A Comprehensive Strategy for Reducing the Tax Gap
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A Comprehensive Strategy for Reducing the Tax Gap
U.S. Department of the Treasury
Office of Tax Policy
September 26, 2006
Executive Summary
In fiscal year 2005, Federal receipts totaled over $2.2 trillion. More than 95 percent of
net receipts were collected by the Internal Revenue Service (IRS) through its
administration of the income, transfer and excise tax provisions of the Internal Revenue
Code. The vast majority of these receipts is collected through our voluntary compliance
system, under which taxpayers report and pay their taxes with no direct enforcement and
minimal interaction with the government. The overall compliance rate achieved under
this system is quite high. In 2001, the compliance rate was over 86 percent, after
including late payments and recoveries from IRS enforcement activities. Nevertheless,
an unacceptably large amount of the tax that should be paid every year is not, requiring
compliant taxpayers to make up for the shortfall and giving rise to the “tax gap.”
The Administration is committed to working with Congress to reduce the tax gap. This
document outlines the Administration’s aggressive strategy for addressing the tax gap.
The strategy builds upon the current efforts of the Treasury Department and the IRS to
improve compliance. As part of the deliberations in preparing the Administration’s fiscal
year 2008 budget request to Congress, the Treasury Department and the IRS are working
with the Office of Management and Budget to further develop this strategy to reduce the
tax gap. This document is intended to provide a broad base on which to build. The more
detailed elements of the tax gap strategy are, in part, contingent upon the budget process
for fiscal year 2008 and beyond. Accordingly, the Treasury Department and the IRS will
provide a more detailed outline of steps they will take to address the tax gap following
release of the Administration’s fiscal year 2008 budget request early next year.
Four key principles guided the development of this strategy:
•
First, unintentional taxpayer errors and intentional taxpayer evasion should both be
addressed.
•
Second, sources of noncompliance should be targeted with specificity.
•
Third, enforcement activities should be combined with a commitment to taxpayer
service.
•
Fourth, policy positions and compliance proposals should be sensitive to taxpayer
rights and maintain an appropriate balance between enforcement activity and
imposition of taxpayer burden.
These principles point to the need for a comprehensive, integrated, multi-year strategy to
reduce the tax gap. Our practical and effective overall strategy includes the following
seven components:
1. Reduce Opportunities for Evasion. The Administration’s fiscal year 2007 budget
includes five legislative proposals to reduce evasion opportunities and improve the
efficiency of the IRS. The Treasury Department’s Office of Tax Policy is working with
the IRS to develop additional legislative proposals for consideration as part of the fiscal
year 2008 budget process. The Treasury Department and the IRS will also continue to
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use the regulatory guidance process to address both procedural and substantive issues to
improve compliance and reduce the tax gap.
2. Make a Multi-Year Commitment to Research. Research is essential to identify
sources of noncompliance so that IRS resources can be properly targeted. Regularly
updating compliance research ensures that the IRS is aware of vulnerabilities as they
emerge. New research is needed on the relationship between taxpayer burden and
compliance and the impact of customer service on voluntary compliance. Research is
also essential to establish accurate benchmarks and to measure the effectiveness of IRS
efforts, including the effectiveness of this comprehensive strategy to reduce the tax gap.
3. Continue Improvements in Information Technology. Continued improvements to
technology would provide the IRS with better tools to improve compliance through early
detection, better case selection, and better case management.
4. Improve Compliance Activities. By improving document matching, examination, and
collection activities, the IRS would be better able to prevent, detect, and remedy
noncompliance. These activities would increase compliance not only among those
directly contacted by the IRS, but also among those who would be deterred from
noncompliant behavior as a consequence of a more visible IRS enforcement presence.
The IRS continues to reengineer examination and collection procedures and invest in
technology, resulting in efficiency gains and better targeting of examination efforts.
These efficiency gains translate into higher audit yields, expanded examination coverage,
and reduced burden on compliant taxpayers.
5. Enhance Taxpayer Service. Service is especially important to help taxpayers avoid
unintentional errors. Given the increasing complexity of the tax code, providing
taxpayers with assistance and clear and accurate information before they file their tax
returns reduces unnecessary contacts afterwards, allowing the IRS to focus enforcement
resources on taxpayers who intentionally evade their tax obligations. The statutorily
mandated Taxpayer Assistance Blueprint, the next phase of which is expected to be
delivered in January, will include a process for assessing the needs and preferences of
taxpayers and will develop a decision model to prioritize service initiatives and funding.
The IRS is also working to provide service more efficiently and effectively through new
and existing tools, such as the IRS web site.
6. Reform and Simplify the Tax Law. Simplifying the tax law would reduce
unintentional errors caused by a lack of understanding. Simplification would also reduce
the opportunities for intentional evasion and make it easier for the IRS to administer the
tax laws. For example, the Administration’s fiscal year 2007 budget includes six
proposals to simplify the tax treatment of savings and families by consolidating existing
programs and clarifying eligibility requirements. The Office of Tax Policy is developing
other simplification proposals for consideration in the Administration’s fiscal year 2008
budget request. In addition, the Treasury Department is evaluating the report of the
President’s Advisory Panel on Federal Tax Reform and is considering options for reform.
These initiatives will continue to be supplemented by IRS efforts to reduce taxpayer
burden by simplifying forms and procedures.
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7. Coordinate with Partners and Stakeholders. Closer coordination is needed between
the IRS and state and foreign governments to share information and compliance
strategies. Closer coordination is also needed with practitioner organizations, including
bar and accounting associations, to maintain and improve mechanisms to ensure that
advisors provide appropriate tax advice. Through contacts with practitioner
organizations, the Treasury Department and the IRS learn about recent developments in
tax practice and hear directly from practitioners about taxpayer concerns and potentially
abusive practices. Similarly, contacts with taxpayers and their representatives, including
small business representatives and low-income taxpayer advocates, provide the Treasury
Department and the IRS with needed insight on ways to protect taxpayer rights and
minimize the potential burdens of compliance strategies.
The success of this comprehensive strategy will depend, in significant part, on IRS
resources and the agency’s efficient and effective use of such resources. The IRS has
made significant progress toward improving the efficient use of its allocated resources,
especially in targeting enforcement efforts to areas where they will have the greatest
direct and indirect impact on compliance. The IRS will continue to seek ways to make its
operations more efficient and thus free resources to fund new compliance initiatives. In
implementing this strategy, the Treasury Department and the IRS recognize that it will be
important to establish benchmarks against which progress on each element of the strategy
can be measured.
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I.
The Size and Source of the Tax Gap
The “gross tax gap” is the difference between the amount of tax that taxpayers should pay
under the tax law and the amount they actually pay on time. In February 2006, the IRS
released updated compliance estimates, showing that the gross tax gap was $345 billion
in tax year 2001.1 As a percentage of tax liability for tax year 2001, this represents a
compliance rate of about 83.7 percent.
This estimate, however, does not take into account taxes that were paid voluntarily but
paid late, or recoveries from IRS enforcement activities. Taking these factors into
account, the “net tax gap” was an estimated $290 billion in tax year 2001, which
represents a net compliance rate of 86.3 percent.
There are three key characteristics of the tax gap:
•
Over 70 percent of the gross tax gap is attributable to the individual income tax,
which is the largest single source of Federal receipts.
•
Over 80 percent of the gross tax gap is caused by underreporting of tax (i.e., by
underreporting income or overstating deductions and credits), with roughly half this
amount (including self-employment tax) attributable to underreporting of net business
income by individuals. Eighteen percent of the gross tax gap is attributable to
underpayments of taxes or failure to file tax returns.
•
Noncompliance is highest among taxpayers whose income is not subject to thirdparty information reporting or withholding requirements.
These characteristics suggest a targeted response designed to address the most significant
areas of noncompliance. The following overview discusses these characteristics in more
detail.
Type of Tax
As indicated above, the IRS estimates that over 70 percent of the gross tax gap is
attributable to the individual income tax. As Table 1 below shows, the remainder of the
tax gap is associated with employment taxes (chiefly self-employment taxes), corporate
income taxes, and estate taxes.
1
The estimates of underreporting of individual income and self-employment taxes were derived from
analysis of the 2001 National Research Program (NRP). Most of the other estimates are projections
derived from older compliance studies.
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Table 1
Gross Tax Gap by Type of Tax
Type of Tax
Gross Tax Gap
($ Billions)
Individual Income
Corporate Income
Employment
Estate
Excise
TOTAL
1
Share of Gross Tax
Gap (%) 1
245
32
59
8
Not Available
345
71
9
17
2
100
Totals may not add up to 100 percent due to rounding.
Type of Error
The IRS estimates that over 80 percent of the gross tax gap is caused by underreporting
of tax (i.e., underreporting of income or overstating deductions and credits). Over 40
percent of the gross tax gap is attributable to underreporting of net business income by
individuals (affecting both income and self-employment taxes). (See Table 2).
The remainder of the gross tax gap is split between two sources of errors:
•
Roughly 10 percent of the gross tax gap is attributable to underpayments, a significant
portion of which is due to employer failures to deposit withheld income and
employment taxes.
•
The remainder of the tax gap is due to failure to file tax returns, mostly for individual
income taxes.
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Table 2
Gross Tax Gap by Type of Error
Type of Error
Underreporting2
Underpayments3
4
Nonfiling
Individual Income Tax
Non-Business Income
Business Income
Adjustments, Deductions,
Exemptions, and Credits
Total
Corporation Income Tax
Employment Tax
FICA
Self-Employment Income Tax
Total
Estate Tax
Total Underreporting
Individual Income Tax
Employment Tax
Other
Total Underpayments
Individual Income Tax
Estate
Total Nonfiling
Gross Tax Gap
($ Billions)
Share of Gross
Tax Gap (%)1
56
109
32
16
32
9
197
30
14
39
57
9
4
11
54
4
285
23
5
5
16
1
83
7
1
3
34
25
2
27
1
Totals may not add up to 100 percent due to rounding.
Information regarding underreporting of excise taxes is not available.
3
Underpayments include employer failures to deposit withheld income and employment taxes.
4
Information regarding the nonfiling gap associated with corporate income taxes, employment taxes, or
excise taxes is not available.
2
Level of Transparency
Tax compliance is greatest for income subject to mandatory withholding by the payer.
Only one percent of the tax due on wage income (reported by employers) was not
reported to the IRS by return filers in 2001.
Noncompliance rates are higher for income that is not subject to withholding, but that is
reported separately to the IRS by a third party when payments are made. The net
misreporting percentage is about 4.5 percent for interest income, dividends, social
security benefits, pensions, and unemployment insurance, all of which are generally
subject to third-party reporting. The net misreporting percentage is somewhat higher for
income items that are subject to some, but not substantial, information reporting. For
partnership and S corporation income, alimony, reportable exemptions and deductions,
and capital gains, the net misreporting percentage is 8.6 percent.
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10
7
1
8
Noncompliance rates are highest for income that is not subject to either withholding or
third-party reporting requirements. About 54 percent of net income from proprietors
(including farms), rents, and royalties is misreported. Underreporting of selfemployment income also results in high noncompliance for self-employment taxes for
social security and Medicare.
Intentional Versus Unintentional Errors
A common question is the extent to which the tax gap results from intentional evasion
rather than unintentional errors by confused taxpayers. Determining taxpayer intent
under a regular examination is very difficult. For obvious reasons, taxpayers do not
concede that their erroneous reporting is intentional, and any analysis of the nature of the
error by IRS examiners is inherently subjective. Some researchers have applied
econometric techniques to compliance data to measure intentional evasion, but the results
have been inconclusive. In all events, complexity provides those taxpayers who are
predisposed to taking aggressive reporting positions the opportunity to argue that their
errors are unintentional.
It is safe to conclude that both intentional and unintentional errors contribute to the tax
gap and that any strategy to reduce the gap must address both intentional evasion as well
as taxpayer confusion due to the complexity of the code.
II.
Challenges to Reducing the Tax Gap
Addressing the tax gap involves improving voluntary compliance, reducing opportunities
for evasion, and making it easier for the IRS to administer the tax laws. We must,
however, have realistic expectations about the magnitude and timing of the impact of any
reasonable strategy to reduce the tax gap, particularly if it is not accompanied by broader
simplification and reform of the tax code, or significant advances in compliance
technology.
Implementing a strategy to reduce the tax gap will take time. As a result, it will take time
to realize the anticipated benefits. As part of this strategy, the IRS will, for example,
acquire and analyze new data, improve document matching programs, refine examination
selection criteria, purchase and test new technology, and train employees to handle new
enforcement and customer service responsibilities.
Moreover, while it may be possible to develop a comprehensive strategy that reduces the
tax gap, it is not possible to implement a policy that would come close to eliminating the
tax gap without an unacceptable change in the fundamental nature of our tax compliance
system.
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III.
A Comprehensive Strategy to Reduce the Tax Gap
With an estimated net tax gap of $290 billion, no single approach will be successful at
substantially reducing noncompliance. A comprehensive, integrated, multi-year strategy
is necessary, within the context of an annual budget process.
1.
Reduce Opportunities for Evasion
Without reliable third-party data, the IRS cannot easily detect errors in the absence of
expensive and intrusive audits. The IRS receives over 1.5 billion information returns a
year, reporting income from employers, financial institutions, third party payers, and state
and Federal governments. However, the IRS still lacks reliable information on certain
types of income, most notably income earned by the self-employed.
Penalties can deter noncompliance, but they may be set at the wrong level. Some
penalties may be too low under current law to change behavior. Other penalties may be
so high that examiners have been unable or unwilling to assert them, particularly when
they believe that taxpayers may have made inadvertent errors.
The Administration’s fiscal year 2007 budget contains five legislative proposals that
would reduce evasion opportunities by focusing on employment taxes, information
reporting, streamlining collection procedures, and problem return preparers. The
legislative proposals in the Administration’s fiscal year 2007 budget are an important step
in reducing the tax gap. The Treasury Department is developing other proposals for
consideration during the deliberations on the fiscal year 2008 budget, which would
further reduce opportunities for evasion without unduly burdening honest taxpayers.
During these deliberations, we are exploring a number of different options including
ways to:
•
Strengthen reporting requirements;
•
Expand IRS access to reliable data;
•
Enhance examination and collections authority;
•
Enable the IRS to detect and prevent multi-year noncompliance; and
•
Set penalties at more appropriate levels.
The issuance of regulations and administrative guidance by the Treasury Department and
the IRS will also continue to play an important role in effectively administering the tax
law and responding to the tax gap problem. Guidance clarifies ambiguous areas of the
law, increasing voluntary compliance. Guidance also targets specific areas of
noncompliance, and prevents abusive behavior, such as tax shelters. Each year, the
Treasury Department and the IRS publish a Priority Guidance Plan. The 2006-2007 plan
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includes 264 guidance projects scheduled for completion between July 2006 and June
2007. Many of the 264 guidance items included in this year’s plan address potential
areas of noncompliance. A representative sample of these items includes:
•
Guidance regarding transfer-pricing arrangements involving cost-sharing under
section 482;
•
Guidance under section 671 regarding information reporting by widely-held fixed
investment trusts (WHFITs);
•
Final regulations under section 860G(b) regarding withholding obligations of
partnerships allocating income from real estate mortgage investment conduit
(REMIC) residual interests to foreign persons; and
•
Final regulations under section 6655 regarding estimated tax payments by
corporations.
The Treasury Department and the IRS have also successfully used the guidance process
to help curb the involvement of taxpayers and practitioners in abusive tax avoidance
transactions. For example, following enactment of the American Jobs Creation Act of
2004 (“AJCA”), the Treasury Department and the IRS released eleven separate guidance
items to put into effect new reportable transaction disclosure and penalty rules. A major
guidance project is currently underway to incorporate these rules into regulations. In
addition, building on provisions in the AJCA, the Treasury Department and the IRS have
taken significant steps to tighten and enforce the ethical rules that apply to tax
practitioners, targeting improper tax advice as a significant contributor to noncompliance
and the tax gap.
The publication of instructions and forms also contributes to increased efficiencies in tax
administration. For example, the IRS and the Treasury Department developed the
Schedule M-3 for large business taxpayers to disclose and reconcile book-tax differences.
The Schedule M-3 increases the transparency of book-tax differences, resulting in a
material increase in the IRS’s ability to detect sources of noncompliance. The Treasury
Department and the IRS are expanding Schedule M-3 coverage to S corporations and
partnerships.
Following release of the Administration’s fiscal year 2008 budget request, the Treasury
Department and the IRS will issue a more detailed outline of the steps we will take to
reduce opportunities for evasion and address the tax gap. In addition, the Treasury
Department and the IRS will continue to identify guidance projects targeted to
compliance and include them in regular updates to the Priority Guidance Plan.
2.
Make a Multi-Year Commitment to Research
Research enables the IRS to develop strategies to combat specific areas of
noncompliance, improve voluntary compliance, allocate resources more effectively, and
reduce the tax gap.
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The National Research Program (NRP) demonstrates the importance of comprehensive
compliance data. As part of the NRP, the IRS reviewed approximately 46,000 randomly
sampled individual income tax returns from tax year 2001 – the first comprehensive
compliance study for individual income tax returns since 1988. Returns for which
reported information could not be independently verified were audited. An NRP
reporting compliance study of 5,000 S corporation tax returns filed in 2003 and 2004 is
currently underway.
Data from the NRP reporting compliance study have been used to estimate the individual
income tax component of the tax gap and to identify sources of noncompliance. Accurate
NRP data provides a critical benchmark for determining the sources of noncompliance
and for measuring changes in compliance rates over time. The IRS is also using the
findings from the NRP to target examinations and other compliance activities better, thus
increasing the dollar-per-case yield and reducing “no change” audits of compliant
taxpayers. Innovations in audit techniques to reduce taxpayer burden, pioneered during
the 2001 NRP, have been adopted in regular operational audits.
More compliance research is needed. Without new reporting compliance studies, the IRS
is forced to rely on old studies, conducted over 20 years ago, to estimate compliance for
areas other than individual income tax or S corporations. Moreover, with each passing
year, the data from the 2001 study on individual income tax compliance becomes more
outdated. Without up-to-date studies in all areas, the IRS is hampered in its ability to
respond rapidly to emerging vulnerabilities in the tax system. A multi-year commitment
to research would ensure that the IRS can efficiently target its resources and effectively
respond to new sources of noncompliance as they emerge. Compliant taxpayers benefit
when the IRS uses the most up-to-date research to improve workload selection formulas
because this reduces the burden of unnecessary taxpayer contacts. Research is also
critical in helping the IRS to establish benchmarks against which to measure progress in
improving compliance.
The IRS is considering new research projects in the following areas:
•
Regularly update NRP reporting compliance studies. NRP studies (such as the 2001
reporting compliance study of individual taxpayers) must be regularly and frequently
scheduled to ensure that the IRS has the most up-to-date compliance data.
•
Initiate new NRP reporting compliance studies. To provide the IRS with more
comprehensive data on the magnitude and sources of noncompliance, NRP studies
could extend to partnerships, other business entities, employment taxes, exempt
organizations, and government entities.
•
Supplement NRP reporting compliance studies with smaller and more targeted
compliance studies. By focusing on specific areas of noncompliance, smaller studies
can yield more information about the sources of noncompliance. Targeted studies
can also provide insight into the effectiveness of different types of compliance
strategies.
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•
Examine the linkages between taxpayer services and compliance. Research would
provide a better understanding of the relationship between taxpayer burdens and
compliance and the impact of taxpayer service on voluntary compliance, two areas
where there has been limited work to date. Understanding the link between taxpayer
service and voluntary compliance could help the IRS better target taxpayer services as
well as develop programs that would both ease taxpayer burden and improve
voluntary compliance.
•
Develop new tools to uncover patterns of noncompliance. Research must be done to
understand the changing patterns of noncompliance and to develop tools to discover
and address it. Improved abilities to link data sets and to recognize similarities in
abusive tax reduction strategies allow the IRS to target examination resources on the
most egregious cases.
•
Improve the allocation of resources. Research could help the IRS better match
enforcement and service resources with the types of noncompliance, thereby
maximizing the overall impact on compliance.
3.
Continue Improvements in Information Technology
Tax administration in the 21st century requires improved IRS information technology
(IT). The IRS is committed to continuing to make improvements in technology,
including:
•
Replacing antiquated core account management systems and technology. The
Customer Account Data Engine (CADE) is the technological foundation that will
enable the IRS to manage its tax accounts better and provide the data for a
modernized IRS. Over time, the existing data base (the Individual Master File) and
retrieval system (the Integrated Data Retrieval System) will be replaced with new
technologies, new data bases, and new applications.
•
Expanding and enhancing compliance activities through early detection, better case
selection, and better case management.
•
Delivering effective customer service, including E-File systems and web services, at
reduced cost.
•
Investing in infrastructure necessary to perform operations more efficiently, thus
freeing up resources for enforcement and taxpayer service projects.
Upon release of the Administration’s fiscal year 2008 budget request, the IRS will report
on specific steps that will be taken to continue to improve its information technology.
4.
Improve Compliance Activities
The IRS has an annual budget of roughly $10.5 billion for fiscal year 2006 to process
roughly 140 million individual, partnership, and corporate income tax returns and 1.5
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billion information returns, provide guidance to taxpayers and their preparers, enforce the
tax law, and collect over $2 trillion of taxes. The IRS can address only a small part of the
tax gap each year through its enforcement activities. In 2005 taxpayer contacts by the
IRS included: 3.2 million notices sent to individual taxpayers who made mathematical or
clerical errors on their 2004 tax returns, 3.5 million notices sent to taxpayers who
underreported income on their tax returns or did not file returns, and 1.2 million
examinations of individual income tax returns.
The IRS is continuing to improve efficiency and productivity through process changes,
investments in technology, and streamlined business practices. For example, to combat
abusive tax avoidance transactions, the IRS is expanding its front-line enforcement
activities by redirecting employees. As detailed in the following section, the IRS
continues to take advantage of technological advances, such as the Internet, to improve
taxpayer services. Not only do these technological advances ease taxpayer burden, but
they free valuable IRS resources to be devoted to enforcement activities.
The IRS will continue to reengineer its examination and collection procedures to reduce
time, increase yield, and expand coverage. As part of its regular examination program,
the IRS is expanding the use of cost-efficient audit techniques first pioneered in the NRP.
By increasing its use of reliable third-party data to verify information reported by
taxpayers, the IRS can better target its audit resources. The IRS is expanding its efforts
to shift to agency-wide strategies, which maximize efficiency by better aligning problems
(such as non-filers and other areas of noncompliance) and their solutions within the
organization. The IRS is committed to improving the efficiency of its audit process,
measured by audit change rates and other appropriate benchmarks.
However, efficiency gains in existing programs alone will not significantly reduce the tax
gap. Some of the new steps described elsewhere in this strategy, such as providing the
IRS with access to more third-party data and simplifying the tax code, would also help
make compliance activities more effective.
To reduce the tax gap further, new initiatives, such as the following, are needed:
•
Expand information reporting. If legislation were enacted to strengthen reporting
requirements, the IRS could use the new information to increase and better target its
enforcement activities. Voluntary compliance would also improve, freeing IRS
resources to focus on more questionable returns.
•
Improve document matching program. Increasing the number of inquiries to
taxpayers when there are discrepancies between amounts reported on tax returns and
third-party information returns would improve compliance.
•
Refine detection programs. Refining and expanding detection programs to target
enforcement efforts on noncompliant taxpayers would ensure that IRS resources are
used effectively.
•
Increase examinations in selected areas. Some types of noncompliance (such as the
large amount of noncompliance attributable to unreported business income) can only
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be detected and prevented through labor-intensive, expensive examinations.
Reducing the tax gap will require more examinations in areas where they are most
cost-effective in recovering amounts attributable to past noncompliance and deterring
future noncompliance. As noted above, the IRS is continuing to reengineer the
examination process, allowing for some increase in coverage.
Implementation of these initiatives would have both direct and indirect benefits.
Improving compliance activities would result in an increase in enforcement revenues as
more noncompliant taxpayers are contacted and examined (the direct benefit). In
addition, a more visible IRS enforcement presence would deter other taxpayers from
evading their tax obligations, thus leading to an increase in voluntary compliance (the
indirect benefit).
5.
Enhance Taxpayer Service
Taxpayer service is especially important to help taxpayers avoid making unintentional
errors. The IRS provides year-round assistance to millions of taxpayers through many
sources, including outreach and education programs, tax forms and publications, rulings
and regulations, toll-free call centers, the Internet, taxpayer assistance centers, and
volunteer income tax assistance (VITA) and tax counseling for the elderly (TCE) sites.
Assisting taxpayers with their tax questions before they file their returns reduces
burdensome notices and other correspondence from the IRS after returns are filed and
reduces inadvertent noncompliance overall.
Since the enactment of the IRS Restructuring and Reform Act of 1998, the IRS has
significantly improved customer service. For example: (1) in the 2006 filing season,
over 56 percent of all individual taxpayers filed electronically (more than double the
number who filed electronically in fiscal year 1999); (2) Low-Income Taxpayer Clinics
have been established to provide free or nominal charge representation for low-income
taxpayers in Federal tax disputes, and to provide tax education and outreach for taxpayers
who speak English as a second language; (3) the number of hits on the IRS web site
(“IRS.gov”), which enables taxpayers to more easily obtain forms, track refunds, and get
answers to their questions, grew to over 135 million during 2006, up nearly 8 percent
from 2005; (4) other services, including the provision of transcripts of tax returns and
matching of taxpayer identification numbers for third-party payers, are now being
provided on-line; and (5) a pilot Compliance Assurance Process (CAP) program, which
allows large corporations to work with the IRS to determine tax return accuracy prior to
filing, provides these corporations with greater accuracy on their tax returns and greater
certainty about their tax liability at an earlier date.
In report language accompanying the fiscal year 2006 Appropriations bill for the
Treasury Department, the Senate Committee on Appropriations requested that the IRS
develop a five-year plan to improve taxpayer services. The Taxpayer Assistance
Blueprint, the next phase of which will be delivered in January, will include a process for
assessing taxpayer needs and preferences, develop a decision model to prioritize service
initiatives and funding, recommend service improvement initiatives, create customercentric performance and outcome measures, and outline a multi-year research plan. The
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Taxpayer Assistance Blueprint will also provide an important tool to help establish
benchmarks against which improvements in customer service can be measured.
6.
Reform and Simplify the Tax Law
The current tax code is too complicated. The complexity of the tax code makes the tax
law too difficult for taxpayers to understand and for the IRS to administer. Special rules
and subtle distinctions in the tax law foster a sense of unfairness in our tax system,
discouraging compliance and increasing the tax gap.
Taxpayers who want to comply with the tax code often make unintentional errors on their
returns, as they struggle to understand complicated rules and forms. Complexity also
provides opportunities for those who are willing to exploit the system. Furthermore,
complexity makes it difficult for the IRS to detect noncompliance. Simplifying the tax
code will reduce unintentional errors by well-meaning taxpayers and reduce opportunities
for evasion. A simpler tax code will also be easier for the IRS to administer.
The complexity of the tax law also contributes to the tax gap because limited IRS
resources are increasingly committed to administering a wide array of targeted tax
provisions created to meet social policy goals. These targeted provisions, which
themselves are growing increasingly complicated, divert IRS resources from basic
compliance efforts.
The Administration’s fiscal year 2007 budget contains six proposals that would simplify
the tax treatment of savings and families. The Treasury Department will continue to
develop additional legislative proposals to simplify the tax code in ways that will reduce
the tax gap. In addition, the Treasury Department is studying the report of the President’s
Advisory Panel on Tax Reform and is considering options for reform. Simplification
proposals aimed at reducing the tax gap would be part of a reform proposal.
Legislative initiatives will continue to be supplemented by administrative efforts to
reduce taxpayer burdens. In recent years, the IRS has taken a number of steps to reduce
taxpayer burden, including the establishment of the Office of Taxpayer Burden Reduction
(TBR). Recent improvements in IRS forms, processes and procedures include
simplifying the filing requirements for Form 944 (Employer’s Annual Federal Tax
Return), eliminating the need for filing Form 2688 (Application for Additional Extension
of Time to File U.S. Individual Income Tax Return) by allowing the taxpayer to get an
automatic six month extension to file, and the creation of the EITC Assistant, an on-line
tool that helps taxpayers determine their eligibility for the earned income tax credit
(EITC) and the estimated EITC amount. Additional projects to simplify tax forms and
processes are currently under review by TBR.
7.
Coordinate with Partners and Stakeholders
The Treasury Department and the IRS extensively coordinate with state and foreign
governments, taxpayer representative groups and practitioners to increase compliance,
gain efficiencies in tax administration, improve taxpayer services and minimize taxpayer
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burden. Increasing the level of such coordination activities will be an important part of a
successful effort to reduce the tax gap.
•
International Exchange of Information. Through tax treaties and tax information
exchange agreements, the United States is able to obtain from foreign tax authorities
information needed to enforce U.S. tax laws. In addition, the United States
participates in information sharing regarding broader, non-taxpayer-specific
information. For example, through the Joint International Tax Shelter Information
Centre (JITSIC), the IRS and tax authorities in other participating countries will
continue to share information regarding abusive tax avoidance transactions.
•
Federal-State Partnerships. The IRS continues to work with state governments to
develop strategies to address trends in noncompliance. For example, combined
Federal-state employment tax reporting allows extensive coordination between the
IRS and state governments with respect to employer noncompliance with
employment tax obligations. In addition, the Treasury Department’s Financial
Management Service and the IRS will launch a pilot program with two states in
January 2007 to enable taxpayers to pay all their Federal and certain state taxes online
by means of the Treasury’s Electronic Federal Tax Payment System (EFTPS). This
initiative will provide one stop for taxpayers to make their Federal and state tax
payments. Additional actions to address the tax gap in the next 18 months will
include:
o
o
o
o
o
o
•
Exploring the use of state data-mining capabilities, designed to utilize
proprietary state data, to refine further and prioritize IRS audit leads;
Testing the use of state Department of Revenue audit reports as an efficient
basis for IRS audit assessments;
Testing the use of State Workforce Agency employment tax audit reports as
an efficient basis for similar IRS audit assessments;
Expanding coordination with other Federal agencies with the goal of
leveraging their resources and securing data pertinent to IRS compliance
programs;
Identifying state and Federal resources and programs that can be used to
communicate tax gap messages; and
Identifying non-traditional methods utilizing state and Federal resources to
communicate the societal impact of the tax gap.
Practitioner Liaison and Education. The Treasury Department and the IRS conduct
liaison and education activities with practitioners in order to learn about
developments in tax return preparation and to ensure that advisors provide
appropriate tax advice. The IRS maintains active relationships with several national
practitioner groups, small business representatives, and industry organizations to
provide information related to the most current IRS positions and guidance. The
creation of the Office of Professional Responsibility has helped restore credibility to
enforcement of professional standards. Over the next 12 months, the IRS will
enhance outreach efforts with these practitioner and industry stakeholders to engage
in a discussion of key components of the tax gap including:
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Proper reporting of gross receipts;
Correct computation of business deductions such as cost of goods sold,
depreciation, travel and entertainment expenses, and motor vehicle expenses;
and
o Third party information reporting.
o
o
•
Taxpayer Representatives. The Treasury Department and the IRS often communicate
with taxpayer representative groups to learn about taxpayer concerns, including issues
regarding taxpayer rights in administering the tax code. For example, comments
received from organizations representing low-income taxpayers significantly
improved new EITC procedures that are currently being tested by the IRS. Recent
meetings with representatives of small businesses have focused on the importance of
balancing the IRS’s need for action in areas of noncompliance with taxpayer concerns
about increased burdens. Ongoing interaction with these groups is an integral part of
this tax gap strategy.
Conclusion
The Administration is committed to reducing the tax gap. In doing so, the Administration
recognizes that the most effective way to reduce the tax gap is to increase compliance
rates through a combination of initiatives (including targeted legislative and
administrative changes, taxpayer service, and enforcement efforts) that are sensitive to
taxpayer rights and minimize taxpayer burden. Simplification of the tax law is also
critically important to this effort. This document provides a broad strategy for reducing
the tax gap. The Administration is committed to working with Congress to further refine
and implement it.
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Tax Gap Strategy Timeline for Fiscal Year 2007
2006
September
October
November
•
•
•
•
December
•
Initial tax gap strategy
Stakeholder meetings to review initial tax gap strategy
Development of Administration legislative proposals for
inclusion in fiscal year 2008 budget request
Development of Administration’s budget request for the IRS
for fiscal year 2008
Proposal for next NRP Reporting Compliance Study
2007
January
•
•
•
•
February
•
March/April
•
May
•
June
•
July
•
Taxpayer Advocate’s Annual Report to Congress
Update of 2006-2007 Treasury Department/IRS Priority
Guidance Plan
Launch of Federal/State Electronic Federal Tax Payment
System (EFTPS).
Deliver Taxpayer Assistance Blueprint Phase II Report to
Congress
Administration’s fiscal year 2008 budget request, including
anticipated legislative proposals for compliance initiatives, tax
code simplification and IRS funding
Detailed outline of IRS tax gap strategy reflecting provisions
in Administration’s fiscal year 2008 budget request
o Outline steps to reduce opportunities for evasion
o Outline IRS research initiatives
o Outline IRS information technology initiatives
o Outline IRS compliance initiatives
o Outline IRS taxpayer service initiatives
o Outline steps to reform and simplify the tax law
Stakeholder meetings to discuss Administration’s fiscal year
2008 budget request
Treasury Department review of practitioner compliance
initiatives
2007-2008 Treasury Department/IRS Priority Guidance Plan.
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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.