Treasury Aims to Increase Voluntary Compliance Rate To Close Tax Gap and To Help Quicken Economic Recovery

The Obama Administration has given the IRS more financial and human resources to restrict tax evasion for the next couple of years–making it more difficult for tax cheats to escape unscathed. In an effort to bridge the enormous tax gap (most of which can be attributed to underreported income–$285 billion), the U.S. Treasury is working with the IRS to accomplish a number of stricter regulatory goals that would result in fewer tax cheaters, more voluntary compliance, and ultimately the reduction of the tax gap.

In this challenging economy, the U.S. government is experiencing a more pressing need to collect tax money in order to fund programs that would help stimulate economic rejuvenation.

On July 8th, the U.S. Treasury issued an updated report on managing the current tax gap issue (estimated at $345 billion a year).

CCH (http://tax.cchgroup.com/) reports:

Treasury Issues Updated Report on Efforts to Close Tax Gap

The Treasury Department on July 8 issued an updated report on its efforts to address the federal tax gap, estimated at $345 billion a year. The Treasury provided the report in response to a request by Senate Finance Committee Chairman Max Baucus, D-Mont.

The IRS collected $2.7 trillion in fiscal year (FY) 2008, representing 96 percent of government receipts. The tax gap represents the amount of legal tax receipts that are owed and not paid. The bulk of the tax gap –$285 billion –is attributed to underreported income. Another $33.3 billion results from uncollected taxes, while $27 billion stems from nonfilers. After IRS enforcement and collection of revenues of approximately $55 billion, the net tax gap stands at $290 billion, based on information from 2001 and earlier. The report notes that the Treasury and the IRS are making intensive efforts to update this information.

“With an ongoing economic recession, these billions of dollars in lost tax revenues could help relieve undue tax burdens … and contribute to long-term economic stability,” Baucus stated. “I am committed to developing legislation to make it easier for taxpayers to comply with their tax responsibilities and eliminate opportunities to underreport taxes or set up offshore tax schemes.”

The report estimates a voluntary compliance rate of nearly 84 percent, based on total tax liabilities of $2.11 trillion and voluntary tax payments of $1.77 billion. The IRS’s strategic plan for FY 2009-2013 sets a goal of 86 percent for 2009. Baucus pressed the Treasury in 2007 for a goal of 90-percent voluntary compliance by 2017.

Baucus commended the Treasury for a quick response to his May 2008 request for an updated plan. The report follows the Treasury’s September 2006 release of a Comprehensive Strategy for Reducing the Tax Gap and the IRS’s August 2007 report on Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance. The earlier reports promoted seven components of the plan to reduce the tax gap:

(1) Reduce opportunities for evasion;

(2) Make a multi-year commitment to research;

(3) Continue improvements in information technology;

(4) Improve compliance activities;

(5) Enhance taxpayer service;

(6) Reform and simplify the tax law; and

(7) Coordinate with partners and stakeholders.

The report summarizes the achievements, ongoing efforts and new initiatives for achieving progress in each area. The report notes that the administration’s FY 2010 budget proposes an expansive set of tools to reduce opportunities for evasion and other noncompliance.

Baucus commented that the report demonstrates that the IRS is working to identify problems, improve tax administration and set short-term compliance goals. He urged the IRS to devise more specific long-term goals, measures and timelines for improving tax compliance and recovering more revenue.

The report restates the IRS’s mantras that enforcement activities must be combined with a commitment to taxpayer service and that proposals must be sensitive to taxpayer rights and the imposition of burden on taxpayers. It pledges that the administration will work with Congress to strike the appropriate balance.

By Brant Goldwyn, CCH News Staff

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