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Tax-cheat rationale: unfair IRS

You filed an honest tax return, but now that April 15 has come and gone, you may be wondering if many other people were similarly honest.

Chances are growing they were not.

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``Our own studies show that . . . the compliance level is trending downward,'' Internal Revenue Service (IRS) Commissioner Roscoe L. Egger Jr. said recently.

Americans fail to report roughly $1 out of every $10 of income to the IRS, government figures indicate. The unpaid tax on this unreported income, coupled with claims for ex-aggerated deductions and exemptions, now costs the United States Treasury about $90 billion a year in lost tax revenue, Mr. Egger says. Unreported income from illegal activity deprives Uncle Sam of an additional $9 billion or more in lost tax revenues each year, Egger estimates.

When taxpayers are asked to explain why ``other people'' cheat on their taxes, the reason most commonly cited is that the tax sys- tem is unfair, an IRS-sponsored public opinion study shows.

Deteriorating respect for the tax system's fairness and eroding compliance are key arguments for an overhaul of the tax system, reform advocates contend.

``The overwhelming majority of taxpayers eat lunch without being able to deduct their meals as business expenses,'' Deputy Treasury Secretary Richard G.Darman argued in a speech earlier this week. ``They buy baseball or hockey tickets without being able to enjoy the luxury of business-related sky boxes.''

As a result of such apparent tax-system unfairness, Mr. Darman says, there is a growing spirit of ``flat-tax populism'' in the land, whereby individuals want tax ``simplicity for others as well . . . . Their interest in simplification is driven by resentment of the present sys-tem's unfairness -- their sense that others benefit from complexity, whereas they do not,'' Darman said.

He and Treasury Secretary James A. Baker III are working on a revised Treasury tax reform plan slated to be unveiled in May.

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An IRS-sponsored survey published in December found almost 1 in 5 taxpayers admit to having cheated on their taxes. Some 7 percent said they overstated deductions, while 16 percent admitted to under reporting income.

Many people are unwilling to confess they cheat on taxes, researchers say. But their attitudes show that they aren't necessarily opposed to cheating. This probably means that more cheating is going on than confessions alone would indicate, according to Madelyn Hochstein, senior vice-president of Yankelovich, Skelly & White, the company that conducted the public-opinion survey for the IRS.

One-fifth of the 2,200 taxpayers surveyed said they had cheated on their taxes, but ``one-third were receptive to the idea. An additional one-third were strongly opposed to tax cheating, and, importantly, the remaining one-third were ambivalent,'' Ms. Hochstein wrote in the March issue of Public Opinion, a magazine published by the American Enterprise Institute.

While individuals blame the tax code's unfairness for other taxpayers' cheating, the IRS study found different factors more clearly linked to a taxpayer's own willingness to cheat. Mental attitudes rather than income or other demographic factors were the most closely associated with cheating. A ``flexible definition of honesty'' and ``skepticism about human integrity'' -- or the belief that most people are noncompliant by nature -- are the attitudes most clearly associated with noncompliance, the IRS study found.

The IRS is ``on the ragged edge'' of having enough auditors to spot all that potential cheating, Egger says. Starting next year the IRS plans to add to its auditing staff. But this year the agency will audit only 1.1 million -- or about 1 percent -- of the 101.4 million individual returns it expects to receive.

Still, taxpayers should not expect to get away with cheating just because the IRS is short-staffed and has had well-publicized computer problems, Egger said. Given IRS efforts to check tax returns against documents filed by employers and banks, individuals who cheat ``do it to their peril,'' he warned. Chart:Americans' views of cheating on taxes Question: In your opinion, do you feel that cheating on taxes is becoming more common these days, less common, or just about the same as always? More common 54% Less common 5% About the same 41% Question: By the same token, have you ever overstated your deductions -- like medical, charity, or business deductions and so forth -- even by just a small amount? Have overstated 7% Have never overstated 93% Source: Yankelovich, Skelly and White, May-June 1984

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