At Work

Crack down on tax fraud?

Several Senators, including our favorites Sanders and Warren are asking the IRS to crack down on large tax cheats. Makes sense … I think. But wait, that’s not where the money is.

The greatest revenue loss is from underreported income; most from individual small and cash businesses.

Once again, off target on trying to fix a problem.

Underreporting Income

There are two ways to underreport income. The first is to tell the Internal Revenue Service (IRS) that you made less money that you did during the tax year; and the second is to claim more deductions, exemptions and tax credits than you really deserve. Underreporting of income is the single largest contributor to the tax gap, making it America’s favorite form of tax evasion. More than 83 percent of the $450 billion tax gap, or $376 billion, is attributed to underreporting of income [source: Internal Revenue Service].

Who is most likely to underreport income to the IRS? According to the non-compliance statistics from 2006, individual filers — not corporations — are the biggest tax evaders, underreporting income by $235 billion, equal to 52 percent of the total tax gap [source: Internal Revenue Service]. Interestingly, the biggest culprits among individual filers are folks who own their own businesses. Underreporting of business income accounts for $122 billion missing from individual income tax returns, while non-business income — normal wages and salary from a job — only add to $68 billion of the tax gap.

https://money.howstuffworks.com/personal-finance/personal-income-taxes/tax-evasion1.htm

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6 replies »

  1. You are correct that the “underground economy” is huge – especially in small town America – I once had a friend who owned a print shop – if he printed menus for a restaurant owner he was paid in gift certificates for meals at that restaurant, etc. – I just had my home re-stained after a devastating hail storm – the painter’s “helper” was paid in cash every day and lives in a multi-million dollar home – a company did repair work on water damage to my mother’s home – the “drywaller” sub contractor was paid in cash and I was told that he had never filed a tax return in his entire life – the list is endless and I cannot conceive of any way to stop it – we can, however, catch the Paul Manaforts and the Trumps so lets do it!

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    • I wonder how the taxpayers end up paying for various welfare services and charity care when they do not qualify for Medicare or Social Security from working under the table.

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  2. My income taxes are pretty straight forward. I always did my own taxes on paper back in the day and now I use software. Back in 1989, my lawyer suggested to use his accountant because I should never do my own taxes. Turns out he exaggerated some of my deductions and charity contributions. The extra money that I got back from what I had figured out just happen to cover his fee. How much of that is encouraged by accountants who know what the red flags are from the IRS?

    I enjoy doing my own taxes because I read how to do them and I know how the things that I do will affect my future returns. I know about possible tax credits and deductions. The are no surprises at filing time. One of the greatest things that came out of the Trump tax cuts is the high standard deduction. For those who have not see the 1040 form 2018 taxes, it is straightforward and looks very different from the past 35 years. There are no more 1040-EZ forms either. It is going to be hard to lie about your deductions for most people because it is hard to reach that $24K deduction for a married couple now.

    Not reporting your income is another story. I wonder about the study on unreported income and how that factors into it. How much is that from people working under the table? How many poor people or illegals are working under the table. The fact of the matter is that I believe that they are the ones who would get back more money with all the income taxes that they paid through the various earned and child credits.

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  3. Years ago I eat in the same restaurant every morning. One day he served Tropicana OJ another day Food Town OJ. I asked why. He said half of his income from the business he bought his food from his food provider the other he and his wife bought at Food Town. This way he only tells the IRS about half of his income. My barber only takes cash? It goes on and on.

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