Tick, tock. The clock is running.

The IRS believes that folks with self-employment income- those who file Schedule C with their 1040- are hiding income. How much? Enough to add $ 125 billion to the US Treasury. (Notice that is the total of the taxes due, not how much revenue is being unreported.) And, these folks are responsible for about 27% of the total taxes not being paid per the law.

These are not really guestimates. The Taxpayer Advocate Service (that’s the part of the IRS that actually serves as a great help to many of my clients who get ensnared in the erroneous ways of some IRS audits) has been examining methods to have taxpayers voluntarily report the proper income to the IRS. (Hmm. So diplomatic. Why not just say: to have taxpayers stop lying and cheating on their tax forms????)

And, what doesn’t surprise me is that the IRS has found that there are geographic regions that are among the biggest cheaters. Where do most of them reside? California accounts for 1/3 of the sites. Georgia and Texas are close behind. Oh- and the DC metropolitan area (DC, MD, VA) are high on the list, too. The five worst cities?  San Francisco, Houston, Atlanta, Washington, DC, and the LA area.  Interestingly, the South Bronx (Mott Haven), West Somerville (MA) and Portersville (IN) are the three most law-abiding communities.

The IRS thinks that folks in these criminally bent (those are my words) communities belong to trade groups, civic groups, and probably religious institutions that routinely bitch and moan about the federal government. So, these are the communities that feel free to cheat the government routinely.

Another interesting fact? If a Schedule C taxpayer was audited (remember that most audits are done via mail, since the IRS budget has been cut and they can’t send around humans to check out everyone) and found to be “clean”… it meant that these folks probably cheated- substantially- over the next three years. How much? They reported 35% less revenue than a control group (similar circumstances) who had not been audited. And, for those who owe money after an audit- their compliance is increased- but the effect diminished enough that by year 5, they were back to their old tricks.

(The IRS thinks this is because the audit inadvertently informed the taxpayer about tactics for legal tax avoidance and illegal tax evasion. Or, maybe, the taxpayer felt persecuted and wanted to get even. I think it’s related to the truism that you will only be audited once every three or four years; otherwise it can be considered harassment- unless, of course, the IRS finds the taxpayer was underreporting or mis-reporting income. Then, the taxpayer is fair game.)

By the way, the IRS’ algorithms are pretty good. Once their computations suggest the taxpayer has unreported income, they effect those correspondence audits. (Only 1.5% of taxpayers are subject to such audits.) And, only 13% of those audited skate without any tax adjustments.

(Hey, there, clients. Read that again. You should be damned pleased that you are employing our services. We’ve only had ONE client over about 5 years who was found to owe the IRS funds during an audit. )

But, to be honest, a lot of the folks who run into IRS problems get there because they just suck at paperwork. (That’s the case for the ONE client of ours- who resisted our demands for changes to his operation for three years.)

Their record keeping is atrocious, they don’t realize they owe quarterly estimated tax payments, they neglect the fact that while they may owe no income tax, they have (substantial) employment tax bills.

Your profits from business may be small enough to not merit that you pay income tax- but the small profit is still subject to a 15.3% employment tax. (There is a credit against that bill- but it is the value to keep in mind.)  And, that’s another place taxpayers come up short- by not realizing they owe income tax AND employment taxes.

By the way, now that the IRS has announced it knows folks are cheating- you can expect those audits to increase in frequency.

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