Thursday, April 20, 2000 | 11:17 a.m.
Nevadans are less likely to face Internal Revenue Service audits now than in the early 1990s, but the state's residents remain among the most scrutinized by the tax agency.
IRS spokeswoman Jodi Patterson in Phoenix attributed the audit decline at the district level to a shrinking agency workforce and new federal regulations. But she also said Nevadans remain highly audited because of the large number of casino workers and other individuals who allegedly hide or under-report their tip income.
"When we look at where to do audits, we'll look at areas where there is a high level of non-compliance," Patterson said. "The tip industry is an area of high non-compliance. In general any cash business will have a higher non-compliance rate.
"If you're a wage earner and get a W-2 form and get taxes withheld, there is much higher compliance in that category."
Residents of the IRS Southwest district, which encompasses Nevada, Arizona and New Mexico, stood a 0.61 percent chance of being audited in 1998, a 50 percent drop from five years earlier.
The number of audits performed by the district fell from 36,549 to 21,228 over that period. But the 1998 audit rate was still fifth highest among the nation's 33 IRS districts and about 33 percent higher than the national average.
The Southwest district's poorest residents, those reporting income of less than $25,000, had it even worse in 1998. They had the nation's second highest audit rate for their income group at 0.56 percent, more than double the national average.
The district's wealthiest taxpayers, those reporting income of at least $100,000, stood a 1.08 percent chance of getting audited in 1998. But that ranked only 18th among all districts and was actually below the national average of 1.13 percent for that income category.
The figures are gleaned from Syracuse University's Transactional Records Access Clearinghouse for the years 1994 to 1998, the latest available.
The statistics are only for audits performed by the 33 IRS districts, including the vast majority of face-to-face reviews. They do not include audits through correspondence with IRS service centers such as in Ogden, Utah, because those figures are not broken down by district.
Patterson said there were two reasons why lower wage earners were being targeted in the Southwest. One is the alleged tip reporting problem in Nevada.
The other is because of alleged fraudulent tax returns filed in Arizona on behalf of alien Mexican nationals who were claiming earned income tax credits they were not eligible to receive. She said one notorious example of the latter involved San Luis, Ariz., a town of about 4,200 people that once filed 14,000 individual tax returns in a single year.
"Congress mandated that we look at earned income tax credits," Patterson said. "There is a lot of abuse and fraud there."
One who is not sympathetic toward the IRS is Tony Badillo, president of the Nevada Casino Dealers Association, who said dealers have been unfairly targeted by the agency since the 1970s. He said other tip earners, such as cocktail waitresses, taxicab drivers and bellboys, escape IRS scrutiny because they are more likely to pocket their tips and are therefore harder to audit.
Many casino dealers are required to pool their tips with their colleagues. Badillo said the tips are then combined with their wages into a single paycheck and taxed accordingly as income. But he said many dealers do not like tip pooling and there are some casinos where they can pocket their own tips.
"I believe they should go after individuals who refuse to pay their taxes but don't make a blanket deal against casino dealers," Badillo said. "The dealers are easy targets because they can catch them in groups."
But Reno accountant David Turner, a board member of the Nevada Taxpayers Association who gives seminars on federal tax laws, said the IRS is justified to target tip earners.
"Back in the 1960s people reported 10 percent of their earnings as tips and the IRS accepted that," Turner said. "But on the Strip tips are often a multiple of their salary, not a percentage. There continues to be extensive non-compliance. Because of the magnitude of the gaming industry in the state that's an incredible amount of money."
Patterson conceded that IRS positions that have been reduced through attrition and lack of funds has become a problem for the agency. The Syracuse data showed that the number of full-time IRS employees in the Southwest district declined sharply from 1,503 in 1994 to 1,186 in 1998.
Meanwhile Congress approved new IRS restructuring legislation during that period, forcing agency employees to spend time learning new federal regulations instead of doing case work. The workforce attrition combined with the need to learn new regulations has translated to fewer audits at the district level, Patterson said.
"Nationwide we have not been able to backfill behind people we're losing," she said. "In our 2001 budget we are asking for additional funds to beef up our staff."
In addition to the funding request there may be other changes affecting the IRS. Senate Minority Whip Harry Reid, D-Nev., author of the nation's first Taxpayer Bill of Rights, said Wednesday that he would like to see the elimination this year of 65 separate marriage penalties that are in the federal tax code. He said he doesn't believe there is immediate need for further taxpayer rights' reform, however.
"We're getting fewer complaints than we got before," he said. "We've made great progress."
But Turner said wealthier taxpayers in particular have been hurt over the past several years by the elimination of deductions for sales taxes and certain rental income. He also blamed Congress for making numerous additions to the tax code over the past three decades.
"The IRS cannot keep up with interpreting regulations because of all these new laws," Turner said.
Although Patterson vouched for the accuracy of Syracuse University's audit statistics, Nevada's first assistant U.S. Attorney, Howard Zlotnick, could not say the same for university data related to prosecution of income tax-related crimes.
The data showed that in Nevada the odds of being prosecuted for IRS-related crimes fell slightly from 21 per 1 million in 1994 to 13 per 1 million in 1998, but that was still the 11th highest rate among the nation's 90 federal districts. The number of actual tax-related convictions in the state dropped from 23 to 19 over the same period, according to the university.
But Zlotnick said those statistics were faulty because they didn't take into account cases involving such crimes as narcotics trafficking and money laundering where the accused were also charged with IRS crimes.
"You can't rely on their figures because they don't tell the whole story," Zlotnick said. "Let's say I open up a laundering case and then bring in a tax case with it. The (Syracuse) records wouldn't reflect the fact we charged for tax (crimes). We vigorously prosecute tax crimes where we can. I don't believe there has been a decline in our prosecution."
Steve Kanigher is a staff writer for the Sun. He can be reached at (702)-259-4075 or by e-mail at [email protected].
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