Biggest tax cheats? Lower income investors

And Tax Cheat Week on the ol’ blog continues.

The latest installment comes from a Congressional committee that says when it comes to reporting capital gains income, the biggest tax evaders are folks in the lowest income tax brackets.

Say what?

That’s not just my reaction. That was the response of Rep. Rahm Emanuel (D-Ill.), who had asked the Joint Committee on Taxation to compile stats that would help in his effort to crack down on tax
cheating.

Investment earnings are a major tax-evasion area of concern, since the IRS essentially takes the word of taxpayers in reporting how much profit they make on asset sales. Sure investment firms and financial companies send the IRS copies of 1099s showing how much a taxpayer got when he or she sold an asset. But there’s no comparable documentation for the asset’s basis, which is key in calculating taxable profit.

Washington wants to change the capital gains honor system.

The president’s fiscal 2008 budget includes a proposal that would require brokers to report basis information to taxpayers and the IRS. If approved, the reporting change would affect publicly traded
stocks, mutual fund shares and securities purchased on Jan. 1, 2009, and later.

This is one tax law change proposed by W that is supported by lawmakers on both sides of the aisle. In fact, some had proposed the change long before it made it into the latest budget document.

If the Joint Tax Committee is to be believed, then the brokers would only need to keep track of such info for their poorer clients. According to a story in today’s New York Times, the Committee’s acting chief of staff, Thomas A. Barthold, wrote a letter to Emanuel contending that "the majority of the dollar amounts
of underreported capital gains income from securities transactions" were among people in the 10 and 15 percent tax brackets.

Yeah, right.

The story says that a third of all investment sale profits are earned by just 10,000 or so taxpayers. At the other end of the earnings spectrum, taxpayers who make less than $50,000 account for 3 percent of investment gains. But it’s those 50K folks, insists Barthold, who are cheating the Treasury out of millions.

The JTC chief pointed to an IRS tax-cheating study, based on 2001 data, which included the previously unknown data on the extent of cheating is by low-income filers. According to the Times, the Committee’s internal research into this area corroborated Barthold’s conclusions.

Figures notwithstanding, joining Emanuel (and me) in the incredulity corner is Rutgers University business professor Jay A. Soledad.

Soledad, who has conducted his own studies on tax cheating, does not dispute that many taxpayers fudge investment earnings. But he told the Times that the Joint Tax Committee’s findings as to which segment of taxpayers cheats the most seem "mathematically impossible."

Why do I think that this data dispute is not over, statistically, legislatively or politically?

Stay tuned and hold onto your investment account statements.