IRS Audits - We Need More

Everyone hates the IRS.  Who could possibly love them?  People hate the idea of audits even more.  An audit brings to thought nail biting, grand iquisitors, hot coals and bamboo under the fingernails.  The reality is much simpler where most people make an honest mistake and have to rethink their income or deductions.

In a survey, 96% of the respondents agreed with the statement "it is every American's duty to pay their fair share of taxes."  93% agreed that everyone "who cheats on their taxes should be held accountable."  In the same survey, only 62% felt that fear of an audit was why they paid their taxes correctly.  The numbers have only shifted slightly in 2008 to 89% feel you should pay all of the taxes you owe, but it is still a very high margin and even higher margins say the government should punish those found to cheat.

The IRS did a survery in 2001 of 46,000 random returns and found that the tax gap, the amount owed versus what was paid,  was $345 Billion or roughly the same amount as th deficite for that year.  The part of the income that has only 1% error is wages, salaries and tips.  The non-farm proprietor incomewas off by 57% or $57 Billion.  Non-farm income is covered by self employed or owners of businesses.  The problem is that the only person reporting the income for these business owners is the owner himself/herself.  The wage earners have to report income each pay period.  This means that the self employed person has a much higher ability and incentive to cheat.  I am sure we all know of the self employed painter, business owner or restauranteur that doesn't count income/receipts paid in cash. 

Why doesn't the business ower pay his fair share of taxes?  It is the right thing to do according to him and 93% of all Americans.  The reason is that the chance of being audited is so small at less than 0.2% of all individuals.  He/she also looks at the other burdens he faces in state compliance and those are costs that he has thanks to our regulations.

Part of the problem is the "cash" basis that some businesses operate under.  Too many places only accept cash, only record trackable transactions (credit cards and checks), and pay employees on a cash basis to avoid FICA.  Part of the problem is that people feel they pay too much already and are entitled to this "minor" entitlement.

Each of these issues cannot be easily solved by the current system.  It also would not be solved by any "Fair Tax" system where only goods sold would be taxes.  It would immediately cover the cash payments to your help because paying them in cash has no benefit or detriment.   A Fair Tax approach eliminates under reporting income because income is not taxed, spending is taxed, therefore saving is encouraged.

However, it would encourage those businesses that already rely on large quantity of small cash transactions, that they do not report now, to continue to not report them.  They have an even larger incentive to pay in cash because the tax savings is even larger versus the income tax.  It covers that portion of the illegal aliens that pay taxes at regular stores, but it still does not cover those small businesses that under report transactions each year and would encourage more in kind trading, to avoid the onerous sales tax.

The net impact of a Fair Tax should be neutral but it does not impact government spending more money than it takes in, but that is the problem with our current system too.  In times of poor spending, like 2009, the income receipts drop just like they do with the current system, but it might create a magnifier.

So, to get back to the basic Blog, we should encourage more audits, not less.  It will statistically increase the percentage of people that report their income.  The audits should cover more self employed and businesses where it is easy to lie about deductions and income.  Since relying on honesty is not motivational then the only alternative is to rely on fear of an audit.  If people should truly pay what they owe and are agast at people cheating on their taxes, then increasing the number of audits is a good thing.  Collect the money due the government, monitor those places prone to small frequent cash transactions for incorrectly reporting receipts, and force more places to use trackable payment methods.  Then the quote from 1984 will prevail.

"There was of course no way of knowing whether you were being watched at any given moment. How often, or on what system, the Thought Police plugged in on any individual wire was guesswork. It was even conceivable that they watched everybody all the time. But at any rate they could plug in your wire whenever they wanted to. You had to live—did live, from habit that became instinct—in the assumption that every sound you made was overheard, and, except in darkness, every movement scrutinized"

I do feel that more audits makes sense.  It is mentally straining, but it you are honest, you have nothing to fear from an audit.  I disliked my audit, but once it was done, I can appreciate why the audit was triggered and that taxes must be paid.  If I pay my part and try to be honest in my tax reconciliation, I expect the same from everyone else.