The tax gap - the difference between the amount that taxpayers pay voluntarily and on time and what they should pay - continues to generate congressional hearings and legislative proposals. The most recent data from 46,000 returns examined under the National Research Program show a net gap of $290 billion for the year 2001.
"It's an issue that comes around in cycles," said American Institute of CPAs technical manager Benson Goldstein. "It's an important issue to look at in any event, but what's triggering it now is the focus on the federal budget deficit."
The Treasury has 16 proposals grouped under four categories: expanded information reporting; improved compliance by businesses; strengthened tax administration; and penalties, including increasing preparer penalties from income tax returns to include employment, excise, exempt organization, and estate and gift tax returns.
"We don't want to enact in haste something that will achieve the objective for a category of taxpayers but add burdens to taxpayers at large," Goldstein said. "For example, the payment card proposal addresses the small businessperson who takes credit card payments from customers. This would report the gross proceeds of credit card receipts from the business. That increases burdens for the small businessperson, because those gross receipts may include sales tax, and don't take into account things like expenses."
"This is information that is available on audit if the Internal Revenue Service asks for it," he explained, "so it's reporting gross proceeds that would get reported anyway, as opposed to cash receipts from a business, which fuels the underground economy. We generally would support increased information reporting as one of the more effective ways to get at noncompliance, but it's not a simple solution."
SEEKING EASY ANSWERS
"Congress is looking for low-hanging fruit," said Bob Trinz, RIA senior tax specialist from Thomson Tax & Accounting. "They've got a problem of how to deal with the alternative minimum tax and the sunset of rate reductions and marriage penalty relief, so they're looking for ways to offset the cost, and the tax gap is a convenient source."
However, the projected revenue may be illusory, according to Trinz. "Over the past decades, the compliance rate has been in the 81 to 84 percent area, and it's currently at 86.3 percent. Getting that up to some higher number would require a substantial effort."
"There are all sorts of proposals floating around," he said. "A likely target is sole proprietors - Schedule C filers. The latest estimate is that they report 73 percent of income, versus the 94 percent rate for the rest. It all comes back to the fact that unless you're an employee with a W-2, your income will not be reported to the IRS."
TIME TO REGULATE?
At the recent Senate hearings, both Finance Committee chair Max Baucus, D-Mont., and ranking member Chuck Grassley, R-Iowa, indicated support for improving the regulation of preparers as part of a plan to increase compliance, according to Bob Kerr, senior director of government relations at the National Association of Enrolled Agents.
Given the emphasis on the tax gap, Frank Degan, chair of the NAEA Government Relations Committee, believes that there is a greater chance for tax preparer licensing legislation than in the past. "The prospects are quite good, at least on the Senate side," he said.
Sen. Jeff Bingaman, D-N.M., recently introduced S. 1219, the Taxpayer Protection and Assistance Act of 2007, which would require the Treasury Department to set standards for commercial tax return preparers, and make it obligatory for non-Circular 230 preparers to pass a competency exam and take continuing education classes.
The bill is similar to S. 832, which was introduced in the last session of Congress. Last summer, the Senate Finance Committee approved S. 832, but the full Senate never considered it.
The AICPA supports the concept of registering unlicensed preparers, according to Goldstein. "However, we do raise certain technical issues that should be addressed," he said. "First, Congress has to provide adequate resources to administer the program. And second, there has to be a nationwide campaign of awareness to promote it. ... It would be a mistake to mislead the public into thinking that all preparers are equal."
Trinz noted the disinterest on the part of the IRS in regulating an additional class of professionals. "The IRS is not for it," he said. "They barely have the resources to administer what they are responsible for now."
