Smart TaxesSmart Taxes

Would you cheat on your taxes?

Have you ever been tempted to cheat on your taxes, even if by just a small amount? Here's why that's not such a good idea.

By MSN Money Partner Feb 14, 2014 12:34PM

By Allison Martin, Money Talks News

Money Talks News on MSN MoneyImagine living in a nation with no taxes. That sounds like a utopia or a dream. But what we do know is that the Internal Revenue Service, or what I like to call Uncle Sam's headquarters, does not always collect what it's owed for a number of reasons.

Somewhere in the mix are those who cheat the system. Who are those people?

An analysis of IRS data by the National Taxpayer Advocate indicates that potential tax cheats are most likely to be sole proprietors found in the areas around Los Angeles, San Francisco, Houston, Atlanta and Washington, D.C., The Associated Press reports. (If you fit that profile, you're more likely to be audited.)

Of course, you don't have to live in one of those areas to be considered a tax cheat, whether you did it intentionally or out of ignorance.

The sad reality of the 'tax gap'

The 2012 Taxpayer Attitude Survey, released by the IRS Oversight Board a year ago, indicates that a vast majority of Americans have an issue with cheating on taxes: 87 percent of the 1,500 respondents said that behavior is unacceptable. Only 11 percent were tolerant of cheating "a little here and there or as much as possible."

What actually happens when it's time to file? For that, we referred to a Treasury Department analysis (.pdf file) last year of the IRS' last tax gap report.

The tax gap, defined as the "difference between true tax liability in any year and amount of tax that is paid voluntarily and on time," amounted to an estimated $450 billion in tax year 2006 (or $385 billion after late payments come in). Underreporting accounted for an estimated $376 billion, while underpayment and non-filing amounted to $46 billion and $28 billion, respectively.

Considering the total tax liability was $2.66 trillion, the compliance rate was only 83.1 percent (or a net rate of 85.5 percent).

Whether noncompliance is due to ignorance or fraudulent intent, you can bet that Uncle Sam wants his piece of your hard-earned pie.

Taxes © Peter Gridley/PhotographerCommon tax cheats

Any income generated throughout the year is taxable, but many don't comply with that rule. For instance, Forbes says, "Americans report 99 percent of their wage income since they know the Internal Revenue Service is getting that information from their employers on W-2's, but pay only 45 percent of the taxes owed in their non-checkable lives."

While you may fly under the radar for the unreported $40 profit you made when you sold an item at last year's yard sale for more than you originally paid for it, other forms of unreported income may get you into some trouble.

Attempts are also made at writing off items such as commuting expenses to and from work, unqualified business expenses, legal fees, and medical expenses for furry companions to reduce taxable income.

And let's not forget about those who earn a large portion of their income in cash; I'm certain some of the cash is magically unaccounted for at tax time.

The IRS is cracking down

The IRS has stepped up its effort to detect the underreporting of income, particularly by small businesses. While you will more than likely not be singled out by Uncle Sam, I want to wish you the best of luck if you are selected for extra attention.

The IRS does not disclose how it selects audit candidates, but there are red flags   that can make you stick out like a sore thumb -- some of which suggest you are hiding income or taking deductions you're not entitled to.

So, it's important to protect yourself by:

  • Accurately reporting all income, even if you are paid primarily in cash.
  • Seeking free assistance with your return if needed.
  • If you feel you must hire a professional to prepare your tax return, selecting one who's honest and experienced.

It's also important to note that being victimized by a scam does not necessarily get you off the hook; you are still the one to blame until the IRS decides otherwise.

Hefty penalties await those who cheat

If you are caught cheating Uncle Sam out of what he is owed, whether through dishonesty or ignorance, your wallet could take a beating. The IRS assesses a penalty of 20 percent of the net understatement of tax for "substantial understatement" and "negligence or disregard of the rules or regulations" violations.

On the other hand, frivolous returns are subject to a $5,000 fine, and civil fraud penalties amount to 75 percent of the understated outstanding tax liability and could result in criminal prosecution.

While it may be tempting to cheat on your taxes to save money or get that large refund, it definitely isn't worth it. And if you do decide to test your luck, you may find yourself among that 1 percent whose returns are audited.

More on Money Talks News


Feb 14, 2014 9:17PM
Did anyone send this to Al Sharpton? He never pays his taxes and as a result he is more than $4.5 million in arrears to the U.S. and New York State.  The question is how does he get away with it? They certainly would not let me get away with it, but then I am not a Democrat, not a Reverend, not a political, liberal hack, and well, lets face it, not a minority.

But one thing he is that I am not, he is a hypocrite. He has his mug on TV 5 days a week complaining how the rich do not pay enough and he is getting away with making millions and paying nothing. That is a hypocrite.

Oh well that is the new democracy under Obama, "one nation, under socialism, with liberty and justice for some".

Feb 14, 2014 3:15PM
Would I deliberately cheat, NO.

Would I take advantage of the tax breaks available to me, Damn Right.
No @$&@! Don't cheat.  Go after the guy stealing 1 million and leave the guy and his 40 dollars from the yard sale alone
Feb 14, 2014 3:17PM
Of course I WOULDN'T cheat on my taxes.  I will however take advantage of any deduction Congress is stupid enough to put into the tax code.  If they straightened out the tax rules and made them fair and equitable for everyone, the government would make plenty of money to operate on - provided, of course, that they are realistic in their spending!!!
Feb 14, 2014 3:59PM

The politicians wrote into tax law a guarantee that they can cheat on taxes all they want without penalty.

No sitting congressman or senator can be audited.

Feb 14, 2014 5:41PM

Do as I say, not as I do!  Bunch of theives and morons!  We have heard it before....."Let them eat cake!"  Signed "The Middle Class!"  I can't wait until people say enough is enough! 

I would NEVER cheat on my taxes.... I feel it is my obligation and duty as a God fearing American citizen to promptly pay my fair taxes in support of our great nation and freedom.

[and I just wanted to say hi to the NSA people who are monitoring this site so the IRS people can take a day off]

Feb 14, 2014 2:49PM
the IRS is a criminal organization.  If you question obama you get put on the special list for the IRS to scrutinize.  They are thugs and thieves.
Feb 14, 2014 9:28PM
Does lying about your income to receive benefits from the government , cheating on your taxes? Well 50 million democrat voters don't think so.
Feb 14, 2014 7:05PM
How many wanted to comment but didn't because they were afraid that the IRS was watching?
Feb 14, 2014 3:06PM
Cheat on my taxes?  Not with the thugs of the IRS/NAZI SS watching.
Feb 14, 2014 7:44PM
Only the iRS itself cheats and gets away with it.
Feb 14, 2014 2:43PM
Feb 25, 2014 7:16PM
I am sitting here looking at an article by Ed O'Keefe that I save from some years back stating that Federal employees owe 1.03 Billion in unpaid taxes. It states that 10.6 million is just owed by congressional staffers. Now why can't they get this? because government and their cronies are thieves. Should you cheat on your taxes. HELL YES! Do I cheat on my taxes? HELL NO! I'm too scared to even take an office deduction because regardless if I were even perfect, the government can sit there and screw you and cost you thousands in time and money defending yourself for nothing. I remember my father being audited years ago. I IRS agent was a real A-hole. After wasting nearly a weeks time we were "owed" less than $20. The agent told my father to file an amended return and my father said forget it as it was nothing more than an additional waste of time. My business partner made a IRS mistake that was caught and the IRS said to send them $3,500 and they would forget it. My Business partner got the correct paperwork and recalculated and owed then less than $300. THE GOVERNMENT IS NOTHING BUT THIEVES WHO WASTE OUR MONEY!
Feb 15, 2014 9:56PM
I'm in the highest tax bracket but I don't cheat on my taxes.  I don't appreciate anyone that does cheat for that matter.  They are just robbing the honest taxpayers.   I certainly maximize all legal deductions
Feb 14, 2014 10:21PM

Taxation loses effectiveness at both extremes. Overcomplicate it and people cannot understand it and pay for an overgrown and expensive tax organization. Oversimplify it and people consider it unfair and grow bitterly resentful. The simplest is a flax tax, in which every individual pays the same amount, but the unfairness of treating rich and poor alike in this way is too evident to overlook.

Isaac Asimov (1920 - 1992)

Feb 25, 2014 6:30PM

No...... I report everything but I also want to take every deduction I'm entitled to.

Feb 14, 2014 5:34PM
The national debt will NEVER be repaid.  So, it could be argued: Why collect any taxes at all?  The answer is that taxation is a device to create a false hope to suckers who buy government debt.  If suckers can be shown that there is an agency in place to collect taxes, they are more likely to believe that they will one day be repaid.
Feb 14, 2014 2:33PM

Yes...  If I was looking to go to work for the government.

Feb 14, 2014 3:11PM
talk to warren buffett, i'm sure he's got lots of ways to ummmm....under report...
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