WASHINGTON, D.C.—Today, U.S. Representative Rahm Emanuel (D-IL) released a letter to Internal Revenue Service Commissioner Mark W. Everson responding to a new IRS study showing the tax gap rising due to increased cheating and deteriorating compliance. 

“Tax sheltering has a deeply corrosive effect on our tax system, resulting in a culture where cheating is accepted and playing by the rules is penalized.  Accordingly, fundamental fairness and the continued viability of our voluntary tax system require a re-ordering of priorities,” wrote Emanuel.

The IRS report indicates underreporting of income accounts for more than 80 percent of the total tax gap which rose to between $312 billion and $353 billion in tax year 2001. 
 
“The vast majority of understated income comes from business activities, not wages.  As a result of this disparity, middle-class families, who derive the vast majority of their incomes from wages, are left to bear an ever-increasing share of the tax burden because others do not abide by the law,” wrote Emanuel.

Following is text of the letter:

March 30, 2005

The Honorable Mark W. Everson
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
 
Dear Commissioner Everson,
 
I am writing to express my concern about the implications of the new IRS study showing the tax gap rising to between $312 billion and $353 billion in tax year 2001 due to increased cheating and deteriorating compliance.  It is likely that the tax gap has grown even larger in the ensuing years, while at the same time we have made the code more complex and added 10,000 new pages.
 
As the report indicates, underreporting of income accounts for more than 80 percent of the total tax gap.  The vast majority of understated income comes from business activities, not wages.  As a result of this disparity, middle-class families, who derive the vast majority of their incomes from wages, are left to bear an ever-increasing share of the tax burden because others do not abide by the law. 
 
Tax sheltering has a deeply corrosive effect on our tax system, resulting in a culture where cheating is accepted and playing by the rules is penalized.  Accordingly, fundamental fairness and the continued viability of our voluntary tax system require a re-ordering of priorities.
 
We must devote the IRS’ limited resources to targeting deliberate evasion by tax cheats and to cracking down on the burgeoning tax shelter industry.  I am concerned that in recent years we have instead focused on working families overwhelmed by complexity and EITC applicants making minor filing errors.
 
While the federal government has run consecutive record-breaking deficits of more than $400 billion, individual tax revenues are at their lowest level since the Truman Administration, and rampant tax sheltering has reduced corporate income tax receipts to historically low levels.  Closing the tax gap would help put us back on the road to a balanced budget. 

At the same time, the 2001 and 2003 tax cuts have made the code more complicated, burdensome and unfair for middle-class families.  In the last four years, the code has been riddled with sunsets, phase-ins, phase-outs, and new sections—not to mention scores of new loopholes and corporate welfare provisions. 

These changes are a boon to those who can afford attorneys and accountants to show them the latest off-ramps, but they are a nightmare for middle-class families facing piles of convoluted new forms and the AMT.  The public's distaste for the current tax code is a direct result of this inequity.

The IRS report underscores the urgent need for fundamental tax reform to make the system simpler and more equitable for middle-class families.  Until Congress addresses these issues, I would hope that the IRS’ resources will be devoted to those who intentionally flout the system. 

When the House of Representatives reconvenes next week, I will call for hearings on this report in the Ways & Means Committee.  I look forward to continuing to work with you to create a tax system that respects the values and interests of middle-class families.

Sincerely,

Rahm Emanuel
Member of Congress