Congress Targets Federal Tax Gap
$350 billion per year and growing.
August 27, 2009
In 2006, the U.S. Treasury’s Office of Tax Policy issued a report called the Comprehensive Study for Reducing the Tax Gap that set a seven-component strategy for reducing the U.S. tax gap. The goal at that time was for an 80-percent voluntary-compliance rate, meaning 80 percent of federal taxes would be collected without audit or other direct intervention by the Internal Revenue Service (IRS). According to the IRS the actual compliance rate is slightly above their 2006 goal — but it may slip in the current economic climate.
The Treasury Department released an updated report on July 8, 2009 reflecting the federal tax compliance results and the related “Tax Gap” — the difference between what individual and business taxpayers actually remit versus what they owe in various federal income taxes. With ballooning deficits, the tax gap has become a very hot topic in Congress.
The IRS collects approximately 96 percent of all federal gross receipts ($2.7 trillion for FY 2008) through the "voluntary" income tax reporting system. The term "voluntary" refers to taxpayers who are effectively on the honor system when it comes to reporting many income and expense items on their business and personal tax returns.
The IRS estimates that there is currently an 84 percent tax-reporting compliance rate, which means that 16 percent of federal income taxes are estimated to be under-reported and/or underpaid by individual and business taxpayers. Less than one in five (20%) of these under-reported taxes, which total over $350 billion annually, are ever collected by the feds through their audit and collection arms.
The tax gap comes in three basic forms — in ascending order of seriousness:
In light of trillion-dollar annual deficits and record spending in Washington, Congress is increasing their scrutiny on non-compliant taxpayers and is exploring a variety of ways to narrow the gap.
Tax Compliance Enhancement
Following are the fiscal 2010 and 2011 proposals currently being evaluated by the Senate Finance Committee:
Other Proposed IRS Improvement Measures
In addition to the aforementioned tax compliance improvements proposed in the report, the following IRS operational enhancements are also being considered:
- The most recent data is from the tax year 2001. The IRS desires more up-to-date audit results and taxpayer data in order to improve its audit selection and audit procedures;
- Includes ongoing compliance studies of S Corps and Individuals for the tax years 2003-2004 and 2006-2007, respectively. The IRS is currently conducting detailed audits to gather critical compliance date and audit statistics similar to the old TCMP audit process.
- Increase the e-file rate by simplifying the filing process, reducing processing errors and expediting the refund process.
- Reach an 80-percent e-file rate.
- Increase of $332.2 million in the FY 2010 budget to support compliance programs.
- Seek increased compliance in the areas of international enforcement with businesses and high income individuals.
- Increased personnel to support analysis and enforcement of policies and to combat the underreporting of taxes.
- Increase use and support of online services. The IRS is proud of their Web site, which has received a 74-percent increase in traffic between FY 2005 and FY 2008 — probably more related to general Web access trends as opposed to a dazzling site. To be fair, there is some excellent content available.
- Increase the efficiency and effectiveness of written communication to taxpayers. The IRS Web site is light-years ahead in terms of clarity and grammar.
- The IRS is currently working on revising various tax forms to reduce the amount of errors involved in filings and to simplify various procedures.
- Increase collaboration with IRS partner agencies and improve the use of information such as state audit reports.
Based on these proposals, which will very likely be implemented in the next couple of years (assuming the IRS can effectively integrate their IT systems and these databases), the 16 percent (or more) of taxpayers who are under-reporting income and/or over-reporting expenses are being given fair warning to follow Vice President Biden's call “to be patriotic …” and pay their fair share of taxes otherwise, the IRS will be turning up the heat and make sure they do in the coming years.
Forewarned is Forearmed!!
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Blake Christian, CPA/MBT, is a Tax Partner in the Long Beach, California office of HCVT, LLP. Christian is also Co-Founder of National Tax Credit Group, LLC.