WHEN Congress passed the 1986 tax reform act, it required taxpayers to include identification numbers for all dependents over the age of two. Suddenly, 7 million dependents no longer appeared on tax filings. Widespread tax cheating?
It could be. However, it is tough to draw conclusions that Americans do a lot of cheating on their taxes. As the Internal Revenue Service (IRS) itself admits, ``Tax gap estimation is not a precise science.''
In a recent analysis of whether Americans have been complying with the tax code over the past 25 years, Susan Long and David Burnham concluded that the behavior of American taxpayers appears to have been ``relatively stable'' since 1969. Ms. Long and Mr. Burnham, in an article in the trade magazine Tax Notes, also conclude that any attempt to measure a so-called ``tax gap,'' does not provide ``a reliable basis for inferring tax compliance trends over time.''
Even so, one of the goals of the 1986 tax changes was to make the tax code appear fairer so Americans would not mind paying their share of taxes.
There has long been a perception that the United States is a nation of tax cheats. Only seven tax seasons ago, Time magazine ran a cover story, ``Tax Cheating - Bad and Getting Worse.'' Two years later, Massachusetts Gov. Michael Dukakis thought he could solve the budget problem by cracking down on cheaters. And in 1987, a Congressional Task Force, headed by Rep. Byron Dorgan (D) of North Dakota concluded that a ``tax gap'' of $100 billion was ``growing in an alarming way.''
In its most recent tax-cheating study, issued two years ago, the IRS estimated Americans underpaid $84.9 billion in taxes in 1987. The IRS estimated the tax gap would grow to $113.7 billion by 1992. However, as Long and Burnham show, adjusted for inflation and IRS changes, there has been little actual change in taxpayer compliance since 1973.
Still, as Robert McIntyre, head of Citizens for Tax Justice, says, ``There is a lot of money at stake. It means the rest of us are paying more to subsidize those not paying.''
The bulk of the shortfall is underreported income, such as when a plumber moonlights. He gets paid in cash for the moonlighting and does not report it. ``That is the paradigm of noncompliance,'' says a congressional staff member. The second-largest source of cheating is proprietors who pocket cash sales.
Congress, however, is continually finding ways to limit potential cheaters. As a result of legislation, brokers must file information on their customers' stock sales, restaurants must report tips, and alimony payers must report who receives their money.
The IRS will get a better idea of how well the rules work when it completes its latest study of taxpayer compliance. Every three years, the IRS conducts extremely thorough audits of a random sample of taxpayers. From the survey, the IRS gets two measurements: a percentage and a gross amount of dollars that should have been paid in taxes. The IRS then extrapolates what this program means for all taxpayers.