Carper Looks at Ways to Cut Tax Gap, Increase Federal Funds
As the federal government faces an exploding federal deficit and a looming financial crisis, it is more important than ever to close the federal tax gap and collect additional revenue without raising taxes, Sen. Tom Carper (D-Del.) said today in opening his congressional roundtable, "Making Headway
WASHINGTON (Oct. 9, 2008) – As the federal government faces an exploding federal deficit and a looming financial crisis, it is more important than ever to close the federal tax gap and collect additional revenue without raising taxes, Sen. Tom Carper (D-Del.) said today in opening his congressional roundtable, "Making Headway on Closing the Tax Gap."
Cutting excessive federal wasteful spending and ensuring that federal agencies like the IRS are properly collecting taxes are two key oversight issues that Sen. Carper has examined as chairman of the Senate Subcommittee on Federal Financial Management, Government Information, Federal Services and International Security.
Sen. Carper held today’s informal roundtable to discuss strategies and options to close the federal "tax gap". This tax shortfall is estimated to have cost the federal government $290 billion in 2001, the last time the gap was studied.
Opening the roundtable discussion, Sen. Carper said that "some taxpayers shortchange the American people by nearly $300 billion, which is roughly $950 for every man, woman and child in America. That is a huge loss to the Treasury, which could be used to fund essential programs or to pay down the debt, and all without raising anyone’s taxes."
The session included testimony from the National Taxpayer Advocate and from key tax and investigative experts from the Treasury Department and the Government Accountability Office.
The tax gap results mainly from a limited number of taxpayers who don’t file, underpay or underreport their federal income taxes. Non-filing occurs when taxpayers who are required to file a federal tax return do not; underpayment occurs when taxpayers file a tax return, but pay less than they owe to government; and, making up 80 percent of the tax gap, underreporting occurs when taxpayers understate their income or overstate their deductions, exemptions and credits.
"We’re going to have to be smart and look at many different ways to close this gap because no single approach, alone, will work," Sen. Carper said. "As we look to a new congressional session in January, it is important to examine the merits of various proposals suggested to close the tax gap and to get experts to help us think outside the box for new solutions."
Although Sen. Carper has not expressly advocated any one of these proposals, the roundtable discussion focused primarily on these seven ideas to close the tax gap:
1.Encourage More Frequent, Voluntary Estimated Tax Payments by Small Businesses: Small business taxpayers have the option of voluntarily participating in the Electronic Federal Tax Payment System (EFTPS), which allows users to schedule automatic electronic tax payments. Unfortunately, most small business taxpayers do not partake in the EFTPS program. Yet, this nonintrusive, user-friendly proposal would encourage greater voluntary compliance because small businesses can avoid unintentional, mistaken tax underpayments.
2.Withhold Payments to Noncompliant Federal Contractors: The federal government has failed to fully exercise authority in its use of the Treasury Offset Program (TOPS) to collect taxes owed against payments to noncompliant taxpayer-contractors. The last GAO reports estimated that more than $6 billion in taxes are owed to the federal government by government contractors.
3.Require Information Reporting by Financial Institutions About Non-Interest Bearing Accounts: Under current law, the IRS cannot identify all bank accounts held by those taxpayers who are being examined, simply because banks are not required to report on the existence of any account that pays less than $10 in interest per year-typically, non-interest checking accounts. This exception induces income avoidance because those who wish to hide financial transactions can do so by using a checking account. If Congress eliminated this exception, then there would be less under-reported income.
4.Reverse Matching Against State and Local Tax Data: A February 2007 IRS study found 2,607 instances where the sales reported to the Iowa state revenue agency exceeded the sales reported to the IRS by $100,000 or more, and 304 cases where the difference was greater than $1 million. If the IRS were to implement a comprehensive, reverse-matching data sharing program, businesses would be more likely to report the same information to both state and federal authorities, and less likely to avoid complying with federal laws.
5.Allow Voluntary Withholding Agreements Among Independent Contractors and Service Recipients: Under current law, restaurants and their waiters enter into an agreement to pay taxes on an estimated percentage of their tips. However, it is not clear whether independent contractor-based service industries have the statutory authority to enter into agreements to engage in withholding on tips. Clarifying the law will increase voluntary compliance among businesses that engage the services of independent contractors.
6.Eliminating the Exception to 1099 Information Reporting for Closely Held Corporations: Under current law, businesses must report to the IRS monies (above $600 annually) paid to other businesses, unless the recipient is a closely held corporation. Payments to sole proprietors must be reported to the IRS, but payments to closely held corporations do not. If Congress were to change current law by requiring 1099 information reporting for all closely held corporations, voluntary compliance would be greater.
7.Improving the IRS’s Data Collection Infrastructure: The information that the IRS receives from third party reporting data is used separately in different IRS functions and departments. However, if the IRS combined all information sources into a single information system, the agency could develop better ways to identify potential under-reporting and help auditors improve efficiency.