As tax deadline nears, IRS frets about the missing $95 billion
Everyone, it seems, knows someone who earns a little something under the table.
* The farmer with a pickup full of firewood peddled it all over Georgetown, demanding cash. ''I didn't have any money, so I had to give him a check,'' remembers a customer. ''He said, 'Make it out to cash. I don't want anything with my name on it.' ''
* A Park Service executive recently discovered the price of installing a new freezer can depend on method of payment. An electrician, queried for the cost of wiring a heavy-duty outlet, replied, ''cash or check? Cash? Forty-five dollars.'' That's substantially lower than the going rate.
* Somewhere in the Northeast, a communications engineer says guardedly, there is an ingenious construction worker who moonlights under the banner of Cash Construction. ''That way, the checks are automatically made out to 'cash,' '' he says.
When the deadline for filing income tax returns comes clanging down at midnight, April 15, Americans will have avoided $95 billion in taxes, figures the IRS. That's triple the tax gap of eight years ago - and enough lost revenue to almost balance the federal budget.
''I think it is clear that if your marginal tax rate is very high, the price of honesty grows, let's face it,'' says Vito Tanzi, director of fiscal affairs at the International Monetary Fund and author of a recent book on underground economies. A rising marginal rate means that every added dollar of income will be taxed at a higher rate.
Most taxpayers do little more than grumble when filling out their form 1040s. Eighty percent of taxes due are voluntarily anted over to the IRS.
At the same time, it is clear income tax evasion is not just the province of drug dealers and conniving corporations. Ordinary people are the strongest single group prying the tax gap wider.
Individual business activities comprise the largest category of tax cheating. The IRS estimates 31 percent of the 1981 tax shortfall--$26 billion--comes from such seemingly minor acts as door-to-door salesmen underreporting their income, and moonlighters working weekends for cash.
Taxes not paid on income from drugs, gambling, and prostitution accounts for estimates of how much tax corporations avoided in 1981.
The rest of the tax gap is caused by hidden capital gains, concealed dividend and interest payments, unsupportable deductions, unreported tips, and other such prosaic actions. Six percent - $4.9 billion--is caused by people who just don't bother to file at all.
Has America turned into a nation of artful dodgers?
Most experts do not accuse US taxpayers of growing more overtly immoral. Rather, they paint them as rational beings succumbing to the temptations of changing circumstances.
The buzzsaw effect of high marginal tax rates on extra income is often mentioned as one possible cause. IMF economist Tanzi says rising rates are the main reason the tax-avoiding underground economy has been growing since 1977, under his calculations. But he's not sure the revenue loss figures are accurate, because much underground activity wouldn't take place if the IRS could compel its taxation.
A groundswell of anger at perceived loopholes in the tax code may also force the tax gap wider.
Tax dodgers ''are cheating because they're angry,'' says Robert McIntyre, a director of Citizens for Tax Justice. ''They're angry because they read about GE'' raking in piles of cash by selling its ''leasing'' tax breaks.
A Joint Committee on Taxation report lists other possible reasons for increasing tax evasion: a complex maze of a tax code, frequently changed; holes in the IRS's withholding and information reporting systems; weak, slap-on-the-wrist penalties in some situations; and a general increase in taxpayer sophistication.
And the IRS, for years seen as a tough, Doberman Pinscher of an agency, may be getting a bit long in the tooth. Agency resources aren't keeping pace with a growing paper-work load. Last year, the service examined only 1.84 percent of all income, estate, and gift tax returns.
''The audit coverage has been steadily declining,'' says an IRS official. ''This year it will be an all-time low.''
The Reagan administration's proposed 1983 budget would add 5,225 new IRS enforcement officials--though the IRS says most of the new crew would be set to work collecting delinquent accounts, rather than chasing avoiders. The IRS now has $20.5 billion in such accounts receivable.
How might the federal government squeeze shut the tax gap?
''The single most effective and fairest means of closing the tax gap and insuring high levels of compliance is withholding at the source,'' IRS commissioner Roscoe Egger recently told a congressional committee.
The IRS would love to expand its withholding powers into such categories as dividend and interest income. The administration proposed such a plan in February, but backed off under political pressure.
Instead, a new bill introduced by Sen. Robert Dole (R) of Kansas and Sen. Charles Grassley (R) of Iowa would stiffen tax information reporting requirements. All interest paying instruments--including heretofore exempt Treasury bonds--would have to tell the IRS who was paid how much interest. Brokers would have to report on capital gains from commodities and securities transactions. And tips paid by credit card would be reported to the IRS.
Information reporting is ''one wheel on the cart. It brings you a lot closer to compliance,'' says Edward Maggio, tax accountant at Seidman & Seidman.
The bill would also give the IRS authority to require such reports be submitted on magnetic tape. One hundred percent of magnetic tape reports are checked against the appropriate taxpayer 1040; for information sent in on paper, the figure is closer to 26 percent.
By dumping a new load of forms on the citizens of America, the bill goes against the administration's professed goal of cutting paper work. Indeed, the bill includes a provision of exemption from the Paperwork Reduction Act.
For instance, the tip provision would thump reams of fresh paper on restaurant owner's desks, says Art Miller of the National Restaurant Association. ''They've already got more government paperwork than they can stand ,'' he says.
Last year's tax bill stiffened penalties for businessmen who play what the IRS terms the ''audit lottery,'' by claiming unsupportable deductions and hoping they won't be audited. The Dole-Grassley measure would slap even stiffer fines on such gamblers.
Senator Dole's office estimates the bill would yield $20.4 billion between 1983-85.