Why do People Cheat on Their Taxes?

The difference between what the federal government is owed, and what it actually collects is expected to be around $300 billion this year. Why do so many people fail to pay their full tax bill? According to CNBC reporter Stuart Green, it is because Americans do not feel morally obligated to pay the IRS.

From CNBC.com:

Why and how are so many people avoiding what Franklin thought was a certainty?

Much of the gap is the result of good faith mistakes by taxpayers — no surprise given the mind-numbing complexity of the tax code.

But some significant part of the disparity is the result of intentional evasion, non-payment, or underpayment. The question is why. Why are so many Americans willfully and flagrantly violating our tax laws?

he issue is a complex one, but a few key factors can be identified. One is that the norms associated with the duty to pay taxes are surprisingly weak. Most scholars agree that society’s ability to enforce compliance with the law lies less in the government’s power to impose sanctions than it does in the norms by which people direct their lives.

Generally speaking, people refrain from committing crimes not because they fear sanctions if they do, but because they believe it is morally wrong to engage in the conduct prohibited.

In the case of paying taxes, lots of people apparently believe it’s not morally wrong to fail to pay what’s owed. Suspicion of taxes is deeply rooted in our national psyche, going back to the Boston Tea Party of 1773 and the Whiskey Rebellion of the early 1790s.

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4 Bankers Charged with Hiding $3 Billion in Assets from IRS

Four bankers who are part of the Zurich-based Credit Suisse Group were indicted yesterday after allegedly helping American taxpayers cheat the IRS out of $3 billion. Warrants were issued for all four (Marco Parenti Adami, Emanuel Agustoni, Michele Bergantino and Roger Schaerer), who are thought to be in Switzerland.

From Huffington Post.com:

Prosecutors allege in the indictment that the conspiracy goes back as far as 1953. The indictment alleges that as of late 2008 Credit Suisse was maintaining thousands of secret accounts for U.S. customers with as much as $3 billion in assets.

The indictment itself – obtained by federal prosecutors in Alexandria, Va. – does not specify the bank as Credit Suisse, but a law enforcement official with knowledge of the case confirmed the bank's identity to The Associated Press. The official insisted on anonymity because he was not authorized to speak publicly on the case.

Public documents unconnected to the case also identify some of the bankers as Credit Suisse employees.

Credit Suisse itself is not charged in the indictment. But the indictment states that bank officials "knew and should have known that they were aiding and abetting U.S. customers in evading their U.S. income taxes."

The indictment claims the bankers discouraged customers from participating in a 2009 amnesty program offered by the Obama administration, in which U.S. taxpayers could avoid criminal prosecution if they came forward with information on their secret accounts and agreed to pay a penalty.

In the fall of 2008, Credit Suisse began exiting the U.S. cross-border banking business, and the bankers advised clients to transfer their accounts to other Swiss banks that did not operate internationally and were therefore not subject to anything but Swiss law.

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Swiss, German Finance Ministers to Sign Tax Deal

From the Associated Press:

Switzerland and Germany are poised to sign a deal that will make it easier for Berlin to obtain information on suspected tax cheats hiding assets in secret Swiss bank accounts, officials said Wednesday.

The agreement — whose broader purpose is to prevent companies and individuals from being taxed twice — includes a clause to help resolve what has become a long-running and at times acrimonious dispute between the two countries.

Swiss Finance Minister Hans-Rudolf Merz is due to meet his German counterpart Wolfgang Schaeuble in Bern late Wednesday to complete the deal, which requires Switzerland to lift its strict banking secrecy laws in future cases of suspected tax evasion. They will also declare their intention to find a solution for billions of euros (dollars) in untaxed German assets already sitting in Swiss vaults, officials said.

Berlin has long accused Switzerland of shielding German tax cheats by only helping foreign authorities investigate outright tax fraud but not the lesser offense of tax evasion.

Last year Schaeuble's predecessor, Peer Steinbrueck, called for governments to use "the whip" against Switzerland, while his party colleague Franz Muentefering of the center-left Social Democrats said that "in the old times one would have sent in troops" to combat tax havens. The remarks prompted outrage in Switzerland.

Exclusive: IRS Hires "Hundreds" for New Wealth Unit

Following the IRS’s recent announcement regarding the creation of a new wealthy tax cheats unit, they have reportedly already hired hundreds of employees to join the new division. The group is expected to use their skills to identify rich and famous tax cheats who have the ability to hide their money in complex tax shelters. You can find a section of a Reuters.com article discussing the new IRS unit below.

The IRS high wealth unit, part of a broader effort to combat international tax evasion, is focusing on "the entire web of business entities controlled by a high wealth individual," IRS Commissioner Doug Shulman told a tax conference this week.

Another IRS official told Reuters "hundreds" of people have already been hired to staff the new unit, including some from within the agency.

"We have drawn top talent within the IRS that have expertise involving wealthy individuals as well as examination of their related entities," said Mae Lew, an IRS special counsel.

The high-wealth unit is focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals.

While use of sophisticated legal structures can be legal, in other instances they "mask aggressive tax strategies," Shulman said.

Tax authorities in Japan, Germany and the UK have also created similar units.

The U.S. House of Representatives on Thursday approved a $387 million boost for the IRS for the fiscal year that started October 1, in part to fund the high-wealth unit. The Senate is expected to vote on the measure on Sunday.

Expose Tax Cheats' Web of Deceit

Possibly taking cues from California, the New York state tax department is thinking about publishing a list of the top 200 business and individual taxpayers who owe the state delinquent taxes. According to NY Daily News, the tax department is hoping to publish this “Most Wanted List” online to shame them into paying off their debts to the government.

"It's a good idea as a tax enforcement device and we are exploring that," tax department spokeswoman Susan Burns said.

As of April, there were about 1 million outstanding tax warrants totaling $14.4 billion, officials said.

Many are deemed "uncollectible," but tax officials estimate $4.2 billion in judgments are active.

The idea for the list comes from legislation being pushed by Assemblyman William Colton (D-Brooklyn) and Senate Deputy Majority Leader Jeffrey Klein (D-Bronx).

Tax officials say they oppose the law, preferring to enact the measure administratively.

Given the fiscal crunch, the state tax department has already increased its efforts to go after tax scofflaws.

The department can't commit to creating a list until it explores the "resources we need," particularly in a time of fiscal crisis, Burns said.

City to Pay for Informing on Tax Cheats

According to a new article from NBC Chicago, a few cities in the Chicago metropolitan area are going to begin offering financial rewards for citizens who provide information on tax cheats. Although the IRS has been running a whistleblower program for years, it is a new development for local governments. Check out the article explaining the new tax protocol below.

Chicago and Cook County residents aren’t the only ones about to get shocking tax news; the city is debuting a “tax whistle-blower” plan that could turn neighbor against neighbor in Chicago’s business community.

The folks at city hall will pay cash bounties to informants who turn in business tax cheats around the city. The reward would amount to some sort of percentage of the tax money that the city recovers.

"It's just another way of bringing people into compliance," Revenue Department spokesman Ed Walsh told the Sun-Times.

Mortgage Data could Help Catch Tax Cheats

According to a new article on Reuters.com, the Federal government could generate up to $1.4 billion in additional tax revenue by comparing mortgage interest statements from banks, with the deductions taken by taxpayers on their returns.

The Internal Revenue Service uses mortgage interest statements, known as 1098 Forms, to catch tax cheats. But a review of 200 samples for 2005 estimated that the agency may be missing tens of thousands of taxpayers who are not reporting or underreporting their income, the Treasury inspector general for tax administration said in a report.

"A large number of individuals are paying a significant amount of mortgage interest and either are not filing tax returns or are filing tax returns indicating their income is not sufficient to cover their mortgage obligations and basic living expenses," said the report, dated August 6.

"The considerable difference between expenditures and income raises very serious questions about whether these taxpayers have additional sources of income that should have been reported on their tax returns," it continued.

The IRS, in a response included in the report, said it agreed with the recommendation that it make greater use of mortgage interest data to track tax evaders. The report did find that the IRS collected $276 million from delinquent taxpayers based on mortgage data from 2005 returns.

For Tax Cheats, Meltdown Prompts Amnesty Offers

From the Associated Press:

Turns out it's a pretty good time to be a tax cheat.

Desperate to bring in revenue in the middle of a recession, states across the country are adopting tax amnesty programs, offering to let people pay their past-due tax bills with little or no penalties or interest.

"Something is better than nothing," said Dino DiCianno, executive director of the Nevada Taxation Department. DiCianno said Nevada gave up more than $14 million in penalties and interest to collect nearly $41 million between July and October.

Oklahoma, like Nevada, generated about twice as much as it expected from its offer of amnesty, raising $82 million through its 90-day Clean Slate program for businesses and individuals. New York has a program under way, and Connecticut and Massachusetts are drawing up theirs. California debated one before rejecting it in favor of stiffer penalties. Delaware's incoming governor campaigned on the idea. A similar program is being considered for Louisiana when its lawmakers return in April.

State after state is facing a disastrous drop-off in tax revenue because of the stock market collapse and the recession. Many states have already cut their budgets and started laying off employees.

"Anything you can do to speed up cash flow is cheaper than your alternatives, like borrowing," said Verenda Smith, spokeswoman for the Federation of Tax Administrators.

Many states are reluctant to offer amnesty, arguing that its rewards cheaters, discourages honest taxpayers and poaches revenue the states will collect in the future — especially as they improve the databases they use to catch delinquents. They worry, too, that people will hold back on their taxes and simply wait for the next amnesty.

"If the attitude is we're going to hand out get-out-of-jail-free cards, people's attitudes can change," said Paul Warren of the California Legislative Analyst's Office. "You can have a breakdown in compliance."