Trying to tax the shadow economy

The US 'shadow economy' (where payments are in cash or in kind, and nothing ever gets officially reported, much less taxed) was estimated in 2012 to be as high as $2 trillion per year.  The IRS reckoned that unreported turnover and income cost it $500 billion in lost taxes.  Heaven knows how high the figures are today - but I doubt they're any lower.

All over the world, the 'shadow economy' is booming even as the 'official economy' is stagnating.  People who are shut out of the regular system are turning to the irregular alternative to survive.  A lot of it involves crime, of course;  but a very large proportion is probably the exchange of goods and services, working for cash under the table, and so on.  It's not surprising that the tax authorities in every country are trying to get a handle on the shadow economy in order to get what they see as rightfully theirs.

Australia's situation is probably a microcosm of what the authorities are trying to do all over the world.  It's certainly instructional.  The Sydney Morning Herald reports:

The Tax Office is targeting the growing number of people making a living or supplementing their regular income from the sharing economy.

"We have a team of data doctors developing the sophisticated tax return analysis we do," says Tax Office assistant tax commissioner Graham Whyte.

"They have PhDs in machine learning, data mining and predictive analytics," he says.

The models scrutinise returns for missing income, over-claimed deductions and also identity crime.

"The models learn and are not based on thresholds so that you can't second guess the models or try and beat them," Whyte says.
Income from working as a taxi driver for UberX or renting out a room on Airbnb should be declared, he says.

Usually the sharing economy "employers" do not pay income tax to the Tax Office on behalf of their "contractors". They therefore do not provide drivers with PAYG payment summaries.

Such income is easy for the Tax Office to track, at least in theory, as most payments in the sharing economy are electronic.

. . .

For the first time, the Tax Office is checking self lodgers' deductions as they complete their tax returns online in real time.

"If your claims are substantially higher than others in similar occupations, earning similar amounts of income, a message will appear, asking you to check them," Whyte says.

The online forms are automatically populated with interest income from bank accounts, for example.

There's more at the link.

I'm sure that Uber and Lyft drivers, and Airbnb landlords, are going to be targeted in the same way in this country.  I'm also aware of efforts to get illegal aliens to talk about their employers, some being offered leniency and even (depending on the importance of their information) immunity from deportation, provided they agree to testify against those paying them in cash and not paying tax on that income, or not paying other statutory requirements such as Workers Compensation premiums, etc.

I think we'll see growing efforts to tax payments in kind as well.  Technically, if you service my car in return for me fixing your plumbing, we're both supposed to report the services we receive 'free' as income equivalent, and pay income tax on them;  also sales tax, as if we'd bought them from a contractor and paid in cash.  However, very few people do.  I don't know how the authorities are going to crack down on it, but I daresay some sort of automated expert system such as they're developing in Australia will be part of it.

Worth keeping in mind by those who are looking to supplement their incomes, or make their scarce dollars stretch just a little further.

Peter