Tax cheats cost U.S. hundreds of billions

If you were pretty sure you wouldn't get caught, would you cheat on your federal income taxes?

If your answer is yes, you're far from alone.

An estimated 30 percent to 40 percent of taxpayers cheat on their returns, defrauding the government of some $290 billion a year, according to an Internal Revenue Service analysis of 2001 returns. Some believe the real percentage of tax cheats is much higher.

One of the chief reasons people cheat is because it's so easy, according to three Ohio business professors who looked at why so many normally honest citizens become tax thieves.

The current tax system is based largely on voluntary compliance. Less than 1 percent of returns are audited, so most cheaters are not caught and those who are usually face small penalties, said Joe Antenucci, professor of accounting and finance at Youngstown State University.

"Any gambler will tell you, when you have a high payoff and low risks, that is when you want to be involved," he said.

Financial need is rarely the primary motive for tax evasion, he said, Most tax evaders are easily capable of paying the correct amount of taxes.

He and his colleagues came up with a profile of the typical tax cheat: male, under age 50 in a high tax bracket with a complex return.

The pressure to cheat, Dr. Antenucci said, comes from the big payoff.

"The top tax rate is 35 percent. In this investment environment, people scratch to make a 5 percent to 8 percent return, and there is 35 percent sitting right there."

Another key reason people evade taxes is that it is easy to rationalize, Dr. Antenucci said.

Typical justifications include the idea that everyone does it, the system is unfair so the perpetrator is righting a wrong and the government just squanders the money anyway.

"When people read about a $500 coffee pot being sold to the government, people don't want to pay their taxes," he said.

Dollar-wise, the biggest loss of tax revenue comes from people under-reporting their income, the government says.

The self-employed dealing mainly in cash, such as lawn services, house cleaners, bars and barber shops "systematically evade taxes because the opportunity to understate cash receipts is exceptionally high," Dr. Antenucci and his colleagues wrote in their study, published last spring.

Studies indicate that the most common way to cheat is overstating charitable contributions, especially church donations, Dr. Antenucci said.

With a staggering $290 billion leaking from government coffers, something should be done, he said.

"That's a huge amount of money. People are furious about another $70 billion or $80 billion going to the war in Iraq. Here is four times that amount every year going uncollected."

On the flip side, people also overpay their taxes by some $945 million annually by overlooking deductions, according to the Government Accountability Office. Of course, that's no where near the amount lost to tax cheats.

The professors advocate attacking the problem on several fronts.

First, create a tax system where cheating is extremely difficult. One way would be to switch to a flat tax or national sales tax. Another would be to significantly increase audits and penalties.

Dr. Antenucci acknowledges that implementing either would be unsavory politically.

He said the government also needs to do a better job promoting itself so people have a harder time justifying cheating.

"The government needs ... a mass campaign to educate the public about the good taxes do in a civilized society."

First published on March 25, 2007 at 12:00 am