Cheating by the Millions

By Otto Friedrich

COVER STORY

Cheating by the Million

Tax evasion is becoming an epidemic, and honest people are suffering

We're talking about hardworking people in an honorable profession," says Bernard Moskowitz, an official of the Internal Revenue Service in New York City. Specifically, he is talking about private-duty nurses, who often earn as much as $150 a day, and he has been investigating whether these honorable people pay their income taxes. The results are dismaying. In a sample of 400 nurses, more than 90% failed to report all their income; the average nurse owes $3,500 in back taxes. Says Moskowitz: "Some of the evasion is blatant."

Or consider donations to charity, another honorable activity, which the IRS has been investigating in Southern California. Here, too, the results are dismaying. In an audit of 4,000 California returns that showed large charitable contributions, the vast majority of those filing the returns were found to be cheating. On average, they owed additional taxes of $5,800. "Many of these people report that they are giving over half their income to the church," says IRS District Director William H. Connett. "But these are often mail-order ministries, organized not for religious reasons but for tax evasion."

Not only do supposedly respectable people cheat on their taxes--federal, state and local--but supposedly respectable institutions help them do it. "Take someone who has just bought $1,000 worth of clothing," says Connecticut Revenue Commissioner Orest Dubno. "The store can ship a necktie somewhere out of state, so it can show a UPS address and receipt, and the buyer avoids the state sales tax. Actions such as these contribute to losses in the hundreds of millions of dollars."

As the dreaded April 15 deadline draws nearer, some 96 million American taxpayers must struggle through the long hours of the night and finally make peace with the exasperating enemy known as Form 1040. Most of them will do their duty and then surrender an average of about $3,300 to the IRS. A large and growing number of Americans, however, will decide to cheat. Indeed, tax evasion is becoming not just a sickness but an epidemic, no longer kept secret but widely admitted, even joked about and accepted.

Out of the estimated $750 billion that U.S. taxpayers are supposed to account for by April 15, the IRS figures, about $100 billion will not be paid. (Of the $650 billion collected, more than half will come from individual income-tax payers, a quarter from employers, and a tenth from corporations.) That "tax gap," the grand total created by Americans who are lying, bilking and inadvertently erring, has risen from $29 billion a decade ago (an increase of 53%, adjusting for inflation), and is expected to hit $120 billion by 1985. Yet the odds on being audited keep dropping, from 2.59% of all taxpayers in 1976 to only 1.55% last year. That means the chances of getting caught are ludicrously small--and the chances of getting prosecuted are smaller still. Though an estimated 50 million returns understate the tax due, only 1,624 people were prosecuted for tax evasion in 1982 and just 917 were sentenced to jail.

"The mind-set of America has changed since World War II," says Roscoe Egger Jr., 62, a former lawyer who has been commissioner of the IRS since 1981. "The concept of civil disobedience, of demonstrations against authority, has people acting in a way that would not have been considered patriotic or acceptable in the past. It accelerated in the Viet Nam War era, and now there is more disregard for the law. It is not as antisocial as it was to evade taxes." The American Institute of Certified Public Accountants, which has an obvious involvement in the problem, is openly alarmed. "Honest taxpayers are bearing an ever increasing burden because of the growing number of citizens who are not paying their full tax," it said in a report issued earlier this year. "If the situation continues to worsen, it could lead to the disruption of our economy and even to a breakdown in society."

Some blame inflation, which has eroded real living standards and cramped the traditional assumption that hard work would pay off in an improving future. Some blame the inflationary phenomenon known as "bracket creep," by which almost every increase in salary, even if it merely keeps one even with the rise in the cost of living, puts the recipient in a higher tax bracket and thus brings a relatively greater increase in taxes owed. These are economic reasons, and tax evasion obviously has major economic roots fed not only by inflation but by recession. Yet tax evasion is also a moral problem, a symptom of the weakened sense of dues owed to country and society, and the spreading sense that anything goes.

In a poll conducted for TIME by Yankelovich, Skelly and White Inc.,* 36% of those questioned believed that cheating on income taxes is becoming more common. More unsettling, 43% found it "acceptable" to barter goods and services without reporting it on the tax forms, and 26% found it acceptable not to report cash payments as income. Other polls reveal an even greater cynicism. In a survey taken in Oregon, one out of four citizens admitted cheating on taxes. In another study, more than half believed that nearly all Americans would cheat if they felt they could get away with it. Yet another survey found that three out of four of those polled would refuse to inform on a serious tax evader if they had evidence to convict him. A slogan spray-painted in red on a bridge spanning Boston's Charles River seems to sum up a growing sentiment: TAXATION is THEFT!

No society ever paid its taxes happily or escaped arguments over who should pay how much. More than two millenniums ago, Plato wrote in The Republic that "when there is an income tax, the just man will pay more and the unjust less on the same amount of income." It used to be a point of pride among most Americans that they acted like Plato's "just man." Throughout the first half of this century, the income tax system that started in 1913 worked well because it worked virtually by itself. Everybody grumbled, but something like 95% or more did their own figuring and then voluntarily paid what they owed. There seemed to be no need for elaborate regulation or extensive surveillance. Cheating on taxes was considered despicable, not much better than robbing the church poor box.

Taxes are, after all, not a choice but a necessity, both the essential duty of citizenship and the lifeblood of the community. Granted that a large share of the taxpayer's tattered dollar goes to pay for myriad blessings that he does not think he wants or needs--whether it be the de-mothballing of a battleship or subsidies to tobacco growers--the fact remains that taxes do pay for schools and libraries, hospitals and highways, police and prisons, and research into outer space. "Taxes," said Justice Oliver Wendell Holmes Jr., "are what we pay for civilized society."

A lot of people no longer believe that or, if they do, are perfectly content to take a free ride and let others pay the bill. They are the captains and foot-soldiers of the "underground economy," which is now believed to involve up to one-quarter of the work force and about 15% of the G.N.P. It extends from the tanned cocaine kings of Miami to the youth selling jewelry on a San Francisco street corner to the carpenter who will build a kitchen cabinet for less money if paid in cash to the little old lady who babysits for the neighbors. Their only common bond is an unwillingness to pay taxes on their earnings. Yet the tax gap also derives from the lies of business executives and professionals, from all kinds of petty chiseling and expense padding.

"A lot of people might get the impression that tax evasion is all being done by waitresses, street vendors and illegal aliens, but that is simply not true," says James Henry, a management consultant with McKinsey & Co. in New York City. "In fact, it is the white middle class, middle-and upper-income people like doctors, lawyers, the self-employed, landlords, people trading on the stock market, who still account for the lion's share." Tax evaders tend to have other characteristics in common. They are more often male than female, younger rather than older--and above average in education.

Who evades how much? By IRS estimates, the breakdown goes like this:

> Unreported income from individual business activities: $26 billion. This includes doctors who prefer cash and contractors who work "off the books." Farmers are in a category all by themselves, and their cheating through hidden income is estimated at another $ 1.4 billion.

> Crime: $6 billion to $10 billion. All tax evasion is a crime, but this figure involves activities that are illegal in themselves.* The total has more than tripled in the past decade, largely because of the flourishing drug traffic. Other tax-free operations: gambling, numbers, prostitution. Some critics, who believe the drug profits may be much higher than the IRS says, charge that the IRS calculations ignore such lucrative activities as loan-sharking, arson, counterfeiting, fencing, pornography and trafficking in illegal aliens. One independent estimate of the untaxed profits in these areas: $25 billion.

> Unreported capital gains: $9.1 billion. That figure, which has quadrupled in the past decade, includes not just undeclared stock-market transactions but profits from the sale of homes, art, gold, jewelry and livestock.

> Unreported dividends and interest: $7.7 billion.

> Profits from partnerships and small businesses: $7.2 billion. That estimate is based not only on underreported income but on padded expenses.

> Nonfiling of returns: $4.9 billion.

> Corporate taxes: $3.9 billion. Though most large corporations are audited annually, firms with less than $1 million in income get checked at a rate of less than 5%, creating opportunities for tax shenanigans.

Bleak as these figures are, the IRS estimates may be too conservative. Peter M. Gutmann, an economics professor at the City University of New York, made an extended analysis of the "underground economy" in 1977 and estimated that undeclared income the previous year had totaled $176 billion, as compared with the IRS figure of around $100 billion. In later studies, Gutmann substantially increased his estimates of unreported income, to $420 billion for 1981.

Most dismaying of all, in a way, is the fact that the IRS claims some $27 billion due in accounts receivable--e.g., money that delinquent taxpayers do not deny they owe but just have not paid. Some cannot pay because of hard times; others simply do not feel like it. That figure, too, is up sharply, from $8.3 billion in 1977.

Why do they do it? The C.P.A. Institute, which devoted two years to a study of the question, offered a list of elements. Among them: high tax rates, plus inflation, can mean a cut in real income, leading people to "reason that their tax burden has risen above their 'fair share.' "

The "increasing complexity" of the tax regulations "can erode public confidence that the tax law is treating everyone fairly." The government's use of the tax law "to motivate or impede certain social activities" further erodes that confidence. Tax incentives, the C.P.A. Institute found, often look like tax loopholes. While lower-and middle-income taxpayers "are harassed over small amounts, insufficient attention is paid to the wealthy." Finally, proliferating government regulations encourage businesses to keep employees off the books.

Beyond the accountants' ken, though, there are less clearly observable reasons. "Greed, gre-e-ed, gre-e-e-e-ed," murmurs Boris Kostelanetz, 71, who was born in Leningrad when it was still St. Petersburg and is now the senior partner of Kostelanetz & Ritholz in Manhattan. He savors his own repetition of the word, but he feels that greed is not always or necessarily the motive. Says he: "Greed means you want to keep money and spend it on yourself. For tax evasion there is something else at work. People who don't file tax returns may be the same kind of people who don't return books to the library, the ones who don't pay traffic tickets. It's a crime of omission, not commission."

Kostelanetz, who has given tax advice to such notable figures as former Vice President Nelson K Rockefeller and former Pennsylvania Senator Hugh Scott, cites the case of RCA Board Chairman Anthony Conrad. He had spent 30 years rising through the ranks and was earning a salary of $250,000 when it was disclosed in 1976 that he had not filed an income tax return in five years. Strangely enough, Conrad had paid $684,000 in withholding taxes and always managed company affairs with great prudence. On Kostelanetz's advice, Conrad resigned and retired to Maryland. He has since filed the back returns and paid roughly $30,000. "People don't like to do unpleasant things,'' Kostelanetz reflects. "Difficult as it is to believe, they may not feel like filling out a tax return, and so they don't."

The everybody-does-it syndrome provides another kind of psychological motivation. "Cheating on taxes is part of social climbing," says L. Jerome Oziel, an associate clinical professor of psychiatry at the University of Southern California who also conducts a private practice in Beverly Hills. "People are ashamed of paying too much in taxes, as if it's a sign of stupidity. It is no longer accepted that good and noble people patriotically pay their taxes. There's a cultural milieu that supports not paying taxes. So people brag about it, as if it were a badge of honor."

The concept of tax shelters is in many ways symptomatic of the whole illness. All of them originated in congressional proposals to use tax laws for economic or social purposes. When Congress wanted to encourage oil exploration, it granted the oil-depletion allowance that originally permitted drillers to write off their first 27 1/2% of profits; when it wanted to encourage ordinary citizens to arrange their own pensions, it authorized Individual Retirement Accounts and Keogh plans, which exempt certain types of savings and investments from taxation. Even the exemption for the interest on home mortgages is a form of tax shelter. All are perfectly legal. Tax avoidance--in contrast to tax evasion--is the term for all such legitimate efforts to keep taxes to a minimum. In the famous dictum of Judge Learned Hand, "Nobody owes any public duty to pay more than the law demands." Many tax shelters, however, pay off only at upper-income levels and can be figured out only by expensive experts.

Some of those experts promote what the IRS calls "abusive" tax shelters, and the agency is investigating nearly 1,000 operators of these complicated schemes. Consider, for example, the master-recording game, in which Mr. A buys a master recording of some song for $100 and sells it to Production Company B for $2,500, and Production Company B sells it to Corporate Promoter C for $250,000. But C pays only $2,500 in cash, the rest in a twelve-year "recourse note," then leases the master record for seven years to various investors for $16,000 each, and . . . have you lost track? The gist of it is that all these investors in the inflated property can pay their share largely with loans, which are later forgotten, and then the total investment can be deducted from the investors' income. The IRS has so far found 5,200 returns that used this ploy during 1979-81, to the tune of $60 million in unpaid taxes.

"Each time the IRS or Congress develops a method of slowing or halting some objectionable shelter practice," says IRS Commissioner Egger, "promoters and/or investors find some way around it--essentially jumping over the roadblocks. At first, promoters were only stretching the law, now they're openly breaking it."

Aside from shelters, tax sleuths uncover a remarkable variety of ingenious deceptions. Joseph Siegel, for example, worked as a commodities broker in Chicago and devised a scheme to record phony trades as paper losses, and then sold these records to other investors to use as write-offs. Frank Wittig, a former computer programmer in Minneapolis, allegedly tried the old trick of claiming deductions for which he did not qualify and then filing for an undeserved state-tax refund. After his first return netted him a refund check for $200 in 1978, he got much more active; by 1981 he had filed 177 returns under 73 different names. All in all, the state estimates that he amassed about $130,000. Wittig was charged last month with six counts of filing fraudulent state tax returns.

Tax officials in Southern California believe they are confronting the vanguard of such deceptions. "Many forms of tax evasion--the ideas--seem to start in California and spread elsewhere, just as fads start out here," says Ron Saranow, chief of the IRS Criminal Investigations Division for the region. One of the local figures who most irritate California tax authorities is Armen Condo, a self-styled "maverick minister" who heads an organization called Your Heritage Protection Association, based in Orange County. With a dues-paying flock of 15,000, Condo took in an estimated $2 million in three years while preaching an unusual gospel: since the U.S. dollar cannot be redeemed in gold or silver, it is therefore corrupt, therefore not "real," and therefore nobody owes any taxes. Finally charged with tax and mail fraud, Condo last June was sentenced to eight years in prison and fined $92,000. He is still free on appeal, but the IRS, which estimates it lost up to $100 million in taxes evaded by his followers, happily reports that the several hundred people who used to attend his weekly meetings shrank to four in the week after his sentencing.

More delicate is the case of Michael Ripinsky, a Los Angeles art dealer, and a couple identified as Mr. and Mrs. Choi. The Chois went to Ripinsky, according to the IRS, because he advertised that his "tax-management, art-investment" firm could provide "taxfree capital gains through the donation of art to charitable organizations." The Chois paid Ripinsky $22,500--the dealer's own fee was $1,350--for a collection of ancient art. The collection consisted of an Egyptian funerary column, which was given to the Los Angeles County Museum of Art, and an Egyptian gold mask, plus 27 other items donated to the Art Museum at the University of California at Santa Barbara. Though the Chois had paid only $22,500, Ripinsky appraised the collection at a tax-deductible value of $94,000. The funerary column was appraised at $25,000. Ripinsky not only requested the museum to list the work as a donation from the Chois but asked it to backdate the 1982 donation to 1981, thus making it deductible for that year. Ripinsky said that his original notification must have been lost in the mails. The Chois then identified themselves as IRS undercover agents. The IRS filed an affidavit in Los Angeles federal court accusing Ripinsky and the two museums of falsifying documents to allow art donors to take fraudulent tax deductions.

Federal income taxes are the biggest problem, but cheating is also increasing on state income taxes, which now total more than $50 billion. A major reason: some states started only last year to correlate federal and local returns to check for discrepancies, and some still do not use computers.

A number of states have started crackdowns. Illinois hired 240 auditors and collectors last year, and increased the penalties for evading taxes from six months in jail and a $500 fine to one year and $1,000 for first-time offenders. It was able to collect $119.5 million in unpaid taxes and identify another $137 million owed. So far this year, it is doing even better, collecting $86 million and finding $78 million more in arrears. After adding 40 auditors to its staff of 90, Kentucky claims they are each discovering more than $800 an hour in delinquent taxes. Of $63 million collected so far, more than 80% came from corporations that had ducked income and sales levies. Says Tax Enforcement Commissioner E. Roe Rogers: "We call it selective auditing, or getting the most bang for our buck."

It is characteristic of even the most blatant tax cheats to offer elaborate justifications for flouting the law; the rationalizations for selfishness are endless. "I have considered carefully the moral issues behind what I'm doing," says a Boston songwriter who will have to be known only as Daniel, "and my philosophy is, Why support a government whose practices I don't believe in? If I use a public service, I pay for it. When I buy gas, I pay the tax. When I drive my car, I pay tolls. And even when I've been below the poverty level, I've given some portion of my money to those who have less than me. I feel charity begins at home."

Daniel is a musician mainly in his mind's eye. He earns his living by cleaning houses and offices for about ten clients at $7 to $10 an hour. He says he is "barely making it" on $7,000 a year, and he declares no more than half of that to the IRS , "just enough to discourage an audit." The chance of being arrested does not worry him. Says he: "I'm a little too clever to get caught."

A Houston bar owner named Bill shares Daniel's philosophy of government--probably from the right side of the political spectrum rather than the left--and he has more to be philosophical about. Says he: "Last month I paid myself a salary of $10,500 and gave $4,400 to the government, and I don't think I got $4,400 worth of service for it. I'm not fond of a graduated income tax that penalizes me for doing what I do well. Also, I need the money, and I'd like to keep some."

There are several ways to keep some in the food and liquor business, says Bill. One way is to clear the cash register a few hours before closing time, so that part of the day's sales go unrecorded. Since the state keeps a close watch on liquor sales, it is safer to record the liquor sales and cheat on food. Bill says he knows one owner who grosses $500,000 a year from his nightclub but reports only $100,000 on his tax returns. "Stealing money from the IRS requires that the owners of the business do it," says Bill. "You don't let anyone else but family do it. Otherwise a disgruntled employee can cause a lot of trouble."

Bill decided that the simplest and safest way to keep more of his earnings was to pocket most of the money made from the coin-operated pool and football tables that stand alongside his bar. They provide him about $8,000 a year, free and clear. Bill's self-serving rationale: "I risked everything I had to start this business, and now that the gamble has paid off, the government is benefiting almost as much as I do--so that it can give money to welfare people, or to foreign governments that have no intention of paying it back. Why should I be penalized because I'm successful?"

Rachel sees tax evasion as a matter of survival. She pays taxes on the $14,500 she earns as a bookkeeper in Boston, but not on the $30 a night she makes in tips as a part-time waitress at a seafood restaurant near the waterfront. In 1971, when she was starting out, she reported $1,000 in tips to the IRS, but more experienced waitresses told her she was being "silly." The only response from the IRS, two years later, was to tell her that she also owed $60 in Social Security taxes on the $1,000, plus a $50 late-payment penalty. Says she: "I accepted the tax. But a penalty? Come on!"

Rachel complained to the IRS about the penalty and got the agency to cancel it. In the course of the talks, she was amazed to hear an IRS employee tell her on the phone, "Frankly, my dear, nobody reports tips." She never did so again. Starting this year, however, restaurant owners who have ten or more full-time employees must withhold 8% of gross sales as an estimated tax on tips, and the result, says Rachel, is "fury."

"Waiters and waitresses who rely on tips for an income have been backed into a corner," she complains. "The money that kept us going is being taken out of our pay, and our employer has in essence become an IRS agent, whether he likes it or not. The fact is, we're the only ones being penalized. Cabbies and hairdressers who receive tips aren't being forced to report their incomes. And when they were originally going to do something about the three-martini lunches, the big guys raised such a fuss that nothing happened."

There are sound reasons for allowing deductions for business lunches. But Rachel's point is pertinent nonetheless: the "three-martini lunch," as President Jimmy Carter called it, adds to the impression that the tax code rewards the well-to-do and those in favored occupations. This perception contributes to the spread of tax evasion. In an interesting experiment at the University of Colorado, a group of students were asked to declare their incomes and pay taxes of about 40%. One-third were told that everyone in the group was supposed to pay 40%, another third were told that the others were paying 65%, the final third were told that the rest owed only 15%. Overall, the group underpaid its taxes by 25%. The worst offenders were those who believed their rates were higher than those of the others: they tried to evade one-third of their tax obligation. By contrast, those who thought they were paying relatively low taxes underestimated their tax bills by only 12%.

"A lot of people don't think it's morally wrong. They think the government is extorting their money to give to families in the slums," says Philip T. Weinstein, a Miami tax attorney. "When they're caught, they don't bother giving explanations. They usually just say, 'Get me out of this.' Sometimes, they're not at all sorry. They're just terribly sorry they got caught. But most people don't get caught."

Tax cheaters rarely worry about getting caught. Some figure the odds are overwhelmingly with them. Others think they have a foolproof scheme. And still others delude themselves into thinking they are doing nothing wrong. "When someone gets arrested," says Sheldon Elsen, a prominent New York tax attorney, "it can be an almost unbelievable shock. I've seen people break down completely." Carr Ferguson, a partner in the Wall Street law firm of Davis, Polk and Wardwell, has seen that too. "People only think it's a moral gray area until they've been charged. After that, it can be absolutely devastating."

Against all these evaders, the IRS is wielding an array of new weapons. Last summer's Tax Equity and Fiscal Responsibility Act (TEFRA) empowered it to prosecute tax shelters that it considers "abusive" rather than waiting to check on individual returns that use such shelters. The act authorized the withholding of 10% in taxes on all interest and stock dividends, though the banks have mounted a noisy lobbying campaign to repeal that provision.

Before the IRS can effectively crack down, however, it must strengthen its whole system for checking returns, a process that has belatedly begun. The IRS began automating 20 years ago, and civil libertarians originally expressed considerable concern that the tax authorities planned to establish a vast data bank that would sacrifice everyone's privacy to the demand of Big Brother. In fact, the IRS has had increasing difficulty in keeping up with its paperwork on the six aging IBM computers installed back then at the national processing center in Martinsburg, W. Va. It is replacing them this spring with a new $10 million NAS 90-60 computer made by (guess who?) Hitachi of Japan. That will enable tax agents to match bank statements and other reports of income (from employers, brokerage houses, companies paying dividends, real estate registrars) with the returns of individual taxpayers.

At the local level, the IRS will finish in May the installation of Sperry Univac 1100/82 computers in its twelve centers. These will make it possible for local agents to get information out of Martinsburg overnight instead of in the three to six weeks that have been required until now.

One of the IRS's most striking failures has been its inability to collect the $27 billion known to be owed in back taxes. Starting May 9, every overdue account will be fed into a computer that can also work a telephone. If the tardy taxpayer does not answer, the computer will hang up and call again in half an hour. It will continue this all day, from 8 a.m. to 8 p.m., Mondays through Fridays, and also Saturday mornings. When the delinquent finally answers, the computer will switch the call to a Treasury agent, and at the same time the agent's video screen will light up with all the details of the taxpayer's derelictions. "This will drastically increase the number of accounts that a revenue agent can contact," says Dean Morrow, acting assistant IRS commissioner for computer services. "And every time a taxpayer is talked to, his chances of paying are drastically improved."

Though it has been demonstrated that each $1 spent on enforcing tax collection brings an average return of at least $10, President Carter refused to hire more IRS employees because of his drive to reduce the size of the federal bureaucracy. Ronald Reagan initially went even further, slashing the IRS work force from 87,400 in 1980 to 82,800 in 1982. The 13,500 agents now examining returns in the field are 250 fewer than were deployed in 1977. Reagan justified the staff cuts on the hopeful ground that his planned tax reductions would reduce tax evasion and IRS work. In fact, since 1980 the number of returns to be processed has increased by 27 million, to 170 million, and major changes in the tax laws have required extensive staff retraining. Belatedly recognizing that shrinking the IRS was a false economy, the Administration has let the agency hire 5,250 new employees in the past year.

Though the computers are programmed to look for anything statistically suspicious, the shortage of staff has meant a continuing decline in the number of audits. Even among those who earn more than $50,000, a group normally audited most heavily, the rate has shrunk from 12.13% to 5.68% since 1972.

Just as it has been slow to discover tax evaders, the IRS has been slow to prosecute them. Between 1972 and 1982, the total number of cases recommended for criminal prosecution rose only from 1,795 to 2,297, and the number who pleaded no contest or were found guilty, from 733 to 1,291. The backlog of civil suits over the amount of taxes due has swelled from 27,910 at the end of 1979 to 53,440 now. A number of experts believe that there should be not only more prosecutions but stiffer penalties. "A touch of jail for the Harvard graduate is a strong deterrent," says Lincoln Almond, the U.S. Attorney for Rhode Island.

Actually, Congress did increase the maximum fine from $10,000 to $100,000 in 1982, and the courts are beginning to impose tougher sentences. In 1972, only 37% of convicted tax cheaters went to jail; they stayed an average of eleven months. Last year 58% were put behind bars for terms averaging 26 months. On the state level, light sentences are still the rule. In Massachusetts, for example, the longest jail term for each count of tax evasion is five years, but first-time offenders receive an average sentence of six months--and only eleven evaders were packed off to the penitentiary last year. "Simply put," says Harry Mansfield, the senior tax attorney at the Boston firm of Ropes & Gray, "we need that element of fear."

Mansfield raises a harder problem, the complexity of the tax law. Not only does this make compliance difficult ("It has got to the point where professionals like myself cannot be competent in all areas and are beginning to specialize within specialties"), but it requires unrealistic levels of sophistication among agents and examiners. Even worse, it fosters the impression that paying taxes is a game, whose object is to beat the system. "There is no substitute for a simple, less bulky and more understandable tax structure," says Mansfield. "As it stands now, a person observes a neighbor cheating and thinks, 'Why not?' Tax evasion feeds upon itself."

Bernard Wolfman, a Harvard law professor, cites the example of an expensive restaurant in Washington, "right in the shadow of the IRS," where he and a group of other lawyers were given signed tax receipts for their dinner, and then saw that the amount had been left blank, to be filled in according to the diner's conscience. "Face it," says Wolfman, "waiters in nice restaurants are serving people they know are deducting the bills racked up in those places. Lower-and middle-income people are not dumb just because they don't have loopholes. They know a significant distinction when they see one, and they resent the well-heeled using tax-free expense accounts and legal shelters to get out of paying their fair share."

Traditionally, of course, everyone agrees that "loopholes" for "special interests" should be abolished, but impassioned defenders arise when the "loophole" happens to be a middle-class favorite, such as interest on home mortgages or even the deductions for children ($1,000 each on the 1040 form). Indeed, every time a bill is introduced in Congress to reform the tax system, it seems to create still more exemptions and complications. The Internal Revenue code now numbers 2,062 pages of text.

This intractable tangle has inspired some reformers to advocate the so-called flat tax. If all exemptions and deductions were abolished, according to their estimates, the tax rate could be cut to a uniform 18%. And the millions of hours now wasted on puzzling over Form 1040 supposedly could be devoted to some more worthwhile purpose--which means just about any purpose at all. H & R Block could enter some other line of business. It seems hard to imagine, though, that such a reform would not inspire just one little exception, and then another and another.

But even if the flat tax did retain its absolute purity, many argue that an equal tax rate for everyone is inherently unequal because it falls proportionately harder on people with low incomes. "Equity calls for some degree of graduation, with progressive rates," says Wolfman. "I like to think of it as democratic equity." Democrats Bill Bradley, a New Jersey Senator, and Richard Gephardt, a Missouri Representative, have proposed a "fair tax," which calls for a basic flat rate of 14% on income up to $25,000 for individuals and $40,000 for couples; surtaxes ranging from 6% to 14% would be applied to income above those levels.

There remains the question of public perceptions. Is the tax system really fairer than many people seem to think? Probably. Is the belief in its unfairness actually a cause or simply a symptom of people's desire to cheat? Probably both. Traditionally, the IRS has attempted at this time of year to improve its image of fairness and power by launching a few well-publicized prosecutions, or at least auditings, of some celebrated people (see box). But it may be that such publicity only strengthens the current cynicism, and makes it easier to rationalize tax cheating on the grounds that everyone else is doing it.

It is always easy, of course, to tell oneself that "everyone" is doing what one secretly wants to do. It is easy to say that this is what the smart people are doing, the winners, the people who know how to beat the system. Easy but wrong. People who lie and cheat on their taxes are neither smart nor winners; they are simply cheats and liars. In the end, the money that they steal is not being stolen from a faceless government; it is being stolen from their honest neighbors who as a result must pay not only their own taxes but the taxes that the cheaters did not pay. "It's no game," says Roderick Chu, New York State's commissioner of taxation and finance. "As more people evade, we either have to raise taxes or cut programs. People ought to think about that."

--By Otto Friedrich.

Reported by David Beckwith/Washington and Adam Zagorin/ New York, with other bureaus

* The survey polled 1,008 registered voters from March 1 to 3. The sampling error is plus or minus 3%. -A person submitting a return covering an illegal enterprise is assured that the IRS will not turn him in to other law-enforcement agencies. As a practical matter, however, most criminal operators who file returns list legitimate occupations.

With reporting by David Beckwith and Adam Zagorin This file is automatically generated by a robot program, so viewer discretion is required.