How Much Tax Evasion?

So I did not give up my search for the source of the estimate that the incidence of fraudulent tax returns is up by 50%.  I will surrender on that point now.  I can’t find it.  I did find an estimate that the IRS fell short of collecting an amount of taxes equivalent to 2% of GDP in 1992.  In 2010 terms that would mean tax cheats kept $285.12 billion from the US Treasury.  The IRS reports it collected $48.9 billion in “enforcement results” in 2009.  Since GDP has grown only slightly from 2009-2010, it’s safe to assume enforcement isn’t keeping up with the estimates of evasion (even old, out-dated estimates).

To be fair, it appears the IRS is focused on materiality when it comes to looking for tax dodgers.  The recent successes in off-shore tax evasion apparently are just the tip of the iceberg.  The Wall Street Journal suggests the cost to the US Treasury from assets kept off-shore and not taxed is about $300 million a year.  That’s about 10 basis points of the estimated amount of missing taxes, but given the size of the overall numbers and the many ways to avoid paying taxes, that’s probably about as big a bite as one can get out of a focused effort. 

While I didn’t find very much in the way of hard estimates of the cost of cheating there is a ton of literature on why and when people tend to not comply with tax collection.  A study published in The National Tax Journal concludes that “tax evasion falls with higher audit rates, higher marginal tax rates, lower AGI, greater use of wage and salary withholding, reduced use of itemized deductions and exemptions, less inequality, and lower unemployment”  If these guys are right, you can bet tax collection rates aren’t getting better.  With the exception of lower AGI and perhaps higher audit rates, there’s nothing on this list that tracks to the present day situation.  An IMF study discounts the above mentioned factors and says it’s really all about being unable to calculate how likely you are to get caught cheating on your taxes and the uncertainty about the consequences of being caught. I can see the point in all of the above, but most of all I’m remembering now something an actuary friend once said to me, “Statistics are meaningless in a universe of one.”  You can’t predict what’s going to happen to you.



Avoiding New Year's Intaxication

I’m guessing it’s a select group of people who take advantage of the IRS issued 2010 Tax Statistics card.  I snagged this rare gem based on reading an article  suggesting the Treasury Inspector General for Tax Administration believes that fraudulent tax returns have increased by 50% over the past year.  My question was – up 50% from what number?  That’s a big increase, even if the base is pretty low.  Unfortunately as of yet, I do not have the answer to that question.  Still, it turns out that when it comes to statistics about taxes there’s plenty of them out there. 

Back to the big catch of the day --  the Tax Stats at a Glance card.  (Did I mention it’s in color?)  It turns out only a third of individuals filing tax returns last year had itemized deductions.  However, almost 58% of individual filers used a paid tax preparer for their return.   From where I sit, this is very good news. If economic models were correct, then it’s my belief the number of people who pay to get their taxes done would correlate highly with the complexity of their tax return.  However, the good news (if you’re an accountant) is that the belief in the inherent incomprehensibility of the US tax code apparently trumps the reality of a relatively straightforward tax year for an individual taxpayer. 



It turns out a little upwards of 300-thousand individual taxpayers have an AGI (Adjusted Gross Income) of more than $1 million.  California has the highest number of the $1-million plus returns.  Vermont has the fewest resident members of the millionaires club, only 389 residents from the Green Mountain state earned (or rather admitted earning)more than one million greenbacks.  On the other hand almost 25-million taxpayers nationwide received some earned income tax credit. 

Last, but not least – roughly 112 million people qualified for the approximately $324 billion in refunds issued last year.  Which brings me to my end of the year admonition to pay taxes responsibly and therefore avoid “intaxication”.  For those of you not familiar with this condition it is defined as  “Euphoria at getting a refund from the IRS, which lasts until you realize it was your money to start with.”