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FOR A FEW YEARS early in my career, I was an internal revenue agent for the IRS. I audited the tax returns of small businessmen, drug dealers, doctors, lawyers, a professional basketball player and everybody in between.
That was 43 years ago, when the IRS was much bigger relative to the population. One result: A larger percentage of the population were subjected to audits.
I saw and heard a lot. Some people would put dogs, cats or imaginary children on their tax returns, and claim an exemption for them. That was when you weren’t required to list Social Security numbers for dependents.
I remember one guy who gave his girlfriend thousands of dollars and had her sign promissory notes, which he promptly wrote off as bad business debts. This also kept his wife from knowing what he was doing.
Another guy started a little business out of his house that never generated any real money. But he wrote off everything as business expenses, including his house, meals out, cars and vacations.
One small businessman didn’t report, in today’s dollars, $310,000 of income. In addition, he paid all his employees in cash, which meant more unreported income. The boss also benefited by not paying the employer’s share of Social Security payroll taxes on their wages. One of the employees got mad at the boss and told on him.
There were more sophisticated tax scams. For instance, at that time, there was a widespread art donation scam and a master song recording scam. I won’t bother you with all the details. But it involved thousands and thousands of dollars just on the one case that I dealt with, which consisted of bogus charitable contributions, along with bogus business tax credits and deductions. This resulted in refunds going to the perpetrators of a well-oiled tax scam machine. Everybody involved benefited at the expense of other taxpayers.
You hear every now and then about the IRS beating up on some “poor” taxpayer in court. When I was an agent, the IRS wouldn’t go to court unless it was 99.9% certain of a conviction. If the IRS was actually taking you to court, you were in big trouble. It had decided it had a slam-dunk case and wanted to make an example of you to others planning the same thing. I imagine it’s the same today. The folks I audited took the wiser course: They paid the tax and maybe a civil penalty.
Court cases sometimes involved tax law that was so ambiguously written by Congress that it could be interpreted in many different ways. The IRS chose one way, the taxpayer another and the courts had to sort it out.
Audits not only catch tax cheats and honest mistakes, but also serve another purpose. Those being audited were a warning to others that the government was indeed at work collecting taxes. This included where the big tax money is—and, by that, I mean large corporations.
My strangest experience came long after I left the IRS. A successful and devoutly religious small businessman started “confessing” to me that he had been blatantly cheating the government out of large amounts of taxes, and had been involving his family. One result was that these family members were eligible for government welfare programs because they appeared to have low incomes.
Why was he telling me all this? I think he wanted me to tell him that it was “okay” and his sins were “forgiven.” I didn’t.
The IRS has been a favorite whipping boy of politicians for decades, resulting in inadequate funding. One result is there are now fewer audits as a percentage of all taxpayers. It sends the message that the politicians don’t care if you fail to pay your taxes. That means a lot of folks—the types I used to audit—are getting away with tax murder. You can’t find tax cheats if you don’t audit them. They’re emboldened, thinking they can do what they want without getting caught.
You should want a strong and well-funded IRS to help drive down national deficits by enforcing the tax laws passed by Congress. A good rule of thumb is that, for every dollar spent on the IRS, we get back $10 in taxes collected.
Ken Begley has worked for the IRS and as an accountant, a college director of student financial aid and a newspaper columnist, and he also spent 42 years on active and reserve service with the U.S. Navy and Army. Now retired, Ken likes to spend his time with his family, especially his grandchildren, and as a volunteer with Kentucky’s Marion County Veterans Honor Guard performing last rites at military funerals. Check out Ken’s earlier articles.
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Count me in the Club also!
I agree with R Quinn, small business owners and unreported tips. Anything where cash is involved. I’ve been an AARP Tax Aide volunteer for 20 years, the IRS gets copies of W2s and 1099s, so that income can’t be underreported without the IRS knowing.
Great piece and I cheered all the way through as a fellow ex-Government auditor working for a highly political agency (in another sector). I knew someone who was quite proud to the family’s small hotel business and playing games with the amount of declared income-they justified it by other unfair taxes and government programs.
I’m guessing AI will improve so it can identify tax return ‘errors’ and automate letters to the taxpayers. This should improve productivity and also identify returns that should be audited (best cases to collect revenue).