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.

from the March 21, 2007 edition

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"All these complications are in the code for a reason," says Mr. Luscombe.

In the late 1990s, in part because of pressure from a Republican-controlled Congress, the IRS adopted a friendlier demeanor. The focus was on customer-service, not crackdowns. The agency is trying to maintain that tone, and experts say better customer service is one way to boost compliance.

But there's also a growing emphasis on other measures to collect what's due:

• The number of audits, and the amount of money collected from those audits, has been rising. In 2005 and 2006, the IRS examined more than 6 percent of returns from filers whose income exceeded $1 million, up from a 5 percent rate in 2004.

• In its recent 2008 budget proposal, the White House proposed expanding enforcement spending by about 5 percent from 2006 levels. The president's plan also calls for additional compliance measures that could enable the IRS to collect another $29 billion in taxes over 10 years.

• Many in the Democratic-controlled Congress would like to see even more done. Sen. Carl Levin (D) of Michigan began pushing legislation in February that would make it harder for individuals to escape taxes by setting up offshore accounts.

"With a $345 billion annual tax gap and a $248 billion annual deficit, we cannot tolerate a $100 billion drain on our Treasury each year from offshore tax abuses," Senator Levin said at the time.

The bill's backers, including Sens. Barack Obama (D) of Illinois and Norm Coleman (R) of Minnesota, argue that the measure is needed to restore the tax system's lost sense of fairness.

The bill would impose new limits on tax shelters used by some America's wealthiest filers. US authorities would assume that an offshore trust is controlled by the American who set it up, unless he or she proves otherwise. This reverses the current burden of proof.

To better enforce current laws, tax experts say the IRS could use more auditors. And some say the biggest need is for a wider flow of information to the tax agency.

"Congress would have to add a number of reporting responsibilities" to make a big dent in the tax gap, says Charles Davenport, a professor of tax law at the Rutgers University campus in Newark, N.J.

For example, if stock-brokerage firms had to tell the IRS the original cost of clients' shares, not just the sale price when they are sold, it would be easier to know if people's tax returns show the right capital gains. Other possible rules could rake in more data about the income of independent contractors or the proceeds from items sold in eBay auctions. The problem right now, Mr. Davenport says, is "there's no big incentive to get it right."

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