TAX FACTS: Enron Report Shows Challenge Facing IRS

Of DOW JONES NEWSWIRES
867 words
21 February 2003
07:30 am
Dow Jones International News
English
(Copyright (c) 2003, Dow Jones & Company, Inc.)

(This article was originally published Thursday)

By Rob Wells

WASHINGTON (Dow Jones)--The investigation of Enron Corp.'s (ENRNQ) tax returns shows in stark terms the difficulty the IRS faces in rooting out complex tax shelters.

Enron prepared 2,486 federal tax returns for its affiliates from 1997 to 2000, according to a year-long investigation by Congress' Joint Committee on Taxation.

Between 1995 and 2001, Enron engaged in a dozen complex tax shelters that reaped $2 billion in tax and accounting benefits, the report said. The company didn't pay any federal income taxes for the tax years between 1996 and 1999.

Enron still is being audited for the 1995-2000 period by a team of 27 Internal Revenue Service agents, economists, engineers and financial products specialists, according to the report.

While 27 auditors may seem a lot, Professor George Plesko of the Massachusetts Institute of Technology said that pales in comparison to the thousands of tax returns Enron has filed over that period. Lindy Paull, the Joint Committee on Taxation's chief of staff, described the government's challenge in stark terms.

"Corporations like Enron have an inherent advantage over the Internal Revenue Service," Paull told the Senate Finance Committee last week. The company "excelled at making complexity an ally."

Enron paid $88 million in fees to a team of sophisticated law firms, investment bankers and accountants - ranging from Bankers Trust to Arthur Andersen - to structure its tax shelters. Enron asserted attorney-client privilege over some tax shelter documents, hindering IRS investigators from getting key documents that would explain the tax shelters, the report said.

Some of Enron's tax shelters resulted in payment of some income tax in the early years and with significantly larger deductions to follow in later years. The transactions involved multiple entities under the Enron umbrella.

Such arrangements make it "exceedingly difficult for the Treasury, the Department and the IRS to timely identify and properly evaluate these transactions," Paull said.

"For any person who tried to review the transaction, if you got out all the deal books that have all the transactions documents in it, there would be no easy way to understand the transaction," she said.

IRS Chief Counsel B. John Williams declined to discuss Enron or any specific taxpayer matter due to confidentiality laws. In a statement, Williams said the agency continues to revise rules to push for greater disclosure of tax shelters and other questionable transactions.

"We are committed to evaluating and acting on that information as soon as it comes to light through promoter registration and audits," Williams said.

Because the IRS audit of Enron remains open back to 1995, it's too early to say what enforcement action, if any, may be brought against the company, said Lillian Mills, assistant accounting professor at University of Arizona who has studied large corporate tax audits.

"They could still be negotiating," said Mills, who emphasized she doesn't have details about the Enron case. "If the IRS has proposed any tax adjustments, the appeal process could still be ongoing."

"I don't think we'll know for a long time because of the privacy of the tax records," Mills said.

The committee investigation said the IRS conducted four audits of Enron beginning in 1990, which uncovered net tax deficiencies of $4.3 million. Future recoveries are uncertain as Enron filed for bankruptcy in 2001.

   IRS Warns About Tax Scams

As the tax filing season kicks into gear, so do promoters of illegal tax scams. The IRS is warning the public not to be conned into falling for any of the common "dirty dozen" tax scams.

"With the tax season in full swing, we're seeing the traditional upswing in tax trickery," Bob Wenzel, acting IRS Commissioner, said in a statement.

Common tax scams include use of offshore transactions, such as a credit card or trust, to avoid paying U.S. tax through false deductions or underreporting of income.

Taxpayers should be wary of identity theft, where shady tax preparers use Social Security numbers and financial information from a client's tax return to apply for loans, credit cards or to remove funds from the client's accounts.

Another scam targets African-Americans, claiming they are entitled to file for tax credits or refunds related to reparations for slavery.

"There is no such provision in the tax law," the IRS said.

The IRS said promoters are pushing an illegal scheme that tells employers not to withhold federal income tax or employment taxes from employees' wages.

"These schemes are based on an incorrect interpretation of tax law," the IRS said.

   Tax Filing Season

The IRS has paid out $54.5 billion in tax refunds through Feb. 14, a 7.8% increase from the same period a year earlier. The average refund is $2,256, up 2.1% from the average refund a year earlier.

All told, taxpayers have filed 26.2 million tax returns, up 6% from the year earlier. Returns filed electronically are up 8% to 22.7 million from the prior year.

-By Rob Wells, Dow Jones Newswires; 202-862-9272; Rob.Wells@dowjones.com

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