BY PATRICK SWEENEY
An estimated 670,000 individuals or couples may have underpaid their Minnesota income taxes by more than $600 million in 1999, according to a new study by the state Revenue Department.
The statistical analysis compared state tax returns to U.S. Census Bureau data in an effort to estimate how many people may have failed to file tax returns or claimed that their taxable income was lower than it really was.
Some of the underpayment was outright cheating, and some may have resulted from the complexity of tax laws, according to Dick Gebhart, research director for the Revenue Department. But the study's conclusion that people shorted the state by $604 million came after subtracting overpayments that some taxpayers made.
"When you're confused, generally you're going to make a decision in your favor," Gebhart said Monday of the tendency of taxpayers to underpay rather than overpay the state.
The $604 million the study said the state should have gotten, but did not, was 10.5 percent of Minnesotans' total estimated income tax liability.
The researchers used data from the approximately 1 percent of Minnesotans randomly selected by the U.S. Census Bureau for more intensive questioning, and then used that information plus assumptions about deductions to calculate the total taxes that should have been owed by all residents.
A similar Revenue Department study of the sales tax in 2000 found that about the same percentage of the sales tax went unpaid.
For people who do pay all the taxes they owe, the bottom line is this: Every Minnesotan — man, woman and child — pays about $120 more in taxes to make up for the people who underpaid their income taxes.
"People who don't pay what they owe are causing everyone else to pay more," Jerry McClure, the Revenue Department's income tax director, said in a statement.
Gebhart said researchers chose 1999 to study because the 2000 Census asked people about their earnings during the previous year.
Gebhart said he knew of no other state that has recently attempted to calculate the so-called "tax gap" between what residents owe and actually pay. The Revenue Department's last attempt to calculate the income tax gap in Minnesota produced a $457 million estimate for 1990.
Differences in the way the two studies were conducted make it impossible to say whether the gap is changing, either in real dollars or as a percentage of total taxes.
McClure said he hoped — but could not say for certain — that the department's increased matching of computerized lists to spot people who fail to file tax returns and the hiring of 34 new auditors over the past four years will reduce the tax gap.
David Strom of the Taxpayers League of Minnesota said it would be unfair to assume that everyone who was underpaying was trying to cheat the system.
"In Minnesota, we rely upon a fairly complex tax system," he said. That complexity — a mix of income, business and sales taxes — makes it difficult for some people to understand, especially when it comes to paying taxes on nonwage income.
As one would expect, the study showed that wage earners whose income is reported to the Revenue Department by employers are far less likely to cheat on their taxes than are self-employed people who often receive cash payments and can inflate business expenses.
The study also found that low-income people, including students and part-time workers, are more likely to fail to file returns. Higher-income people, who bear most of the income tax burden, are more likely to under-report their income.
About 3,000 taxpayers earning $500,000 or more a year account for one-sixth of the tax gap, the study found.
This is not a commitment for a loan or an ad for credit as defined by paragraph 226.24 of regulation Z.