by Michael Fleshman
The following excerpt is taken directly from a GAO report called "HIGH-RISK SERIES An Update," which highlights the difficulties in collecting revenue legally owed to our federal government. You will note from the steps recommended that significant collection efforts are to be focused on corporations and other business practices. The $450 billion in annual lost revenue does not take into account other shady tax loopholes used by the wealthy hide their income. It also isn't clear if this total includes taxes lost in the underground cash and barter economies, which costs us billions in lost revenue. Unpaid taxes are an affront to a fair and balanced tax system. Lost revenue must be made up out of the pockets of law abiding citizens. Any changes to tax laws to make them fairer must include provisions to make collection more uniform.
Enforcement of Tax Laws
The Internal Revenue Service (IRS) recently estimated that the gross tax gap--the difference between taxes owed and taxes paid on time--was $450 billion for tax year 2006. For a portion of the gap, IRS is able to identify the responsible taxpayers. IRS estimated that it would collect $65 billion from these taxpayers through enforcement actions and late payments, leaving a net tax gap of $385 billion. The tax gap has been a persistent problem in spite of a myriad of congressional and IRS efforts to reduce it, as the rate at which taxpayers voluntarily comply with U.S. tax laws has changed little over the past three decades. Given that the tax gap has been persistent and dispersed across different types of taxes and taxpayers, coupled with tax code complexity and a globalizing economy, reducing the tax gap will require applying multiple strategies over a sustained period of time.
IRS enforcement of the tax laws is vital for financing the U.S. government. Through enforcement, IRS collects revenue from noncompliant taxpayers and, perhaps more importantly, promotes voluntary compliance by giving taxpayers confidence that others are paying their fair share. GAO designated the enforcement of tax laws as a high-risk area in 1990.IRS and Congress have shown a commitment to addressing the tax gap. Importantly, IRS continues to research the extent and causes of taxpayer noncompliance and is using the results to revise its examination programs. While still in the early planning stages, IRS has met with key stakeholders to develop options for expanding compliance checks before issuing refunds to taxpayers. IRS is also extending a program to encourage taxpayers to voluntarily report their previously undisclosed foreign accounts and assets, which has resulted in billions of dollars in collections. IRS, as well as Congress, has taken other innovative actions aimed at further improving tax compliance, often directly based on GAO's work, including the following:
" Since 2012, brokers have been required to report their clients' basis for securities sales.
" Since 2011, banks and other third parties have been required to report businesses' credit card and similar receipts.
" Starting in 2014, U.S. financial institutions and other entities are required to withhold a portion of certain payments made to foreign financial institutions that have not entered into an agreement with IRS to report details on U.S. account holders to IRS
" Starting with tax year 2010, IRS is requiring businesses to report on their tax returns uncertain tax positions--those for which a business reported a reserve amount in its financial statements to account for the possibility that IRS does not sustain the position upon examination or that the position may be litigated.
" IRS is continuing its multiyear effort to replace the systems it uses to process individual tax returns and receive electronically filed tax returns.
The impact of these initiatives on taxpayer compliance and the tax gap may not be known for years and will depend, in part, on how IRS implements them. Using the new information from financial institutions could require IRS to develop new business processes and uses of information technology. Implementation will also be influenced by IRS's ability to provide quality taxpayer services, such as telephone, correspondence, and online assistance. GAO found that some services
have experienced performance declines in recent years and IRS's website could offer additional interactivity for taxpayers.
Another initiative IRS undertook in 2010 was to begin implementing new requirements for paid tax return preparers, such as competency testing, with the goals of leveraging relationships with paid preparers and improving the accuracy of the tax returns they prepare. Given that they prepare approximately 60 percent of all tax returns filed, paid preparers have an enormous impact on IRS's ability to administer tax laws effectively. In January 2013, the U.S. District Court for the District of Columbia enjoined IRS from enforcing the new requirements for paid preparers. IRS has filed a motion to suspend the injunction and intends to appeal the District Court's decision.
Further refining of direct revenue return-on-investment measures of its enforcement programs could improve how IRS allocates resources across its programs. Better use of such measures, subject to other considerations of tax administration, such as minimizing compliance costs and ensuring equitable treatment across different groups of taxpayers, could help maximize income tax collections. Resource allocation will become increasingly important as IRS is tasked with broader responsibilities, such as those in the Patient Protection and Affordable Care Act, in a time of tight budgets.
Additionally, targeted legislative action may be needed to address some compliance issues. IRS has statutory authority -- called math error authority--to correct certain errors, such as calculation mistakes or omitted or inconsistent entries, during tax return processing. Expanding such math error authority could help IRS correct additional errors before interest is owed by taxpayers and avoid burdensome audits. Additional types of information reporting could also help improve compliance.