The gap in taxes between the amount owed per a tax return and the amount actually collected by the IRS is a variance that the IRS would very much like to resolve. Unfortunately, although the number of examinations is on the rise, the amount of dollars collected has seen a recent decrease.
One reason for this is that the tax code, ever a nefarious body of complex regulations, has not been getting any simpler. International tax law and complicated financial holdings take man-hours and resources away from easily collected dollars, and many times yield little as far as collection.
In their June 10, 2010 report Trends in Compliance Activities Through Fiscal Year 2009, the Treasury Inspector General for Tax Administration (TIGTA), an independent IRS oversight branch, noted that although there was an increase in the total number of tax returns and dollars collected, gross collections fell by 15% in 2009, which represents an uncollected sum of over $2 trillion dollars.
Revenues collected via enforcement actions (levies on assets, sales of property and seizures) are down 13%. TIGTA noted that revenues collected were higher in 2007 and 2008 primarily because of the settlement of several large tax shelter cases.
Hiring at the IRS has increased. Nearly 2,000 more collection representatives and tax examiners have been brought on board since 2005. An IRS Examiner reviews tax returns for potential errors and items claimed that a taxpayer is not eligible for. Collection Representatives take over on cases that have unresolved, delinquent amounts due or tax returns that have yet to be secured.
The Tax Gap
Over the past 30 years, the tax gap has ranged from approximately 15% to 20%. As of 2005, the last year that hard figures were available, the IRS estimated that the tax gap was hovering at around $345 million.
The non-filing of certain income sources and the underreporting of income has traditionally accounted for 75% or more of the tax gap. Out of this figure, over 60% of non-reported income comes from those taxpayers that are self-employed or operate small businesses.
This income is difficult for the IRS to verify. The return of a wage-earning employee is subject to hard-copy verification; income reported on a tax return is subject to a document matching program that makes sure that the amounts reflected on a tax return are in line with what was reported by the payer to the IRS. For those who are self-employed, gross receipts and business expenses are subject to unfortunate “estimation.”
Closing the Gap
A May 27th press release summarized IRS Commissioner Douglas Shulman’s comments made to the American Payroll Association and the American Accounts Payable Association.
Shulman said that there is “…general agreement both in the US and around the globe that withholding and third-party information reporting are powerful tools to improve and maintain taxpayer compliance… Beginning in 2012, payment processors will be required to make an annual information report to the merchant and the IRS stating the gross amount paid to the merchant during a calendar year. This will help improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.”
Shulman suggested that merchant banks will report to businesses, via a Form-1099, the total dollar figure from credit and debit card purchases made by customers at that particular business. This will ensure that dollars are accounted for, and the appropriate taxes paid, by both sides of the transaction.
Shulman also would like to make better use of Form 1009-MISC, used now to report gross self-employment income to non-wage earning taxpayers. Typically, a 1099-MISC form was required to be sent to the IRS only if a business paid out more than $600 for the year to individuals only that had contracted with them to do work. Now, all business to business transactions over $600 need to be reported. Since many contracting and consultant work is done by business to business, this unregulated point of transaction now becomes accountable.
Overall, IRS enforcement has been on the decline since the 1990s, no doubt an outcome of the congressional hearings and the resulting IRS Restructuring and Reform Act of 1998. Taxpayer service was the focus for many years as the IRS attempted to roll out a “kinder and gentler” image.
Ever cyclical and considering the fact that revenues are down, enforcement spending is starting to increase, with the hope that the tax gap can come to a closure.
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