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Cheating the Tax Man

Every year, the Internal Revenue Service collects trillions of American tax dollars to line our country’s coffers. In 2007, the IRS reported, income taxes accounted for about $1.1 trillion, which was 46 percent of the total. While we may grumble and moan about filing the papers that fund our democracy, according to the IRS’s 2008 taxpayer attitude survey, 72 percent of Americans believe paying taxes is our civic duty. And the top reason they give for promptly filing their tax returns is “personal integrity.”

The majority of US citizens, 1 in 1.5 (67 percent), appear to put that integrity on display each year by filing a federal income tax return.

But the numbers don’t add up. It turns out answering a survey is a lot different from actually sending money to the IRS. Even though most people say they’re against cheating, in 2001 the IRS came up short by about 290 billion dollars. It estimates that a full 30 to 40 percent of people are fudging their filings.

The most common way people cheat is by overstating their charitable donations—especially to their churches. But the biggest blow money-wise that the IRS takes each year comes from people underreporting their earnings. That’s difficult for salaried employees, since companies keep track of what they’re paid. But self-employed taxpayers have no such oversight. Such small-business owners often deal in cash, making their true income difficult to track. A 2006 study by the Commerce Department found tax cheating by such unincorporated businesses was the government’s biggest revenue loss. It seems everyone from landscapers and house cleaners to barbers and bartenders has a hard time resisting the pull to keep a little extra for him—or herself. Percentage-wise, the study said, farmers are the worst offenders, failing to pay 72 percent of the money they owed.

That doesn’t mean you’ll find many tax-evading farmers in jail, though. The odds of not being caught are distinctly in their favor. Only 1 in 99.06 individual income tax returns end up being audited by the IRS. You have a similar chance of having a flight canceled during a May vacation (1 in 97.33) or, if you’re a Major League Baseball fan, of cheering for the Washington Nationals (1 in 97.36). Of course, how much you make matters. While only 1 in 56.62 Americans making $100,000 a year is audited, the number jumps to 1 in 10.81 for those making a million dollars or more.

If those odds help tempt tax cheats, once the IRS calls for an audit and initiates a criminal investigation, the chances aren’t nearly as promising. 1 in 1.35 (74 percent) adults investigated for tax or financial crimes is referred for prosecution—after which 1 in 1.09 (92 percent) is formally indicted. Once sentenced, the odds of spending time in jail are 1 in 1.24 (81 percent).

But you don’t have to do anything illegal to work the system. Many taxpayers simply get creative with their deductions to keep more of their money. A dairy farmer from Erie, Pennsylvania, wrote off an African safari as a research trip, since his dairy used wild animals in its advertising. And a professional bodybuilder counted his body oils as a business expense. Turns out those deductions were legit, which means there’s a fine line between cheating on your taxes and finding a loophole that keeps you in the ranks of the “law-abiding.”

By Adam Hinterthuer for Book of Odds