Tax Lawyer's Blog

Tara Siegel Bernard wrote a Column in the Your Money section of the New York Times yesterday in which she considers whether more taxpayers will cheat on their taxes this year because of the bad economy:

With just a few more days to file your tax returns, you may be tempted — especially in this down economy — to shave a little income, maybe, or add a little more to your deductions.

After all, what are the odds of being audited?

Ms. Bernard wonders whether the average American’s tax returns would stand up under the scrutiny given the tax returns of the Tom Daschles, Tim Geithners and Charlie Rangels of the world:

As it turns out, the most recent Internal Revenue Service statistics estimate that about 86 percent of taxes owed are collected.

And of the approximately $290 billion that goes uncollected by the IRS, a big piece can be attributed to inadvertent mistakes, given the complexity of the tax code. But when presented with the opportunity, a large swath of people still seem to forget to report a chunk of their undocumented income.

But who are these underpayers?

The IRS knows:

Not surprisingly, the IRS has studied the issue. And what it found was that the biggest portion of uncollected tax revenue was from people who run cash-intensive businesses and don’t have receipts for all their earnings.

Wage earners, whose employers report every last penny, don’t have much wiggle room.

When Ms. Bernard speaks of “wiggle room” she means, of course, opportunity to cheat.

The IRS’s National Research Programestimates that only 1% of wage, salary and tip income is underreported.

In contrast, it estimates that a whopping 57% of the income from self-employed workers and small businesses (usually blue collar businesses like plumbing, carpentry and painting) is underreported.

So do you think you’re more likely to be audited if you’re a self-employed blue collar worker who files a Schedule C?

We do and we’ve said so here and here.

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