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Narrowing the Tax Gap

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Narrowing the Tax Gap James B. Mackie III Director, Revenue Estimating Division Office of Tax Analysis U.S. Treasury Disclaimer Any views or opinions are my own and ... – PowerPoint PPT presentation

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Title: Narrowing the Tax Gap


1
Narrowing the Tax Gap
  • James B. Mackie III
  • Director, Revenue Estimating Division
  • Office of Tax Analysis
  • U.S. Treasury

2
Disclaimer
  • Any views or opinions are my own and do not
    necessarily reflect the official views of the
    U.S. Treasury.

3
Bottom Line
  • The tax gap is a serious multi-dimensional
    problem.
  • The tax gap can be reduced but not eliminated.
  • The Administration is committed to working with
    Congress to reduce the tax gap without unduly
    burdening compliant taxpayers.
  • The Treasury has proposed a multi-pronged
    approach to reducing the tax gap and has made
    specific Budget proposals consistent with this
    strategy.
  • Some budget proposals have been enacted.

4
Tax Gap Background
5
What is the Tax Gap?
  • Gross tax gap. The difference between the amount
    of tax that taxpayers should pay under the tax
    law and the amount they actually pay on time.
  • Estimate of 345 billion in tax year 2001, 83.7
    voluntary compliance rate.
  • Net tax gap. Gross tax gap less taxes that were
    paid voluntarily but late and recoveries from IRS
    enforcement activities.
  • Estimate of 290 billion in tax year 2001, 86.3
    net compliance rate

6
Sources of the Tax Gap
  • Caused by many kinds of errors and omissions.
  • Intentional evasion and unintentional errors both
    contribute to the tax gap.
  • Tax complexity leads to unintentional errors and
    creates opportunities for intentional evasion.
  • Better taxpayer service can reduce unintentional
    errors.
  • Cant tell how much of the gap is from
    unintentional errors.
  • Over 80 of the gross tax gap is from
    underreporting of income.
  • Over 40 is underreporting of net business income
    (individual income tax and self-employment tax).
  • About 10 of the gross tax gap is from
    underpayment of tax and about 10 from nonfiling.

7
Information Reporting and Withholding
  • Noncompliance is highest among taxpayers whose
    income is not subject to third party information
    reporting or withholding.
  • Withholding. Wages are underreported by 1.
  • Information reporting. Interest income,
    dividends, social security benefits, pensions,
    and unemployment insurance are underreported by
    4.5.
  • No information reporting. Net income from
    proprietorships, rents, and royalties is
    underreported by 54.

8
Information on the Tax Gap is Dated and Incomplete
  • Identifying the sources and levels of
    noncompliance is critical to designing and
    implementing effective remediation.
  • The main source of information is the National
    Research Program (NRP), which has compliance data
    from 2001.
  • NRP looked only at individual income and
    self-employment taxes.
  • Estimates of compliance for other taxes (e.g.,
    corporate income tax) are based on information
    that is much older studies are 20 years old.
  • Study of S corporation compliance is in final
    stages.
  • Excise tax compliance has never been studied.

9
Reducing the Tax Gap vs. Raising Revenue
  • Reducing the tax gap is not the same thing as
    raising revenue.
  • Some tax changes are clearly targeted towards
    noncompliant taxpayers and the tax gap, e.g.,
    increased information reporting, penalties,
    closing specific illegal tax shelters.
  • Some tax changes raise revenue from compliant
    taxpayers and also reduce the tax gap, e.g.,
    eliminating the home office deduction or the
    charitable deduction.
  • Some tax changes simply raise revenue without
    affecting the tax gap (compliance).

10
Can the Tax Gap Be Closed?
  • The tax gap can be narrowed, and it is important
    to do so.
  • All Americans should pay their fair share of
    taxes.
  • Expectations have to be realistic.
  • The tax gap is a longstanding, persistent
    problem.
  • Compliance rates are about the same as 20 years
    ago despite large changes in tax law and in tax
    enforcement.
  • There is no low-hanging fruit in this area.
  • former IRS Commissioner Lawrence Gibbs.
  • IRS already gets the easy enforcement dollars.

11
Can the Tax Gap Be Closed? (cont.)
  • Closing the tax gap completely seems infeasible
    if not impossible. It would require draconian and
    costly measures.
  • Universal audits.
  • Very severe penalties.
  • High burden on compliant taxpayers.
  • Increase tensions between taxpayers and the
    government.
  • Large reductions in the tax gap would be VERY
    difficult to make and might not be worth the cost
    imposed on the IRS and on taxpayers.
  • Same problems as completely closing the tax gap.
  • 290 billion per year is a large overstatement of
    the achievable reduction in the tax gap.
  • Improvement in the governments net fiscal
    position would be smaller because of the cost of
    collection.

12
Treasurys Tax Gap StrategyFour Principles
  • A Comprehensive Strategy for Reducing the Tax
    Gap, OTP, September, 2006.
  • (1) Address unintentional taxpayer errors and
    intentional taxpayer evasion.
  • (2) Target specific sources of noncompliance.
  • (3) Combine enforcement with taxpayer service.
  • (4) Respect taxpayer rights and balance
    enforcement against taxpayer burdens.

13
Seven Specific Strategic Components
  • (1) Reduce evasion through legislation and
    regulation.
  • (2) Commit to multi-year compliance research.
  • (3) Improve information technology.
  • (4) Improve IRS compliance activities.
  • (5) Enhance taxpayer service.
  • (6) Simplify the tax law.
  • (7) Coordinate with partners and stakeholders.

14
Implementing the Treasury Strategies
  • Made some progress on all fronts.

15
Budget Proposals Legislation to Reduce Evasion
  • 16 specific proposals in the FY 2008 Budget.
  • Expand information reporting (7).
  • Three proposals account for most of the revenue.
  • Business payments to corporations File an
    information return for payments summing to 600
    or more to a corporation.
  • Basis on security sales Brokerage houses, mutual
    funds, asset managers, and fiduciaries would be
    required to report adjusted basis on sales of
    publicly traded securities.
  • Merchant payment card reimbursements Card
    processors must report to the IRS gross
    reimbursement payments made to merchants.

16
Budget Proposals Legislation to Reduce Evasion
(cont.)
  • Improve compliance by business (3).
  • These include a proposal to amend the collection
    due process rules for employment taxes that has
    been enacted in modified form by HR 2206.
  • Strengthen tax administration (3).
  • Make willful failure to file a return a felony.
  • Strengthen penalties (3).
  • Two have been enacted in modified form by HR
    2206.
  • Increase and extend to other types of returns
    penalties on tax preparers for filing erroneous
    returns. (Issues MLTN standard, no transition
    relief.)
  • Create an erroneous refund penalty.
  • HR 2206 also increased the penalty for writing
    bad checks to pay taxes (not a Budget proposal).

17
Budget Proposals Legislation to Reduce Evasion
(cont.)
  • Modest revenue pick-up (29 billion over ten
    years).
  • Most revenue from information reporting.
  • Proposals focus on noncompliance, not raising
    revenue by changing the baseline against which
    compliance is measured.
  • Respectful of taxpayer rights and burdens.
  • No low-hanging fruit.

18
Sidebar Treasury Revenue Estimating for
Enforcement Initiatives
  • Two types of revenue effects.
  • Direct revenue immediately related to specific
    enforcement programs, e.g., penalties collected
    and revenues from audits. (These are counted as
    revenue from IRS enforcement.)
  • Indirect revenue from changes in voluntary
    compliance caused by the enforcement initiative.

19
Sidebar Treasury Revenue Estimating for
Enforcement Initiatives (cont.)
  • Three types of enforcement initiatives.
  • Legislative initiatives.
  • Statutory changes to administrative provisions of
    the IRC.
  • Score direct and indirect revenue effects
    (although the effects can be small).
  • Management initiatives.
  • Redeploy existing enforcement resources to
    increase efficiency.
  • Do not score.
  • Historical productivity increases already in
    baseline tax receipts.
  • Management decisions are made too frequently to
    track and evaluate.

20
Sidebar Treasury Revenue Estimating for
Enforcement Initiatives (cont.)
  • Resource initiatives.
  • Net additions to current service levels of
    resources applied to IRS enforcement programs.
  • Occasionally (rarely) have scored direct effects.
  • Little information on which to base indirect
    effects.
  • Generally only large changes would be expected to
    yield measurable revenue.
  • Descore IRS funding reductions controversial.
  • Interaction of resources and legislative
    initiatives.

21
Budget Proposals Legislation to Reduce Evasion
(cont.)
  • Rejected proposals (too draconian)
  • Require individuals to file 1099s for
    transactions with doctors, auto mechanics, dry
    cleaners and other service providers.
  • Require cash transactions to be done with a
    payment card or check and require issuer/bank
    reporting to IRS.
  • Substantially increase the number of IRS agents
    and audits.

22
Budget Proposals Legislation to Increase
Simplicity
  • Simplify the tax treatment of families and
    savings incentives.
  • LSA, RSA, ERSA.
  • Clarify definition of child, simplify EITC
    eligibility, reduce complexity of refundable
    child tax credit.
  • These help to reduce the complexity that causes
    unintentional noncompliance.

23
Other Budget Proposals
  • 410 million in new IRS funding aimed at the tax
    gap.
  • Additional compliance research.
  • Investment in information technology.
  • Enhancement of enforcement activity.
  • Improvements in taxpayer service.

24
Other Budget Proposals Additional Compliance
Research
  • New studies for the corporate tax, employment
    tax, partnerships, and excise taxes.
  • Update the 2001 National Research Program (NRP)
    study.
  • IRS just announced that will begin these studies
    in the fall.
  • Multi-year rolling methodology will provide
    regular updates of the data.
  • New studies of the effect of IRS taxpayer service
    on compliance.

25
Other Budget Proposals Information Technology
  • Upgrade infrastructure.
  • Enhance IT security.
  • Continued work on Customer Account Data Engine,
    Account Management Services, Modernized e-File,
    and Common Services Projects.

26
Other Budget Proposals Enhanced Enforcement
  • Increase audits of high-risk small business tax
    returns and step up collections and prosecutions.
  • Expand document matching.
  • Increase examination for large complex business
    returns, foreign residents, and smaller firms
    with international activity.
  • Withhold refunds for delinquent taxpayers.
  • Increase oversight to help prevent third parties
    from using tax exempts to reduce taxes.
  • Increase criminal tax investigations.

27
Other Budget Proposals Enhance Taxpayer Service
  • Expand voluntary income tax assistance programs
    directed towards low income, elderly, limited
    English proficiency, and disabled taxpayers.
  • Improve telephone and Web site services
    recommended by the Taxpayer Assistance Blueprint.

28
Tax Regulations Increase Compliance
  • Targets specific areas of noncompliance.
  • Clarifies tax law and increases voluntary
    compliance.
  • Recently published guidance will improve
    compliance.
  • Transfer pricing cross border services.
  • Foreign tax credit separation of credit from
    income.
  • Reportable transactions rules (tax shelters)
    create transactions of interest category.

29
Partners and Stakeholders
  • Public roundtable in March
  • Hosted by Assistant Sec. Solomon and Commissioner
    Everson.
  • Insights.
  • Identify specific causes of tax gap and target
    them for reform
  • Remedies should not impose unreasonable burdens
    on compliant taxpayers
  • Simplify the tax code
  • Manage expectations no solution is perfect
  • Work with Congressional staff.
  • Discuss and refine legislative proposals.
  • Increased information sharing with foreign
    countries continually updating and expanding tax
    exchange information agreements (Brazil, 3/2007)
    and renegotiating tax treaties.

30
Current Work
  • Tax gap project is ongoing.
  • Treasury is working actively to determine the
    next steps consistent with the principles and
    strategies outlined last September.

31
Bottom Line(again)
  • The tax gap is a serious, multi-dimensional
    problem.
  • Tax gap can be reduced but not eliminated.
  • The Administration is committed to working with
    Congress to reduce the tax gap without unduly
    burdening compliant taxpayers.
  • The Treasury has proposed a multi-pronged attack
    on the tax gap and has made specific Budget
    proposals consistent with this strategy.
  • Some have been enacted.
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