Tax Hacks 2012 – Profile of the American Tax Cheat

Picture a person most likely to cheat on their taxes. If what you imagine is an older, rich businessman, you got it wrong. More than likely it’s an egotistical, big-spending single guy in his 40s living paycheck to paycheck.

According to the DDB Life Style Study conducted last year, those are the characteristics of the most likely tax cheater. The survey concluded there are no big income differences between cheaters and non-cheaters, with 42 percent of cheaters describing a paycheck-to-paycheck lifestyle, and 45 percent considering themselves spenders. Cheaters have a higher opinion of themselves than non-cheaters, the survey says – 46 percent think they’re “overall better than most people,” and 52 percent believe they’re “special and deserve to be treated that way.” They’re also far more likely to work under the table while claiming unemployment, lie and ask friends to lie for them, and even take money from their kids’ piggy banks.

Of course, tax cheating isn’t always the product of a character defect – sometimes it’s an honest mistake. In the video below, Money Talks News founder and CPA Stacy Johnson has more on tax cheaters, and talks to a few people who didn’t realize they might be cheating. Check it out, and then read on for more…

Are we a nation of cheaters?

According to the annual taxpayer attitude survey commissioned by the IRS, 84 percent of taxpayers believe you should never cheat, and only 8 percent say it’s acceptable to “cheat as much as possible.”

But apparently those who do cheat are going to town. The IRS computes what they call a tax gap estimate, which shows how much money should be coming in versus how much actually does. Estimates for 2006, the most recent year completed, show an increasing number: In 2001, the tax gap was a staggering $345 billion – in 2006, $450 billion.

While you might get away with failing to report yard-sale profits like Stacy mentioned in the video above, the IRS will notice if the income you fail to report is reported by someone else – like your employer. They also randomly pick people to audit every year, and the IRS is investigating and prosecuting more people now than they have in at least a decade.

That’s just one of several initiatives the IRS has begun to catch cheaters. A speech by IRS commissioner Doug Shulman given last year reveals an expanded “voluntary disclosure” program, where cheaters turn themselves in and pay penalties to skip jail – which often leads to investigations of related people, such as co-workers or professional tax preparers.

The IRS is also forcing professional tax preparers to register and take continuing education courses, and the agency is watching small businesses more carefully. From the speech: “Beginning in 2012, electronic payment processors, including credit and debit card processors, will also be required to make an annual information report to the merchant and the IRS stating the gross amount paid to the merchant during a calendar year.”

If you do get caught cheating, the penalties can be severe. As we mentioned in Tax Hacks 2012 – 6 Scams to Avoid, tax evasion can mean years in jail and a $250,000 fine on top of what you already owe. Many celebrities have found this out the hard way, including recently released “Survivor” winner Richard Hatch, who just lost a court plea to lower his tax payment and reportedly can’t afford an apartment.

So don’t take the risk. Get the help you need and pay your dues. If your income is under $50,000 a year or your age is over 60, you can get free tax help – check out Tax Hacks 2012: 4 Places for Free Help. If you’re filing yourself, don’t skip these 8 Easy-to-Miss Deductions.

What do you think?

Do you think too many Americans cheat on their taxes? Do you think the tax code is unfair? Sound off here or on our Facebook page!