Taxes 2011 – Are We a Nation of Cheaters?

Every year since 2002, the IRS Oversight Board has conducted a “Taxpayer Attitude Survey” to determine, among other things, how Americans feel about cheating on their taxes. Here’s one of the questions they ask, along with the most recent results.

How much, if any, do you think is an acceptable amount to cheat on your income taxes?

• A little here and there: 8 percent
• As much as possible: 4 percent
• Not at all: 87 percent

These results differed a bit from the 2003 survey, and show that Americans are less likely to cheat today than they were then. Back in 2003, only 81 percent of respondents said cheating was never acceptable, and 12 percent said a little cheating here and there was OK.

But like the authors of other articles who took these results with a grain of salt (see this story at CNNMoney.com and this one at WalletPop) I too wondered whether we’re all as honest as we claim to be. So I took a camera into the field to find out.

Check out the results in the following news story, then meet me on the other side for more.

As I said in the story above, while one division of the IRS suggests that 87 percent of Americans would never cheat on their taxes, another division of the same agency offers evidence that many do with a highly publicized report called “Reducing the Federal Tax Gap.”

The tax gap

The so-called “tax gap” is defined by the IRS as “the difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time. The tax gap can also be thought of as the sum of non-compliance with the tax law.”

Where specifically does the shortfall originate? According to this 2009 report, 82 percent of 2001’s 345 billion dollar gap (the last year it was reported) comes from a combination of unreported income or overstated deductions.

So, if both of these reports are to be believed, the IRS thinks that the vast majority of us are honest – but that somehow we’re underpaying our taxes by hundreds of millions of dollars.

How the IRS intends to “mind the gap”

If you watched the video above, you saw three people say on camera that they wouldn’t think about reporting the profit they made on something they bought at a yard sale or a small gambling win, because they didn’t know they were supposed to. (The fact is that as far as the law is concerned, you’re supposed to report and pay taxes on any money you make, however you make it: small, large, legal, illegal – all income is taxable.)

The IRS could rely on it’s survey findings that nearly 9 in 10 of us would never cheat, and simply remind us to pay taxes on every dime we made. But studies have also discovered something else: People who’s income is reported for them by those paying it – with forms like W-2s or 1099s – is highly likely to be reported. That’s why the IRS is instituting new ways to increase “information reporting.” Two recent examples:

• Credit and debit card payments to businesses. Starting in January 2011, organizations that process credit and debit card payments for merchants must annually report the amount of these payments to the IRS.
• Cost basis reporting. Starting in January 2011, brokerage firms must report the cost and holding period to the IRS, not just the proceeds from securities transactions.

Another way the IRS is keeping us honest? They’re increasing both enforcement actions (translation: audits) and fines for those who don’t comply.

Bottom line? The IRS is proud to report how honest you are, America. But they’re happy to invest a little time and taxpayer money to make sure you stay that way.