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COLUMN from DEAN ALEXANDER: This Installment / IRS Numbers and What They Mean — Part 1

By Dean Alexander

April 23, 2012. I would like to select some newly published statistics and venture into some social interpretation of who we are based on the numbers.  The numbers, such as how many people file, how many comply with the law and percentage of wage earner to business income are examples that will shed light on how we live and who we are as a people.

But before I do that I would like to comment on the new tax agreement passed by Congress to the extent that it affects wage earners.   Wage earners may have to fill out a new w-4 with their employer in order to reflect the reduction in social security taxes taken out from the employees. 

As many may know by now, the new tax agreement will reduce the social security rate from 6.2% to 4.2%.  That equates to a reduction of about $80 a month in taxes if you are making fifty thousand dollars a year.

Now let us have some fun with IRS numbers: I will put the number up, then make a comment or a question.  Here we go: 

The IRS says that in 2008, we filed 142.5 million returns.  

We are a country of 300 million people including the children.  It is unbelievable to file that many returns.  To file such large numbers means one of three interpretations: we are as a people extremely conformist, we are believers of public duty, or we are behaving under a typical phenomenon of advanced economies. 

Third world countries and less advanced economies such as Greece suffer from notorious non compliance with income tax filings.  Many of those countries tap into the American experience (for good or for ill) to improve the tax compliance regime.

We may want to believe that we comply because we want to dispose of our civic duties.  But some studies show otherwise.  A published study by Kim Bloomquist, Internal Revenue Service, found that matchable income such as income reported on the 1099 has a higher compliance ratio than non-matchable income. 

To illustrate this point, suppose that you are a house painter.  People either pay you cash or by check.  At the end of the year you either report the full income if you want to play by the rule or you may report part of the income.  Many taxpayers don’t report the cash part of their income.  They know that the IRS does not know how much they made that year. 

But suppose that you painted a building owned by Exxon.  Exxon sent you at the end of the year a 1099.  Now we realize that the IRS knows exactly how much you made because Exxon sends a copy of this 1099 to them.  The IRS now knows for sure that you will report every penny Exxon paid you because the income is verifiable or matchable.  That is why the matchable income compliance gets a higher ratio of reporting than the non matchable income. 

So much for the good citizen.   We operate out of fear, not out of certain romantic beliefs.  We cheat when we can.  We will file if we know we may get caught.  It is human nature, at least as some philosophers or theologians such as Saint Augustine would have it, we are all sinners.