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After a
three-year study, the IRS has released final figures on the "tax gap." These
figures are based on estimates using 2001 tax year data gather by the IRS's
National Research Program (NRP). The tax gap is the difference between what
taxpayers owe and what they actually pay.
Last year,
preliminary numbers from the NRP estimated the tax gap to be between $312
billion to $353 billion. The final numbers show it to be $345 billion for
2001. Figure in inflation, and the probable tax gap for 2005 pushes the $400
billion mark.
The IRS
reported that $55 million of the 2001 tax gap has been collected through
enforcement or was voluntarily paid by taxpayers. However, the rest has not
been collected; for the most part, the reason is that the offenders have
not even been discovered.
The last
time a study like this was done was in 1988. According to IRS Commissioner
Mark Everson, 85.5% of tax money that is owed to the IRS is coming in on
time.
 National
survey
The NRP studied tax returns filed by individuals in 2001. The IRS analyzed
each line item and determined
what had been misreported. It calculated what was reported on a line
compared to what should have been on the line.
The NRP
revealed that 80% of the gap is due to underreported taxes, while the
remaining portion of the gap is due to non-filing and underpayment of tax.
Everson explained that the tax gap results largely from underreporting of
income and not overstating deductions.
Key findings
Compliance is highest when third-party reporting is required. Among workers,
farmers had the lowest level of compliance but contributed only $6 billion
to the 2001 tax gap.
Other
notable gap findings include:
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Total Non-Business
Income: $56 billion tax gap,
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Wages, Salaries, Tips:
$10 billion tax gap
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Total Business Income:
$109 billion tax gap
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Non-Farm Proprietor Income: $68 billion tax gap
-
Rents & Royalties:
$13 billion tax gap
Complexity is a problem
Everson said that the complexity of the Tax Code contributes to the tax gap.
He reiterated the need to reform the Tax Code by simplifying it. Everson
predicted that a simplified Tax Code will not only reduce errors but also
prevent taxpayers from making intentional errors on their returns.
Needed reforms
With such a huge tax gap, the IRS recognizes that something has to be done.
According to Everson, one fix would be to increase third party reporting,
coupled with a refinement of the audit process by updating the audit
selection system. These changes are possible because of information gained
from the NRP study.
The IRS will
also close the tax gap by targeting enforcement to improve compliance.
Everson indicated that the new results findings will have more of an effect
on how audits are conducted rather than how resources are allocated in the
examination process.
White House proposals
The White House has made some recommendations to Congress to improve tax
collection. These include:
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expanding third party
information reporting to include certain government payments for
property and services
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expanding third party
information reporting on debt and credit card reimbursements paid to
certain merchants
-
clarifying liability
for employment taxes for employees leasing companies and their clients
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enhancing requirements
that paid return preparers sign returns and impose penalties for
failure to do so; and
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authorizing the IRS to
issue levies to collect employment tax debts prior to collection due
process proceedings.
Congressional reaction
Congressional responses to the tax gap problem are mixed. Senator Max
Baucus, D-Montana, and ranking member of the Senate Finance Committee (SFC),
said the Bush Administration's proposals to close the tax gap are
"unacceptably weak." Baucus recently asked Everson for details about how the
IRS plans to close the tax gap.
SFC Chairman
Charles Grassley, R-Iowa, recognized a serious problem with the tax gap and
the difficulties with finding the right solution. "The tax gap numbers show
that the only thing harder than measuring the tax gap is finding ways to
solve it. There's been a tax gap as long as there's been taxes ...There's no
quick, easy solution," Grassley said.
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