IRS steps up efforts to close 'tax gap'
Underpayment due to cheating or confusion is causing audits to rise, and new rules could be on the way.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the March 21, 2007 edition
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Around this time each year, Americans dutifully send in what they owe in federal taxes – or at least about 84 percent of it.
The government would like to get the other 16 percent. Growing concern about this "tax gap" – underpayment due to a combination of cheating or failing to understand a complicated tax code – means that audits are on the rise and new rules could be on the way.
IRS scrutiny is greatest for high-income tax filers and people who put small-business income on their returns. But even average taxpayers saw audit rates edge up last year to levels last seen in the late 1990s.
Forget brushing up on Shakespeare. This spring is the season for being sure you know the latest rules on credits and deductions.
In addition to stepped-up examinations, momentum is building for new reporting requirements – on stock brokerage firms, for example – to determine who owes what.
Such steps won't fully recover an estimated $290 billion or more in lost revenue. But analysts say such moves are important – if only to prevent the compliance gap from growing bigger.
"If at least it's coming down and not growing, then I think that would give people more confidence in the tax system," says Mark Luscombe, an analyst at CCH, a provider of tax information in Riverwoods, Ill. "They really need to get this tax gap under control, so that the majority of people feel that they should comply."
The danger is that, if more people believe their neighbors are cheating and getting away with it, the compliance problem could grow. Last year, researchers at Youngstown State University in Ohio suggested that this psychology is already at work: Many people feel justified in cheating a little, in part because they believe the system is unfair and that worse evaders are going undetected.
Of course, the notion of getting tougher as a way to build public trust in the tax system – and in the agency that represents it – is a tricky proposition. Policymakers are trying to balance the need for greater compliance against the risk of simply adding to public frustration.
The tax gap is, to some degree, a symptom of the tax code's exasperating complexity. Millions of Americans struggle hard to pay what they owe, and still fail.
"It is easy to look at a $290 billion tax gap and see a pot of gold," Scott Hodge of the conservative Tax Foundation said at a March 9 Treasury Department roundtable. "But for many taxpayers, efforts to close that gap could become a mountain of paperwork."
From President Bush to Democrats in Congress, leaders are calling for a simplification of the tax code, not just enforcement. But action has proved difficult. One reason is that voters like their special tax breaks, and politicians like to dole them out.
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