Transcript Narrowing the Tax Gap James B. Mackie III Director, Revenue Estimating Division

Narrowing the Tax Gap
James B. Mackie III
Director, Revenue Estimating Division
Office of Tax Analysis
U.S. Treasury
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Disclaimer
• Any views or opinions are my own and do
not necessarily reflect the official views of
the U.S. Treasury.
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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.
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Tax Gap Background
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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
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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.
– Can’t 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.
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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%.
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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 selfemployment 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.
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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).
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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.
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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 government’s net fiscal position 11
would be smaller because of the cost of collection.
Treasury’s Tax Gap Strategy:
Four 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.
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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.
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Implementing the Treasury
Strategies
• Made some progress on all fronts.
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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.
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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).
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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.”
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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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