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obligated to file but without the benefit of the tax credits the taxpayer can easily transition from receiving a refund to owing money to the IRS.

Of the three Tax Gap sources listed above underreporting by individuals is the largest noncompliance component amounting to 197 billion dollars in 2001 alone and which is why Congress is so eager to close the gap. Underreporting includes understating income, improper deductions, overstated expenses, and erroneously claimed credits. Let's look at the behavior associated with each of these and how the IRS detects them on each of our individual tax returns.

With regard to understating income, this typically happens when individuals pay someone in cash for a service or a product. For example, the person who provides home daycare might ask her clients to pay in cash and not provide her Social Security Number (SSN) so that the payer doesn't report the transaction on the payer's individual tax return in the form of the Child/Dependent Day Care Credit, which would then alert the IRS to the transaction. This credit is a very generous one so Congress and the IRS dangle it in front of taxpayers to discourage them from working with people or businesses that avoid paying taxes. The credit also rewards people who play by the rules.

Improper deductions include charitable deductions - cash and/or non-cash. Over the years the IRS has been tracking how much each of us claims for charitable contributions and analyzing that data by region and income brackets to gauge how realistic our "write-offs" are with respect to our individual tax profiles. Recent changes in the tax law will now require more proof that the amount we claim is legitimate.

An example of an overstated expense is the basis of a capital asset that an individual sells. Capital assets include stocks, a house, fine art, jewelry or anything that the taxpayer has purchased as an investment with the intent of selling at a profit. Over the years, Congress has relaxed the rules on taxing profits from the sell of a primary residence but there are very strict rules about which house is a primary residence when taxpayers own more than one home.

Stocks include those that are purchased outside of a sheltered account, such as retirement funds. Capital gains tax is typically applied when individuals purchase stock on their own, through a broker or as part of an employee purchase stock option where they work. When the taxpayer sells that stock they will either realize a gain, a loss,

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