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In about a third of the audits, the taxpayer gets off clean. The rest almost always produce an increase in his tax—last year amounting to $2 billion. The IRS claims that it is not vindictive and only wants to get its money, but it cannot shake the conviction of many investigated taxpayers that an auditor is judged by how much more money he can dredge up.
If the taxpayer is caught, he can usually escape simply by paying up, with 6% interest. Better than 98% of all challenged returns are resolved without going to court; last year only 764 citizens suffered criminal tax convictions.
Canine Dependents. The most common form of chiseling is the phony dependency claim. Some taxpayers simply make up names; others list more children than they really have. Still others claim dead relatives, cats and dogs as dependents. Business deductions run a close second in disputes. This year the taxmen are keeping a closer eye than ever before on entertainment and travel deductions, and the Administration is seeking legislative repeal of the so-called "George M. Cohan rule." Deciding a tax suit filed against the free-spending Broadway actor, a court ruled in 1930 that the IRS had to accept his word that some entertainment deductions were part of his business, even though he could produce no receipts or records. The ruling has hampered the IRS ever since in its efforts to corner businessmen with heavy expense-account deductions.
For every tax cheater, there is at least another taxpayer who ends up paying too much, either out of timidity, ignorance, or failure to take full advantage of the tax laws. Many taxpayers do not read far enough to realize that they may be entitled to a 4% credit on dividend income.
Consultants feel that most taxpayers do not deduct enough for medical expenses, and that they seldom make an attempt to document losses due to floods, storms or fire. Still others forget to deduct for insurance payments, excise, taxes, sales taxes.
Even the man who wants to throw out furniture can turn it into a tax benefit. By donating furniture or clothes to a thrift shop run by a charity (there are 36 such shops in New York City alone) he can deduct the fair market value.
The taxpayer is more likely to get into trouble for what he puts on his return than for what he omits. The Service estimates that more than $24.4 billion in income went unreported last year, representing about $4 billion in tax money. The sole proprietor—the doctor, lawyer, farmer or small businessman who keeps his own records and is often paid in cash—is the chief offender in failing to report income.
Ceaseless Search. The search for clues to such offenders never stops. Many IRS agents spend much of their time scanning the newspapers, carefully clipping anything that might point to a suspicious tax situation: a gossip-column item that a movie star has bought a yacht, a crime story reporting the discovery of a heroin cache, a doctor's indictment for malpractice. The Service also gets help from tips by informers, who are frequently disgruntled employees, wives or girl friends. Last year the IRS collected $12 million as a result of informers' tips, paid them $522,000 (they get up to 10% of the reported tax). Some taxmen now check on the informers themselves, on the theory that if they know so much about such dealings they may at one time have played the game themselves.