Uncle Sam will soon know who's earned what in stocks
Washington — When Merrill Lynch customers opened their June statements, they got a surprise. Tucked inside the envelope was a brochure saying that starting today, the huge brokerage firm will be keeping tabs for the Internal Revenue Service when a customer sells stock.
''We are starting to accumulate information which will be filed with the IRS in early 1984,'' a firm spokesman says.
Under a tax bill passed last year, Merrill Lynch, like all other brokerages, is required to tell the IRS how much cash individuals raise by selling securities. The new rules, largely ignored in the din surrounding the battle over withholding on interest and dividends, are a bid to boost compliance with tax laws.
Tax law compliance will be getting increased attention in coming weeks - and not just from individuals who sell stocks.
Under the recently passed congressional budget, the tax committees are being asked to raise $12 billion in new revenues in the coming fiscal year and $73 billion by fiscal 1986. With tax cheating expected to cost the Treasury $100 billion this year, tightening up on compliance is one of the least unpopular ways of raising revenue on Capitol Hill.
''When looking for revenues, we ought to emphasize broadening the tax base and collecting more taxes due under existing laws,'' says Senate Finance Committee chairman Robert Dole (R) of Kansas. The Finance Committee held a series of hearings on tax law compliance and tax shelters last week.
House Ways and Means Committee chairman Dan Rostenkowski (D) of Illinois was a staunch supporter of tightening tax law compliance by withholding on interest and dividends. That provision of the Tax Equity and Fiscal Responsibility Act of 1982 was repealed after heavy lobbying by banks and savers.
The legislation to repeal withholding has cleared both houses of Congress but has not gone to conference committee or been acted upon by the President. But the Treasury Department has postponed for 30 days the original July 1 date for starting withholding.
Chairman Rostenkowski said Wednesday that he would hold hearings the middle of this month to see how committee members want to raise additional revenue. A committee staff member added, ''It is very likely that compliance will be considered when we hold hearings on a tax bill this summer.''
Tax cheating is fertile ground for raising revenue. The difference between the total amount of tax that is voluntarily paid by individuals, corporations, and others in legitimate activities for a given year and the correct liabilities for that year grew from $28.8 billion in 1973 to $81.5 billion in 1981, says Philip E. Coates, acting commissioner of internal revenue. Individual taxpayers account for about 92 percent of that difference, the IRS says.
And in just three illegal activities - drug dealing, illegal gambling, and prostitution - the difference between payments and liability grew from $2.1 billion in 1973 to $9.3 billion in 1981, the IRS estimates.
Individual compliance with the tax law varies according to how closely the IRS can track income, among other factors. Individuals report some 93.9 percent of their wages, the IRS estimates.
''This high compliance rate is generally attributed to the fact that tax is withheld before the taxpayer receives payments to the high degree of accuracy in information reported with respect to withheld amounts; and to the ability of the Internal Revenue Service to detect noncompliance,'' according to a study on noncompliance by the Congressional Joint Committee on Taxation.
But where the IRS has little or no information about income, compliance falls off. For example, until the new reporting rule for brokers went into effect, the IRS had no easy way to track capital gains, the amount an individual makes by selling stock and other assets at a profit. So some 40 percent of all capital-gain income went unreported.
The new rules require bankers, brokers, and commodity dealers to record a customer's gross proceeds from the sale of stocks, bonds, commodities, and regulated futures contracts. For this year the report to the IRS and to the customer can lump together the proceeds from all such sales.
''But beginning in 1984, each transaction is reported,'' an IRS spokesman says. And the IRS asserts that it could require reporting from real estate and collectibles dealers, although it has not yet done so.
The Reagan administration recently suggested additional ways to boost compliance, including:
* Requiring ordinary taxpayers to provide the IRS with the taxpayer identification number of individuals to whom they make payments (such as alimony), so the government can see if the payments are reported.
* Making tax shelter promoters keep a list of investors for seven years after the investment is sold to make it easier for the IRS to pursue such investors.
* Toughening penalties for understating gift and estate taxes.
Congressional aides complain that none of these measures alone would raise vast sums, and they point to other potential compliance measures outlined in a recent Joint Committee on Taxation study.
The panel noted the possibility of increasing spending on IRS enforcement activities, boosting cooperation between state and federal tax authorities, stepping up information reporting, and eliminating tax code provisions requiring computations based on multiple years.
Of course, too much enforcement can backfire, the panel noted, by creating ''a 'catch-me-if-you-can' mentality which would erode compliance.''
What taxpayers report to the IRS (Portion of total income reported in 1981) Rents 95.6 percent Wages and salaries 93.9percent Farm proprietor income 88.3 percent Interest 86.3 percent Pensions and annuities 85.2 percent Dividends 83.7 percent Nonfarm proprietor and small business income 78.7 percent Estate and trust income 76.2 percent State income tax refunds, alimony, and other income 62.0 percent Royalties 61.2 percent Capital gains 59.4 percent Source: Internal Revenue Service