The IRS’ Case of Missing Children

A funny thing happened in 1987 when, for the first time, the Internal Revenue Service required taxpayers to list the Social Security numbers for children age 5 and over they were claiming as dependents. What happened is that about 7 million children simply vanished--at least from tax returns.

In 1986, when taxpayers had only to provide the names for children they were claiming as exemptions, 77 million dependents were listed. But then the law changed, and in returns filed for 1987 only 70 million exemptions were identified.

Is there implicit in this remarkable demographic change the merest hint of earlier widespread tax-dodging? You bet your Form 1040 there is! For a lot of years, millions of children were apparently and profitably created not in the usual way but solely through acts of imagination. When it became easier to check on the existence of such claimed exemptions, these “dependents” simply faded away.

This was no nickel-and-dime scam. By 1987, with each exemption worth $1,900, the shrinkage in the pool of claimed dependents brought the Treasury an extra $2.8 billion in taxes. With the exemption for 1989 raised to $2,000, and with regulations now requiring an entry of Social Security numbers for all children 2 years and older, the additional revenue should grow.

The IRS indicates that tax filers who claimed fewer dependents in 1987 than in 1986 may be asked to explain the discrepancy. That could mean a few billion dollars more for the Treasury when all taxes, interest and penalties are collected. Americans have a pretty good record of honesty on tax returns. The new system is likely to make them even more honest.