Cheating on Taxes: Common Among Rich and Poor

Every year at tax time, Americans get creative at deductions and expenses.

April 15th in America: Somewhere, someone is probably wondering whether they can write off pets as dependents on their Form 1040.

Someone else is maybe thinking that big-screen TVs count as a business expense. And a surprising number of people are figuring the Internal Revenue Service won't notice if they don't file tax forms at all.

To Republican leaders in Congress the IRS is a band of thugs with pencils. Congressional investigations have indeed exposed IRS abuses ranging from pursuit of taxes that have already been paid, to a chronic inability to provide accurate advice to public inquiries.

But if their behavior is any guide, many US taxpayers really consider the IRS the gang that can't add straight. They cheat often, and imaginatively, on tax forms. Fully 17 cents of every dollar owed in federal taxes is never paid, according to IRS figures.

Given the chances of being audited, which have fallen by half in the last fifteen years, it's surprising that cheating isn't more rampant than it is, say some experts.

"The level of compliance is astoundingly high given the chances of being caught," says Mike McKee, a University of New Mexico economist who studies compliance issues.

The IRS doesn't have much money to study tax compliance issues any more. But a form change made in the late 1980s suggests the extent to which fudging is a US way of life.

In 1987 the IRS began requiring that taxpayers supply the Social Security number of all dependents claimed as exemptions. Suddenly, 7 million dependents vanished from the system.

Of course, it's easier for some people to cheat than others. The vast majority of taxpayers have at least some of their income withheld for taxes by their employers. It's pretty hard to hide income documented by W-2 and 1099 forms.

Cash and retail businesses are where much noncompliance comes in. Handymen, house cleaners, and others who take in relatively small amounts from large numbers of customers find it much easier to cheat than do salaried administrative assistants.

But this does not mean that one economic class is necessarily more compliant than another. The well-off are as tempted to squeeze a few extra bucks out of the system as are weekend baby sitters. The IRS has had much success in recent years prosecuting sports figures for evading the taxes on income earned by signing autographs at memorabilia shows, for instance.

THE fear of audits (besides native honesty) helps keep many Americans on the tax straight and narrow. But in reality, the possibility of having to sit across from an IRS agent and own up to the fact that you don't really have a receipt for that donation to the ASPCA is minimal.

Nationwide, 0.7 percent of taxpayers are audited every year, according to data developed by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University. That's less than half the rate of 1981, when 1.6 percent of total returns were audited.

About 1 in 3 of these encounters was triggered by an IRS computer automatically noticing a questionable mathematical disparity, such as an excessive number of deductions in relation to gross income. Some 23 percent of audits are caused because a related return - say, that of a business partner - is also being scrutinized.

A surprising 20 percent of audits resulted from an individual's decision to not file a return at all, according to TRAC figures.

A taxpayer's chances of being hauled before the IRS do appear to vary according to where they live. Residents of Los Angeles County are four times as likely to be audited as New Jerseyites, for instance.

The IRS says these discrepancies stem from the different taxpayer mix in different areas. But many who study the tax code don't buy this argument, and believe that different IRS offices have different enforcement cultures.

"The larger lesson here is that administration of our tax code is a very uneven and arbitrary matter," Pete Sepp, vice president of the National Taxpayers Union, says of the TRAC data.

Congress is preparing to levy even harsher criticism. Following the success of last year's widely publicized hearings of IRS abuses, the Senate Finance Committee will hold another round focusing on criminal matters, such as IRS raids and seizures gone awry, later this month.

Mr. Sepp says he believes that the IRS probably collects taxes in a fair and even-handed manner 95 percent of the time. But he points out that given the number of US taxpayers that means 5 million people a year will experience some IRS-related problem.

"Over a lifetime of 40 or 50 years of paying taxes, the chances are pretty good that you'll have a horror story of your own some day," he says.