LEGISLATION PROPOSED TO BAN 'RETURN-FREE' SYSTEM: H.R. 5114, the Tax Return Choice Act of 2006, was introduced in the House and referred to the Ways and Means Committee. The bill, which has 88 Republican and 17 Democrat co-sponsors, would prohibit the Internal Revenue Service from completing individual tax returns other than through the programs already offered through the Free File Alliance, Taxpayer Assistance Centers, Tax Counseling for the Elderly, and Volunteer Income Tax Assistance programs.The bill reflects the efforts of a number of groups concerned that a return-free system similar to the one used in the U.K., Germany and Japan would be a step backward from voluntary compliance, and would raise taxes on those who used it. Under such a system, the tax agency computes final tax liability based on third-party data, such as W-2s and Form 1099s, and sends the taxpayer a written determination and a bill. The taxpayer can accept the calculations and pay the bill, or wait for a refund. The taxpayer can then make minor adjustments, or may disregard the determination and prepare a separate return.

Since few taxpayers challenge the government findings, critics say the impact is to raise taxes, and contend that the same agency that collects taxes, writes tax regulations, collects revenues, performs audits and enforces compliance should not also become the tax preparer.

GAO EYEBALLS IRS'S BUDGET REQUEST: The Government Accountability Office gave a thumbs-up to the Internal Revenue Service's $11 billion budget request, saying that the agency appears to have recognized that throwing money at enforcement can only reduce the tax gap so much.

The GAO said that the IRS's 2007 budget request is a small decrease after adjusting for inflation, and sets performance goals for service and enforcement that are all equal to, or higher than, its 2006 goals. The GAO said that the IRS has improved its filing season performance so far in 2006, and that more refunds are being directly deposited, which is a faster and more convenient process. Electronic filing also continues to grow, but at a slower rate than in previous years. Taxpayers are also continuing the recent pattern of using IRS walk-in sites less and community-based volunteer sites more.

The budget reduces funding by 15 percent for the business systems modernization program, an ongoing effort to replace aging information systems, which the GAO worried could impede progress in delivering improvements to taxpayers.

The GAO's major complaints are that more savings might be found through consolidating under-utilized operations, and that it will be hard for the agency to achieve its long-term compliance goals because the tax gap has persisted for many years at close to the current level. "Reducing the tax gap will likely require new and innovative solutions such as simplifying the tax code, increasing income subject to withholding and increasing information reporting about income," the report said. The report is available at www.gao.gov/new.items/d06615t.pdf.

NEW SOI BULLETIN SHOWS CONTINUED REVENUE, RETURN GROWTH: The recently released Winter 2005-2006 issue of the Statistics of Income Bulletin disclosed that adjusted gross income rose in 2004 for the second year in a row, increasing by 8.9 percent to $6.8 trillion. The largest component of AGI, salaries and wages, increased 6.0 percent, to $4,977.9 billion, while net capital gains rose 53.2 percent, to $442.1 billion. Taxable income increased 10.6 percent, to $4.6 trillion.

For 2004, taxpayers filed 132.4 million individual income tax returns, an increase of 1.4 percent from the 130.6 million returns filed for 2003. Total income tax revenue increased 10.5 percent, to $870.3 billion.

The Bulletin shows that there were more than 7.3 million individuals in the United States with gross assets of $675,000 or more in 2001, representing about 3.5 percent of the total U.S. adult population. Top wealth holders had a combined net worth of more than $13.8 trillion, or 32.7 percent of total U.S. net worth. Almost 4 million, or 53.7 percent, of these wealthy individuals were male, and 3.4 million were female.

Taxpayers, including businesses, are expected to file a total of 229.3 million tax returns with the Internal Revenue Service during calendar year 2006. That projection reflects a modest increase of only 0.1 percent over the estimated calendar year 2005 filings of 229.0 million. After 2006, however, grand total return filings are projected to grow at a more typical average annual rate of 1.2 percent, and to reach 246.8 million by 2012.

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