Why People Don't Lie On Their Tax Returns
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.)

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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.

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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.)

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