Steven Barkan, University of Maine
Originally published in the Bangor Daily News on April 14, 2015.
Wednesday is the dreaded Tax Day, the Internal Revenue Service’s filing deadline for 2014 tax returns. Millions of people and businesses around the United States are sending in their returns at the last minute or have done so during the past few months. Nobody likes paying taxes, but they are the cost of a civilized society, as Supreme Court Justice Oliver Wendell Holmes once famously said.
But Wednesday is also the day when millions of people and businesses around the nation break the law by failing to pay the taxes they owe. Tax fraud is a serious national problem that amounts to $385 billion annually, based on IRS data for 2006, the latest year for which the IRS has an estimate of the so-called “net tax gap,” the figure that remains after late payment of taxes owed.
How does tax fraud occur?
The average worker has trouble cheating the IRS even if he or she wanted to because taxes are automatically withheld from paychecks, and most workers have no other sources of income. Most tax fraud thus stems from the failure to report self-employment income and from falsifying deductions. People who fail to report self-employment income come from all walks of life, ranging from restaurant servers who fail to report tips to plumbers and other blue-collar workers to physicians and other white-collar professionals. Because of their high incomes, professionals probably account for a disproportionate amount of tax fraud from unreported income. Professionals also are in a position to falsify deductions that appear to be plausible for them but that would look strange for average workers.
Corporations also fail to pay taxes they legally owe. Corporations’ unpaid taxes amounted to $67 billion in 2006, or almost one-fifth of the tax gap that year. Back in 1991, the U.S. General Accounting Office, known today as the Government Accountability Office, estimated that two-thirds of all U.S. corporations evade taxes by failing to report some of their income.
Some very wealthy individuals and families also evade taxes by establishing illegal offshore accounts. Last month, one of Switzerland’s largest banks agreed to pay a $211 million penalty to avoid prosecution by the U.S. Department of Justice for allegedly helping wealthy Americans to evade their taxes. The federal government is currently investigating many other banks in Switzerland and other nations for similar practices.
Since none of us likes paying taxes, we might not regard tax fraud as a serious problem. We might even secretly cheer the individuals and companies that get away with it. But that would be a shortsighted reaction for several reasons.
First, most do pay their fair share of taxes whether they like to or not, and those that don’t are mocking honest citizens who choose to obey the law. Second, tax fraud is illegal, plain and simple: It is a federal crime, punishable by a prison term of up to five years. Third, tax fraud amounts to an incredible amount of money, as we have seen — $385 billion annually. This figure is almost 23 times greater than the $17 billion annual cost of conventional property crime — burglary, larceny, motor vehicle theft, and robbery (which is also considered a violent crime) — as estimated by the Federal Bureau of Investigation. If every individual and business paid the taxes they legally owe, the $468 billion federal budget deficit estimated for this fiscal year would be reduced by more than 82 percent.
Tax fraud is part of a larger pattern of fraud in other areas of life. We all know about identity theft, which probably amounts to losses to individuals and businesses of more than $50 billion annually. Insurance fraud is estimated to range between $100 billion and $400 billion annually. This figure includes health insurance fraud, much of it committed by medical professionals; arson committed to collect fire insurance; and auto insurance fraud. False claims for auto insurance raise the price of the average premium that honest citizens pay.
So on Tax Day 2015, Americans who have paid the taxes they legally owe should be proud they have done so even if they don’t like paying a penny. Tax evasion is a serious crime that harms the nation and takes hundreds of billions of dollars away from social and economic programs that would help people in Maine and every other state. The individuals and businesses that cheat the IRS may be lining their pockets, but they also are breaking the law for personal gain.
Steven Barkan is a professor of sociology at the University of Maine. He is a member of the Maine chapter of the national Scholars Strategy Network, which brings together scholars across the country to address public challenges and their policy implications. Members’ columns appear in the BDN every other week.