No one enjoys paying income taxes, but there are at least two good reasons why real estate professionals should play fair with the Internal Revenue Service and state taxing authorities this tax season.

The first and perhaps most compelling reason is that the stiff penalties for cheating aren’t worth the real risk of being caught.

A seven-year audit in Hawaii concluded that the state’s top 10 real estate companies allegedly failed to pay more than $575,000 in taxes owed, interest on the unpaid taxes and penalties for tax fraud. The Hawaii Attorney General last year filed a lawsuit against 12 real estate agents who allegedly failed to report and pay taxes on $9 million of commission income. Failure to pay taxes in Hawaii can be punished with imprisonment for as long as one year and a fine of as much as $25,000. The state’s tax department is also looking into civil cases against more than 45 other agents, according to an Inman News report.

What’s more, the IRS has a plan to improve compliance through more enforcement and increased taxpayer services and outreach efforts. More than 221,000 taxpayers who earned $100,000 or more were audited last year, the highest number of such audits in the last decade. The total number of audits of taxpayers in all tax brackets topped 1.2 million last year, a 20 percent jump from the prior year.

The second reason is that professionals and homeowners alike benefit from government housing programs.

Most taxpayers seem to be convinced that government programs by definition involve a huge waste of tax dollars, and indeed, many taxpayers can point to dozens of programs they personally view as unnecessary or even counterproductive. Yet numerous public services on which we all depend wouldn’t exist without the taxes and government-imposed fees that make these services possible.

Consider this short list of government-run real estate and banking programs:

  • The U.S. Department of Housing and Urban Development, the nation’s largest housing agency, helps developers build affordable housing for low-income people, funds an array of urban renewal programs, distributes Section 8 rental housing assistance, and enforces fair housing laws, among other programs.

  • The Federal Housing Administration insures home mortgages.

  • The Rural Housing Service within the U.S. Department of Agriculture provides affordable low-income housing programs for small communities.

  • The Federal Emergency Management Agency runs the national flood insurance program for homeowners and generally comes through reliably with aid after natural disasters, its shamefully botched response to last year’s hurricanes notwithstanding.

  • The Federal Reserve regulates bank interest rates to fight inflation.

  • The U.S. Mint prints new money to replace worn-out currency in circulation.

  • Multiple federal bureaus collect data to study the U.S. economy and regulate the financial sector to protect consumers and investors.

  • State real estate departments provide licensure and regulation of real estate and banking industries.

  • State housing agencies run a variety of housing programs for the needy.

  • Local building-permit offices review and approve plans for new construction and establish safe and sound building codes.

  • Local law enforcement agencies protect commercial property owners from property-related crimes.

Governments also run myriad other agencies that aid both businesses and individuals. These agencies defend the nation’s borders, build highways, operate public transportation systems, provide social services for the needy, operate public schools and universities, maintain parks and libraries, and issue such vital documents as passports, driver’s licenses, marriage licenses, birth and death certificates, and property deeds. How would modern society function without these and so many other services?

The IRS recently estimated that taxpayers failed to remit some $345 billion they owed in 2001, the year selected for a three-year study of 46,000 tax returns to measure the so-called “tax gap” between what taxpayers should have paid and what they actually paid on a timely basis. The IRS said its own enforcement activities and other late payments recovered about $55 billion of the gap, leaving a net gap of $290 billion for 2001. Underreported income accounted for an estimated 80 percent of that year’s tax gap.

Plenty of opportunities exist for self-employed people to add to the tax gap. Income can be underreported while deductions can be padded with personal expenses, to take just two examples. Add the widespread belief that everyone cheats and the temptation arises to go ahead and just do it.

But it’s not true that everyone cheats. Some people are basically honest; others want to sleep sounder at night without having to fear of the attentions of the IRS.

“The vast majority of Americans pay their taxes accurately and are shortchanged by those who don’t pay their fair share,” IRS Commissioner Mark W. Everson said.

It’s an old saying, but nonetheless true: Cheaters never prosper, so please, pay your taxes.

Marcie Geffner is a real estate reporter in Los Angeles.


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