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the IRS may be shrinking,

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it's still far from toothless.

2:53

Wall Street Journal tax reporter

2:55

Laura Saunders joins me. Laura,

2:57

what kinds of things do

3:00

people usually try to fudge

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on their tax return? It's a

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range. They might omit income, just

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leave it off. They might exaggerate

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deductions or credits and claim... deductions

3:10

and credits that they shouldn't, or

3:13

they might just not file altogether.

3:15

And that'll get you in a

3:17

world of trouble, which I want

3:19

to get into. But since the

3:22

Trump administration took office, thousands of

3:24

IRS workers have been laid off,

3:26

and tax enforcement has been reduced.

3:28

Does this mean that people feel like

3:30

this is the year to cheat on

3:32

their tax return? A lot of them

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seem to think that. And we talked

3:36

to some preparers who said they're getting

3:38

pushback. Do I really have to put

3:41

that in? They're not looking anyway. Yeah,

3:43

they'll never notice. And they said they're

3:45

getting more of that this year. So what are

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some of the ways that the IRS knows that

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you cheated? Under the law. People who

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make payments to individuals very often

3:53

have to also tell the IRS

3:55

about those payments. Think about your

3:57

W-2 form. It has what you're...

4:00

pays you, it has a lot of

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other information. And the IRS gets something

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like 250 million of those a year.

4:07

That's a good place for it to

4:09

start. But beyond that, there are all

4:11

these 1099 forms. Did you get money

4:13

from a brokerage account, dividends, interest, capital

4:16

gains? Did you have gambling winnings? Did

4:18

you get unemployment benefits? All these things

4:20

are reported to the IRS as well

4:23

as to you. And so the IRS

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has wonderful computers that can match these

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up and they send you a letter

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and say, what about? that money? What

4:32

about those gambling winnings that we didn't

4:34

hear about from you? And the other

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thing is that perhaps you didn't file

4:39

at all. Well, if they get one

4:41

of those forms, they might say, where

4:44

is the return? And that could be

4:46

trouble. So even with all of these

4:48

slashes to its workforce, the IRS can

4:51

still detect these crimes. How does it

4:53

do that? Well, it matches with a

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computer, and it'll probably start that about

4:57

the end of this year and go

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on for a year or two. Then

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the computer generates letters. What about this?

5:04

What about that? We didn't hear about

5:07

that. Come on, tell us about the

5:09

other. How does the IRS... penalize unpaid

5:11

taxes. Oh, there's so many ways. And

5:14

Congress has provided the IRS with a

5:16

toolbox of penalties. The first thing that

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happens is interest. It's not a penalty

5:21

per se, but it feels like a

5:23

penalty. And right now, the interest rate

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on unpaid taxes is 7% a year.

5:28

It used to only be 3%. That's

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a lot more. And then there are

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penalties on top of that. Penalties for

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failure to file, penalties for failure to

5:37

pay. Both of those can mount up

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to 25% very quickly. Beyond that, one

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of the most famous ones that people

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really fear is it called a substantial

5:46

understatement penalty. And that means if you

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understate your tax by a certain amount,

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you get a higher penalty. And if

5:53

the income is severely... understated, then they

5:55

have six years to find you instead

5:58

of three years to find you. On

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top of that, if you've done something

6:02

willfully fraudulent, the penalty on that is

6:05

75% of the tax you owe and

6:07

there is no statute of limitations. Wow,

6:09

so it could just keep, it could

6:12

haunt you forever. I'm curious. Do these

6:14

penalties stack up on top of each

6:16

other? Yes, they absolutely do. Now with

6:19

failure to file and failure to pay,

6:21

there's some offsets between them that bring

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them down just a little bit, but

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generally they just stack up. And then

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the last penalty, which is kind of

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wild, is the one for frivolous tax

6:32

returns. Now that's where the tax protesters

6:35

come in. Say that you submitted a

6:37

tax return that said that under the

6:39

Constitution, nobody should have to pay income

6:42

tax. That could be liable for a

6:44

frivolous tax penalty. Or what if you

6:46

took your paper tax return and you

6:49

colored it and then sent it in

6:51

that way, but you didn't put any

6:53

information or numbers or anything like that

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on it? That would also be a

6:58

candidate for a frivolous tax penalty. So

7:00

these penalties have gotten... more expensive, meaning

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this really isn't the time to mess

7:05

around? That's right. The big thing that's

7:07

gotten it more expensive is the interest

7:10

rights, and they, of course, the interest

7:12

rates run on the penalties as well

7:14

as the tax. So it's a pretty

7:16

serious business now. And you spoke to

7:19

some tax professionals who have clients that

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have tried to push the envelope this

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year. What did they say about it?

7:26

Absolutely. The professionals said to me that

7:28

they're hearing more about, oh, they'll never

7:30

know. We don't have to tell them

7:33

that. This is a big tough year.

7:35

They're not going to know. And then

7:37

the professionals turn around and say, no,

7:40

this has to be correct. Was that

7:42

really a business meal? Or was it

7:44

just a pleasure meal? One thing that's

7:47

important to know here is that tax

7:49

professionals have to ascertain that the information

7:51

on return is correct, and if it's

7:54

not, they could lose their licenses. So

7:56

that gives them a really good reason

7:58

to push back against clients. And that

8:00

applies to about half of taxpayers. The

8:03

other half do them themselves, maybe with

8:05

commercial software. There are not as many

8:07

restraints on them. Yeah. And you write

8:10

in your story, which can be found

8:12

in our show notes, that nearly 80

8:14

million Americans prepare their own tax returns.

8:17

What is self-filers need to know if

8:19

they're tempted to test the IRS's limits

8:21

this year? Well, they need to know

8:24

all the things we've just talked about,

8:26

all the ways they have to find

8:28

you, and all the penalties they can

8:31

impose on you. A former commissioner said

8:33

that he tells his clients that when

8:35

you dance with a bear, you dance

8:38

till the bear gets tired. That means

8:40

if you attract attention from the IRS,

8:42

it may go on and on and

8:44

on it. That's a good reason not

8:47

to attract their attention. And there's an

8:49

even better reason. It is that you'll

8:51

be able to sleep well at night.

8:54

Yeah. You don't want to be haunted

8:56

about what you did wrong. Which is

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priceless. Yes. That's W.S.G. reporter Laura Saunders,

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and that's it for your money briefing.

9:03

This episode was produced by me with

9:05

supervising producer Melanie Roy. I'm Mariana Aspudu

9:08

for the Wall Street Journal. Thanks for

9:10

listening.