Unreported Income

Sorry for diving into a politically tinged topic, but alas, an editorial from The NY Times this morning causes me to reflect on a recent discovery.

The editorial is How to Collect $1.4T in Unpaid Taxes, and it begins by reflecting how the imposition of payroll withholding drove the spending required to be victorious in WWII, even leading to wealthy people being proud of what their money was accomplishing (albeit a rare sentiment).

However the editorial correctly points out that large swaths of the economy doesn’t have that automatic payment baked in, and instead the people are expected to honestly prepare their returns and to pay their fair share.

Why is this so? Primarily because there is no equivalent third party verification of this income, as in this snippet:

In a remarkable 2019 analysis, the Internal Revenue Service estimated that Americans report on their taxes less than half of all income that is not subject to some form of third-party verification like a W-2. Billions of dollars in business profits, rent and royalties are hidden from the government each year. By contrast, more than 95 percent of wage income is reported.

What, you tell me that if nobody is looking over your shoulder, you aren’t likely to declare all of your income? Say it ain’t so!

Case in point

A couple of years ago, my step-father passed away (he was 86, and had been suffering from congestive heart failure for years, and he wasn’t really good at taking his medications, so it was not really a shock) and I was the trustee of the estate, an irrevocable trust set up by my parents back in the early 1990s.

One of my duties as trustee was to clean out and clean up the family home for sale to divide the proceeds amongst the heirs. In the process I found lots of documents, and documentation, including all the tax filings going back to 1978.

Not that it was relevant to the estate, I glanced through the old taxes, and in the early 1980’s their declared income was << $10K. I had to double take and spit take a few times. I had LIVED in their house until 1988 or so, so I knew full well what sort of money they made, and how it was spent. We lived quite well, middle of the middle-class lifestyle, owned a home, multiple cars, several teens to be kept in clothes, long-ish road trip vacations every year, getting into RVing, and a lot of off-road motorcycling.

But, both my parents worked for themselves. My stepfather was an appliance repairman, and my mother cleaned houses. Two independent businesses, each with multiple classes of customers. The appliance repair had a lot of business that was ad-hoc (as in, people had their oven die, and looked for a repairman in the Yellow Pages*, as well as being the repairman for a few local landlords, who provided a steady stream of work for him via their rental properties (houses, townhouses, duplexes and apartment blocks).

Likewise, my mother had a lot of residential business (much more than half) and also she would do the cleanup after construction of new homes, and of homes put on the market (she had connections with realtors and builders).

Guess which parts of the income was declared?

(No cookies if you guessed that they only recorded the revenue of the B2B work).

And, the rest? Yeah, that was the era of cash, of checks, poor computer ties between banks and the government, and the ability to just keep all that ad-hoc business off the books. But there were expenses for all this other work, and – you guessed it – the legitimate business was used to write off a lot of expenses (supplies, parts, tools, etc) and that got the amount of tax owed each year near to $0.

Now, long beyond the statute of limitations, it is moot, but I am currently of the belief that my parents were far from unique, and that to this day, many of the sole proprietorships or small businesses employ similar tactics to hide, obfuscate, and yes, to cheat on their taxes.

I am all for entrepreneurship, but in 2019 a study (in the editorial linked) estimated that $600B of owed taxes are not paid because of the lack of an independent accounting. That is enough to fund the damn Pentagon. That is enough to provide healthcare to all Americans. That pisses me off. And it should piss you off.

The proposal would not increase the amount anyone owes in taxes. It would, instead, increase the amount paid in taxes by those who are currently cheating.

Want these nice things? Let’s figure out how to collect what is owed to the government, before we talk one more second about cutting taxes.

Product Manager in Tech. Guitar player. Bicycle Rider. Dog rescuer. Techie.