Wall $treet Week with FORTUNE's April 8, 2005 program includes a segment on tax cheats, and chances are, you know at least a few of them.

Below are excerpts from the oversight board's 2004 annual report:

The Board applauds Commissioner Everson for his commitment -- in the face of a tide of increasing non-compliance -- to improved enforcement because it is both just and necessary. One out of five Americans now believe that it is acceptable to cheat at least a little on their taxes. However, actually delivering on these pledges to crack down on tax evasion has proven to be a much more difficult task. Enforcement continues to be an ongoing problem. The numbers are still at unacceptable low levels and in spite of some improvements, there is no across-the-board turnaround in sight.

The Board believes that it makes perfect sense from a business perspective to provide the IRS with a modest budget increase so the agency can begin to collect the $300 billion that is left on the table each year. In a recent article, Washington Post financial columnist Al Crenshaw was puzzled why the Administration and Congress "aren't falling over themselves to give the IRS more money. Tax enforcement pays for itself many times over, and it would seem to be a good way to cut the deficit." The Board concurs with this assessment and urges Congress and the Administration to work together quickly to find a solution to this critical resource problem.

The Board is particularly concerned by the alarming data trends found in a number of recent independent reports that confirm suspicions that the IRS is not making significant progress to close the compliance gap.

For example, the General Accounting Office found that 63 percent of U.S. corporations did not pay any federal taxes from 1996 to 2000.

In its "Trends in Compliance Activities Report Through FY2003," the Treasury Inspector General for Tax Administration (TIGTA) painted a mixed picture of IRS Collection and Examination functions. Collection activities showed a continuing modest increase, but examination actions have not returned to pre-1998 levels. Meanwhile, the inventory of delinquent accounts and the total amount of uncollected liabilities continue to grow. And while audits of individual tax returns increased in fiscal 2003 as compared to the previous year, the number of corporate tax return examinations further declined. The overall examination rate is still 57 percent less than it was in fiscal 1988.

According to the Transactional Records Access Clearinghouse (TRAC), "major IRS programs to enforce the tax laws against businesses and corporations are continuing to decline." For example, it also found that audits for business taxpayers were down. Five years ago, three out of every 1,000 returns were audited; in fiscal 2003 that rate dropped to two out of every 1,000 business tax returns. The decline in face-to-face audits for all corporations was steeper: 15 audits per 1,000 returns in FY1999; seven per 1,000 in FY2003. The audit rate for "pass-through entities" also fell; 4.5 audits per 1,000 in 1999; 3.2 per 1,000 in 2003.

In spite of this disturbing picture, the Board recognizes that some improvements have been made. For example, the IRS has been able to put the brakes on the rising collection backlog. TIGTA found that many collection compliance indicators showed improvement in fiscal 2003.

» IRS Oversight Board: 2004 Annual Report (requires Acrobat reader)

Collection re-engineering, which the Board strongly supports, is generating positive benefits such as a 15 percent increase in the number of Taxpayer Delinquent Accounts closed and a substantial jump in the use of enforcement tools, such as liens, levies and seizures.

The decline in face-to-face audits for all corporations was 15 audits per 1,000 returns in fiscal 1999; seven per 1,000 in fiscal 2003. The audit rate for "pass-through entities" also fell; 4.5 audits per 1,000 in 1999; 3.2 per 1,000 in 2003.

Other innovative programs are refocusing resources in key areas:

• To pursue promoters of abusive shelters, domestic and offshore abusive tax avoidance transactions (ATAT), high-income taxpayers, and unreported income, the IRS is focusing resources away from traditional examination functions into key strategic areas.
• To improve its K-1 matching program, which was initially unsuccessful, the IRS redesigned the initiative by making the forms and related instructions easier to understand, simplifying the filing process, and working closely with stakeholder groups to build understanding and support for the program.
• To crack down on abusive shelters, the IRS has increased its use of promoter audits. The IRS has over 100 such audits in progress, and established a Lead Detection Center to centralize and develop leads on abusive tax avoidance transactions.
• To shorten the cycle time on large corporate audits from five years to two years, the IRS is using a streamlined process to identify issues for audit by focusing on materiality and risk analysis.
• The IRS is strengthening its Office of Professional Responsibility, appointing a new experienced director, and proposing tougher penalties on professional standards of conduct. As Commissioner Everson has stated, "attorneys and accountants should be pillars of our system of taxation, not the architects of its circumvention."

In its recent report on the proposed fiscal 2005 IRS budget, the Board warned that proposed staffing increases for both revenue agents and revenue officers will in all likelihood not materialize because the Administration's budget fails yet again to take into account unfunded congressional mandates, such as pay increases, and rising administrative costs. As the Washington Post observed in its April 14, 2004 editorial, "Taxes and 'Terror' ": "The result is that the nation's budget deficit is roughly twice the size it would be if tax collection were watertight and that the strain on honest taxpayers -- the vast majority -- increases unfairly."

The Board further believes that long-range goals should be established for voluntary compliance. Senate Finance Committee Ranking Member Max Baucus has proposed a promising concept to help get the IRS back on track and, in a way that can be measured. The senator called for a 90 percent voluntary compliance rate by the year 2010 -- a 5 percent increase over estimated current levels. His proposal would raise an additional $100 billion each year in revenues -- without raising taxes.

The concept of a numeric goal for the compliance rate has other merits.

The Board believes that setting singular, clear goals can have an energizing effect on the agencies that own them. The IRS is no exception as demonstrated by the 80 percent e-filing goal RRA established. Although it is doubtful that the agency will meet this goal by 2007, no one can doubt the very positive changes it engendered, and the efficiencies and cost savings it continues to produce. Recent reallocations of resources to enforcement are directly tied to the closing of a major paper tax return processing center made possible by e-file growth. Although the updated estimate of the non-compliance rate will not be available until early 2005, the Board believes that similar positive benefits could be derived by establishing a challenging but realistic long-range goal for voluntary compliance.

However, as both the Board and Commissioner Everson have consistently argued, increased enforcement is but one part of the compliance equation. Serious steps must also be taken to simplify the tax code and make it easier for honest taxpayers to comply with it. That means that the IRS must provide improved services to all types of taxpayers and do a better job educating them about their responsibilities under the law. While enforcement is an extremely important tool, particularly when applied to those who willfully evade reporting income and paying their taxes, in the Board's view, it is always the tool of last resort.