Top tax-cheating communities

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If you live in Los Angeles, San Francisco, Houston, Atlanta or Washington, D.C., chances are you know a tax cheat.

That’s not me casting aspersions on the residents of some of my favorite cities. That’s the evaluation of the National Taxpayer Advocate.

As part of its 2012 report to Congress, the Advocate’s office included preliminary results of its survey of Factors Influencing Voluntary Compliance by Small Businesses.

In English, the  Internal Revenue Service’s independent oversight office wanted to know why some small-business owners filed their taxes honestly and others didn’t.

The National Taxpayer Advocate study focused on sole proprietorships, which account for two-thirds of all U.S. businesses. That taxpaying segment also is one which the IRS routinely cites as a contributor to the tax gap, the $385 billion that the IRS says it is owed but which hasn’t been paid.

For the most part there is little backup documentation, referred to as third-party reporting as in W-2 or 1099 forms,  of sole proprietor data included on Schedule C filings. Uncle Sam basically relies on the good faith and true tax filing of these business owners.

In its evaluation of 350 communities across the country and why folks there cheat (or not) on their taxes, those five cities had the largest number of small businesses that were inclined to fudge their tax forms.

Why taxpayers cheat

National Taxpayer Advocate Nina E. Olson cited three key factors that contribute to, in her words, “noncompliance among small businesses”: distrust of government, distrust of the IRS and disbelief in the fairness of our tax system.

“Under our system of government, it may be inevitable that important decisions about tax policy and federal budgeting are sometimes deferred until the last minute,” Olson wrote in the report.

But such a system adds to taxpayer frustration, distrust and ultimately encourages tax cheating.

I’m not talking about attempts to claim crazy tax deductions or push the limits of legal tax loopholes. I’m talking flat-out, stick-it-to-the-tax-man, intentional false filing.

The Taxpayer Advocate agrees. Olson noted in her report that the tax code’s complexity confirms taxpayers’ suspicions that the tax laws are designed to entrap them and obscure what is and is not being taxed.

No doubt some of that sentiment was high this week as taxpayers, both individuals and businesses, rushed to get their tax returns (or filing extensions) to the IRS by the April 15 deadline.

Did you make sure you didn’t cheat the U.S. Treasury out of tax dollars? Have you ever intentionally short-changed the tax collector? If so, why? Was it because you just couldn’t afford the tax bill or was it part of a personal protest?

And more importantly, how can the tax system be improved so that all of us will readily comply and pay all our taxes without thinking about ways to cheat even a little?


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Veteran contributing editor Kay Bell is the author of the book “The Truth About Paying Fewer Taxes” and a co-author of the e-book “Future Millionaires’ Guidebook.”