On April 15, millions of Americans will stand in long lines at the post office to file their tax returns. Although usually a law-abiding citizen, the Explainer can't help but wonder: What happens if you get tired of waiting and decide not to file your taxes at all?
Probably nothing. If you're self-employed without any major assets or loans, the odds of getting busted are extremely low. In fact, an estimated 7 million Americans fail to file their taxes every year, and in 2008 the IRS examined only 158,000 such cases. That comes out to a roughly 2 percent chance of getting caught. Even if the IRS does audit you, the agency probably won't press charges. Instead, they'll just file a tax return for you and charge you a fee for the trouble.
It gets trickier, though, if you have a boss or if, for some reason, you end up on the IRS's radar. Businesses are required to file tax forms for every employee. So if an employee doesn't file or misrepresents his earnings, the IRS can spot the discrepancy. Tax evasion can catch up with you if you take out a mortgage for a house (since tax statements are usually necessary) or if you take a government job, like, say, treasury secretary (since the IRS automatically audits all incoming employees). Evasion is also a bad idea if you have enemies: The IRS often snags evaders when embittered spouses or fired employees rat out their former lovers or bosses. Lastly, if you're planning on cheating the government, it's best not to be famous. Wesley Snipes went on trial in 2008 after earning $38 million over five years and paying zero taxes on his income.
There's a difference between paying taxes for a few years, then stopping, and never paying them at all. The IRS keeps records, so it knows if you suddenly stop filing. You'd probably have more luck sailing under the radar if you start cheating from the get-go. But, again, that'll work only if you're self-employed—or, better yet, unemployed.
You should also keep in mind that the IRS can bust you down the line. Yes, there's a statute of limitations for criminal penalties: After six years, you can't go to jail for not paying taxes. But if the IRS ever discovers that you didn't file your taxes in 2008, they can still force you to pay civil penalties.
But, wait—you did stand in line at the post office and you did pay your taxes. What are the chances you'll be audited? Depends on your tax bracket. If you make between $25,000 and $100,000, the odds of getting audited are about 7 in 1,000. That number goes up if you make more money. If you make between $100,000 and $200,000, you've got a 1 percent chance. Between $200,000 and $500,000, the odds go up to about 2 percent. Once you get to the highest income category—$10 million or more—there's a 10 percent chance you'll get audited. The likelihood of auditing also goes up slightly if you make less than $25,000, since low-income earners are more likely to take advantage of the earned-income tax credit. The IRS conducts randomized audits every few years, but that's more about data collection than busting tax evaders.
Of course, that doesn't mean every person in the same tax bracket has the same chance of getting audited. Every tax return gets a score that reflects its audit potential, called a DIF score. The exact components of the DIF score are a secret; otherwise, we would all know how to avoid getting audited. If your DIF score is high enough—i.e., if your tax return has enough red flags—it will trigger an automated audit. (About 80 percent of audits are conducted entirely by computer; the rest of the time you deal with an IRS agent.)
The biggest red flag is high deductions compared with your income. For example, if you earned $60,000 this year and donated $50,000 to charities, the IRS might wonder how you could get by on just $10,000. Or say you have a business that reported $500,000 in income but only netted $25,000 in profits. The IRS might suspect there's more than just a bad economy at work. Your chance of getting audited also depends on the type of work you do. Restaurateurs, for example, have a history of dodging taxes, because they're primarily compensated in cash. Farmers are also frequently noncompliant and thus also have a relatively high risk of getting audited.
Why does the IRS bother with so much auditing? Because it's profitable. The IRS spends about $5 billion a year on enforcement, which includes auditing, collections, and prosecutions. And every year, enforcement brings in about $55 billion in additional tax revenue. That number may go up, as President Obama's 2010 budget provides funding to hire more IRS investigators.
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Explainer thanks Ian Comisky of Blank Rome and Robert McKenzie of Arnstein & Lehr LLP.