By George L. Yaksick, Jr., Staff Writer
The Treasury Department and the IRS announced on August 2, 2007, a comprehensive multi-year timeframe for taking action to reduce the $300 billion tax gap--the difference between what taxpayers owe and what they actually pay.
Treasury and the IRS have pledged to increase audits (especially for Schedule C filers), develop more regulations and guidance, pursue tax shelter investors, and expand international cooperation. Most importantly, Treasury and the IRS intend to update their six-year old estimate of the size of the tax gap to
learn how large or small the gap really is.
According to the 100-page report, the Treasury Department developed a four-point comprehensive strategy for reducing the tax gap which directs the IRS to improve compliance by addressing both unintentional taxpayer errors and intentional taxpayer evasion, targeting specific sources of noncompliance, combining enforcement activities with a commitment to taxpayer service, and developing policy positions and compliance proposals with sensitivity to taxpayer rights by maintaining an appropriate balance between enforcement activity and imposition of taxpayer burden.
The timeframe highlights more than 100 specific initiatives. The majority of the initiatives are scheduled to be launched in FY 2008 and FY 2009. However, many appear dependent on increased funding of IRS operations for FY 2008 and beyond.
Treasury and the IRS didn't say how much revenue their initiatives would recover. The George W. Bush administration has proposed 16 tax gap measures that it estimates would collect nearly $30 billion over 10 years. At the heart of the administration's proposals are expanded information reporting requirements, such as requiring reporting of payments to corporations aggregating to $600 or more in a calendar year and reporting merchant credit card reimbursements.
The leaders of the powerful Senate Finance Committee (SFC), who have long been vocal critics of lax IRS enforcement, greeted the report with cautious optimism. SFC Chair Max Baucus (D-Mont.) said in a statement that he was "encouraged" by the report but "disappointed that Treasury chose not to set a specific goal for the rate of voluntary compliance." According to Treasury and the IRS, the overall compliance rate was 86 percent in 2001. Baucus has repeatedly urged Treasury and the IRS to raise it to 90 percent by 2017.
SFC ranking Republican Charles Grassley (R-Iowa) called the plan a "good beginning." He added, "Now begins the hard work of making it all happen. Too often, I've seen the best of intentions run into the brick wall of reality."
Schedule C Filers -- Non-farm proprietor income is underreported by an estimated $68 billion, according to Treasury and IRS. In response, Schedule C filers can expect more audits. By September 30, 2008, the IRS plans to increase the number of Schedule C audits by seven percent. Schedule C audits will grow by an additional five percent by September 30, 2009.
International Activities -- In 2004, Australia, Canada, the U.K., and the U.S. launched the Joint International Tax Shelter Information Centre (JITSIC). The four countries use JITSIC as a clearinghouse for information about abusive cross-boarder transactions. Japan has accepted an invitation to joint JITSIC in the near future. Treasury and the IRS also reported that JITSIC will open an office in London this autumn in addition to its office in Washington, D.C.
The U.S. also plans to expand the use of the Organisation for Economic Co-operation and Development (OECD) to identify emerging abusive transactions and trends. The OECD has been in the forefront of persuading so-called "tax haven" countries to heighten their oversight of transactions.
Taxpayers can expect more regulations on transfer pricing, the foreign tax credit, foreign trusts, and cross border restructurings in FY 2008 and FY 2009. The IRS intends to hire more international examiners in 2007 and 2008.
Quicker Turn-Around on Guidance -- Treasury and the IRS promised to increase the flow of regulations and published guidance in FY 2008 and FY 2009. By September 30, 2008, 80 percent of the items on the 2007-2008 Priority Guidance Plan will be released. The percentage will increase to 85 percent by September 30, 2009 for items on the 2008-2009 Priority Guidance Plan.
"There were 264 items on last year's Priority Guidance Plan," said Thomas Ochsenschalger, AICPA vice president--taxation. "I wouldn't be surprised if there are 300 on the FY 2007-2008 plan."
Tax Shelter Investors -- In 2004, the IRS offered a one-time settlement initiative to investors in the so-called Son of BOSS tax shelter. The IRS warned that taxpayers not participating in the settlement would risk criminal prosecution. Treasury and the IRS indicated that they will litigate unresolved Son of Boss cases in FY 2008 and FY 2009. They also promised higher conviction rates for abusive tax schemes, corporate fraud and egregious nonfilers.
Nonprofits -- On July 24, a government investigator told the House Ways and Means Committee that charitable organizations were responsible for nearly $1 billion in unpaid federal taxes in 2006. Treasury and IRS intend to implement a new electronic examination system for the Tax-Exempt/Government Entities Division as well as initiating a new project to identify nonprofits not reporting and paying federal employment taxes.
- Related items:
- Are Small Businesses a 'Tax Gap' Target?
- IRS Continues Work on Reducing Tax Gap
- IRS Begins Tax Season With Important Issues Unresolved
- Gov't Can't Audit Its Way Out of Tax Gap: IRS Official
- IRS Outlines Taxpayer Protections in Private Debt Collection Program
- IRS Outsources Some Debt Collection Activity
- IRS Releases First Fact Sheet To Address Business Income Tax Gap; More To Come
- IRS Reports $345 Billion in Taxes Went Unpaid for 2001 Tax Year
Added to the news August 10, 2007.
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