No doubt billionaires and any wealthy taxpayer seek to lower their tax liability. But so do you and I – Roth accounts, staying under IRMAA premium levels, QCDs, HSAs, tax credits, etc. All legal, not necessarily available to everyone but all lower tax liability.
The group that commits the most common type of tax fraud — underreporting income — is primarily self-employed individuals and small business owners.
Here’s why:
- Wage earners (employees) have their income reported directly to the IRS on W-2 forms and taxes withheld, leaving little room for hiding income.
- Self-employed workers, gig workers, cash-based businesses, and independent contractors don’t always have their income reported on official forms. They have more opportunity to leave off cash payments, tips, or side jobs.
- IRS research shows the “tax gap” is lowest when third parties report income (like W-2 wages) and highest where there’s no reporting at all (cash transactions, some rental income, or informal business).
So, while tax fraud occurs across many groups, the largest share comes from individuals running cash-heavy or self-employed businesses, not from regular wage employees.
Did you ever wonder why the sign says “cash only?”
- They account for a substantial share of underreported income—ranging from nearly half to more of the individual income underreporting gap Tax Policy Center.
- For example, in 2014–16, nearly 47% of individual underreporting was business income, and about 21% was self-employment related Tax Policy Center.
- In 2021, small business/pass-through income alone contributed $182 billion, and self-employment taxes accounted for $68 billion of underreporting CRFB.
- Wage and salary earners:
- These taxpayers are far less likely to underreport income, due to employer information reporting (W-2s) and tax withholding mechanisms, resulting in much lower misreporting rates Tax Policy CenterCRFB.
- Corporations and high-income individuals:
- They contribute a smaller share proportionally to the gross tax gap, though specific sophisticated avoidance schemes do exist (e.g., basis shifting among the ultra-wealthy) Business Insider.
- However, in absolute terms, small businesses and self-employed individuals account for the lion’s share of noncompliance.
QUINNSCOMMENTARY 
The original purpose for the cash register was to protect the merchant from dishonest employees. When I was in the CR business, I was often asked how they, as the owner, could direct some of the cash to themselves.
My answer was always the same. “You will always have a partner. The partner you know (eg IRS) or the one you don’t (employees). I can tell you exactly what the IRS will take. I can’t with your employees. Which one do you want?”
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