$2 Trillion Underground Economy Helps and Hurts the Recovery

The growing underground economy may be helping to prevent the real economy from sinking further in debt, according to analysts.  The shadow economy composed of those who can't find a full-time or regular job and turn to work that pays them under the table, reports no income and pays no taxes.

"You normally see underground economies in places like Brazil or in southern Europe," said Laura Gonzalez, professor of personal finance at Fordham University. "But with the job situation and the uncertainty in the economy, it's not all that surprising to have it growing here in the United States."

Estimates are that underground activity last year totaled as much as $2 trillion, according to a study by Edgar Feige, an economist at the University of Wisconsin-Madison.

That's double the amount in 2009, according to a study by Friedrich Schneider, a professor at Johannes Kepler University in Linz, Austria. The study said the shadow economy amounts to nearly 8 percent of US gross domestic product.

Much of that money goes into cash registers, said Gonzalez, as personal consumption has risen since the recession.

But that money also creates issues for tax preparers.  If the income is not reported, the workers are guilty of income tax evasion.  But determining whether a client is being truthful about their income is a near-impossible task because it is an underground – sometimes called “grey” – economy.

Acting on the issue as well, is the fact that rising attention to fraudulent returns could place preparers in an awkward position. If they question clients who provide documentation of low income, yet…they are visibly affluent, they risk losing business.  If they fail to question the income claims as clients, they leave themselves open to questions about the integrity of their returns. 

The issue remains open, with no easy answers.  Keep pace with TaxingSubjects as we report on developments on this issue.

Source:  Washington Post/CNBC/Moneymorning