Interest in how to close the tax gap -- the amount of money the IRS says it is owed but has not been able to collect -- has been rekindled by release of a new Government Accountability Office report.
Previous studies have indicated the tax gap for 2001, the most recent year for which data are available, stood at $345
billion in uncollected taxes. The net
As the budget deficit grows and election year rhetoric dampens enthusiasm for tax increases, lawmakers keep returning to ways to close the tax gap.
The GAO report focused on ideas kicked around during a September 2007 forum of public and private tax professionals. The bottom line, according to the report, is that "the tax gap has been a persistent problem in spite of efforts to reduce it, as the estimated rate at which taxpayers voluntarily comply with our tax laws has changed little over the past three decades."
Gap solution highlights: The GAO noted that the discussions yielded a mix of recommendations, some of which had been previously raised, as well as newer ideas to help the IRS close the tax gap. The reports cites the following highlights
- Don't delay "serious efforts" to reduce the tax gap while all ideas are being examined.
- The IRS enforcement strategy should focus on large business entities, regardless of the type. This includes S corporations, C corporations, partnerships or large sole proprietorships.
- Partnering with states to share more data could lead to compliance improvements.
Some forum participants also suggested increasing information reporting, such as Dubya's budget proposal that brokers report the basis of security sales. Legislation in this regard is in the works.
Another suggestion was to provide incentives to improve compliance, as well as extend or eliminate the statute of limitations on enforcement actions.
And the report said that many Americans are not directly affected by tax code complexity because "they are insulated from such complexity, at least somewhat, by either paid preparers or through the use of tax preparation software." I'm not sure I agree with this assessment.
Congressional encouragement: Sen. Max Baucus (D-Montana), chairman of the Senate Finance Committee, views the report as encouragement for continued Capitol Hill efforts to close the tax gap. This issue has long been a pet project of the senator, as noted in this 2006 post about the uncollected money gap.
"This report underscores that the tax gap is a serious problem that is not going to be easy to fix," said Baucus in a prepared statement issued following the report's release. "The complexity of our tax laws and the increasingly global economy are driving the need to take a good look at tax reform in order to maintain our nation's competitiveness, improve tax compliance and reduce taxpayer burden."
He also announced that he would be holding hearings on tax reform, including ways to improve tax compliance and improve tax administration to reduce the tax gap. The GAO report estimated that closing the tax gap by a single percentage point could produce an extra $3 billion annually.
"The sooner we get full tax compliance, the sooner we can lower the tax burden for honest Americans who abide by our tax laws," Baucus said.