America at tax time: What cheaters cost us

(CBS News) There are such things as honest mistakes, of course But as the income tax filing deadline approaches, the better angels of our nature battle it out with those devils that encourage our cheating ways. Our Sunday Morning Cover Story is reported now by Rebecca Jarvis:

April 17th - Tax Day - is just two days away, and for Americans everywhere, these are taxing times.

If you think filing your tax return is stressful, try preparing 21 MILLION of them. That's how many Wilma Hayes and her fellow tax pros at H&R Block did last year.

"It takes over my life," Hayes said. "I eat, I sleep, I breathe taxes."

Hayes told Jarvis she's even slept in her office - and what keeps her working late are certain taxpayer tendencies, like procrastination.

"I can't even begin to tell you, I mean, to see people come in with a stack of papers at the last minute," she said.

CBS Moneywatch special section: Your taxes

Many of them, she says, lack a clear understanding of the tax code. Others lack something else: Honesty about their finances. Examples: "The claiming of expenses they're not entitled to. Stretching it. Home offices that aren't really there. Claiming dependents that are not theirs."

And tax evasion - big and small - is a national problem.

According to David Callahan, who heads a think tank called DEMOS, the government only collects about 85 percent of the money that it is owed. And what happens with that other 15 percent?

"Goes into the pockets of the tax cheaters, and the rest of us help subsidize them by paying higher taxes," said Callahan.

There's a lot to subsidize, he says The most recent IRS estimate shows a $385 billion shortfall in revenue, mostly from under-reported income.

"Ever since there have been tax collectors, there's been tax evasion," Callahn said. "Every empire in history, every government on the planet faces the problem of tax evasion. What's happened in the United States is that in the past couple decades, the tax system has become a lot more complex, [so] there are more opportunities to cheat now than there used to be."

And those opportunities are especially ripe for a certain type of tax payer. IRS Commissioner Douglas Shulman says his agency keeps a vigilant eye on one group in particular:

"People who make a lot of money and have very complicated returns, there's a lot more places where a) we're not going to get information on them and we need to do a double-check; and b) where people have the opportunity to push the envelope," Shulman said. "The reality is, if you make $50,000 a year as a schoolteacher, all of your income is withheld by your school system, sent to us. There's very little non-compliance."

Shulman says the IRS sees all kinds of fraud, from multi-million dollar offshore bank accounts to small-scale numbers fudging. But he still believes in the moral goodness of most Americans.

"This country has a great tradition of voluntary compliance. And I think the reason for that is the American people believe that this is a great country. They believe that their freedom, the opportunities afforded to them by living in this country isn't free. And that's what taxes are for."

A 2011 survey by the IRS Oversight Board seems to back Shulman up: Eighty-four percent said it is "not at all acceptable to cheat on one's income taxes."

But according to David Callahan, the survey left out a critical question:

"If you asked Americans, 'Do you think that other people cheat on their taxes?' most people would probably say 'Yes,'" he said. "Nobody wants to be the chump who dots every i and crosses every t and pays every dime.

"And if you think that other people are cheating on their taxes or being 'aggressive' with their deductions, then you may feel that it's okay to do it yourself."

So how about YOU? Would YOU ever cheat on your taxes?

Before you answer, ask yourself another question: What's worse - fudging your numbers to save a few hundred dollars, or stealing a few hundred dollars' worth of stuff from a store? Both are illegal, and most of us realize that shoplifting is wrong.

But some researchers say when it comes to taxes, our behavior gets a little murkier.

"When I'm confronted, let's say, with taxes and I'm thinking about, 'Should I cheat or should I not cheat? Should I report extra income or should I fudge it?' there is that immediate impulse that says, 'No, don't do this. This is wrong,' because fairness is really important to human species," said psychologist David DeSteno. "But give us a few seconds and there's a motivation to make it okay for ourselves. We can justify it."

In other words, DeSteno says, we're not even honest about our own dishonesty.

In an experiment, DeSteno asked subjects to flip a virtual coin on a computer - only ONCE. The flip would decide if they'd get stuck with a difficult task, or be rewarded with an easy one. He secretly watched . . . and found a staggering number of cheaters.

"What you see is 90 percent of the people do not do what we all consider the right thing," DeSteno told Jarvis. "They either assign themselves the good task immediately, or they flip the coin and if they get an answer they don't like, they flip it AGAIN - and they flip it AGAIN until they get the answer they want - which is basically the same thing as cheating."

And it doesn't end there: When they watched OTHER people being equally deceitful, they condemned that behavior.

So are we all just moral hypocrites?

"We all have the potential to be moral hypocrites," said DeSteno. "We're not arguing that people are bad; we're arguing that people are just more variable. If you want to guide your moral behavior in the way you want, then you need to understand how the mind really works."

"But we can't all be psychologists like you," Jarvis replied.

"Thank God!" DeSteno laughed.

Even if people are "complicated," one solution may be simple, says behavioral economist Francesca Gino. Using mock tax returns, she tested whether a small change in the form's layout - moving the signature line from the bottom to the top - might produce a BIG change in people's behavior.

It did: Her subjects became LESS likely to cheat.

She said signing your name on the TOP of the form reminds you of your ethical standard: "You're reminded of the fact that you care about being a good and moral person. And so since you want to be consistent with that image, you're then more likely to be more honest.

"Instead, if the signature is at the end, it's too late to go back to the numbers and change them."

The IRS has no plans to change our tax forms.

David Callahan said something else is far more critical for the agency: A bigger budget. The IRS was forced to cut 5,000 jobs this past year.

And Callahan argues that our nation's economic well-being is at stake.

"We have lost $3 trillion to tax evasion in the last decade," Callahan said. "So, if you can make a serious dent in tax evasion, it would very much help with our deficit. In terms of 'bang for the buck,' if you want to reduce the deficit, hire more IRS agents."

But getting money for tax collection versus, say, schools or parks is a hard sell, especially now.

Either way, one thing is clear: Dishonesty won't be disappearing any time soon.

"It's not just cheating on people's taxes," said Callahan." "There's cheating in sports, there's cheating in our schools, there's cheating in businesses by corporations, there's insurance fraud, there's cheating by healthcare providers, with Medicare fraud. Everywhere you look, there's a lot of cheating."

For more info:

• "Out of Character: Surprising Truths About the Liar, Cheat, Sinner (and Saint) Lurking in All of Us"by David DeSteno and Piercarlo Valdesolo (Crown)
• H&R Block
• irs.gov
• demos.org
• Francesca Gino, Harvard Business School