The threat by Sen. Max Baucus, D-Mont., to hold back the appointment of Eric Solomon as assistant secretary for tax policy at the Department of the Treasury is misplaced, according to observers.Baucus, the ranking member of the Senate Finance Committee, said that he would place a hold on President George W. Bush's nominee for the Treasury's top tax position unless the department details how it will close the tax gap.
"I have told Treasury Secretary [Henry] Paulson that I want the administration, the Internal Revenue Service and the Treasury to give Congress a plan by the end of September of how we are going to solve the tax gap. I want a business plan with timelines, with benchmarks, with dates, revenues that will be collected and certain specific actions that the IRS and Treasury would have to take," Baucus said.
At press time, the Treasury Department had not agreed to meet the deadline.
The American Bar Association Tax Section recently wrote Baucus urging him not to fulfill his threat. "We believe ... that the position of assistant secretary for tax policy should be filled without delay," the Tax Section stated.
"The position has been vacant since February 2004. This vacancy has had a serious, detrimental impact on the development of tax policy and sound administration of the tax law. It is, therefore, imperative that the position be filled at the earliest possible opportunity," it wrote. "Separately, the Tax Section shares the concerns that you have recently expressed regarding the tax gap. We would urge, however, that these concerns not cause delay in filling the position of assistant secretary for tax policy."
"My response to Baucus is that it's your fault," said E. Martin Davidoff, tax liaison chair of the American Association of Attorney-CPAs. "Congress is not giving the IRS enough money to do its job. Using private debt collectors to get 25 cents on the dollar when they could do the job better using their own employees is grossly inefficient, yet they're forced to do this because of the budget that Congress passes. They're able to use private debt collectors because those get paid out of what they collect."
Under H.R. 5576, passed by the House in June, the IRS would receive $10.482 billion in appropriated funds, $63 million less than it received in fiscal 2006 and $110 million less than the amount the Bush administration requested.
"They're not giving enough money to collect the tax, let alone enforce the laws," Davidoff said.
"If Congress were serious about the tax gap, it would give the IRS enough money to complete its modernization, keep its computers up to date, provide first-class service and do enforcement properly," he said. "Right now, it doesn't have enough money to get under the weeds and do the undercover work necessary to find the ones who are not filing and not reporting income."
Davidoff suggested increased IRS resources to target those tax practitioners who prepare false returns as a regular practice. "There are thousands of these bad practitioners," he said, "but it will take substantial undercover operations to root them out."
The real problem is people omitting income and not filing, according to Davidoff. "Right now, if someone can file their return but not pay, the easiest course of action is not to file the return," he explained. "If they file, they face a tremendous assault. The IRS will quickly start the cycle of notices, liens and levies. There needs to be a methodology for non-filers to get back into the system early on and be given enough time to get their financial house in order."
"And of course, there's the complexity issue," Davidoff said. "Congress is so concerned about the tax gap, yet they're the ones making the code increasingly complex."
Too much enforcement?
Meanwhile, concern over the growing tax gap is causing undue focus on enforcement, the Congressional Research Service charged in a recent report on appropriations.
"It appears that the proposed budget continues a trend several years in the making of putting greater stress on enforcement at the expense of the modernization effort and, to a lesser extent, taxpayer service," the CRS stated.
"A primary force driving this shift in IRS priorities is the administration's avowed intention to reduce the federal tax gap, which is the difference between what taxpayers owe and what they pay on time," the CRS wrote.
Although the proposed budget strives to strike what it calls an "appropriate balance between enforcement and taxpayer service," the CRS noted that it tips the balance further toward enforcement, noting that from fiscal 2003 to 2006, the proportion of appropriated funds devoted to processing, assistance and management edged downward from 40 percent to 39 percent, while the proportion going into tax law enforcement rose from 39 percent to 44 percent. At the same time, the proportion going into the Business Systems Modernization program dropped from 4 percent to 2 percent.
Moreover, the CRS said that if the proposed budget is enacted as submitted, "The proportion of appropriated funds going to processing, assistance and management would fall to 38 percent; the proportion devoted to tax law enforcement would rise to 45 percent; and the proportion funneled into the BSM program would drop below 2 percent."
"The budget proposal would rely on a combination of changes in tax law, improvements in the IRS's 'administrative procedures,' and the development of a 'sound technological infrastructure' to reduce the tax gap," the researcher stated.
The bill would revise the IRS budget by creating three new accounts - taxpayer services, enforcement, and operations support - while retaining the current accounts for BSM and the health insurance tax credit.
Under this structure, the IRS would receive $2.059 billion for taxpayer services, $4.757 billion for enforcement, $3.438 billion for operations support, $212 million for the BSM program, and $15 million for administration of the health insurance tax credit.
Confusion in the gap
The tax gap itself is a nebulous concept that doesn't lend itself to measurement, according to George Pieler, former tax counsel to the Senate Finance Committee.
"To some extent, the tax gap has always been an artificial concept, because the calculation to reduce it always excludes the negative dynamic effects of any new collections devices," he said.
"The tax gap, at least to some extent, is an artifact of the complexity of the tax code, and the best way to reduce it is to reduce tax rates and special tax breaks, credits and exemptions which allow people to game the system," he said.
There is also a certain amount of confusion in terms in reporting on the tax gap, according to Davidoff.
"Statements attributed to [IRS Commissioner Mark Everson] suggest that small business is not reporting over 50 percent of its income. He's referring to net, not gross income, so that the statement may be technically accurate but it gives a misleading impression. Not all of it is intentional. Some of it is unreported income and some is overstated deductions."
"And keep in mind that the numbers themselves understate what non-filers contributed to the gap, because they only looked at filed returns," he continued. "Even the IRS admits that the non-filer component is a shot in the dark, because it's based on very little and very old information."
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