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If not with audits, what will IRS use to collect?

Audits by the taxman are scary things. No Texas business or resident likes the idea of facing off with the IRS. However, what readers may be surprised to learn is that the IRS doesn't much care for audits, either. Its own studies reveal that audits are time consuming for the agency and don't yield as much in revenue as might be desired.

The IRS estimates that some $458 billion in taxes owed go uncollected each year, the greatest proportion of that is the result of income that goes unreported by individual business owners. Further, research indicates that Texas seems to be among several hot spots where tax compliance is notoriously low among sole proprietors. That makes audits and appeals a bit more common in this region.

The issue, according to officials, is that a lot of business gets done on a cash basis. About 63 percent of that income never gets reported, and the IRS admits audits haven't proven to be particularly effective in encouraging better reporting compliance. Indeed, officials say evidence suggests that while audits might lead to better reporting for several years, the reporting gap tends to return.

In addition, data suggests honest taxpayers who are put through the audit wringer and found to honest sometimes begin reporting less income in the years after. Researchers say the audit experience may actually serve to erode honest individuals' "tax morale." Alternatively, they say it might actually educate taxpayers about legal and illegal tax avoidance strategies they hadn't been aware of before and result in lower income reporting going forward.

Despite the apparent shortcomings of the audit in improving reporting behavior, there doesn't seem to be any other alternative in the wings. That said, it seems audits are going to continue for the time being, and while they don't happen as often as we might think, they will continue to generate fear and prove to be costly, even if the outcome is that everything is A-OK.

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