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7/16/14 OT - $$$

Tax evasion in the United States

Under the federal law of the United States of America, tax evasion or tax fraud, is the purposeful illegal attempt of a taxpayer to evade payment of a tax imposed by the federal government. Conviction of tax evasion may result in fines and imprisonment.[1]

Tax evasion is separate from "tax avoidance", which is the legal utilization of the tax regime to one's own advantage in order to reduce the amount of tax that is payable by means that are within the law. Tax evasion is illegal while tax avoidance is legal.

In Gregory v. Helvering the US Supreme Court concurred with Judge Learned Hand's statement that: "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." However, the court also ruled there was a duty not to illegally distort the tax code so as to evade paying one's legally required tax burden.[2]

Occurrence[edit]

The Internal Revenue Service (IRS) has identified small business and sole proprietorship employees as the largest contributors to the tax gap between what Americans owe in federal taxes and what the federal government receives. Rather than W-2 wage earners[clarification needed] and corporations, small business and sole proprietorship employees contribute to the tax gap because there are few ways for the government to know about skimming or non-reporting of income without mounting more significant investigations.

When tips, side-jobs, cash receipts, and barter income is not reported it is illegal cheating because no tax is paid by individuals. Similarly, those who are self-employed or run small businesses may not declare income and evade the payment of taxes.

The typical tax evader in the United States is a male under the age of 50 in the highest tax bracket and with a complicated return, and the most common means of tax evasion is overstatement of charitable contributions, particularly church donations.[3]

Estimates of lost government revenue[edit]

U.S. Federal Revenue Lost
to Tax Evasion[5]
Year Revenue lost
(US$ billion)
2010 305
2009 304
2008 357
2007 376
2006 385[6]
2005 314
2004 272
2003 257
2002 269
2001 290
Total revenue lost: $3.44 trillion

In the United States, the IRS estimate of the 2001 tax gap was $345 billion.[7] For 2006, the tax gap is estimated to be $450 billion.[8]

A more recent study estimates the 2008 tax gap in the range of $450 to $500 billion, and unreported income to be approximately $2 trillion.[9] Thus, 18 to 19 percent of total reportable income is not properly reported to the IRS.[10]

Measurement[edit]

Beginning in 1963 and continuing every 3 years until 1988, the IRS analyzed 45,000 to 55,000 randomly selected households for a detailed audit as part of the Taxpayer Compliance Measurement Program (TCMP) in an attempt to measure unreported income and the "tax gap".[11] The program was discontinued in part due to its intrusiveness, but its estimates continued to be used as assumptions. In 2001, a modified random-sampling initiative called the The National Research Program was used to sample 46,000 individual taxpayers and the IRS released updated estimates of the tax gap in 2005 and 2006.[12] However, critics point out numerous problems with the tax gap measure.[13] The IRS direct audit measures of noncompliance are augmented by indirect measurement methods, most prominently currency ratio models[14]

After the TCMP audits, the IRS focused on two groups of taxpayers: those with just a small change in the balance due, and those with a large (over $400) change in the balance due. Taxpayers were further partitioned into "nonbusiness" and "business" groups and each group was divided into five classes based on total positive income. Using line items from the auditor's checksheet, discriminant analysis, and a scoring mechanism, each return was awarded a score, known as a "Z-score". Higher Z-scores were associated by IRS personnel with a higher risk of tax evasion. However, the Discriminant Index Function (DIF) system did not provide examiners with specific problematic variables or reasons for the high score and so each filing had to be manually examined by an auditor.[15]

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