I read Hilzoy's post from last week in which she expressed her hope that Daschle gets ditched as a result of his tax problems, and for a change I even read the comments. Responses to a few of them:

I can't speak specifically to waitress tips. In my decade of preparing tax returns I've seen tips for waitressing only once. In that case, in spite of filing a year late, the taxpayer had pretty good records and was able to come up with a reasonably reliable figure. (Ironically, in her case, overreporting her tip income would have worked slightly in her favor. Her total income was so low that the increase in her earned income tax credit outweighed the increase in tax.)

That aside, the line that interests me is, "Who is really going to guesstimate high?" Actually, a lot of people do.

Cases with uncertain amounts of income aren't very common, but the parallel situation, where you have an uncertain amount of deductible expenses to count against your income, comes up a lot. In such cases, I would say clients who estimate their deductions timidly are far more common than those who estimate them aggressively. It's very common for clients to tell me, "I probably spent a lot more than that, but I don't want to overclaim, so let's just say X." Often they're far more timid than they really need to be, but they'll resist my gentle coaxing to claim more.

Yes, there are a few aggressive clients who are always trying to sneak out a little something extra if we don't slap them down, but they're the smallest group. Possibly my sample is self-selecting and our clients are disproportionally honest and responsible, but among the roughly 250 taxpayers whose returns I've seen over the years, most err in the side of paying too much.

Curiously, most of them assume that they are the exception. There is a common attitude that says, "I know everyone else cheats but I don't." In fact, everyone else doesn't. The conventional wisdom, I suspect, misperceives taxpayers on the whole as being quite a bit more dishonest than they actually are.

There are two specific situations where I find cheating to be common. In both cases, there is a widespread attitude that in these specific cases it is OK. Either because they have been misinformed or because they wish to delude themselves, the cheaters believe that they aren't cheating.

One of these is for small on-the-side jobs done by people who aren't normally self-employed. I'm always surprised by how many people think they don't have to pay tax on this sort of income. People who actually make a living self-employed know better, but others have it in their head that if they don't get a 1099 that means they don't have to pay tax on it. Sometimes I'll hear someone ask to be paid only $599 for a job rather than $600 or more because then it won't be taxable. Um, no. It's still taxable. It's just that the IRS is far less likely to catch you if you cheat.

The other is for non-cash charitable contributions, where a lot of people want to claim the item for more than it's worth. I used to see this most often with used cars, though the IRS started cracking down on that a few years ago. I would actually hear people say that you should donate an old car rather than sell it because you'll get more benefit that way. This is patently absurd. The amount of the allowable deduction is the fair market value of the item, so by definition the deduction can only be more than what you could sell it for if your tax rate is more than 100%.

Another comment:

This is a variation on the theme whereby everyone believes that everyone else is cheating.

When we get new clients, I often look at their prior year returns and I sometimes find stuff that was missed. I don't know about cabinet appointees, but among the people I've worked with, people are just as likely to err in one direction as in the other.

This is also true when the IRS questions a return and the client has to go back and dig deeper in their records. As often as not, it turns out they actually overpaid. A couple years ago a good friend of mine got a letter from the IRS because some stock options weren't reported properly. After we sorted it all out, it turned out he had overpaid by about $1,000 and the IRS owed him money. I've seen that happen with audits, too.

One guy's take on Daschle's situation:

Yikes, no. This guy is unclear on the concept.

First of all, Daschle is not a wage employee, so he wasn't going to get a W-2 from InterMedia at all. Any income would have been reported on a 1099.

Second, the car was presented to him for business use, not as a gift. From the company's point of view, Daschle was only using it for business, in which case the expense was legitimate. It is only when Daschle used the company car for personal use that it became income. Even if the company knows he's going to do that (and I assume they do) it's still not their responsibility to report it on the 1099. Among other things, without quizzing Daschle about his usage of the car, they wouldn't be able to calculate the correct figure.

A lot of the stories aren't very clear on exactly what happened. I suppose readers who aren't in the tax business wouldn't find it interesting reading. An exception is this one, which is pretty detailed.

In summary: The car provided to him was used mostly for personal use during 2005, 2006 and 2007, but he neglected to report any of it as income. (His 2006 return was actually reviewed by the IRS and accepted as filed, but the IRS wouldn't know about the car.) In June 2008, possibly as a result of contemplating a vetting, Daschle realized that the car should have been reported. He informed his accountant of this, and also mentioned that he thought the 1099 for 2007 was wrong. The accountant proceeded to prepare amended returns for the three years, including tracking down the error on the 1099. At this point, it appears that even though Daschle knew the return needed to be corrected, he still didn't realize what a large amount of money was involved.

Some time in December, Obama's vetting team went over Daschle's return. Like the IRS, they didn't know about the car nor the inaccurate 1099, but they did spot some questionable charitable donations. Daschle did not tell Obama's team about the amended returns until they were filed, which happened on Jan 2. The vetting team then recognized that the car was still not done properly because self-employment tax was not paid on it.

Based on my experience, I would say that all three of Daschle's tax errors — forgetting to count personal use of the car, screwing up on some of the charitable contributions, and failing to notice the mistaken 1099 — are commonplace. They are indeed errors, and all of them are ultimately his responsibility, but none of them are egregious. None of our clients have wealth at anywhere near his scale, but I could easily imagine them making the same errors at a smaller scale. Hopefully, they would be found eventually, we'd say "oops" and then we'd file the amended returns and make it right, just as Daschle is doing. It sucks that our tax code is so convoluted that things like this are common, but it really is just normal operating procedure.

I blame Daschle for two things. First, he ought to have a better relationship with his accountant. The accountant knows full well that personal use of an auto is taxable. If I'm aware that a client has regular access to a company car, it's something I'm going to ask about it, but with a lot of clients you really don't know what's going on. Given Daschle's high profile position, he ought to be more careful. I don't expect him to think like an accountant and be aware of everything, but he needs to either hire an accountant who will more aggressively nag him, or (more likely) assign some staff member the task of looking out for such things and acting as go-between. Second, if the Obama team is actually looking at his tax returns in December, it's hard for me to imagine why Daschle would fail to mention to them that his accountant is in the process of amending them.

I blame the accountant for one thing. If they amended the return for use of the car, how could they fail to pay SE tax on it? Yes, he's well beyond the cap for FICA, but Medicare has no cap. That's pretty basic stuff. In my office, you just code it as SE income and the software does it for you. Unless there's some special situation I'm not aware of, the accountant ought to be embarrassed by that.

All that said, I'm glad that Daschle has been ditched. I have no opinion on whether he really is the best man for the job of leading health care reform through Congress, nor would I assert that his clumsiness with his tax returns disqualify him from serving. But I do think changing the culture of government is more important than either of these things.

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