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All RSS Feeds The Christian Science Monitor At tax time, lots of money under table Wed Apr 13, 4:00 AM ET From gambling to painting to child care, not all income gets shared with the IRS. By Ron Scherer, Staff writer of The Christian Science Monitor NEW YORK - Danielle L teaches private swim lessons on Long Island. The $ 30 per 30 minutes she charges is just "a little extra" on the side. Brya n M likes to play poker, and so far this year the student has made abou t $8,000. And painter Jack K charges $600 in cash to brighten a room.
Get Monitor headlines by email What all three have in common is that none of them declares these earning s to the IRS. As of midnight Friday, when most Americans will have filed their taxes, t he IRS estimates there is a "tax gap" of over $300 billion a year, about 15 percent of total tax revenues - money that should be paid but is not finding its way to the US Treasury. That's a lot of cash under the table, golf fees written off as expenses, and inflated charitable gifts. It's equal to 75 percent of the annual bu dget deficit, two-thirds of Defense Department spending, or what the US spends on Medicare in a year. First, the billions that don't come in that should come in further increase the nation's indebtedness and burd ens future generations," Mark Everson, the IRS commissioner, says in an interview. "Secondly, you discourage compliance when someone else is get ting away with it and breaking the law." Tuesdsay, using new IRS data, the Economic Policy Institute released a st udy of tax cheating, or what it termed "Do-it yourself tax cuts." The Wa shington, DC, group called the compliance problem "a crisis in US tax enforcement," and said closing the gap "is one of the best bargains avai lable in economic policy." The problem may only get worse, as an increasing number of Americans beco me subject to the Alternative Minimum Tax (AMT) Some projections sugges t that 35 million people will be paying the AMT by 2010, according to Ni na Olson, the National Taxpayer Advocate. The AMT "discourages compliance," says Mr Everson, "in the sense that pe ople go through a calculation of their tax and at the end we say ... The tax agency audited 46,000 i ndividual returns and then extrapolated how much money was not paid, on a national basis, for all 131 million Americans who file. The tax gap, the IRS estimated, i s between $312 billion and $353 billion The IRS numbers show the bulk of the gap coming from underreporting of in come, such as people working off the books, or taking too many deduction s A smaller portion was due to non-filing and underpayment. The tax mos t often underreported is the individual income tax. The study was a wake-up call for the agency, which increased its spending on enforcement after a period of lower funding for IRS agents. Since 20 01, it doubled its audits of those earning $100,000 or more and increase d its overall audits 37 percent over 2001. And the audits have been succ essful: The IRS estimates that enforcement activities, plus late payment s, recovered about $55 billion of the tax gap. Some of the money recouped came from a crackdown on wealthy people using improper tax shelters. One indiv idual alone owed $100 million, and the average owed involving this schem e was $1 million. There are still 400 people who invested in the tax she lters who chose not to participate in the settlement and another 200 did n't qualify. The IRS estimates it will collect another $300 million from "Son of Boss." More people may be feeling the hot breath of the tax collector on them so on. Congress appropriated $48 million for the IRS to use private collect ion firms in 2006. "All I can tell you is, we are extremely cognizant of the fact that we need to be attentive to taxpayer rights here,," Everso n said at a recent Monitor Breakfast. Even though the IRS i s still analyzing the data, Everson believes the bulk of the tax gap is underreporting of income. Danielle, for example, considers her swim lessons the same as babysitting . "A little kid selling lemonade on the street isn't going to fill-out a W2 form, and I'm not going to tell the government about the swim lesson s," she says. "When I work as a lifeguard or swim team coach for a town I expect to be taxed because it's for an organization." Some who underreport rationalize their actions as the right thing to do. For example, Bryan believes that since poker is not his primary source o f income, he doesn't need to declare the money. "The high-up tournament players get audited sometimes and need to get receipts and recordings of their winnings, but I don't get nervous about the IRS or anything," he says. "I fe el a little hypocritical," says the college student, "because I favor a bigger government in terms of more spending on social programs and healt hcare, but here I am not paying an income tax." But IRS scrutiny does n ot always result in a check to the Treasury. The case started when the IRS was investigating a check-cashing business in Miami. The IRS observed a couple cashing millions of dollar in checks and began to look into their dealings. But the jury determined that the couple were using the check ca shing store legitimately to pay workers in New York City who were painti ng low-income apartment buildings. Courtney Allison and David T Cook contributed to this story.
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