How many people try to cheat the IRS at tax time?
That's a difficult question to answer in up-to-the-minute terms because, while the IRS studies the matter closely, it releases data several years after the fact. Recently, the administration released an analysis of 2006 tax collections and found that the IRS collected 83.1 percent of the money the law said people owed, a slight decline from the 83.7 percent collected in 2001. In actual terms, that translates into $450 billion in outstanding collections in 2006. Given that IRS enforcement agents expect to collect about $65 billion of that eventually, the net amount of uncollected tax from that year will be about $385 billion.
It's easy to look at these numbers and conclude that a chunk of the nation's fiscal deficit problem could be solved if everyone paid his or her fair share. Given how $385 billion can multiply year after year, that is a valid assessment. Getting hold of that money, however, is not an easy thing.
The bulk of the problem is unreported income, not people who try to take deductions or credits they don't deserve. The majority of Americans pay most of their taxes — even slightly more, in many cases (hence the annual tax refunds) — through payroll withholding. This is the most effective way for the IRS to collect money. But people who operate sole proprietorships or unincorporated businesses, or who have other income from sources that can't easily be traced or reported, account for much of the collection deficit, the IRS says.
More enforcement alone isn't likely to solve the problem, although it is true the number of IRS compliance officers has fallen over the last 20 years. Nor would it be an easy thing for the government to require stricter reporting. More than 30 years ago, Congress tried to force banks to withhold taxes from interest income, but had to retreat because of public outcry. Americans don't want a greater intrusion of government into their private lives. Businesses don't need more red tape.
Nor is rising delinquency a result of high tax rates. The figures for 2006 and 2001 cover a period in which rates were declining. It would be interesting to see how compliance changed with the recession of 2008 and beyond, but marginal tax rates — high though they may be — remain below levels that would generate a massive underground economy.
One partial solution may be to simplify the tax code, which now weighs in at about 4 million words. The independent watchdog National Taxpayer Advocate said Americans spend more than 6 billion hours a year combined complying with all requirements, or the equivalent of 3 million people working full-time all year.
It may be difficult to argue that most tax cheats simply don't want to deal with the complications of reporting income and figuring deductions. The issues probably run deeper than that. But it is easy to see that an overly complicated system leads to worries about mistakes and breeds contempt.
Regardless of compliance rates, a simplified tax code would be fairer and would generate better feelings about one's obligation to pay taxes. A 16.9 percent delinquency rate — something a bank would find alarmingly unacceptable on outstanding loans — indicates systemic problems.