At tax time, lots of money under table

Some of the money recouped came from a crackdown on wealthy people using improper tax shelters. Last month, for example, the IRS announced it had collected $3.2 billion from a scheme it called "Son of Boss." One individual alone owed $100 million, and the average owed involving this scheme was $1 million. There are still 400 people who invested in the tax shelters who chose not to participate in the settlement and another 200 didn'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 soon. Congress appropriated $48 million for the IRS to use private collection 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,," Everson said at a recent Monitor Breakfast.

Many people just don't feel compelled to pay taxes. Even though the IRS is 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 lessons," 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 of 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.

(For the record, the IRS considers gambling winnings to be income as it does any other form of cash remuneration, which it says must be reported.)

Not reporting her income has made Stephanie P., who works "off the books" for $10 an hour at a real estate office in New York, feel guilty. "I feel a little hypocritical," says the college student, "because I favor a bigger government in terms of more spending on social programs and healthcare, but here I am not paying an income tax."

Large movements of cash often do attract the IRS. But IRS scrutiny does not always result in a check to the Treasury.

For example, last June, a jury acquitted a south Florida couple accused of evading taxes on $10.1 million in income on their apartment painting business. 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. It decided they were cheating. But the jury determined that the couple were using the check cashing store legitimately to pay workers in New York City who were painting low-income apartment buildings.

• Courtney Allison and David T. Cook contributed to this story.

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