SitNews - Stories in the News - Ketchikan, Alaska


Watch out: Feds aiming to close the 'tax gap'
Scripps Howard News Service


February 15, 2006

WASHINGTON - Tax scofflaws who cost the government $345 billion and maybe more each year will have a tougher time holding out on Uncle Sam if efforts succeed in closing the "tax gap" between what Americans owe and what they pay.

That Internal Revenue Service estimate of the tax gap from 2001 is based on new checks of 46,000 personal returns from that year and other updated data, but the actual gap "may be higher," IRS Commissioner Mark Everson concedes in urging Congress and the administration to take steps to improve tax enforcement.

Almost 100 percent of the 135 million wage earners whose income taxes are withheld from their paychecks comply with the tax code, the IRS reports, and there's better-than-90 percent compliance among taxpayers whose investment and business income is reported on 1099 forms.

Everson won't say what triggers a tax audit "for obvious reasons," but concedes that taxpayers whose returns look "way out of line" for their income level and family size have a better chance of getting an IRS look-see.

Professional tax preparers call this audit trigger "DIF," for "discriminate index function." A computer program generates a score for each of the individual tax returns filed annually indicating the likelihood of questionable items.

For instance, if the average charity deduction for your tax bracket is $500, but you claim a $5,000 write-off, expect DIF to flag your return.

Only 16 percent of Americans fall into the tax-scofflaw category because they make mistakes or cheat: Of that $345 billion total, the IRS said, underreported income accounted for 82 percent of the tax shortfall, including $197 billion that individual taxpayers failed to report.

The biggest single revenue loss came from proprietors of unincorporated businesses, who typically file a Schedule C with their tax return. They shorted the government $68 billion in 2001, while partnerships came up $22 billion shy.

"These taxpayers increase the burden on everyone else and cheat their neighbors and competitors," Everson says.

Last year, beefed-up IRS enforcement saw a 20 percent increase in audits, with the 1.2 million individual audits almost double the level of five years before. Almost 5,000 businesses with assets of more than $250 million were audited, too.

The new 2007 Bush budget proposal calls for a $137 million increase in the IRS' $47.3 billion budget, largely for enforcement efforts. The request also asks that Congress:

- Expand government reporting to the IRS of its purchases of property and services from corporate suppliers and contractors.

- Require credit-card companies to report gross receipts of retailers, restaurants and small businesses.

- Make all paid tax preparers sign returns and face penalties for failure to attest to a return's accuracy, just as the federal government requires of licensed attorneys, accountants and enrolled tax agents.

IRS Taxpayer Advocate Nina Olson also recommends that Congress:

- Require sole proprietors who incorporate to file the same 1099 income-reporting form they had to file with the IRS before they became a corporation. "There are good reasons to incorporate ... but one isn't to avoid reporting income," Olson says.

- Require brokers and other agents to report the original "cost basis" of investments when they are sold to show just how much of a gain or a loss taxpayers have experienced since the date a stock, bond, mutual fund or real estate was bought. The tax-gap estimate puts capital gains and dividend underreporting at $11 billion a year.

- Establish voluntary withholding for individuals and small-business owners who deal largely in the "cash economy." Olson says too many don't save up when quarterly estimated income-tax payments are due, and voluntary monthly withholding could help.

Congress already cracked down on the donations of cars, boats, RVs and planes by requiring taxpayers to claim no more than what the charity receives at resale, starting Jan. 1, 2005. And lawmakers would limit deductions for dedicating historic building facades in tax-cut legislation the Senate passed Tuesday for negotiations with the House.



Contact Mary Deibel at DeibelM(at)

Publish A Letter on SitNews
        Read Letters/Opinions

Contact the Editor

Stories In The News
Ketchikan, Alaska