The measures to close the tax gap offered by President Bush in his 2008 budget are somewhat modest, according to observers.The president's $2.9 trillion budget contains a number of legislative proposals to close the gap in four areas: by expanding information reporting, improving compliance by businesses, strengthening tax administration and expanding penalties.
The president's proposal "contained surprisingly few proposals aimed at narrowing the tax gap," said Robert Kerr, senior director of government relations for the National Association of Enrolled Agents.
"The proposals are probably a little modest," said Alan D. Viard, former Federal Reserve Bank of Dallas economist and resident scholar at the American Enterprise Institute. "We thought it might be somewhat bigger in scope. The administration is under a lot of pressure from Senate Democrats to take aggressive action, although Sen. [Max] Baucus [D-Mont., chairman of the Senate Finance Committee] has refused to put forth his own proposals to reduce the tax gap."
The tax gap, the difference between taxes owed and taxes paid, was estimated at $290 billion for 2001 - a compliance rate of about 86 percent. Internal Revenue Service estimates say that underreporting of capital gains resulted in about $11 billion of that gap.
Noting that, "Compliance increases significantly for payments that a third party reports to the IRS," the budget proposes that businesses file an information return for payments aggregating $600 or more in a calendar year for corporations other than tax-exempt corporations.
Brokers, including mutual funds, would be required to report information on the adjusted basis in the sale of publicly traded securities. The IRS would be granted authority to promulgate rules, including exceptions, to implement this. Under current law, basis is not reported to the IRS. "Requiring the reporting of the purchase price along with the sale proceeds will put a stop to the underreporting of gains," said Viard.
There are administrative challenges to transferring some of the responsibility of basis calculation from the taxpayer to the broker, both for the broker and for the taxpayer, according to Roger Harris, director of government relations for the NAEA. "We believe the taxpayer has the right to an explanation of how a basis was calculated, as well as the right to appeal the calculation, so long as the taxpayer presents a lawful method of alternate calculation," he said.
In a move that would affect users of online auction site eBay, the budget proposes that a broker be required to make an information return showing its customer's name, address and taxpayer identification number, as well as gross proceeds from the sale of tangible personal property. This would apply only to customers for whom a broker has handled 100 or more transactions, generating at least $5,000 in gross proceeds in a year.
A 2005 Nielsen study found that 724,000 sellers rely on eBay sales as their primary or secondary source of income, and that eBay users sold $44.3 billion of merchandise, none of which was directly reported to the IRS.
Information return penalties are currently $50, not to exceed $250,000 ($100,000 for smaller filers) in a year for each failure to timely file an accurate information return. If the failure is intentional, the penalty for each return is $100. The penalties would be increased to $100 and $250, and the caps would be increased to $500,000 and $1,500,000.
MORE ACCESS FOR THE IRS
The president's proposals call for expanded IRS access to information in the National Directory of New Hires, which is a database containing newly hired employee data from Form W-4. This data would be used by the IRS in administering a wide range of tax provisions beyond the Earned Income Tax Credit, including verifying taxpayer claims and identifying levy sources. Currently, the IRS can only obtain employment and unemployment data on a state-by-state basis, which is costly and time-consuming.
The budget proposes an expansion of preparer penalties, and would impose a penalty on the failure to comply with electronic filing requirements, and create an erroneous refund claim penalty. The current preparer penalties - set in 1989 - are $50 for certain failures (failure to sign a return, failure to show his taxpayer ID, failure to furnish a completed copy of the return to the taxpayer, etc). The penalty is $250 for understatements if the preparer knew, or should have known, of the understatement of liability. It rises to $1,000 if the understatement is due to willful, reckless or intentional disregard of rules.
The scope of the existing preparer penalties would be expanded from income tax returns to include employment, excise, exempt organization, estate and gift tax returns, and related documents. The per-failure penalty would be increased from $50 to $150, the $250 penalty would be increased to the greater of $1,000 or 50 percent of the preparer's fee, and the $1,000 penalty would be increased to the greater of $5,000 or 50 percent of the preparer's fee.
"I'm not sure that by itself the penalty addresses the situation the way registration or licensing of preparers would," said Harris. "You probably need a combination of both."
Other penalties would impose an assessment on corporations and tax-exempt organizations for failure to comply with electronic-filing requirements. Although filing on paper instead of electronically is treated as a failure to file, the addition to tax for failure to file is based on an underpayment of tax, and no addition is imposed if the corporation is in a refund or credit status. Therefore, the budget proposes a penalty for failure to comply with an electronic filing requirement of $25,000 for a corporation or $5,000 for a tax-exempt organization.
The budget also proposes a penalty in the amount of up to 20 percent of a disallowed portion of a claim for refund or credit, including the EITC, for which there is no reasonable basis for the claimed tax treatment for which the taxpayer did not have reasonable cause.
The budget contains a number of proposals that target business compliance: requiring all corporations and partnerships that file Schedule M-3 to file their tax returns electronically; clarifying when employee leasing companies can be held liable for their clients' federal employment taxes; and amending collection due process procedures for employment tax liabilities.
What about small biz?
"The biggest problem by far is the non-reporting or underreporting by small businesses," Viard noted. "The opportunity for tax evasion is so widespread, and it's so easy to underreport the amount of cash received."
The president's budget proposal stated that additional approaches would be considered, such as improvements in coordination with the states, including reporting of financial activity that may not currently be subject to information reporting.
"It's easy to talk about closing the tax gap in the abstract," said Sen. Chuck Grassley, R-Iowa, ranking member of the Finance Committee. "It's harder to enact concrete proposals that may be politically unpopular."
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access