Internal Revenue Service: Challenges Remain in Combating Abusive Tax Schemes Page: 4 of 32
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Accountability * Integrity * Reliability
United States General Accounting Office
Washington, D.C. 20548
November 19, 2003
The Honorable Charles E. Grassley
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate
Abusive tax schemes encompass such distortions of the tax system as
falsely describing the law (saying, for example, that the income tax is
unconstitutional), misrepresenting facts (for instance, promoting the
deduction of personal expenses as business expenses), or using trusts or
offshore bank accounts to hide income. During an April 2002 hearing
before the Senate Committee on Finance, we testified about the inexact
process for estimating the extent of abusive schemes used by individual
taxpayers.1 We pointed to Internal Revenue Service (IRS) estimates that
about 740,000 taxpayers had used certain types of abusive schemes in tax
year 2000, and that $20 billion to $40 billion in improper tax avoidance or
tax credit and refund claims had occurred that IRS had not yet been able to
identify and address. We noted that abusive schemes could threaten our tax
system's integrity and fairness if honest taxpayers believe that significant
numbers of individuals are not paying their fair share of taxes.
The estimated 740,000 taxpayers consisted of estimates of the number of
taxpayers in four major scheme areas--about 62,000 with frivolous returns,
105,000 with frivolous refunds, 65,000 using abusive domestic trusts, and
505,000 using offshore schemes. Of the 505,000 taxpayers estimated to use
offshore schemes, IRS estimated 500,000 were abusing offshore credit
cards. In our testimony, we discussed how IRS arrived at its estimates. We
also understand that some of the estimates reflected high-end numbers, for
example, the numbers of taxpayers who were associated with a particular
abusive promoter, but not necessarily reflecting an abusive scheme on their
The $20 billion to $40 billion estimate of taxes not identified and addressed
related to offshore schemes. Saying there were no reliable data to predict
1U.S. General Accounting Office, Internal Revenue Service: Enhanced Efforts to Combat
Abusive Tax Schemes-Challenges Remain, GAO-02-618T (Washington, D.C.: Apr. 11, 2002).
GAO-04-50 Challenges in Combating Abusive Tax Schemes
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United States. General Accounting Office. Internal Revenue Service: Challenges Remain in Combating Abusive Tax Schemes, report, November 19, 2003; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc291496/m1/4/: accessed October 20, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.