Are taxpayers in some parts of the country more honest than those in others? If you said yes, you’d be right.
A recent nationwide survey of more than 3,300 self-employed taxpayers by the IRS National Taxpayer Advocate found few communities with high levels of tax compliance by sole proprietors.
But it found lots of communities with low levels of compliance. The places with the highest levels of noncompliance were towns and neighborhoods in or near San Francisco, Houston, Dallas, Atlanta, and Washington, D.C.
Low compliance communities included some of the wealthiest places in the United States, such as Beverly Hills, Calif.; Newport Beach, Calif.; New Carrollton, Md.; and College Park, Ga.
Communities with low levels of tax compliance by small-business owners. Source: Source: IRS Taxpayer Advocate Service.
In contrast, high-compliance communities tended to be poorer. These included the Aleutian Islands; West Somerville, Mass.; Portersville, Ind.; and Mott Haven (a neighborhood in the Bronx, N.Y.).
By the way, the IRS says it does not choose which taxpayers to audit based on where they live, so you won’t lower your audit risk by moving to the Aleutian Islands.
Does this mean wealthy people are more dishonest than the poor? Maybe. But it could also mean that they have more opportunities to cheat on their taxes.
The Taxpayer Advocate’s analysis of the survey results revealed the following key findings:
- Taxpayers in the low-compliance group made more money than those in the high-compliance group: $87,000 as compared with about $46,000 for the high-compliance group.
- Taxpayers in the high-compliance group expressed more trust in government and the IRS.
- Very few of the low-compliance communities were in the Midwest.
- Those in the low-compliance group expressed less trust in preparers.
- Taxpayers in the low-compliance group were more likely to participate in local organizations.
- Both groups professed a moral obligation to report income accurately.
- Most agreed the tax rules are so complicated that it is very difficult to get a tax return exactly right.
- Taxpayers in construction-related and real estate-related industries were less compliant than those in other industries, while taxpayers in professional and technical service industries appeared to be more compliant.
- The low-compliance group had larger businesses: an average of about seven employees, as compared with about four for the high-compliance group.
The Taxpayer Advocate concluded from all this that the best way to ensure higher compliance with the tax laws is to “promote trust in government, the law and the IRS.”
The Advocate suggested that means to accomplish this might include tax simplification, an expansion of taxpayer protections and remedies, and taxpayer education about their government.
(Source: IRS Taxpayer Advocate Service, Factors Influencing Voluntary Compliance by Small Businesses: Preliminary Survey Results.)
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including “Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants,” “Deduct It,” “Working as an Independent Contractor,” and “Working with Independent Contractors.” He welcomes your questions for this weekly column.