While most taxpayers and their accountants complain about the increasingly complex Tax Code, some of the nation's biggest corporations welcome complexity as an opportunity to "game the system."At least that's the latest grumbling from Capitol Hill, where members of the Senate Finance Committee are voicing fresh concerns over the widening "corporate tax gap."
During hearings on the problem, senators from both sides of the political aisle took turns blasting business taxpayers who seek out shady loopholes to reduce their tax burden.
Although he noted that "the complexity of the Tax Code itself creates burdens and inefficiencies for taxpayers and the IRS," Finance Committee chair Chuck Grassley, R-Iowa, maintained that some sophisticated corporate taxpayers "view complexity as creating opportunities for tax avoidance."
Sen. Max Baucus, D-Mont., the committee's ranking Democrat, put it even more bluntly while advocating aggressive Internal Revenue Service action to close the corporate tax gap: "We need to ensure that some [companies] do not gain a competitive edge because they have gamed the tax system."
Behind the congressional concern over non-compliance by business taxpayers is the fact that corporate taxes are becoming an increasingly important revenue stream for the U.S. Treasury. In 2005, corporate income tax receipts jumped 47 percent, to a record $278.3 billion. That represents 2.3 percent of the nation's total gross domestic product - the highest proportion since 1980 - and indications are that the IRS will be looking to businesses for an even bigger share in 2006. In fact, tax service officials told the committee that corporate tax receipts are up another 30 percent for the first eight months of this fiscal year.
But while corporate tax receipts are on the rise, so too is tax avoidance by large businesses. The latest IRS estimates peg the amount of "clear non-compliance" by corporate taxpayers at $32 billion for the 2001 tax year.
The current corporate tax gap - the difference between taxes owed and taxes collected - could be considerably higher than that figure, officials from the Government Accountability Office told the committee.
For his part, Sen. Baucus estimated that corporate and other business non-compliance now accounts for "about 40 percent" of the $350 billion in federal tax liability that goes uncollected each year.
Complexity = noncompliance
IRS Commissioner Mark Everson agreed that Tax Code complexity is at least partially responsible for the corporate tax gap, because "large businesses are able to utilize every available resource to explore opportunities to reduce their tax liability by using the most intricate and complicated code provisions."
And the constant tinkering by Congress doesn't help, he said. "Every new tax law, even those that are simple on their face, creates additional complexity while providing taxpayers with further tax planning opportunities, adding to our challenges to administer the federal tax system," Everson told the panel of lawmakers.
Although not all corporate tax avoidance is illegal, much of it falls into a gray area that creates enforcement problems for the IRS and encourages aggressive tactics by many businesses, U.S. Comptroller General David M. Walker testified.
"Complicating corporate tax compliance is the fact that in many cases the law is unclear or subject to differing interpretations," he told Congress. "In fact, some have postulated that major corporations' tax returns are actually just the opening bid in an extended negotiation with the IRS to determine a corporation's tax liability."
Publicly traded companies present a particular challenge to the IRS in this respect, Everson said. These "companies strive to reflect the highest possible after-tax profits on their financial statements, while at the same time being incentivized to report the lowest possible taxable income and tax liability," he told Congress.
The difference between income reported by public companies to their shareholders and taxable income reported on their tax returns to the IRS has grown dramatically in recent years, from $79 billion in 1995 to $203.8 billion in 2002.
One particular problem cited by the IRS commissioner: the lack of penalties for corporate taxpayers that file improper refund claims.
"The accuracy-related penalties in the code apply only in the case of an underpayment of tax, and provide no disincentive to taxpayers who file frivolous or negligent claims for refund," Everson told the committee. "We believe this encourages promoters, including accounting firms, to market improper refund of claims schemes."
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