Posted on 04/13/2005 11:42:59 AM PDT by LibWhacker
At tax time, lots of money under table From gambling to painting to child care, not all income gets shared with the IRS.
NEW YORK – Danielle L. teaches private swim lessons on Long Island. The $30 per 30 minutes she charges is just "a little extra" on the side. Bryan M. likes to play poker, and so far this year the student has made about $8,000. And painter Jack K. charges $600 in cash to brighten a room. It's more, however, if he gets paid by check.
What all three have in common is that none of them declares these earnings to the IRS. And they are not unusual.
As of midnight Friday, when most Americans will have filed their taxes, the IRS estimates there is a "tax gap" of over $300 billion a year, about 15 percent of total tax revenues - money that should be paid but is not finding its way to the US Treasury.
That's a lot of cash under the table, golf fees written off as expenses, and inflated charitable gifts. It's equal to 75 percent of the annual budget deficit, two-thirds of Defense Department spending, or what the US spends on Medicare in a year.
"The tax gap has two implications. First, the billions that don't come in that should come in further increase the nation's indebtedness and burdens future generations," Mark Everson, the IRS commissioner, says in an interview. "Secondly, you discourage compliance when someone else is getting away with it and breaking the law."
Tuesdsay, using new IRS data, the Economic Policy Institute released a study of tax cheating, or what it termed "Do-it yourself tax cuts." The Washington, D.C., group called the compliance problem "a crisis in US tax enforcement," and said closing the gap "is one of the best bargains available in economic policy."
The problem may only get worse, as an increasing number of Americans become subject to the Alternative Minimum Tax (AMT). Some projections suggest that 35 million people will be paying the AMT by 2010, according to Nina Olson, the National Taxpayer Advocate.
The AMT "discourages compliance," says Mr. Everson, "in the sense that people go through a calculation of their tax and at the end we say ... 'just kidding, you really owe $2,200 more.' "
The IRS "tax gap" estimates comes from a three year study called the National Research Program for tax year 2001. The tax agency audited 46,000 individual returns and then extrapolated how much money was not paid, on a national basis, for all 131 million Americans who file. In 2001, all taxpayers paid $1.767 trillion on time - or between 83.4 to 85 percent of the amount the IRS estimates was due. The tax gap, the IRS estimated, is between $312 billion and $353 billion
The IRS numbers show the bulk of the gap coming from underreporting of income, such as people working off the books, or taking too many deductions. A smaller portion was due to non-filing and underpayment. The tax most often underreported is the individual income tax.
The study was a wake-up call for the agency, which increased its spending on enforcement after a period of lower funding for IRS agents. Since 2001, it doubled its audits of those earning $100,000 or more and increased its overall audits 37 percent over 2001. And the audits have been successful: The IRS estimates that enforcement activities, plus late payments, recovered about $55 billion of the tax gap.
Some of the money recouped came from a crackdown on wealthy people using improper tax shelters. Last month, for example, the IRS announced it had collected $3.2 billion from a scheme it called "Son of Boss." One individual alone owed $100 million, and the average owed involving this scheme was $1 million. There are still 400 people who invested in the tax shelters who chose not to participate in the settlement and another 200 didn't qualify. The IRS estimates it will collect another $300 million from "Son of Boss."
More people may be feeling the hot breath of the tax collector on them soon. Congress appropriated $48 million for the IRS to use private collection firms in 2006. "All I can tell you is, we are extremely cognizant of the fact that we need to be attentive to taxpayer rights here,," Everson said at a recent Monitor Breakfast.
Many people just don't feel compelled to pay taxes. Even though the IRS is still analyzing the data, Everson believes the bulk of the tax gap is underreporting of income.
Danielle, for example, considers her swim lessons the same as babysitting. "A little kid selling lemonade on the street isn't going to fill-out a W2 form, and I'm not going to tell the government about the swim lessons," she says. "When I work as a lifeguard or swim team coach for a town I expect to be taxed because it's for an organization."
Some who underreport rationalize their actions as the right thing to do. For example, Bryan believes that since poker is not his primary source of income, he doesn't need to declare the money. "The high-up tournament players get audited sometimes and need to get receipts and recordings of their winnings, but I don't get nervous about the IRS or anything," he says.
(For the record, the IRS considers gambling winnings to be income as it does any other form of cash remuneration, which it says must be reported.)
Not reporting her income has made Stephanie P., who works "off the books" for $10 an hour at a real estate office in New York, feel guilty. "I feel a little hypocritical," says the college student, "because I favor a bigger government in terms of more spending on social programs and healthcare, but here I am not paying an income tax."
Large movements of cash often do attract the IRS. But IRS scrutiny does not always result in a check to the Treasury.
For example, last June, a jury acquitted a south Florida couple accused of evading taxes on $10.1 million in income on their apartment painting business. The case started when the IRS was investigating a check-cashing business in Miami. The IRS observed a couple cashing millions of dollar in checks and began to look into their dealings. It decided they were cheating. But the jury determined that the couple were using the check cashing store legitimately to pay workers in New York City who were painting low-income apartment buildings.
The $600 would get taxed when (if) the painter bought something with it. (Assuming, of course, that his purchase wasn't an under the table deal as well).
I really like your giant yard.
FairTax would catch most of this......
Folks would at least have to consciously go out of their way to evade a retail tax.
As it stands now cash income is essentially ignored and untaxed unless the individual takes an extra effort to track and report it, Just the opposite of a retail sales tax that is collected with purchase and remitted by a certified business.
A Taxreform bump for you all.
If you would like to be added to this ping list let me know.
John Linder in the House(HR25) & Saxby Chambliss Senate(S25), offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright, and provide a IRS free replacement in the form of a retail sales tax:
H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.Refer for additional information:
Sorry, I'd rather stick to a low flat income tax.
You and many others are taking that quote out of context.
When Christ said that, he was pointing out that GOD owned czar, and that everything that czar has is GOD's.
So in other words, czar has no claim to anything, GOD has claim to all.
Unless the painter took the $600 cash and burned it, the Fair Tax will catch it when he spends it.
In a govt. 'Of the people, by the people, and for the people', we 'the people' are caesar with the govt. in the role of servant.
You need to do your homework and actually read H.R. 25.
Yes the money would be taxed when the painter bought something with it, but it would not be taxed when the houseowner earned it.
The transaction not being taxed is the transaction from the houseowner to the painter, it really makes very little difference wether you are not taxint the transaction as painters income or not taxing it as houseowners expense.
She's just a typical liberal.
When the painter takes that $600 to the grocery store, to Wal-mart, hardware store, to the restaurant, to the mall, it will be taxed. Under a retail sales tax, the tax can only be avoided if that money is saved or invested.
2005 Nominee, Dumbest Statement of the Year. ;)
I live in LA and worked one year as a tax interviewer for H&R Block. The musician and actoid types -- the big socialists -- were also the biggest, sleaziest tax cheats we ever saw in there. Any movie an aspiring actoid rented qualified as a deduction in their eyes. Some would just tell us to "make" the deduction in this or that section "bigger". We would comply -- we had to -- but we would tell them that it would be on them if they were audited. We would put notes along with the return on sending them back to the local Quality Control office saying that we gave the taxpayer that disclaimer so H&R would be covered.
If someone paid a painter $600 in cash under the table to paint his house, how would the FairTax catch this?
The painter (whom I assume is not certified as a business open to be monitored) would be paying tax on his purchases for materials as well as taxes on everything he buys in a legitimate business. Same is true of the person hiring the painter.
Only $300B?
How about the whole drug trade?
Tired of people freeloading? Tired of criminals getting a 30% bonus for being criminals?
SUPPORT NRST!
A national sales tax, YES. And at the wholesale level ONLY.
It would "catch" the painter on the spending side, same as you and me. It puts us on equal footing with the underground economy.
Note that most estimates of NRST rates don't tak ethe underground economy into account.
If the 15% in the article is right, NRST could be significantly cheaper than current estimates. I suspect the 15% is low, especially with all the illegal immigrants we have nowadays.
A wholesale tax is call a VAT. It is also applied at retail, in most cases. NRST taxes only retail - it taxes stuff that is consumed.
A wholesale VAT would not extract money from the underground economy.
Have you even read H.R. 25?
There is just something utterly immoral about the idea that every time money changes hands it should be taxed. They really could legally go after kids running a lemonade stand, or kids who get $5 checks from their grandparents. That is just plain evil.
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