Unaccounted for currency in die U.S. has been argued to reflect die presence of widespread income tax evasion. In turn, income tax evasion is especially problematic in this era of large government budget deficits and growing national debts which have led to debt crises. This empirical study seeks to identify determinants of recent federal personal income tax evasion in the U.S. using the most recent tax evasion data available, data that run through 2008 and are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI (adjusted gross income) to reported AGI. The empirical estimates find that personal income tax evasion is an increasing function of the maximum marginal federal personal income tax rate, the interest rate yield on three year Treasury notes, per capita real income, and a dummy variable for the years in which the second war in Iraq was conducted, while being a decreasing function of the Tax Reform Act of 1986, the ratio of the tax free interest rate yield on high grade municipals to the taxable interest rate yield on ten year Treasury notes, the audit rate by IRS (Internal Revenue Service) personnel, and the average IRS penalty on detected unreported income. Thus, among other things, this study finds that more aggressive IRS policies are effective tools in the war against personal income tax evasion.
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