The hearing examined the latest "tax gap" estimate which IRS has priced at $345 billion for tax year 2001. The tax gap is the difference between the amount of tax imposed on taxpayers for a given year and the amount that is paid voluntarily and timely. At 11 am that day, the Treasury Department released their strategy for reducing the tax gap.
Russell George, the Treasury Inspector for Tax Administration (TIGTA) and Nina Olson, the National Taxpayer Advocate put forth proposals that would reduce the tax gap, including increased third-party reporting, and witholding. They also agreed that IRS must have more thorough research on the sources of the tax gap and reliable data in order to address the problem. However, the main theme that emerged on this panel is that tax simplification is the ultimate solution to reducing the tax gap.
While fundamental tax reform is the end goal, certain legislative proposals may help close certain portions of the tax gap in the interim. Professor Jay Soled of Rutgers University, testified on the START Act, S.2414, which would require securities brokers to report a customer's change in basis to the IRS in order to increase capital gains reporting and close the capital gains tax gap--estimated by the IRS to be at least $11 billion annually.
The final panel explored the idea of "tax transparency" and how much the public should know about tax deductions, exclusions, credits, and narrowly crafted provisions in tax bills. Stephen Entin and Jason Furman agreed that "rifle shot" provisions benefiting one or two specific companies are inherently unfair. However, the main message was clear: tax simplification would prevent these narrowly-crafted special interest provisions from being included in tax bills in the first place. Neal Boortz testified on the FAIR Tax, which would eliminate our unbalanced tax system altogether by eliminating the income tax and creating a 23% sales tax.
• $345 billion in unpaid taxes: The Internal Revenue Service’s (IRS) most recent updates issued in February 2006 estimate the tax gap for the 2001 tax year to be $345 billion.
• The tax gap estimate is unreliable: The IRS itself has concerns with the overall tax gap estimate they have come up with because some areas of the estimate rely on old data; and it excludes many components of the tax gap.
• IRS cannot produce timely data: Due to antiquated methodologies and systems, IRS cannot report more recent data than tax year 2001.
• Some legislative proposals aim to decrease the “tax gap” by increasing reporting requirements. S.2414 could potentially bring in billions of dollars through closing the capital gains tax gap. This bill would require securities require securities brokerage firms or mutual funds to track and report the adjusted basis a taxpayer has in his or her stock, bond, and mutual fund investments, to both the taxpayer and the IRS
Impact on Taxpayers:
• The very existence of the tax gap means that honest taxpayers are bearing the financial burden of those who do not pay what they owe. When taxpayers fail to comply with tax laws, the burden of funding the nation’s commitments, including funding growing budget deficits, falls more heavily on taxpayers who voluntarily pay their taxes.
• The complexity of the tax code means that $ 2.2 trillion is collected each year from law-abiding filers trying to responsibly pay their taxes (representing a compliance rate of 86 percent). But not everyone can afford professional help and even with it, many mistakes are made.
• The complexity of the tax code demands that a massive IRS bureaucracy could never be big enough to adequately enforce the code to eliminate the tax gap.
These Findings Demand a Response:
• Fundamental tax reform in the form of tax code simplification are the ultimate answers to solving the elusive tax gap problem.
• The Congress must pass S. 25, the Fair Tax Act of 2005.
