Tax Day is already a dreaded date for many Americans. The rush to submit your tax return before the deadline, worry over whether the Internal Revenue Service will accept your return or select you for a seemingly random audit and waiting to get whatever refund you’re owed — there’s no doubt that filing taxes can be almost as big of a drag as actually paying taxes.
But as annoying as paying taxes and submitting a return to the IRS can be, it’s nothing compared to tax ID theft, tax fraud and tax evasion, which every year soak law-abiding taxpayers for billions of dollars.
While most of us aren’t excited to pay taxes or file returns, the majority of Americans recognize how important it is that we do so lawfully and correctly. Nearly 90 percent of Americans say it’s unacceptable to cheat on your taxes, and a similar number agree that it’s important for the IRS to ensure that corporations and wealthy individuals are complying with tax law. About 95 percent of Americans agree that it’s important that everyone carries their fair tax burden.
Despite this, thousands of people are prosecuted every year for tax evasion or tax fraud, and thousands more Americans are the victim of ID theft schemes involving fraudulent tax returns. While fewer people are reporting being the victim of tax ID theft, we’ll show you why that isn’t necessarily good news.
To celebrate Tax Day (no, really), let’s look at how much we pay, how many of us try to get out of paying our fair share and what you can do to ensure that your tax burden is the only one you’re carrying.
The State of Income Tax
About 150 million individual income tax returns are filed every year in the United States, and the Internal Revenue Service takes in well over $3 trillion in total tax collections annually. Individual income tax collections account for nearly half of the federal government’s total revenue.
The income tax each worker pays is the largest stream of revenue for the federal government, and that’s been the case since 1950, though the share of federal revenue from individual income tax has varied over the years. The second largest source, payroll tax, is also partially on the shoulders of workers, as employees pay half of that tax, employers pay the other half, and self-employed individuals pay the entire share.
So everyday Americans are the ones largely footing the bill for the federal government. But the average taxpayer also gets a refund to the tune of more than $400 billion combined in the average year. The average individual income tax refund varies widely by year and state. Here’s a look at where the states stack up when it comes to average tax refunds issued:
Turns out everything is bigger in Texas, even the tax refunds. The average refund in Texas is well over $3,000, making it about 30 percent bigger than the average refund issued in Maine. A total of six states have average refunds that eclipse $3,000, while six others have average refunds that are south of $2,500.
While corporations are also beneficiaries of refunds, the vast majority go to individual taxpayers, with about 98 percent of refunds being issued to everyday Americans.
Understanding Tax ID Theft
It’s not much fun to file a tax return at all (even if you’re getting a refund), but thousands of Americans are victimized every year by tax ID theft, which is when someone uses your Social Security number to claim a fraudulent refund. Most people these thieves strike don’t even know they’ve been victimized until it comes time to file their actual return and they’re informed someone has already filed with that Social Security number, and perhaps even been issued a refund.
The statistics on tax ID theft vary so widely from year to year that it’s difficult to make generalizations about what the data show, and what at first could appear to be good news, fewer people claiming tax ID theft, could actually turn out to be bad news with a closer look at the funding of the IRS.
A quick look at those figures indicates tax ID theft has dropped by nearly two-thirds in recent years. While this is certainly good news and likely means fewer people are being victimized, it’s irresponsible to consider this data in a vacuum.
While there’s not a huge drop between 2016 and 2017 in IRS spending on investigations, the agency also has seen its overall operating costs fall almost every year since 2011.
In addition to the IRS seeing overall spending drop, which is good in one sense for taxpayers, the agency is still dealing with a backlog of ID theft reports with an annual backlog of about 10 percent of old cases.
The IRS data on tax ID theft does not separate individual reports based on the state of residence of the person making the report, but search trends can help us begin to understand where this issue seems most prevalent. According to Google search trends, people in Florida are most likely to search for terms related to tax ID theft than those in other states.
While most states are not listed in the Google data, that simply means the likely search volume in those states is lower than that of the lowest-ranked state on this list. So this tell us that Florida residents are the most likely, followed by those in Missouri to search for resources on tax ID theft.
What’s the overall impact of tax ID theft? In short, billions of dollars. About $6 billion per year is saved from being fraudulently returned to the wrong taxpayer thanks to enforcement efforts each year.
Tax Evasion & Fraud
While tax fraud is a different animal altogether than tax ID theft, both are serious and common ways that the average taxpayer is taken advantage of for someone else’s ill-gotten gains. Similarly to how complex the picture is for tax ID theft, while the IRS and others in the federal government could celebrate numbers that show fraud and tax evasion are declining, the picture is murky at best, as the IRS has less money overall to devote to investigations surrounding theft, tax evasion and fraud.
The IRS annually initiates thousands of tax evasion investigations, and the agency usually is able to make a case against those they pursue. In 2016 (the most recent year for this data), about 2,700 cases were recommended for prosecution by IRS investigators; about 97 percent of those under investigation were convicted. Nearly 4 in 5 of them were sent to prison, with an average term of 41 months.
The statistics on convictions secured vary by year but also by the time of tax fraud or evasion. For instance, about twice the number of investigations were launched into abusive return preparers than individuals evading employment tax.
In addition to catching those trying to hide legal income, the IRS also pursues cases against those attempting to hide income whose source is illegal.
So what about those who are being arrested and convicted for tax fraud? About two-thirds of tax fraud and evasion offenders are men, and more than half are white.
The vast majority of those convicted of tax fraud are far from hardened criminals. In fact, more than 80 percent had no criminal history when they were convicted. Still, the total amount these individuals were convicted of trying to conceal from the IRS is huge, with the median loss topping $250,000 and more than 80 percent involving losses of upwards of $100,000.
Keeping Your Tax Information Safe
How can you go about ensuring your tax information is safe and that you get the full refund you’re due? While it may seem intuitive to argue against e-filing, as this could be a way to expose your information, a few common-sense practices can help keep your information safe even if you file online.
Upwards of 90 percent of individual taxpayers’ returns are e-filed each year, so here are some tips to ensure your information is safe from prying eyes:
- Use strong passwords.
- Always use security programs with firewalls and anti-virus protections.
- Consider subscribing to a top identity theft protection company to help watch for suspicious activity.
- Phone and email phishing scams commonly invoke the IRS, but remember the agency will always send you mail communications first.
- Don’t carry your Social Security cards, and ensure all prior years’ returns and documents are well-secured in a locked box.
While the usual main warning sign is that you find someone has already used your Social Security number to file a tax return, there are a couple of other things to watch out for:
- If you know your info was in another data breach, you should be on-guard.
- You owe more than you expected.
- The IRS says wages were reported for you that you did not earn.
About This Report
All of the federal tax statistics we used came directly from the Internal Revenue Service, through a few reports, including:
Tax filing, collections and refunds
Tax ID theft and fraud and tax evasion
IRS workforce and enforcement budgets
Taxpayer attitude study
Most of the IRS data we used was from 2017.
Information on the percentage of people who e-file came from eFile.com.
Search trends were calculated using the Google Trends tool.
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