The Impact Of Tax Cheats

The Internal Revenue Service estimates that, each year, about 16.3 percent of the nation’s federal taxes go unpaid — and that’s after the IRS takes whatever action it takes to try to achieve compliance.  This “compliance gap” leaves a pretty big hole in the federal budget.  In 2018, if all of the federal taxes that were owed were actually paid, it would have meant another $643 billion in revenue for the federal goverment — which would have covered about 83 percent of our ridiculously large federal budget deficit.

celebrity_tax_cheats-624x300Why don’t people just suck it up and pay what they owe?  That’s not a self-answering question.  The Government Accountability Office says there are three main reasons for non-compliance:  third-party reporting issues, reduced IRS budgets and staffing, and the complexity of the Internal Revenue Code.  The first and third reasons involve mistakes — where third parties don’t correctly report what a taxpayer has earned, or has received in a taxable transaction, or where a taxpayer has legitimately tried to figure out what they owe, and simply been wrong — but the second category clearly relates to the ability of the IRS to ferret out, audit, and penalize those who are knowingly cheating.  In short, if you had perfect compliance, reduced IRS budgets and staffing wouldn’t make a difference.  And the lines between the three categories may be blurry, too.  If a taxpayer professes confusion about how to treat a particular source of income but adopts a stretched reading that dramatically minimizes their taxes, is that cheating, or a product of tax code complexity?

So, what can we do to improve the compliance numbers, recognizing that getting perfect, 100 percent compliance is an unattainable goal?  The answer to that question seems to turn on political inclinations and your view of human nature.  Some people, like the author of the article linked above, think that simplifying the tax code would result in a higher compliance rate — an argument that presupposes that people honestly try to figure out, and pay, what they actually owe.  The flip side argues that increasing the IRS budget for oversight and compliance is the best way to promote compliance.  In short, if more people fear they’re going to get caught, it will have a prophylactic impact on a wider group of taxpayers who will choose to simply pay their taxes rather than risk audits and penalties.

There’s undoubtedly merit in both arguments, although being somewhat cynical about human nature, I tend to agree more with the latter camp — but it’s also true that neither of these solutions has much promise in the short term.  Tax simplification has been the Great White Whale of politics for as long as I’ve been filling out 1040 forms, and it never quite happens.  And campaigning for office on a platform of increased IRS funding and more aggressive tax enforcement doesn’t seem like the ticket to political success.

So we’re likely to bump along as we have been, with many people accepting their federal tax burdens, a segment of the population consciously cheating on their tax obligations, and a continually growing deficit because we can’t actually do something about the “compliance gap.”  It makes you wonder:  at some point, is that “compliance gap” going to grow even larger?