Tax Break

Closing the $450 billion tax gap

April 23, 2012

Fundamental tax reform, more funding for the IRS, and increased third-party disclosure were among the many solutions to the $450 billion tax gap offered at a Congressional hearing Thursday.

Closing the gap between taxes owed and taxes paid will require a multi-faceted approach, testified James R. White, the director of strategic issues at the Government Accountability Office (GAO) before the IRS oversight subcommittee of the House of Representatives. (His testimony and report is available here.)

Growth in the tax gap, which added $105 billion between 2001 and 2006 (their most recent figures), has made it more urgent, though closing the entire gap may not be possible given public resistance to excessive government intrusion and limits on IRS resources, White noted.

The largest chunk of the tax gap, $179 billion in 2006, came from the misreporting of business income and self-employment taxes, most often by sole proprietors, according to the GAO.

How much is intentional was not clear, though the GAO did find better compliance in categories like wages and salaries which third-party sources independently provide to the IRS. Things like rent and royalties and farm income, which have no such system, were far more likely to be misreported.

Among sole proprietors, 61 percent underreported their net income in 2001, according to the GAO.

More third-party reporting is now being done including on clients’ securities sales and credit card receipts. Other areas where third parties could provide helpful information include higher education expenses and certain payments to landlords and corporations, White said.

 

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