11 Things You Might Not Know About Income Tax

Image credit: 

© David Woo/Corbis

Every American’s least favorite day of the year is just around the corner. In commiseration, here are some things you might not know about the income tax.

1. More People Think It’s Okay to Cheat

Taxes are never popular, but recently they have gotten even less so. In 2011, 16% of Americans said it was acceptable to cheat on your taxes, up from 13% in 2010. The number of people who said cheating “as much as possible” was fine doubled to 8%. Researchers blame this increase on the news coverage that rich Americans and corporations use tax loopholes to pay as low as 0% tax. As the perception that others cheat becomes more prevalent, people are more likely to see fudging their taxes as a moral grey area.

2. A Lot of Money Slips Through the Cracks

According to IRS estimates, some $250-300 billion worth of taxes goes unpaid every year by people who don’t report all their income. In 1995, Congress gave the IRS $100 million to go after this missing money. They got a return on their investment of 8 to 1, but the program was cut the next year. That might be why now…

3. You Can Get Paid to Snitch

Yes, the IRS wants you to rat out your company, co-workers, and neighbors if you think they might be hiding money from the government. And if the extra they owe in taxes is enough, you could walk away with a decent chunk of change. For your anonymous reporting, you get a 15-30% cut of (a minimum of) $2 million. So far, it’s working: in 2006 the IRS recovered more than $1.4 billion in taxes owed through this program.

Unfortunately, like everything involving bureaucracy, there is a rather long form you need to fill out when reporting someone. It’s also important to have some specific details, so calling up and reporting your ex just to make his or her life difficult probably won’t get you anywhere.

4. Typos Can Get You Audited

When people are suspected, they face an audit. So what can you do to avoid it being you? Experts say that some of the main reasons people get audited have nothing to do with what they claimed. For example, make sure you have no typos before you submit your form. Inexact spelling probably means inexact numbers and can trigger an audit. And audits aren’t proportional across all tax brackets: Half of all individual filers who get audited make under $25,000 a year.

5. It’s All Lincoln’s Fault

The IRS was created during the Civil War to manage the first income tax. The Revenue Act of 1862 was an emergency war measure that was based off of the income tax that Great Britain had recently implemented. The tax, and the number of people who had to pay it, increased every year of the war. By the time General Lee surrendered, 10% of all Union households had paid the tax, and it contributed 21% of the North’s war revenue.

6. The Income Tax Was Once Ruled Unconstitutional

In 1894 the income tax was revived for the first time since the Civil War. But just a year later, the Supreme Court ruled it unconstitutional because it was a direct tax, and not apportioned among the states on the basis of population, which is the only tax the Constitution originally allowed for. The 16th Amendment was ratified in 1913 to allow for direct taxation.

7. Some People Claim the 16th Amendment is Not Valid

Tax protesters argue that the income tax is still unconstitutional because the amendment creating it was never properly ratified. While they cite many reasons for this, the main argument is that the language of the proposed amendment that was sent to some of the states for approval was slightly different than what was actually ratified. However, the amendment has been upheld every single time its legitimacy has been challenged in court.

8. The IRS Enforced Prohibition

When the 18th Amendment was ratified in 1919, Congress passed the Volstead Act. This act gave the head of the IRS responsibility for making sure no alcoholic beverages were manufactured, sold, or transported in the United States. It wasn’t until eleven years later, when it was more than obvious that illegal alcohol was directly tied to organized crime, that enforcement duties were passed to the Department of Justice. After Prohibition ended, the IRS continued to regulate alcohol, tobacco, and firearms, until the ATF became its own bureau in 1972.

9. The IRS Put Al Capone Behind Bars

Since the IRS was watching bootleggers, they also zeroed in on their finances. Despite being tied to murders, bribery, pimping, and illegal gambling, in 1931 it was Al Capone’s failure to file tax returns that finally put the infamous gangster in jail.

10. We Are All Terrible at Doing Our Taxes

Out of 228 million American adults who pay taxes each year, 82 million choose to get theirs done by a professional. Of those 82 million, 40% would rather cut their own hair than do their own taxes.

Accountant or no, people do try to get in some crazy deductions, although according to professional accountants men are far more likely than women to claim odd things. Women also tend to be more prepared and calmer when it comes to filing.

But for those taxpayers who still haven’t filed by the time April rolls around, 68% say they waited so long because of simple procrastination or laziness, while only 26% said it was because of confusion about the process.

It’s not just the laymen who get tripped up by the complexities of the tax code. In 2005, the tax preparation company H&R Block admitted that they had overstated the company’s earnings in 2003 and 2004 by over $91 million. They blamed "insufficient resources" in their corporate tax accounting department.

11. It Could Be a Lot Worse

In 1918, Congress passed the Revenue Act which increased income tax to help pay for World War I. Those in the highest tax bracket shelled out 77%.

More from mental_floss...

April 11, 2012 - 1:00pm
submit to reddit