As the federal deficit widens, taxpayers deserve a system where CEO’s pay their fair share. Yet according to a study by the Congressional Budget Office, America’s working families pay an increasing portion of federal taxes compared with the richest 1 percent.[1] In addition to recent tax law changes that favor the wealthy, there is evidence that the Internal Revenue Service (IRS) could do more to enforce tax collection from America’s executive elite.

In fact, there is evidence that the IRS spends a disproportionate amount of resources collecting taxes from the working poor, while the rich escape tax scrutiny. According to IRS data, one out of 47 low-paid workers who file for the earned income tax credit are likely to be audited. In contrast, the chances of being audited for high-income taxpayers who have more than $100,000 in income is one out of 145.[2]

Reporting profits from stock sales is largely based on voluntary compliance by taxpayers. Knowing there is little risk of an IRS audit, share-rich executives may be tempted to underreport their capital gains. According to a recent study, this form of tax evasion will cost the government more than $250 billion in the coming decade.[3] To help prevent this abuse, companies should report to the IRS the tax basis for shares held by their senior executives.

Executive deferred compensation plans also can be abused by CEOs. These plans allow executives to defer taxes on up to 100 percent of their pay and often receive above-market interest or other preferential treatment. Just before the collapse of Enron, executives cashed out millions in deferred compensation that was supposed to be at risk in case of bankruptcy. Beginning Dec. 24, 2004, these plans are subject to new rules to help prevent abuse, and executives could owe back taxes on improper deferrals.

The IRS also must step-up its audits of abusive tax shelters and executives who reap the benefit of these schemes. The IRS recently settled with executives at 42 companies who improperly sheltered $700 million in stock option gains. The General Accounting Office estimates that 12 percent of Fortune 500 companies obtained tax shelter services from their external auditors between 1998 and 2003, a significant conflict of interest for auditors who are supposed to be watching the books.[4]

The IRS must protect the average taxpayer who plays by the rules and crack down on these abuses.

Send an e-mail to the IRS now.