IRS, States Try Different Methods to Reduce “Tax Gap”

The Internal Revenue Service is working to improve its offer-in-compromise program, which allows taxpayers to seek a reduction in what they owe in back taxes.

MarketWatch reported that the IRS issued a revised Form 656 late last year that reveals the formula it uses to calculate appropriate offers of back tax payments, which is considered the most complicated part of the offer-in-compromise process. The new application is designed to show taxpayers up front if they are eligible to file for an offer.

The hope is that fewer taxpayers will fall for scams from unscrupulous advisers who promise to figure out the amount to offer to pay the IRS. Taxpayers have paid thousands of dollars for a “service” that led them to believe they would pay pennies on the dollar, only to have their offer rejected by the IRS, MarketWatch reported.

A recent tax study shows that the gross tax gap – the difference between what taxpayers should pay and what they actually pay on a timely basis – exceeds $300 billion per year, the IRS has reported. IRS enforcement activities, combined with late payments, recover about $55 billion, leaving a net tax gap of between $257 billion and $298 billion.

While the IRS is implementing more efficient tax-collection processes and beefed-up enforcement to collect back debts, states sometimes turn to tax amnesty programs or data mining services to bring in tax dollars.

The state of Texas, for example, has turned to SPSS Predictive Analytics software and Elite Analytics LLP, a data mining service, to reduce the tax gap. The Texas Comptroller of Public Accounts was able to recover more than $400 million in unpaid taxes since its inception in 1998, the company said. All 50 states use SPSS software.

In Indiana, the state will give delinquent taxpayers from Sept. 15 to Nov. 15 to pay back taxes without penalties as a way for the state to collect some of the $600 million it is owed, the Indianapolis Star reported. State officials expect the amnesty program to bring in up to $103 million. At least 40 other states have used tax amnesty programs to collect debts.

California also put an amnesty program in place, but since it ended March 31, new penalties are in place for pre-2003 tax period. If your company owes income of sales and use taxes for tax years prior to Jan. 1, 2003, a new surcharge of 50 percent of the interest on the tax will be due. Other penalties will apply. The law firm of Fenwick & West LLP says taxpayers with legitimate tax disputes could be penalized.

IRS Commissioner Mark Everson said in a recent statement that federal tax code reform would increase compliance. “Complexity obscures understanding. Complexity in the tax code compromises both the service and enforcement missions of the IRS. Those who try to follow the law but cannot understand their tax obligations may make inadvertent errors or ultimately throw up their hands and say 'why bother.' Meanwhile, individuals who seek to pay less than what they owe often hide behind the tax code's complexity in order to escape detection by the IRS and pay less than their fair share.”

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