Citing documents provided by an unidentified IRS executive, the Times reported that more than one-third of the 3 million Americans who are late on tax payments have had their cases sent to an inactive file since June 1999, when the IRS decided to stop pursuing them. Last year, 668,018 cases were sent to the file compared to 98 cases in 1998, the documents said.

Some of the cases involved tens of thousands of dollars. But the IRS defined them as too small to pursue given the agency's resources, said David A. Mader, assistant deputy commissioner of the IRS.

From 1992 to 2000, the IRS' staff was reduced from 115,000 to 97,000 while the number of tax returns filed increased by 10 percent. During that period, the number of audits the agency performs fell by two-thirds and seizures of property to pay back taxes declined by 99 percent.

On Thursday, the newly created, independent IRS Oversight Board reported that the IRS budget increase proposed by President Bush is too little to address agency problems ranging from outmoded computers to declining enforcement activity.

The board said in its 24-page report that the agency's budget for the fiscal year that begins Oct. 1 should be $10.2 billion, or nearly 9 percent higher than Bush's request of $9.4 billion.

``It is well known that the IRS is broken,'' said the board's chairman, Larry Levitan, a former partner at Andersen Consulting. ``Service to taxpayers is inadequate and enforcement levels have dropped to a dangerous level, giving the impression that it's easy to get away with cheating.''

The board, created by Congress in 1998 to help manage the IRS, urged lawmakers to approve more than $1.2 billion to cover the next two years of work in modernizing the agency's antiquated computer system. Bush recommended almost $400 million for the 2002 fiscal year for the technology account.

Bush's budget also would result in 1,300 fewer employees hired than the board recommended to end a decade-long staff reduction that has contributed to the sharp drop in audits and other enforcement activities and prevented the IRS from providing proper taxpayer service. At the same time, the board said, demand is increasing for services such as taxpayer education, traffic at walk-in sites and phone calls.

In a written statement, Treasury Secretary Paul O'Neill said Bush's budget ``requested adequate resources to fund necessary IRS improvements.'' It represents a 7 percent increase over the year before, he added.

``I am confident that the amount in the president's budget will allow the IRS to provide America's taxpayers with better quality service and help to enforce the tax law with integrity and fairness,'' O'Neill said.