Most people believe in being honest when filing their tax returns, if we are to believe the results of the 2010 Taxpayer Attitude Survey conducted by the IRS Oversight Board. 87% of taxpayers answered "not at all" to the survey question, "How much, if any, do you think is an acceptable amount to cheat on your income taxes?" (For related reading, also take a look at Audit Stories You Won't Believe.)

TUTORIAL: Personal Income Tax Guide

The survey is conducted by randomly calling U.S. phone numbers to sample the attitudes of 500 adult men and 500 adult women. The board has been conducting the survey since 2002, and the percentage of "not at all" answers to this question has always fallen between 81% and 89%. Over the same period, answers ranged from 3-5% of taxpayers surveyed that responded that it was acceptable to cheat as much as possible, and 6-12% responded that it was acceptable to cheat a little here and there.

If the survey results accurately reflect Americans' attitudes, why is it that most people don't lie on their tax returns? Here are a few ideas.

1. They Think it's Wrong.
According to the survey, in 2010, 97% of people either completely agreed or mostly agreed with the statement, "It is every American's civic duty to pay their fair share of taxes." Furthermore, 80% of survey respondents said that their personal integrity has a great deal of influence on whether they report and pay their taxes honestly. Of course, it is possible that people did not respond honestly to these survey questions, whether out of fear, shame or wanting to give the "right" answer.

Given the tax gap - the difference between what all taxpayers voluntarily remit and what the IRS says it is owed - it seems as if plenty of people do not believe in paying all that they owe. The most recent IRS figures released in 2005 state that the tax gap was $345 billion for the 2001 tax year.

2. They Can't.
The reporting requirements imposed on businesses make it difficult for taxpayers to fudge the numbers on their returns without attracting the IRS's attention.

Employers collect federal, state, Social Security and Medicare taxes from each employee's paycheck and remit the taxes directly to the government. Not only does the employee never have access to that money, but the details of these payment and collection activities are reported to the IRS on form W-2 every January. (While it would be possible to lower federal withholding by claiming more exemptions than one is entitled to on form W-4, to do so would require an act of perjury.)

Also, any interest or dividend income that people receive from a financial institution gets reported to the IRS on forms 1099-INT and 1099-DIV. As far as itemizing deductions, the home mortgage interest, property taxes and mortgage insurance that people pay are also reported to the IRS.

Even the self-employed are likely to have their income reported to the IRS on forms 1099-MISC submitted by their clients.

TUTORIAL: Budgeting Basics

3. They're Afraid of Being Audited.
As children are afraid of the bogeyman, adults are afraid of the IRS audit. However, it may come as a surprise to learn that this fear wasn't most survey respondents' biggest influence on whether they reported and paid their taxes honestly. 35% said that fear of an audit had a great deal of influence, 29% said that it had somewhat of an influence and 35% said that it had very little influence or was not at all an influence. This might be because average audit rates hover around 1% for individual taxpayers with adjusted gross incomes ranging from $25,000 to $200,000.

4. They Don't Think it's Worth the Risk.
If a taxpayer is discovered to have underreported his or her income, they will have to pay the IRS the tax that was originally due on that income plus penalties and interest. If a taxpayer does not file a return at all, they will have to pay an additional penalty of 5% per month - with a maximum of 25% - from the return due date.

Failure to pay penalties may seem mild at first glance - half a percent per month, assessed from 21 days after the date the IRS sends the notice and demand for payment. However, for tax fraud crimes such as tax evasion, there are penalties of up to 75% of the tax due plus interest on both the tax and the penalty starting from the return due date, according to tax lawyer and NOLO author Frederick W. Daily III. In rare but serious cases, noncompliant taxpayers are convicted of criminal tax fraud and sent to prison.

The thought of all the time, energy, stress and legal costs involved in being accused of a tax crime, not to mention the possibility of owing an unexpected and large sum of money at an unspecified future date, probably just aren't worth the risk of trying to get away with underreporting income for most people.

Integrity or Fear?
Whether stemming from personal integrity or from fear, there are many reasons why most people choose to be honest on their tax returns - even if they don't agree with tax laws or with the way the government spends their money. (For additional reading, also see Taxpayers The IRS Is Targeting This Year.)

Related Articles
  1. Entrepreneurship

    Taxes in Florida for Small Businesses: The Basics

    Learn why Florida's tax laws make it an attractive place to start a small business, and understand the types of taxes a small business owner must pay there.
  2. Taxes

    6 Tax Breaks That Anyone Can Claim

    Many can be applied to an individual’s return, and you don’t need to be a financial genius to claim them. Here are six credits or deductions that could be yours for the taking.
  3. Taxes

    7 Expenses You Won’t Believe Are Deductible

    You may be surprised at some of the things that qualify as legitimate tax deductions. Here are seven that are especially quirky.
  4. Taxes

    6 Tax Myths Everyone Should Know

    The notion that large refunds are good is but one of many enduring tax myths. Here are five more you should know.
  5. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  6. Taxes

    The 5 Countries Without Income Taxes

    Discover information on some of the best countries to consider relocating to that offer the financial benefit of charging no income tax.
  7. Fundamental Analysis

    7 Ways to Create a Tax-Efficient Portfolio

    Taxes may be a necessary evil, but that doesn't mean they can't be reduced. Here's a host of smart moves today's investors can make.
  8. Taxes

    Countries With The Highest & Lowest Corporate Tax Rates

    The United States is No. 2 in the world for its high corporate tax rate. There are ways around paying it, and many nations with lower rates are worse off.
  9. Economics

    Explaining Fair Market Value

    Fair market value is the price at which a buyer and seller are willing to exchange a good.
  10. Taxes

    4 Reasons Why Delaware Is Considered a Tax Shelter

    Understand what a tax shelter is and how one is normally created. Learn about Delaware and the top five reasons why it's considered a tax shelter.
  1. How long do I need to keep income tax records?

    Keep all tax-related records for at least three years. For example, keep your 2015 tax return, filed in early 2016, at the ... Read Full Answer >>
  2. Are estate distributions taxable?

    In general, most estate distributions are not subject to income tax. In some cases, however, a distribution from an estate ... Read Full Answer >>
  3. Are Cafeteria plans taxable?

    Whether the benefits you receive through your employer-sponsored cafeteria plan are taxable depends entirely on which benefits ... Read Full Answer >>
  4. Why is the Cayman Islands considered a tax haven?

    The Cayman Islands is one of the most well-known tax havens in the world. Unlike most countries, the Cayman Islands does ... Read Full Answer >>
  5. Why is Panama considered a tax haven?

    The Republic of Panama is considered one of the most well-established pure tax havens in the Caribbean due to extensive legislation ... Read Full Answer >>
  6. Do financial advisors prepare tax returns for clients?

    Financial advisors engage in a wide variety of financial areas, including tax return preparation and tax planning for their ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!