April 30, 2013
United States citizens and residents are taxed on their worldwide income. All of it should be declared on an income tax return and be accounted for. To what extent does that happen? It happens more here than in Greece, but certainly less than in a perfect world. Click to read an excellent article by James Surowiecki from the April 29, 2013 New Yorker, which does a good job of summarizing the extent of the problem.
He gives small mention to large amounts of cash that have been spirited out of the country and invested in tax havens around the world. Treasury has broken into some of the Swiss banks, but there are a lot of other tax havens that have not been touched.
Why doesn’t the IRS do more to correct this problem? It tries, but the problems are huge. The IRS has to administer an obscenely complicated set of laws with limited resources. It can only audit about 2% of all returns. Where cash is not deposited in a bank account it is very difficult to detect. Indirect methods of determining income by measuring expenditures can detect unreported income, but the audit costs consume limited resources and it cannot get to everyone.
Practical next steps
- Note the date on this article. It describes the rules as they stood then, and tax procedure changes.
- Start from the notice you actually received: the number in the top right corner and the date printed on it decide what is still open to you.
- Pull your account transcripts before deciding anything. They show what the IRS believes about your account, which is not always what the letters say.
- If a deadline is running or the amount is significant, have someone read the file before you respond.
Official sources for current verification
- IRS Topic No. 201 — The Collection Process
- IRS Publication 594 — The IRS Collection Process
- IRS Topic No. 202 — Tax Payment Options
- IRS — IRS Audits
- Taxpayer Advocate Service — Audits in Person
- IRS — Accuracy-Related Penalty
Important notice
This material provides general information, not legal or tax advice. Tax outcomes depend on the facts, procedural history, applicable law, and current agency guidance. Reading this page does not create an attorney-client relationship.
