Taxes: 10 Ways to Cheat Like a Pro

Feb. 23, 2009— -- Before bowing out as nominee for health czar, Thomas A. Daschle explained as best he could how he managed to overlook $340,000 of income on his 2005 through 2007 tax returns. His reason: The income (some cash and a lot of chauffeuring) didn't show up on his 1099s. These are the forms self-employed people such as influence peddlers receive instead of W-2 wage statements.

The former Senate majority leader seems to have something in common with his fellow citizens -- or at least those who contribute to the $345 billion annual gap (as of 2001) between what the Internal Revenue Service estimates taxpayers owe and what they voluntarily cough up.

Tax filers own up to nearly all the income the IRS can double-check against documents sent to it by employers, brokers and banks. But people are for some reason very neglectful when it comes to income and deductions that the IRS can't easily cross-check. They pay only 45 percent of the taxes owed in their noncheckable lives.

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"I run into it with clients all the time. The current system has built a mentality that if there is no W-2 or 1099, it's not reportable income," says Phoenix CPA Edward Zollars.

Daschle should have known better, but maybe it's understandable if ordinary folks think this way. Over the past two decades the number of 1099s and other information returns sent to the Internal Revenue Service has doubled -- to a projected 1.95 billion this year. IRS computers match most against individual returns and spit out 3 million-plus CP 2000 notices to taxpayers a year demanding an explanation for discrepancies.