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The answers to the first two questions are known only to those persons at the IRS responsible for determining the extent and scope of audits. The answers may have something to do with resources, and may have something to do with perceived audit needs in other industries. There may have been empirical evidence indicating that noncompliance by other taxpayers was increasing at an alarming rate. The answers will not be known until someone, somehow, persuades the IRS to inform the public. Until then, it's a matter of guessing.
The answer to the third question is impossible to determine. Even the IRS doesn't and cannot know. It is possible that in the course of a tax audit, the IRS would discover that Madoff or someone acting as he did had recycled dollars in a Ponzi scheme. It is also possible that this would not have turned up. Perhaps, if the IRS did discover something sinister, it would have passed the information along. That is a guess, but it is probably a very good guess. The IRS does have a history of cooperating with the Department of Justice when criminal behavior comes to light through tax audits. On the other hand, whether it would send information to other agencies, such as the SEC, is a more difficult question to answer.
For me, there is a fourth question. It is the product of my increasingly cynical mind, the mind that sees relationships woven among life's patterns. Is it mere coincidence that during the same time that federal regulators were backing off close supervision of the financial services industry, the IRS also began backing down on the number of audits of that same industry? Could the industry's representatives and lobbyists have been so effective in their "get government off of people's back" campaign that there was a government-wide retreat? How can lobbyists be that effective? Do they speak with golden tongues? Do they make arguments so effective that no one ever, ever could deny that non-regulation of the financial services industry is the best ever thing for the American economy? Did they engage in behavior itself no less criminal than much of what transpired behind the closed doors of a loosely and perhaps phantomly regulated industry?
Hindsight is so amazing. I wonder how many people who were sucked into the "minimize or eliminate government, end taxation, give us freedom" movement now think to themselves, "Hmm. Who got the freedom from this deregulation and what did they do with it? Perhaps they decided they were now free to hoodwink and defraud the typical citizen." Much like the folks in the town that reduced taxation due to citizen pressure and then found itself in turmoil when reduced revenues required laying off half of the police force, to the consternation of the citizens, Americans may be discovering that the pied pipers of reduced taxation and deregulation masquerading as freedom were thinking not of the nation or their compatriots, but of themselves. Perhaps more IRS audits would have made a difference. Perhaps not. Perhaps the SEC and the other relevant regulatory agencies could have and should been more diligent in their examinations of the industry's activities.
Isn't it interesting, though, how, when things turn out badly, there's an implication that the IRS should have done more to prevent the problems. Yes, the IRS, that agency so despised. Despised, of course, until people begin to figure out that perhaps it really isn't their enemy.
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