David Cay Johnston

On March 28, the U.S. Justice Department sought to close a nationwide chain of income tax preparation shops it accuses of fraud. The action underscores the potential for abusive business practices that taxpayers face because Congress has failed to embrace technology that would eliminate most tax returns.

The Justice Department wants a federal judge to shut down Instant Tax Service, whose sole owner is Fesum Ogbazion of Dayton, Ohio, saying he is responsible for “extensive and pervasive tax fraud.” It also sued four of his 276 franchisees. The company has not responded to the lawsuit.

Congress could easily eliminate fraud by abusive tax preparers, as is alleged in the Ogbazion case, and save taxpayers billions of dollars annually, by simply ending mandatory filing of tax returns for most taxpayers.

About 100 million taxpayers — those whose income is entirely from wages and retirement funds, and who do not itemize deductions — should not have to file returns. The government already has the information it needs to calculate the taxes these people owe, once they supply their marital status and number of dependents. It would not take much to automate their income tax payments, as many other modern countries do.

I put the chances of Congress taking such a sensible course at one in 84,000. That’s about the same as the odds of being indicted for a tax crime in 2011, based on an analysis of official data by Syracuse University’s Transactional Records Access Clearinghouse.

Congress will not act because individual income tax returns, which for most people are make-work that creates a drag on the economy, provide tidy revenues for Intuit, the maker of TurboTax software, H&R Block and other legitimate corporations that profit from preparing tax returns. These companies have considerable resources at their disposal to spend on lobbying politicians to keep the tax filing requirement. One sign of their determination: Intuit in 2006 donated $1 million in support of an unsuccessful candidate for California state controller who opposed optional state-prepared returns in California. Intuit has said there are serious problems with the program, which remains in operation, but in my view none of Intuit’s criticisms stands up to scrutiny.

A SIMPLER TAX CODE

Intuit, H&R Block and other tax firms say that they help people pay the least tax and avoid costly mistakes. But these concerns would be easily addressed by simplifying the tax code. In my view, any business that depends on government-induced inefficiency should be swept into the dustbin of history.

Another reason reform is unlikely is that politicians have learned from Republican pollster Frank Luntz over the years that riling up voters against the Internal Revenue Service attracts votes and campaign donations. Actually fixing the problem by ending tax filing for the vast majority would require politicians to come up with other ways to get donors to open their checkbooks. Republican politicians who follow Luntz’s advice seem not to realize they are attacking law enforcement, a strategy that would offend many of their donors if applied to the FBI or street cops.

Short of ending tax filing for most Americans, Congress could license tax preparers — instead of only requiring that they identify themselves with a unique number. We don’t trust amateurs to inspect elevators or audit charities, so why do we let just anyone charge for preparing tax returns? This is especially true given that U.S. Taxpayer Advocate Nina E. Olson has thoroughly documented false and fraudulent reporting by tax preparers who are exempt from IRS professional conduct rules because they are not accountants, enrolled agents or lawyers.

The case of Instant Tax Service appears to be particularly egregious. The Justice Department alleges that the company charges its customers, who are mostly poor and unsophisticated, as much as $1,000 for 15 minutes of tax preparation. It “encourages its franchisees to lie to the IRS about anything,” the department said in court papers.

The government’s complaint quoted Ogbazion, the company’s owner, as saying that “every tax return being done is pretty much fraudulent” at a franchise in Los Angeles. Ogbazion did not revoke the franchise, but did sue it for royalties, the department said. According to the Justice Department, Ogbazion said he did not pay attention to customer complaints because, if he did, he “wouldn’t be able to sleep at night.”

Ogbazion’s business and personal phones are disconnected. At the one listed number that was answered a woman said he was no longer reachable there. Ogbazion also did not respond to messages to his work and home email addresses.

100 MILLION UNNECESSARY RETURNS

The Justice Department brings a high-profile tax case pretty much every year as the mid-April tax deadline approaches. But this misses the much bigger picture: More than 100 million unnecessary tax returns are filed each year, costing billions of dollars in software or preparation.

Meanwhile, the way Congress has written tax laws, and the way courts interpret them, makes it hard to pursue tax cheats. The average time for each criminal tax prosecution the Justice Department completed last year was 740 days, more than double the 345 days in 1992. Last year, the Justice Department completed only 3,656 criminal cases in which tax was the main charge, the analysis by Syracuse University’s Transactional Records Access Clearinghouse shows. No wonder the odds of a criminal tax indictment, while still minute, were 75 percent higher two decades ago.

The Justice Department relies on a law enforcement theory known as general deterrence. The strategy is to bring widely publicized cases to keep people in line. But the IRS criminal division website lists just 79 criminal cases in 2011. Figuring the others requires perusing 90 websites run by local U.S. Attorneys. Many convictions get little or no news coverage, which means zero general deterrence.

Canada, with a ninth of the U.S. population, listed all 204 tax convictions last year at the Canada Revenue Agency’s website. Claude St-Pierre, Canada’s director general for tax enforcement and disclosures, told me that posting all convictions is both a deterrence strategy and an effort to educate Canadians so they do not get lured into tax scams.

Congress should fund more prosecutions, many more, so the Justice Department does not have to reject 40 to 50 percent of criminal referrals by the IRS. Following Ottawa’s lead, the IRS should prominently post every criminal conviction and every request for a civil injunction (a much less expensive law enforcement strategy than prosecution) at its website.

The real solution, though, is to get rid of the archaic, frustrating make-work for 100 million taxpayers whose only benefit is profits for tax preparation firms.

By David Cay Johnston

The views expressed are his own.

A new report from London and President Barack Obama’s statements to “60 Minutes” show financial crimes spreading like wildfire and governments failing to stop them.

Tax evasion equals 18 percent of global tax collections, a new report by British accountant Richard Murphy shows. His report for the Tax Justice Network cleverly lined up a World Bank Report on the size of shadow economies with a Heritage Foundation report on average tax burdens by country to reach that figure.

Murphy’s $3 trillion estimate, 5 percent of the global economy, shows how a combination of weak rules on accounting and disclosure combined with inadequate budgets to enforce tax laws impose a terrible cost on honest taxpayers and the beneficiaries of government service.

While the United States has one of the most effective tax regimes, especially for on-the-books wage earners and pensioners, and one of the smallest underground or shadow economies, it has the largest amount of tax evasion measured in dollars.

Murphy’s report covers 145 countries that generated $61.7 trillion of gross product, 98.2 percent of the world total. The 145 countries had only 61.7 percent of world population, a reminder of how poor the more than 2.7 billion people in the other 90 countries are.

Murphy estimates U.S. tax evasion at $337.3 billion, 10.7 percent of the global figure and close enough to the official Internal Revenue Service tax gap estimates to be credible.

The United States has lower tax rates than eight of the nine other top 10 tax evasion countries. Rampant evasion in America raises doubts about the notion that high tax rates fuel evasion.

WHY NO PROSECUTIONS?

Another sort of financial crime was discussed when Steve Kroft, interviewing Obama for CBS’s “60 Minutes,” cited a poll showing that 42 percent of Americans believe Obama’s policies favor Wall Street. Kroft said he suspects that is because “there’s not been any prosecutions, criminal prosecutions, of people on Wall Street.”

Obama deftly avoided the issue. “Some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal. That’s exactly why we had to change the laws.”

Shame on Kroft for not following up with the obvious question: “Where are the prosecutions of those who did commit crimes, Mr. President?”

There is no need for new laws to rein in fraud, the evidence of which is pervasive, reported in detail by our savviest journalists, thoroughly documented in academic reports and in all manner of official government reviews.

Obama then ever so subtly shifted gears, telling Kroft “and that’s why we put in place the toughest financial reform package since FDR and the Great Depression. And that law is not yet fully implemented…”

Obama’s words neatly conflated two separate issues.

One is atrocious business judgment that should have wiped out the wealth of those who invested in the speculative derivatives casinos. That might have restored Wall Street as a home to investment houses that marshaled capital for productive investments.

The other issue is fraud.

Juries often fail to grasp arcane regulations. A crime so complex that it takes a prosecutor a day for her opening argument invites reasonable doubt. But fraud is something juries do get. Show a jury falsified records and bald-faced lies in disclosure documents, then toss in testimony from insiders who pointed out the wrongdoing only to be told to shut up — or who got fired — and convictions follow.

A GROWTH INDUSTRY

We know this because during the savings and loan crisis two decades ago juries convicted in more than three thousand cases, including more than a thousand major felony cases committed by senior insiders.

The man most responsible for those convictions was Bill Black, a federal banking regulatory lawyer at the time who now teaches about white-collar crime as a professor at the University of Missouri-Kansas City law school.

So has Obama or his Justice Department sought Black’s advice? “No,” Black told me.

Instead Obama leans on Treasury Secretary Timothy Geithner, who was worse than a sightless sheriff when he presided over the Federal Reserve in New York. Geithner not only failed to stop the looting, he actually shut down investigators who were onto the frauds because he said he worried that the institutions he was supposed to regulate were too fragile to withstand scrutiny.

The worst part of this is that the statements of the leading Republicans seeking to succeed Obama, a Democrat, make clear they have no interest in putting Wall Street criminals behind bars either.

Financial theft is a growth industry because of government failures that I would attribute to excessive reliance on the financier class for advice, campaign donations and absurdly well paid jobs for officials between their government jobs.

Will the next journalist who interviews President Obama please press the issue: where are the banking fraud prosecutions, Mr. President? And don’t let up until the president picks up the phone and tells Attorney General Eric Holder he wants a 1,000 or more major felony indictments in the next nine months.