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Wealthy Investors Cheat on Their Taxes Most...
January 24, 2005 5:32 PM

This article reviewing a recent paper from TaxAnalysts.com points out how current tax law encourages cheating by allowing individuals and entities to overstate the purchase price of an asset, thereby reducing the tax liability once its sold. The problem is that the IRS has no effective means of determining the price paid for the asset.

Workers have their wages reported to the IRS, banks tell the IRS how much people paid in tax-deductible mortgage interest, and Congress requires parents to give a Social Security number for each child claimed as a dependent. The working poor are sometimes required to do much more, like producing report cards from schools and affidavits from landlords, to qualify for the Earned Income Tax credit. Yet there's no verification process for capital gains. The authors of this paper conservatively put the cost of these wealthy tax cheaters at $250 billion over ten years.

...and there's more...

Congress has cut overall financing for audits except for the Earned Income Tax credit for the working poor, which critics have said is rife with fraud. But the estimated $29 billion that is lost because of cheating on capital gains is more than four times the highest estimate cited by Congressional lawmakers for losses in the Earned Income Tax credit, most of which the National Taxpayer Advocate has shown is not related to cheating. Math errors and disputes between estranged parents over who may claim a child for the credit account for most of the disputes, and most of those who challenge denials eventually receive the credit.

Since 1997, Congress has given the I.R.S. additional funds to audit the working poor even as it has cut money for other audits. As a result, according to I.R.S. data, the working poor are about eight times more likely to be audited than investment partnerships..

We have reprinted the article from the NY Times on our site.

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