With tax season in full swing, many are now stressing over the dreaded chore. Yet, as filing continues, we hear about some in positions of power who, either errantly or by choice, fail to pay the same dues. With recent examples such as former Senator Tom Daschle and Secretary of the Treasury Tim Geithner, many begin to question the reliability of the system. To lend an opinion on this taxing topic, Dominick Peruso, associate professor of accounting, business, and economics, shares some of his expertise.
What exactly is the problem at hand?
Tax evasion is fraud. There is something called the tax gap; it’s essentially the tax due vs. what taxpayers actually pay. In 2007, it was estimated that the tax gap was $290 billion. Part of that total consists of underreported income. Which can be something as simple as forgetting to include baby-sitter income. Some of the tax gap comes from people over-reporting deductions. About 90 percent of the gap can be characterized as honest mistakes based on confusion in reading and/or interpreting the tax code. The other 10 percent is fraud.
In your educated opinion, do you feel as though there is more tax evasion among politicians?
I don’t think politicians commit tax fraud more often than the average citizen. It’s just more noticeable because they are in the public eye. Frankly, tax fraud is hard to detect and enforce. The IRS audits less than 1 percent of individual tax returns. The ironic part of recent politicians’ tax problems is that many of them voted on complex tax legislation but failed to correctly account for fairly simple tax transactions.
What is the most common type of tax fraud, inadvertent or not?
Underreporting income. The Tom Daschle issue was a good example. After he lost his Senate reelection bid, he was hired by a friend to work as a consultant for the friend’s company. Additionally, he was given the regular use of a chauffeur. Daschle assumed his friend offered the service as a gift – this was problematic. The cost of the chauffeur service was substantial, and Daschle had to pay over $140,000 in back taxes and penalties. Many tax errors are the result of simple oversights or taxpayer misunderstanding.
Shouldn’t government workers be the most knowledgeable about taxes, thus least likely to commit fraud?
That’s a good argument. On one hand, the tax code is enormous and can be very confusing. On the other hand, taxpayers have a responsibility to get advice or guidance from a knowledgeable tax preparer. The Daschle tax issue was a little more complex, but the Geithner tax problems were simple enough they could have been identified had he completed the question and answer section of Turbo Tax*.
How do the authorities find out, and what happens to violators?
The IRS knows traditional red flag areas: self-employment as hobby income (loss), high investment income (loss), and lots of itemized deductions. They recently tightened up charitable contributions, by requiring proper and additional documentation. This way they can track changes in that area and identify previous fraud. Also, they get information from employers, banks, and other sources of personal information. There has also been a hotline instituted for those aware of tax fraud to call; that has helped greatly.
Should there be harsher punishment for those who violate?
I’d like to see harsher penalties for the most blatant violators. Frankly, the whole federal tax system is unnecessarily complex and costly, which can lead to honest errors. The IRS doesn’t have the resources to properly enforce tax law. As a result, we have the tax gap. Although not popular with my fellow accountants, I’d like to see a simplified and fair federal tax system. Some of the more promising ideas include the flat tax and the so-called fair tax, a national sales tax.
Christopher Bender ’10, Juniata Online Journalist
* When Geithner worked for the IMF, he should have treated his income as self-employment income subject to self-employment tax (i.e. the employee and employer’s share of Social Security and Medicare taxes). The IMF alerts their employees to this responsibility and it would have been easily computed by nearly any tax preparation software. Certainly, a paid preparer would have caught this. Additionally, Geithner claimed a childcare deduction for a summer camp for his children. This is a prohibited deduction. As the new Treasury Secretary, these easily avoidable tax errors will probably compromise his credibility. For detailed information on Geithner’s tax problems see http://online.wsj.com/public/resources/documents/geithnertax20090113.pdf