthews out of private practice, persuaded him to take over as chief of the unit and its 2,900 agents, and gave him a clear mandate to change the way it operated. While the IRS will still help out on narcotics cases, Matthews doesn't want those big scores to dominate his group's image. "The problem with a tax charge in a drug case is that it leaves people thinking that the IRS was only interested in pursuing the cases due to the narcotics charge as opposed to the tax crime," Matthews says. "We don't fool ourselves into believing those cases send a huge deterrence message to the average taxpayer. We're trying to reach that slim portion of the public that is willfully deciding to cheat and falsify their books and bank accounts. That's where criminal investigation should be spending its time." In his year at the helm, Matthews has pushed his investigators to give priority to several emerging tax-evasion issues: * Abusive trusts. When Matthews arrived, the complaint he heard most often from his peers was that the IRS wasn't doing enough to crack down on phony offshore trusts. In recent years, there has been a proliferation in trusts, offshore and domestic, created for no reason other than to shield income from the IRS and enable wealthy individuals to live virtually tax-free in the USA. "Foreign trusts had become the flavor of the day," Matthews recalls. "There are a lot of people who have made a business out of duping individuals into believing they can avoid paying taxes," says Harvey Schneider, a partner at Putney Twombley Hall & Hirson. "It's a growth area."

"People who use trusts to avoid paying taxes are being led astray by charlatans and frauds," adds Andrew Blackman of Shapiro & Lobel. In 1996, the IRS didn't have any convictions in this area. By 1999, the agency had scored 35, and in 2000, it added 52 more. Courts treat these cases seriously. In November, John Modena of Michigan was sentenced to 5 years in prison for promoting "sham" trusts. His clients, five members of the Russell family, each got jail sentences, as well. "The next time a tax preparer hears from a client about a foreign tax scheme, the tax professional will be able to tell the client that the IRS is pursuing this area aggressively and that individuals have gone to jail for similar schemes," Matthews says. Adds Dale Hart, an IRS deputy commissioner: "We don't lose these cases. The legal history is that these are shams. This is a slam-dunk when we get to court." * Employment tax fraud. This form of tax evasion, where an employer diverts this tax from an employee's paycheck and into his own pocket, is another area where Matthews has heard criticism of IRS enforcement in the past. But in recent months, the agency has notched some prominent convictions. On Nov. 29, C. David Morrison was convicted of taking $4.5 million in employment taxes from employees of Logan General Hospital in Logan, W.Va., and diverting it into various business projects. The theft forced the hospital to seek Chapter 11 bankruptcy protection from creditors. "A lot of people were astonished at the number of multimillion-dollar cases out there," Matthews says. * Electronic filing fraud. As more people rush to take advantage of electronic filing, con artists impersonating real taxpayers have victimized the IRS. This year, the IRS is implementing safeguards to help discern the difference between legitimate returns and bogus ones. The criminal investigation unit is putting together a SWAT team of computer-savvy investigators to deal with electronic filing issues. Matthews says the biggest shift in his unit was the arrival of Nancy Jardini as associate chief counsel in the criminal tax division. Jardini, a Justice Department trial attorney who helped prepare the Webster Commission report, is responsible for changing the way the IRS investigates its cases. In the old days, an investigator might spend a year building a case against a suspected tax cheat, only to have an IRS lawyer poke holes in it at the end of the process. Under Jardini, IRS investigators will start working with in-house attorneys early in the game to determine whether a case has legs. "The goal is to eliminate mistakes," Jardini says. "We review all search warrants and advise investigators every step of the way. A big part is to kill bad cases early. By providing expert on-site advice, hopefully our cases will move more quickly through the system." Matthews has another goal: to get the word out that an efficient cadre of tax investigators, bent on exposing real tax cheats, will reassure average, law-abiding American taxpayers that they're not getting stuck with someone else's bill. "For the 200 million taxpayers who are filing honest returns, the criminal investigation unit is a good news story," he says. "If you think you're paying for someone else's fraud, we're a great story."