Automatic Reporting & Withholding Leads to Less Cheating

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The Internal Revenue Service (IRS) on Tuesday announced updated tax gap estimates for the 2001 tax year indicating a difference of $345 billion between what taxpayers should have paid and the amount actually paid. Approximately $55 billion of that will be recovered through late payments and IRS enforcement activities, leaving a net tax gap of $290 billion for tax year 2001.

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“The vast majority of Americans pay their taxes accurately and are shortchanged by those who don't pay their fair share,” IRS Commissioner Mark W. Everson said in announcing the updated figures. “The magnitude of the tax gap highlights the critical role of enforcement in keeping our system of tax administration healthy.”

Workers who had 99 percent of their wages reported to the government and taxes withheld from their paychecks were the least likely to cheat, the New York Times reports. Those most likely to cheat? That would be farmers, investors, and small business proprietors, according to the New York Times. The IRS would add landlords to that list.

The new statistics have been used to update the audit selection system, enabling the IRS to audit more efficiently and improve the detection of underreported income and overstated deduction, credits, etc.

Since 2001, the year covered by the study, the IRS has taken a number of steps to bolster enforcement and reduce the tax gap. Enforcement revenues increased by nearly 40 percent from $33.8 billion in 2001, to $47.3 billion in 2005. Audits of high-income taxpayers, earning $100,000 or more, reached a ten-year high in 2005, at 221,000. Total audits of all taxpayers topped 1.2 million last year, an increase of 20 percent.

The President's Fiscal Year 2007 budget proposal contains several legislative changes aimed at narrowing the tax gap including:

  • Expanding third-party information reporting to include certain Government payments for property and services;
  • Expanding third-party information reporting on debt and credit card reimbursements paid to certain merchants;
  • Clarifying liability for employment taxes for employee leasing companies and their clients;
  • Expanding beyond income taxes the requirement that paid return preparers sign returns, and imposing a penalty when they fail to do so; and
  • Authorizing the IRS to issue levies to collect employment tax debts prior to collection due process proceedings.

According to the Senate budget committee's Republican analysis of the President's budget proposal, six measures for closing loopholes and improving tax compliance will yield $1.0 billion in increased revenue between 2007-2011. In addition, the budget proposal contains measures intended to improve tax administration by the IRS, including curbing the use of frivolous submissions to delay tax administration and consolidating the judicial review of collection cases in the U.S. Tax Court. By implementing information reporting measures and requiring improved collections the proposed budget analysis claims an increase in revenues of $1.5 billion over five years.

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