Yet another pillar of my community has been indicted, this time for failure to pay taxes for 4 years, to the tune of only a little over $1MM — not even enough to really make a difference in lifestyle. Indictment means criminal. Why would this person risk it all for this? (Photo is Leona Helmsley, just for illustration).
Quite naturally, like everything else in life, I went on line for the answer, this time to SSRN the source of all knowledge and wisdom. SSRN sez:
Coleman, Stephen,The Minnesota Income Tax Compliance Experiment: Replication of the Social Norms Experiment(November 1, 2007). Available at SSRN: http://ssrn.com/abstract=1393292
The paper reports a repeat of a previous study demonstrating that when the state tax authorities notify taxpayers that most people pay their taxes, people want to fall in with social norm compliance and pay up. Here’s the paragraph that had a modest effect on taxpayer compliance in Minnesota:
According to a recent public opinion survey, many Minnesotans believe that other people routinely cheat on their taxes. This is not true, however. Audits by the Internal Revenue Service show that people who file tax returns report correctly and pay voluntarily 93 percent of the income taxes they owe.
Yet, this doesn’t get to the point: rich people don’t have that social norm compliance. And, they can easily hide their income because it is mostly not from wages. (See “Rich Cheat More on Taxes, New Study Shows. . . )If you have businesses, rents, capital gains, and all sorts of trusts, it’s easier to bog things up than if you’re a straight salary schmoo.
Although plenty of wealthy folks are tightwads, why would someone risk their freedom for such a small amount of money? Social norm compliance? But how do they know what’s the social norm? Who passes along this information, that, “it’s not tax fraud, it’s tax avoidance, and who doesn’t like Bermuda or Lichtenstein?”
Likely suspects: brand name professional firms, the law firms and accounting firms, cow-towing to their clients so they don’t get fired. It’s social norm compliance among the service providers. You don’t want to be the only one advising your client not to have “an aggressive tax-minimization strategy” or “planned stock sales” or any of the rest of it.
I agree that it’s social norm compliance, but here, the lever seems to me to be on the service providers that the wealthy folks rely upon, rather than the taxpayers themselves.
A friend of mine once said: “I’m married to a wealthy Republican lawyer, so of course we pay no taxes of any kind.”
Maybe that’s what happened here — Plus, I guess 4 years ago (when this individual allegedly stopped paying certain kinds of taxes) there wasn’t much in the IRS enforcement budget.