If you'd happened to pick up the report on boosting tax collections released by the Internal Revenue Service on August 2, you'd know it wasn't exactly light summer reading. Entitled "Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance," the hefty document aims to close that "gap" between the cash IRS officials think they should be collecting and what they actually bring through the U.S. Treasury Department's door.
Today, IRS officials estimate some $290 billion dollars that should have come into federal coffers in 2001 never made it into Uncle Sam's pockets. That's 2001's tax gap (net of receipts recovered through collection efforts). The gaps for subsequent years have yet to be calculated.
But, take heart. The IRS has a seven-component strategy for bringing in the bucks. A big chunk of it will revolve around slashing opportunities for evasion so that more people pay their fair share of the nation's tax bill.
Charles Christian, director of the School of Accountancy at the W. P. Carey School of Business, is chair of the IRS Advisory Council’s Tax Gap Analysis Group, an advisory board for IRS policies (his comments here do not necessarily reflect the views of the Advisory Council). If you're wondering which IRS-proposed changes might bring in a healthy payback, he'll point you to the agency's goal of expanding information-reporting vehicles as a start.
Information reporting occurs in the form of documents filed with the IRS on behalf of taxpayers to document how much money was paid to them. So, for example, banks send a Form 1099 to depositors to tell them how much interest income they made. Companies send 1099s to report non-employee compensation paid out to independent contractors. Mortgage holders use Form 1098 to report mortgage interest paid by taxpayers. The list goes on and on.
Such third-party reporting "is critical for ensuring voluntary compliance" with tax codes, according to the August 2 IRS report. Without that third-party reporting, the IRS can't easily spot errors or detect low-balled statements of income and inflated deduction claims, the report continues. And, while the IRS receives around 1.5 billion information returns annually, the agency still lacks reliable third-party information on certain types of income, "most notably income earned by small businesses and the self-employed," the report claims.
However, the agency has a few legislative proposals designed to change that.
Among those IRS proposals, you'll find expanded information reporting for brokers and auctioneers. "This proposal would require a broker who is an auctioneer or operates a consignment business (electronic or other) to file an information return showing customer information and gross proceeds from the sale of tangible personal property," the IRS report states. "Think eBay," says Christian. Or WeBidz.com, uBid.com, Overstock.com and dozens of other sites like them. Think of organizations like Sotheby's, too.
Reporting consequences would apply only if the seller chalks up more than 100 transactions and $5,000 in gross sales over the course of a year. "There are hundreds of eBay sellers who sell more than $5,000 a year," Christian notes. Many large businesses also are e-Bay regulars, he adds. For those who don't add eBay sales into their income statements, this certainly could provide an incentive to come clean. IRS staffers calculate the measure could bring in an additional $2 billion over the next 10 years.
Auctioneers aren't the only ones who might be doing more paperwork if the IRS gets its way. The agency also would like to see basis reporting on security sales. "In the past, mutual funds have reported the basis, but if you bought individual stocks, the burden was on you to determine the adjusted basis" for tax reporting, Christian explains. And, that could be tricky.
"You might have bought more stock along the way or gifted some to a child. You might have opted into a dividend reinvestment program that purchased new shares. There may have been a stock split. Or maybe the corporation spun off one of its divisions. All of these events are very common," he says. They're complicated, too.
Each event means you must complete new calculations to pinpoint your adjusted basis, which is what determines your gain or loss on the sale of stock. Christian admits average folks could have trouble with such financial details. In fact, he recalls spending an hour working with his brother, trying to reason out such figures for a stock owned by the Christian bothers' dad. Both sons are attorneys. No wonder the IRS would like to see certain brokers handle this chore. They think it will bring in another $6.7 billion during the next decade.
More, more, more
The IRS also has proposed additional reporting requirements for payments to corporations. Currently, 1099 payments to individuals aggregating $600 or more require such paperwork. It doesn't happen that way for companies, Christian says. This change, according to the IRS, is estimated to bring in another $7.7 billion in 10 years.
The retail trade is under scrutiny, too. "If I go to a merchant and buy something using a bank card, I pay American Express, Mastercard, Visa or whomever. Then, American Express -- or other bank-card provider -- reimburses the merchant," Christian explains.
The IRS would like American Express, Mastercard, Visa and other bank-card issuers to report how much they've reimbursed each merchant. That way, if Mastercard reports $2 million in sales for the merchant, and Visa reports $1.6 million in sales, yet the merchant only reports half a million in sales, the IRS will have something to match the merchant's word against. Such a provision likely will generate $10.7 billion over the next ten years, according to IRS estimates.
Although the IRS only sees it bringing in a measly $749 million in the coming decade, the IRS also would like to see employers required to obtain a certified taxpayer identification number from contractors. Why? Because people can make them up, Christian says.
That is, when people live in the world of cash -- not credit cards or checks -- and they're not planning on filing a tax return, they may give a made-up or borrowed social security or tax ID number when filling out income-reporting forms for an employer. "They work the job, take the money and leave. Then, they don't file a return, and the IRS doesn't know who the money was paid to because the identification number is wrong," Christian adds.
A million here, a million there
Other changes the IRS would like to see include:
- Stiffer penalties for companies that should file information reports such as 1099s but don't. Estimated value: $546 million over the next 10 years.
- Information-reporting requirements for governments -- such as states, counties and municipalities -- that sometimes are exempt from 1099 filing. Estimated value: $390 million over the next 10 years.
- Standards clarifying tax-payment obligations when employees are leased out by one company to another. Estimated value: $57 million over the next 10 years.
Legislative measures are only part of the story in the recently released tax-gap report. The IRS also would like to increase research by resuming random audits of taxpayers, beef up the agency's computing power, increase compliance activities such as operational audits on fishy-looking returns, and share more information with partners like state and foreign governments. At the same time, IRS officials want to simplify tax laws to cut the errors-based portion of the tax gap and enhance taxpayer service to help all of us muddle through the forms that remain.
To do that, the agency has asked Congress to approve a 4.7 percent budget increase, which will give tax collectors a total of $11.1 billion to work with in fiscal year 2008.
Recent history indicates such an increase could provide very good return on investment for the United States.
As former IRS commissioner Mark Everson told a House Ways and Means subcommittee last March, "Based on the most recent 11 years of collection experience, we estimate that every dollar we have spent on enforcement has generated an average of four dollars in increased revenue to the federal treasury."
- There is an estimated $290 billion gap between the taxes IRS officials think they should have collected and what they did collect for 2001.
- Several legislative proposals are on the table to close this "tax gap."
- Along with changes in tax laws, increased taxpayer service, and improved computing power, the IRS wants to increase enforcement efforts.
- To meet its goals, the IRS has asked Congress for a budget increase. The agency maintains that each additional dollar spent on enforcement is likely to bring in a fourfold return on investment.