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+ - IRS AND THE TAX GAP
+
+[House Hearing, 110 Congress]
+[From the U.S. Government Publishing Office]
+
+
+
+ IRS AND THE TAX GAP
+
+=======================================================================
+
+ HEARING
+
+ before the
+
+ COMMITTEE ON THE BUDGET
+ HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED TENTH CONGRESS
+
+ FIRST SESSION
+
+ __________
+
+ HEARING HELD IN WASHINGTON, DC, FEBRUARY 16, 2007
+
+ __________
+
+ Serial No. 110-9
+
+ __________
+
+ Printed for the use of the Committee on the Budget
+
+
+ Available on the Internet:
+ http://www.gpoaccess.gov/congress/house/budget/index.html
+
+ U.S. GOVERNMENT PRINTING OFFICE
+
+33-390 PDF WASHINGTON DC: 2007
+---------------------------------------------------------------------
+For sale by the Superintendent of Documents, U.S. Government Printing
+Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
+DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP,
+Washington, DC 20402-0001
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+ COMMITTEE ON THE BUDGET
+
+ JOHN M. SPRATT, Jr., South Carolina, Chairman
+ROSA L. DeLAURO, Connecticut, PAUL RYAN, Wisconsin,
+CHET EDWARDS, Texas Ranking Minority Member
+JIM COOPER, Tennessee J. GRESHAM BARRETT, South Carolina
+THOMAS H. ALLEN, Maine JO BONNER, Alabama
+ALLYSON Y. SCHWARTZ, Pennsylvania SCOTT GARRETT, New Jersey
+MARCY KAPTUR, Ohio THADDEUS G. McCOTTER, Michigan
+XAVIER BECERRA, California MARIO DIAZ-BALART, Florida
+LLOYD DOGGETT, Texas JEB HENSARLING, Texas
+EARL BLUMENAUER, Oregon DANIEL E. LUNGREN, California
+MARION BERRY, Arkansas MICHAEL K. SIMPSON, Idaho
+ALLEN BOYD, Florida PATRICK T. McHENRY, North Carolina
+JAMES P. McGOVERN, Massachusetts CONNIE MACK, Florida
+BETTY SUTTON, Ohio K. MICHAEL CONAWAY, Texas
+ROBERT E. ANDREWS, New Jersey JOHN CAMPBELL, California
+ROBERT C. ``BOBBY'' SCOTT, Virginia PATRICK J. TIBERI, Ohio
+BOB ETHERIDGE, North Carolina JON C. PORTER, Nevada
+DARLENE HOOLEY, Oregon RODNEY ALEXANDER, Louisiana
+BRIAN BAIRD, Washington ADRIAN SMITH, Nebraska
+DENNIS MOORE, Kansas
+TIMOTHY H. BISHOP, New York
+[Vacancy]
+
+ Professional Staff
+
+ Thomas S. Kahn, Staff Director and Chief Counsel
+ James T. Bates, Minority Chief of Staff
+
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+ C O N T E N T S
+
+ Page
+Hearing held in Washington, DC, February 16, 2007................ 1
+Statement of:
+ Hon. John M. Spratt, Jr., Chairman, House Committee on the
+ Budget..................................................... 1
+ Hon. Paul Ryan, a Representative in Congress from the State
+ of Wisconsin............................................... 2
+ Mark Everson, Commissioner, Internal Revenue Service......... 4
+ Prepared statement of.................................... 5
+ Response to question posed by Mr. Ryan................... 23
+ Response to question posed by Mr. Andrews................ 40
+ Hon. J. Russell George, Inspector General for Tax
+ Administration, U.S. Department of the Treasury............ 49
+ Prepared statement of.................................... 51
+ Nina E. Olson, National Taxpayer Advocate, Internal Revenue
+ Service.................................................... 65
+ Prepared statement of.................................... 66
+ Michael Brostek, Director, Tax Issues, Strategic Issues Team,
+ U.S. Government Accountability Office...................... 83
+ Prepared statement of.................................... 85
+ Chris Edwards, director of tax policy studies, Cato Institute 109
+ Prepared statement of.................................... 111
+
+
+ IRS AND THE TAX GAP
+
+ ----------
+
+
+ FRIDAY, FEBRUARY 16, 2007
+
+ House of Representatives,
+ Committee on the Budget,
+ Washington, DC.
+ The committee met, pursuant to call, at 10:05 a.m. in room
+210, Cannon House Office Building, Hon. John Spratt [chairman
+of the committee] presiding.
+ Present: Representatives Spratt, Cooper, Schwartz, Kaptur,
+Becerra, Doggett, Blumenauer, Berry, Boyd, McGovern, Sutton,
+Andrews, Scott, Etheridge, Hooley, Moore, Bishop, Ryan,
+Barrett, Garrett, Hensarling, Conaway, Campbell, Tiberi,
+Porter, Alexander, and Smith.
+ Chairman Spratt. Good morning. I will call this hearing to
+order. I am pleased to open today's hearing on the IRS and tax
+gap.
+ I welcome our panel of witnesses: Mark Everson,
+Commissioner of the Internal Revenue Service; Treasury
+Inspector General for the Tax Administration, Russell George;
+GAO's Director for Tax Issues, Michael Brostek; the National
+Taxpayer Advocate, Nina Olson; and the Director of Tax Policy
+Studies at the Cato Institute, Chris Edwards.
+ We will first hear from the Commissioner of the Internal
+Revenue Service Mr. Everson, and then we will turn to the other
+witnesses for a second panel after questions of Mr. Everson.
+ Given our committee's jurisdiction and our commitment to
+getting the country's fiscal house back in order, our focus
+today will be on the so-called ``tax gap.'' the tax gap is the
+difference between taxes legally owed and taxes actually
+collected. The Internal Revenue Service has developed a recent
+estimate of the size of our tax gap, the most recent being
+2001, which was $345 billion, a sizable sum, and that was 6
+years ago. The gap has, in all likelihood, grown even larger by
+now, but even that tax gap from 6 years ago is $1 billion more
+than last year's unified budget deficit, which was $248
+billion.
+ This suggests that, if we can only do a better job of
+collecting taxes that are already current policy, already in
+the current Tax Code, our fiscal situation could be
+substantially better. The persistence of the tax gap means that
+we have larger deficits than we would otherwise rack up and a
+growing legacy of debt for our children and grandchildren.
+Saddling future generations with this huge mountain of debt is
+not just a budgetary problem, but it raises fundamental issues
+of moral fairness.
+ There is another issue of fairness at work here as well.
+The tax gap is unfair to the scrupulous taxpayers, the vast
+majority who end up having to pay more in taxes because of
+those who do not pay what they obviously owe in taxes. So, as
+we try to get the budget back on the right track, for the sake
+of both fairness and practicality, a good place to look and
+look carefully is the tax gap and what we can do to collect
+better what is already owed the United States Government. That
+is why we have assembled this group of witnesses today to help
+us understand more about how we can narrow this tax gap and
+reap the benefits.
+ I look forward to the witnesses' testimony. As I said, we
+will first hear from IRS Commissioner Everson and then
+entertain questions for him, and once those questions are
+completed, we will call up our second panel. But before turning
+to the Commissioner, let me turn to our Ranking Member Mr. Ryan
+for his opening statement.
+ Mr. Ryan. I thank the Chairman, and I am excited that we
+are having this hearing today because this is an issue that we
+are going to be talking about quite a bit in the days to come
+as we assemble our budget. We are talking about this over on
+the Ways and Means Committee as well, and as you can see,
+Commissioner, there is a lot of Member interest here.
+ First, I think it is important to note that the pro-growth
+tax policy and the tax relief that we have passed have helped
+to significantly increase the revenues that are now coming into
+the Federal Government. In fact, we have seen double-digit
+revenue growth for 2 consecutive years, the first time that
+this has happened since the 1980s, and again, through the first
+4 months of fiscal year 2007, revenues are coming in at a rate
+of 9.8 percent over last year. So right along with our economy,
+revenues are continuing to grow at a robust rate.
+ Clearly our budget challenges are on the spending side
+rather than on the revenue side, but I understand that we are
+here to talk today about how we might close the so-called ``tax
+gap'' or the difference between the amount of taxes owed and
+the amount actually collected to get even more revenue. This
+tax gap has proven extremely difficult to define. I have spent
+the last 6 years on the Ways and Means Committee looking at
+this issue, and it is tougher than it first seems. We are never
+really sure how big it is, and we really do not know whether
+closing it would actually bring in much additional revenue, but
+beyond that, we have got to ask ourselves whether or not it is
+worth it to significantly increase enforcement and to try and
+get after what we are calling the ``tax gap'' because this
+could come with considerable costs.
+ Back in the mid-1990s, you remember the hearings that were
+occurring here at the time. Congress saw a parade of taxpayers
+complaining about how IRS enforcement tactics were violating
+their rights. To relieve this, Congress passed the IRS
+Restructuring and Reform Act. The IRS has come a long way since
+that time, and IRS Commissioner Everson is really to be
+commended for that progress. They have done a great job of
+developing a very respectful relationship with the American
+people, and clearly that is something I would imagine Members
+on both sides of the aisle would want to preserve and see
+continue. So I think we need to be extremely careful that we do
+not reverse that progress and force the IRS back into the time
+when the American taxpayers consider compliant enforcement
+methods an actual threat.
+ Furthermore, I think there is great danger that if we
+significantly increase enforcement and paperwork requirements
+to try and close this gap, we could be placing a larger burden
+on those who can afford it least, on the individuals in our
+small businesses who are struggling to compete in the global
+marketplace.
+ Finally, I think it is also important to note that, while
+we have very limited data on the so-called ``tax gap,'' we do
+know that more than 80 percent of the tax gap is thought to be
+a result of simple individual taxpayer error. So what we are
+really talking about is well-meaning Americans who
+misunderstand one or more portions of the Federal Government's
+17,000-page Tax Code and 66,000 pages of accompanying
+regulations.
+ As the Treasury Department concluded in its 2006
+Comprehensive Strategy for Reducing the Tax Gap report, the
+fact is that most Americans simply do not understand how to
+calculate their taxes because our Tax Code is too complex.
+Trying to comply with the current Tax Code is also tremendously
+difficult and costly for small-business owners. According to
+the Tax Foundation, the cost of Tax Code compliance has more
+than doubled in the past 10 years and was at $265 billion in
+2005, placing a large drain on our economy.
+ So, clearly, the key to get after all of these taxpayer
+errors is to first reform the IRS Tax Code. This would provide
+significant improvement in taxpayer compliance rates and get us
+as close as we will ever be to closing the tax gap, while
+avoiding adding immense new taxpayer burdens and returning to a
+free reform-style IRS. I think if we really want to get at
+this, which we clearly do--we want people to pay the taxes that
+they owe, end of story--that is what the fair thing to do is,
+but the question is do we do it with an army of IRS agents and
+more complexity to the Tax Code and make it more burdensome for
+those who can least afford it, like individuals and small
+businesses, especially when we have a challenge of global
+competition, or do we clean the whole code up, reform the IRS
+Code and make it much easier for people to willingly and easily
+comply with the Tax Code?
+ That seems to be, to me, the crux of this debate, and I
+hope we can flesh that out as this hearing and others like it
+continue on.
+ Thank you, Mr. Chairman. I yield back the balance of my
+time.
+ Chairman Spratt. Just to follow up on one thing that Mr.
+Ryan mentioned, you say that we do not have a revenue problem,
+that we have a spending problem. We do have a revenue problem,
+I think you will agree, with the alternative minimum tax. If we
+cannot stop it from applying to middle-income taxpayers, who
+are well in this target range right now, we are going to see
+millions of middle-income taxpayers paying the alternative
+minimum tax, and it was never meant to be imposed upon them.
+But to repeal it, to change it, to revise it, we have to come
+up with a substantial portion of revenues to make up for the
+revenues that will be lost due to the repeal or to the revision
+of the alternative minimum tax, and this is one source I think
+we should look to first. Let us see what we can squeeze without
+bearing down overmuch on the taxpayers out of the tax gap.
+ So, for that reason, among others, we welcome you today,
+Mr. Commissioner. We are glad to have you.
+ Before turning to you, let me ask for unanimous consent
+that all Members who wish may be able to submit an opening
+statement for the record at this point.
+ Chairman Spratt. And I would like to say, if you have a
+statement, you can submit it for the record, and we will make
+it part of the record so that you can summarize it as you see
+fit. The floor is yours, Mr. Commissioner, and thank you again
+for coming.
+
+ STATEMENT OF MARK EVERSON, COMMISSIONER, INTERNAL REVENUE
+ SERVICE
+
+ Mr. Everson. Thank you, Mr. Chairman, Ranking Member Ryan
+and members of the House Budget Committee.
+ I am pleased to be with you this morning to discuss the
+President's fiscal year 2008 budget proposals that cover this
+subject of tax compliance. I am glad that the committee has an
+interest in this subject of tax administration. This is my
+first appearance before the committee.
+ Before I start, I would like to introduce my daughter Emma.
+If you could stand up, Emma. She is here today because Fairfax
+County has decided to close the schools for the third day, and
+we did not let her sleep late. She came down for a civics
+lesson, and if I get any particularly tough questions, she is
+quite good, and I am going to ask her to answer them, so--but
+thank you.
+ I have been in this job almost 4 years now, and during this
+period, we have worked hard to rebuild IRS enforcement
+capabilities. We have made real progress. Over the last several
+years, I would suggest we have restored respect for tax
+enforcement and the need to comply with the law, but I would
+add that we have not done so at the expense of service to
+taxpayers. At the IRS our working equation remains service plus
+enforcement equals compliance. That is not service or
+enforcement. You have to do both. I think we have a pretty good
+balance right now and are making strides in both areas.
+ Turning to the President's 2008 budget request for the IRS,
+I want you to know that I am pleased with the submission which
+provides almost a 5 percent increase from the 2007 funding
+level. Most significantly, the request not only augments our
+enforcement activities, but also devotes monies to rebuild our
+system's infrastructure and increase our research capabilities.
+I feel that the request reflects Secretary Paulson's and
+Director Portman's confidence that the IRS will use these
+monies wisely and generate a real return for the Government.
+ I know that a subject of keen interest to the members of
+the committee and to many others in Congress is the tax gap. By
+the ``tax gap,'' I mean the difference between taxes owed the
+government and those actually paid on a timely basis. Before
+taking your questions, I would like to make several
+observations about the tax gap.
+ First, while the most recent National Research Program
+study did a good job of updating our numbers and sizing the
+gap, we need more research to better identify the sources of
+noncompliance. We need to conduct this research on a timely and
+continuing basis.
+ Second, we cannot audit our way out of the tax gap, and
+while simplification of our tax laws will surely help the vast
+majority of Americans who already voluntarily comply with those
+laws, I would note that we will actually have to complicate the
+tax laws to change the behavior of noncompliant taxpayers, as
+an example, by requiring more information reporting.
+ Third, in recent years we have made considerable progress
+in improving compliance, as indicated by the steady growth in
+enforcement revenues. Those are the direct monies that we
+receive from our audit-collection and document-matching
+programs.
+ Fourth, to quickly and dramatically reduce the tax gap
+would take Draconian steps that would fundamentally alter the
+relationship between taxpayers and their government, require an
+unacceptably high commitment of enforcement resources and risk
+imposing unacceptable burdens on compliant taxpayers.
+ That having been said, there are reasonable steps that can
+be taken to improve compliance. We have made 16 such proposals.
+In order to further improve tax administration, I ask the
+Congress to both fully support the President's 2008 budget
+request for the IRS and to enact the 16 accompanying
+legislative proposals into law.
+ Before closing, since this is my first appearance before
+this committee, I would like to explain the nature of my duties
+and how they impact my ability to answer some of the questions
+you may wish to pose. As Commissioner of Internal Revenue, I
+oversee our Nation's tax administration system. I do not,
+however, develop tax policy proposals or take a position on
+them as a part of the legislative process. Questions on tax
+policy issues are better addressed to Treasury Secretary
+Paulson or Assistant Secretary Solomon.
+ Beyond the fact that policy questions are outside of my
+lane, there are very practical reasons for the IRS not to be
+drawn into policy conversations. If, for example, a
+Commissioner were to take a position against a piece of pending
+legislation on policy grounds, and then the Congress were to
+actually pass it into law, the public might be skeptical
+concerning IRS implementation of the statute because of the
+Commissioner's previously stated opposition to the legislative
+proposal. In the tax policy area, the IRS' role is limited to
+advising on the potential compliance impact of legislative
+proposals.
+ Having offered that clarification, Mr. Chairman, I am happy
+to take your questions. Thank you.
+ Chairman Spratt. Thank you very much.
+ [The prepared statement of Mark Everson follows:]
+
+ Prepared Statement of Mark Everson, Commissioner of Internal Revenue
+
+ Good morning Chairman Spratt, Ranking Member Ryan and Members of
+the Committee on the Budget. I am pleased to be here this morning to
+discuss the President's FY 2008 Budget request, and the IRS' efforts to
+improve compliance with our nation's tax laws.
+ a commitment to service and enforcement
+ In FY 2006, we continued making improvements in both our service
+and enforcement programs. This is not just our assessment, but also
+that of the IRS Oversight Board in its most recent annual report.
+According to the Board, the IRS has made steady progress towards
+``transforming itself into a modern institution that provides efficient
+and effective tax administration services to America's taxpayers.''
+ improving taxpayer service
+ According to a survey commissioned by the Board in 2006, taxpayers
+increasingly recognize that the IRS provides good quality service
+through a variety of channels, such as its Web site, toll-free
+telephone lines and Taxpayer Assistance Centers. This is supported by
+the metrics that we use to measure the effectiveness of our taxpayer
+service efforts. In category after category we continue to see
+improvement in the numbers in our telephone services, electronic
+filing, and our IRS.gov access. This is demonstrated by the following:
+ Electronic filing by individuals continued to increase, up
+6 percent from TY 2005 (3 percentage points) to 54 percent of all
+individual returns.
+ The level of service for toll-free assistance was 82
+percent, about the same level of 2005 and up substantially from 2001.
+The level of customer satisfaction with the toll-free line remains 94
+percent, the same as last year.
+ The tax law accuracy of toll-free response improved to 91
+percent from 89 percent in the prior year.
+ Taxpayers continued to find IRS.gov a useful source of
+information about the tax system and how to comply with their tax
+obligations. Visits to the IRS Web site jumped nearly 10 percent in
+2006 to more than 193 million visits.
+ More taxpayers used the online refund status tool
+``Where's My Refund.'' In 2006, there were 24.7 million status checks,
+up nearly 12 percent from 2005.
+ Clearly, more work needs to be done by the IRS to improve services.
+But we are making progress, and these numbers underscore that point.
+ Another development in our taxpayer service program is the Taxpayer
+Assistance Blueprint (TAB). This collaborative effort of the IRS, the
+IRS Oversight Board, and the National Taxpayer Advocate began in July,
+2005 through a Congressional mandate. We sent Phase 1 of the Blueprint
+to Congress in April, 2006. Phase 1 identified and reported the
+following five strategic service improvement themes for increasing
+taxpayer, partner, and government value:
+ Improve and expand education and awareness activities:
+This theme addresses the critical need for making taxpayers and
+practitioners aware of the most effective and efficient IRS service
+options and delivery channels for meeting their tax obligations and
+receiving benefits they are due.
+ Optimize the use of partner services: This theme
+emphasizes the critical role of third parties in the delivery of
+taxpayer services, and calls for improving the level of support and
+direction provided to partners to ensure consistent and accurate
+administration of the tax law.
+ Enhance self-service options to meet taxpayer
+expectations: This theme focuses on providing clear, standard, and
+easily customized automated content to deliver accurate, consistent,
+and understandable self-assistance service options--particularly for
+transactional tasks.
+ Improve and expand training and support tools to enhance
+assisted services: This theme highlights the need for ensuring accurate
+information across all channels by improving and expanding training,
+technology infrastructure, and support for employees, partners, and
+taxpayers.
+ Develop short-term performance and long-term outcome goals
+and metrics: This theme provides for the development of a comprehensive
+set of performance goals and metrics to evaluate how effectively the
+IRS is meeting taxpayer expectations, and how efficiently it is
+delivering services.
+ Phase 2 of the Blueprint will be sent to Congress soon. Throughout
+this project, extensive research allowed us to refine our understanding
+of taxpayer and partner needs, preferences, and behaviors and to
+identify current planning documents, decision processes, and existing
+commitments affecting IRS service delivery. Certain recurring findings
+emerged from the wealth of data analyzed. These findings, combined with
+agency-wide considerations and priorities, led to the development of
+the five-year Strategic Plan for taxpayer service.
+ The Strategic Plan includes a suite of service improvement
+initiatives across all delivery channels, a portfolio of performance
+metrics, and an implementation strategy, which recommends numerous
+future research studies. The Strategic Plan outlines a decision-making
+process for prioritizing service improvement initiatives based on
+taxpayer, partner, and government value and ensuring continued
+stakeholder, partner, and employee engagement. This process is designed
+to help the IRS to balance quality service with effective enforcement
+to maximize compliance. More details on TAB Phase 2 will be available
+when the report is delivered to Congress.
+ While TAB remains a work in progress, the FY 2008 budget request
+includes the funding necessary to implement some of the telephone
+service and Web site enhancements recommended by the Blueprint.
+Enhancing telephone service will contribute to the goal of increasing
+taxpayer, partner, and government value. Improving IRS.gov will help us
+to make the Web site the first choice of individual taxpayers and their
+preparers when they need to contact the IRS for help.
+ The Blueprint also recommends a suite of multi-year research
+studies to continue to refine and improve our understanding of optimal
+service delivery. In addition to funding for research regarding non-
+compliance, the FY 2008 budget includes funding for research to
+understand better the effect of service on compliance.
+ expanding enforcement efforts
+ Another reason for the Oversight Board's positive assessment of our
+work in FY 2006 is that IRS enforcement efforts have increased in
+virtually every area. According to the Board, ``As demonstrated by a
+variety of measures, the IRS' performance on enforcement has improved
+considerably, and real progress has been achieved over the past six
+years.''
+ One of the most obvious measures is the increase in enforcement
+revenue, which has risen from $34 billion in FY 2002 to almost $49
+billion in FY 2006, an increase of 44 percent. Since 2003, Federal
+government receipts have also increased by $600 billion. In FY 2006,
+the Federal government collected over $2.4 trillion in total receipts.
+This is an historic level, with annual receipts up 12 percent over FY
+2005 alone. In the past two years the U.S. has seen the highest year-
+to-year revenue growth in 25 years. Revenue growth has been the
+greatest for corporate taxes and high income individual taxes--both
+areas where we have substantially increased our enforcement presence in
+recent years.
+ In FY 2006, both the levels of individual returns examined and
+coverage rates have risen substantially. We conducted nearly 1.3
+million examinations of individual tax returns. This is almost 77
+percent more than were conducted in FY 2001, and reflects a steady and
+sustained increase since that time. Similarly, the audit coverage rate
+has risen from 0.58 percent in FY 2001 to 0.98 percent in FY 2006.
+ While the growth in examinations of individual returns is visible
+in all income categories, it is most visible in examinations of
+individuals with incomes over $1 million. The number of examinations in
+the category rose by almost 80,000 as compared to FY 2004, the first
+year the IRS began tracking audits of individuals with income over $1
+million. The coverage rate has risen from 5.03 percent in FY 2004 to
+6.30 percent in FY 2006.
+ Growth in audit totals and coverage rates extend to other taxpayer
+categories. Preliminary estimates show that the IRS examined over
+52,000 business returns in FY 2006, an increase of nearly 12,000 over
+FY 2001. The coverage rate over the same period rose from 0.55 percent
+to 0.60 percent. For corporations with assets over $10 million,
+examinations rose from 8,718 in FY 2001 to 10,591 in FY 2006, an
+increase in the coverage rate from 15.1 percent to 18.6 percent. For
+the largest corporations, those with assets over $250 million,
+examinations have increased by nearly 30 percent growing from 3,305 in
+FY 2001 to 4,289 in FY 2006.
+ Finally, examinations of tax exempt organizations have also risen.
+In FY 2001 5,342 tax exempt examinations were closed. This has risen to
+7,079 in preliminary FY 2006 numbers.
+ the president's fy 2008 irs budget request
+ The first step in continuing the progress we have made to improve
+service and voluntary compliance is approval of the President's FY 2008
+budget request for the IRS. That request is for $11.1 billion in
+appropriated resources and represents a 4.7 percent increase over the
+FY 2007 House-passed Joint Resolution (JR) level of $10.6 billion.
+ The request includes $3.6 billion in appropriated resources for
+taxpayer service and $7.2 billion for enforcement, an increase of 0.9
+and 5.8 percent, respectively, over the FY 2007 JR level. This increase
+includes $56 million in initiatives supporting taxpayer service and
+$291 million is initiatives supporting enforcement. As in FY 2006 and
+FY 2007, the Administration proposes to include IRS enforcement
+increases as a Budget Enforcement Act program integrity cap adjustment.
+The Budget also requests $282 million for Business Systems
+Modernization. This is a $69 million and 33 percent increase over the
+level in the House passed Joint Resolution.
+ If approved, we project that these investments will increase annual
+enforcement revenue by $699 million dollars a year, once the new hires
+reach full potential in FY 2010. This does not include the indirect
+benefits of these investments, which as I will discuss later in my
+testimony, could be several times the direct return on investment. In
+addition, we estimate that the legislative proposals for improving
+compliance that are in the Budget, which I discuss later, will generate
+$29.5 billion over the next ten years.
+ In addition to the broad goals of continuing the improvement of
+service and enforcement, the President's Budget request for the IRS
+will support a number of initiatives.
+ enhancing taxpayer service
+ Taxpayer service is especially important to help taxpayers avoid
+making unintentional errors. The IRS provides year-round assistance to
+millions of taxpayers through many sources, including outreach and
+education programs, tax forms and publications, rulings and
+regulations, toll-free call centers, the Internet, Taxpayer Assistance
+Centers (TACs), and Volunteer Income Tax Assistance (VITA) and Tax
+Counseling for the Elderly (TCE) sites.
+ Assisting taxpayers with their tax questions before they file their
+returns reduces burdensome post-filing notices and other correspondence
+from the IRS and reduces overall inadvertent noncompliance.
+ The FY 2008 Budget contains two significant taxpayer service
+initiatives. First, we are requesting $5 million to expand volunteer
+income tax assistance. This taxpayer service initiative will help
+expand the IRS' volunteer return preparation, outreach and education,
+and asset building services to low-income, elderly, Limited English
+Proficient (LEP), and disabled taxpayers.
+ Second, the budget contains a $10 million request to begin
+implementation of the TAB. As part of the TAB effort, we conducted a
+comprehensive review of our current portfolio of services to individual
+taxpayers to determine which services should be provided and improved.
+Based on the findings of the Blueprint, the funding for this initiative
+will implement the following telephone service and Web site interaction
+enhancements:
+ Contact Analytics provide a tool for evaluating contact
+center recordings for the purpose of improving understanding of service
+levels for potential enhancements.
+ Estimated Wait Time provides a real-time message that
+informs taxpayers about their expected wait time in queue, allowing
+them to make more informed decisions based on the status of their call
+and thus reducing taxpayer burden and increasing customer satisfaction.
+ Expanded Portfolio of Tax Law Decision Support Tools
+enables taxpayers to conduct key word and natural language queries to
+get answers to tax law questions through the Frequently Asked Questions
+database accessed on IRS.gov, thereby steadily increasing customer
+satisfaction and operational savings.
+ Spanish ``Where's My Refund?'' adds the ability to check
+refund status to the Spanish Web page on IRS.gov, enabling the Spanish-
+speaking community to receive the same level of customer service on the
+web as available to the English Web page.
+ Continued technological advancements offer significant
+opportunities for the IRS to improve the efficiency and effectiveness
+of call center services. Website enhancements are designed to maximize
+the value of IRS.gov, making the site taxpayers' first choice for
+obtaining the information and services required to comply with their
+tax obligations.
+ improving compliance activities
+ The IRS is continuing to improve efficiency and productivity
+through process changes, investments in technology, and streamlined
+business practices. We will continue to reengineer our examination and
+collection procedures to reduce cycle time, increase yield, and expand
+coverage. As part of its regular examination program, the IRS is
+expanding the use of cost-efficient audit techniques first pioneered in
+the National Research Program (NRP).
+ The IRS is also expanding its efforts to shift to agency-wide
+strategies, which maximize efficiency by better aligning problems (such
+as nonfilers and other areas of noncompliance) and their solutions
+within the organization. The IRS is committed to improving the
+efficiency of its audit process, measured by audit change rates and
+other appropriate benchmarks.
+ There are six specific initiatives proposed in the FY 2008 Budget
+aimed at improving compliance. These include:
+ Providing $73.2 million to improve compliance among small
+business and self-employed taxpayers in the elements of reporting,
+filing, and payment compliance. This funding will be allocated for
+increasing audits of high-risk tax returns, collecting unpaid taxes
+from filed and unfiled tax returns, and investigating for possible
+criminal referral, persons who have evaded taxes. It is estimated that
+this request will produce $144 million in additional annual enforcement
+revenue per year, once new hires reach full potential in FY 2010.
+ Providing $26.2 million for increasing compliance for
+large, multinational businesses. This enforcement initiative will
+increase examination coverage for large, complex business returns;
+foreign residents; and smaller corporations with significant
+international activity. It addresses risks arising from the rapid
+increase in globalization, and the related increase in foreign business
+activity and multi-national transactions where the potential for
+noncompliance is significant in the reporting of transactions that
+occur across differing tax jurisdictions. With this funding, we
+estimate that coverage for large corporate and flow-through returns
+will increase from 7.9 to 8.2 percent in FY 2008, and produce over $74
+million in additional annual enforcement revenue, once the new hires
+reach full potential in FY 2010.
+ Providing $28 million for expanded document matching in
+existing sites. This enforcement initiative will increase coverage
+within the Automated Underreporter (AUR) program by minimizing revenue
+loss through increased document matching of individual taxpayer account
+information. We believe the additional resources will result in an
+increase in AUR closures from 2.05 million in FY 2007 to 2.64 million
+in FY 2010. We expect $208 million of additional enforcement revenue
+per year, once the new hires reach full potential in FY 2010. In
+addition, the budget requests $23.5 million to establish a new document
+matching program at our Kansas City campus. This enforcement initiative
+will fund a new AUR site within the existing IRS space in Kansas City
+to address the misreporting of income by individual taxpayers.
+Establishing this new AUR site should result in over $183 million in
+additional enforcement revenue per year once the new hires reach full
+potential in FY 2010.
+ Providing $6.5 million to increase individual filing
+compliance. This enforcement initiative will help address voluntary
+compliance. The Automated Substitute for Return Refund Hold Program
+minimizes revenue loss by holding the current-year refunds of taxpayers
+who are delinquent in filing individual income tax returns and are
+expected to owe additional taxes. We estimate that this initiative will
+result in securing more than 90,000 delinquent returns in FY 2008 and
+produce $82 million of additional enforcement revenue per year, once
+the new hires reach full potential in FY 2010.
+ Approving $15 million to increase tax-exempt entity
+compliance. This enforcement initiative will deter abuse within tax-
+exempt and governmental entities (TEGE) and misuse of such entities by
+third parties for tax avoidance or other unintended purposes. The
+funding will aid in increasing the number of TEGE compliance contacts
+by 1,700 (6 percent) and employee plan/exempt organization
+determinations closures by over 9,000 (8 percent) by FY 2010.
+ Appropriating $10 million for increased criminal tax
+investigations. This will help us to aggressively attack abusive tax
+schemes, corporate fraud, nonfilers, and employment tax fraud. It will
+also address other tax and financial crimes identified through Bank
+Secrecy Act related examinations and case development efforts, which
+includes an emphasis on the fraud referral program. Our robust pursuit
+of tax violators and the resulting publicity, foster deterrence and
+enhance voluntary compliance.
+ In addition to these initiatives, I should stress to you the
+importance of allowing us to continue with the private debt collection
+program. The use of private collection agents (PCAs) was authorized by
+the American Jobs Creation Act of 2004. As we continue to debate the
+efficacy of this program, I want to take this opportunity to make a
+couple of points for purposes of our ongoing discussions.
+ One issue that has been debated is the relative efficiency of using
+PCAs versus using IRS employees to collect the taxes owed. The most
+important question is not whether IRS employees or PCAs can do the job
+more efficiently, but rather whether PCAs collect money that would
+otherwise go uncollected. The IRS lacks the resources to pursue the
+relatively simple, geographically dispersed cases that are now being
+assigned to PCAs. It is not realistic to expect that the Congress is
+going to give the IRS an unlimited budget for enforcement, and if
+Congress provided the IRS additional enforcement resources, I believe
+those resources would be applied best by allocating them to more
+complex, higher priority cases that are not appropriate for PCAs.
+ The IRS continues to work with PCAs to ensure that the program is
+fair to taxpayers and respects taxpayer rights. We currently estimate
+that between now and FY 2017, our partnership with PCAs will result in
+approximately 2.9 million delinquent cases receiving treatment that
+would otherwise have gone unworked. This partnership will help reduce
+the backlog in outstanding tax liabilities, which has grown by 118
+percent over the last 12 years. From September 7, 2006, when cases were
+first assigned to PCAs, through December 31, 2006, PCAs collected more
+than $11 million in net revenue. We estimate that cases worked by PCAs
+will generate estimated gross revenue of between $1.4. billion through
+FY 2017.
+ Another reason to continue to use this tool is to evaluate whether
+we in the public sector can learn anything from these PCAs that will
+enable us to do our jobs better. Particularly over the last 20 years,
+government agencies at all levels have adopted many practices and ways
+of doing business that have been pioneered in the private sector. One
+need look no further than the vastly expanded use by the government of
+the Internet in providing services to the public as an example of a
+practice that was pioneered in the private sector but adopted quickly
+and effectively by the government. We should not remove PCAs as a tool
+for addressing the problem before we have an opportunity to evaluate
+PCAs' potential to help improve compliance and perhaps even to show the
+government how to be more effective in its own efforts.
+ reducing opportunities for evasion
+ The IRS is already aggressively pursuing enforcement initiatives
+designed to improve compliance and reduce opportunities for evasion. As
+pointed out earlier, these efforts have produced a steady climb in
+enforcement revenues since 2001, as well as an increase in both the
+number of examinations and the coverage rate in virtually every major
+category.
+ In the budget request, the Administration proposes to expand
+information reporting, improve compliance by businesses, strengthen tax
+administration, and expand penalties in the following ways:
+ Expand information reporting--Specific information
+reporting proposals would:
+ 1. Require information reporting on payments to corporations;
+ 2. Require basis reporting on sales of securities;
+ 3. Expand broker information reporting;
+ 4. Require information reporting on merchant payment card
+reimbursements;
+ 5. Require a certified taxpayer identification number (TIN) from
+non-employee service providers;
+ 6. Require increased information reporting for certain government
+payments for property and services; and
+ 7. Increase information return penalties.
+ Improve compliance by businesses--Improving compliance by
+businesses of all sizes is important. Specific proposals to improve
+compliance by businesses would:
+ 1. Require electronic filing by certain large businesses;
+ 2. Implement standards clarifying when employee leasing companies
+can be held liable for their clients' Federal employment taxes; and
+ 3. Amend collection due process procedures applicable to employment
+tax liabilities.
+ Strengthen tax administration--The IRS has taken a number
+of steps under existing law to improve compliance. These efforts would
+be enhanced by specific tax administration proposals that would:
+ 1. Expand IRS access to information in the National Directory of
+New Hires database;
+ 2. Permit the IRS to disclose to prison officials return
+information about tax violations; and
+ 3. Make repeated failure to file a tax return a felony.
+ Expand penalties--Penalties play an important role in
+discouraging intentional non-compliance. Specific proposals to expand
+penalties would:
+ 1. Expand preparer penalties;
+ 2. Impose a penalty on failure to comply with electronic filing
+requirements; and
+ 3. Create an erroneous refund claim penalty.
+ The Administration also has four proposals relating to IRS
+administrative reforms.
+ The first proposal modifies employee infractions subject to
+mandatory termination and permits a broader range of available
+penalties. It strengthens taxpayer privacy while reducing employee
+anxiety resulting from unduly harsh discipline or unfounded
+allegations.
+ The second proposal allows the IRS to terminate installment
+agreements when taxpayers fail to make timely tax deposits and file tax
+returns on current liabilities.
+ The third proposal eliminates the requirement that the IRS Chief
+Counsel provide an opinion for any accepted offer-in-compromise of
+unpaid tax (including interest and penalties) equal to or exceeding
+$50,000. This proposal requires that the Secretary of the Treasury
+establish standards to determine when an opinion is appropriate.
+ The fourth proposal modifies the way that Financial Management
+Services (FMS) recovers its transaction fees for processing IRS levies
+by permitting FMS to add the fee to the liability being recovered,
+thereby shifting the cost of collection to the delinquent taxpayer. The
+offset amount would be included as part of the 15-percent limit on
+continuous levies against income.
+ The proposed budget provides $23 million to implement these
+initiatives. This will fund the purchase of software and the
+modifications to IRS information technology systems necessary to
+implement these legislative proposals.
+ enhancing research
+ Research enables the IRS to develop strategies to combat specific
+areas of noncompliance, improve voluntary compliance, and allocate
+resources more effectively.
+ Historically, our estimates of reporting compliance were based on
+the Taxpayer Compliance Measurement Program (TCMP), which consisted of
+line-by-line audits of random samples of returns. This provided us with
+information on compliance trends and allowed us to update audit
+selection formulas.
+ However, this method of data gathering was extremely burdensome on
+the taxpayers who were forced to participate. One former IRS
+Commissioner noted that the TCMP audits were akin to having an autopsy
+without benefit of death. As a result of concerns raised by taxpayers,
+Congress, and other stakeholders, the last TCMP audits were done in
+1988.
+ We conducted several much narrower studies since then, but nothing
+that would give us a comprehensive perspective on the overall tax gap.
+As a result, until the recent NRP data, all of our subsequent estimates
+of the tax gap were rough projections that basically assumed no change
+in compliance rates among the major tax gap components; the magnitude
+of these projections reflected growth in tax receipts in these major
+categories.
+ The National Research Program, which we have used to estimate our
+most recent tax gap updates, provides us a better focus on critical tax
+compliance issues in a manner that is far less intrusive than previous
+means of measuring tax compliance. We used a focused, statistical
+selection process that resulted in the selection of approximately
+46,000 individual returns for Tax Year (TY) 2001. This was less than
+previous compliance studies, even though the population of individual
+tax returns had grown over time.
+ Like the compliance studies of the past, the NRP was designed to
+allow us to meet certain objectives: to estimate the overall extent of
+reporting compliance among individual income tax filers and to update
+our audit selection formulas. It also introduced several innovations
+designed to reduce the burden imposed on taxpayers whose returns were
+selected for the study.
+ Almost as important as understanding what the NRP research provides
+is to understand its limitations. The focus of the first NRP reporting
+compliance study was on individual income tax returns. It did not
+provide estimates for noncompliance with other taxes, such as the
+corporate income tax or the estate tax. Our estimates of compliance
+with taxes other than the individual income tax are still based on
+projections that assume constant compliance behavior among the major
+tax gap components since the most recent compliance data were compiled
+(i.e., 1988 or earlier).
+ The NRP provided accurate data for determining the sources of
+noncompliance and for measuring changes in compliance rates over time.
+The IRS also uses the NRP findings to better target examinations and
+other compliance activities, thus increasing the dollar-per-case yield
+and reducing ``no change'' audits of compliant taxpayers. Innovations
+in audit techniques to reduce taxpayer burden, pioneered during the
+2001 NRP, have been adopted in regular operational audits.
+ Recurring and timely compliance research is needed to ensure that
+the IRS can efficiently target its resources and effectively provide
+the best service possible and respond to new sources of noncompliance
+as they emerge. Compliant taxpayers benefit when the IRS uses the most
+up-to-date research to improve workload selection formulas, as this
+reduces the burden of unnecessary taxpayer contacts. Research is also
+critical in helping the IRS to establish benchmarks against which to
+measure progress in improving compliance.
+ The FY 2008 Budget would fund two significant research initiatives.
+First, the budget requests $41 million to improve compliance estimates,
+measures, and detection of noncompliance. This will fund research
+studies of compliance data for new segments of taxpayers needed to
+update existing estimates of reporting compliance.
+ Unlike the past, the IRS will conduct an annual study of compliance
+among 1040 filers based on a smaller sample size than the 2001 NRP
+study. This will provide fresh compliance data each year, and by
+combining samples over several years will provide a regular update to
+the larger sample size needed to keep the IRS' targeting systems and
+compliance estimates up to date.
+ The second research program funded by the request is to research
+the effect of service on taxpayer compliance. The budget requests $5
+million for this project, which will undertake new research on the
+needs, preferences, and behaviors of taxpayers. The research will focus
+on four areas:
+ Meeting taxpayer needs by providing the right channel of
+communication;
+ Better understanding taxpayer burden;
+ Understanding taxpayer needs through the errors they make;
+and
+ Researching the impact of service on overall levels of
+voluntary compliance.
+ continuing improvements in information technology
+ Tax administration in the twenty-first century requires improved
+IRS information technology (IT). We are committed to continuing to make
+improvements in technology and the FY 2008 Budget reflects that
+commitment. The FY 2008 Budget requests $81 million to improve the IRS'
+information technology infrastructure. Sixty million dollars of this
+amount is requested to upgrade critical IT infrastructure. This
+infrastructure initiative will provide funding to upgrade the backlog
+of IRS equipment that has exceeded its life cycle. Failure to replace
+the IT infrastructure will lead to increased maintenance costs and will
+increase the risk of disrupting business operations. Planned
+expenditures in FY 2008 include procuring and replacing desktop
+computers; automated call distributor hardware; mission critical
+servers; and Wide Area Network/Local Area Network routers and switches.
+ The other $21 million will be used to enhance the Computer Security
+Incident Response Center (CSIRC) and the network infrastructure
+security. This infrastructure initiative will provide $13.1 million to
+fund enhancements to the CSIRC necessary to keep pace with the ever-
+changing security threat environment through enhanced detection and
+analysis capability, improved forensics, and the capacity to identify
+and respond to potential intrusions before they occur. The remaining
+$7.9 million will fund enhancements to the IRS' network infrastructure
+security. It will provide the capability to perform continuous
+monitoring of the security of operational systems using security tools,
+tactics, techniques, and procedures to perform network security
+compliance monitoring of all IT assets on the network.
+ Finally, the FY 2008 Budget requests a total of $282.1 million to
+continue the development and deployment of the IRS' Business Systems
+Modernization program in line with the recommendations identified in
+the IRS' Modernization, Vision, and Strategy. This funding will allow
+the IRS to continue progress on modernization projects, such as the
+Customer Account Data Engine (CADE), Account Management Services (AMS),
+Modernized e-File (MeF), and Common Services Projects (CSP).
+ The development of the CADE (Customer Account Data Engine) and AMS
+(Account Management Services) systems is the heart of the IT
+modernization of the IRS. The combination of these two systems working
+together will enable the IRS to process tax returns and deal with
+taxpayer issues in a near real-time manner. In fact, our objective is
+that IRS operate similarly to what one expects from one's bank; account
+transactions occurring during the business day will be posted and
+available by the next business day. In addition, AMS will enable the
+IRS representatives who work with taxpayers to have access to all the
+information regarding that taxpayer, including electronic access to tax
+return data, and electronic copies of correspondence. Armed with such
+comprehensive and up-to-date information, our representatives will be
+in a much better position to help taxpayers resolve their issues.
+ MeF is the future of electronic filing. It provides a standard data
+format for all electronic tax returns, which will reduce the cost and
+time to add and maintain additional tax form types. MeF is a flexible
+real-time system that streamlines the processing of e-filed tax returns
+resulting in a quicker acknowledgement of the filing to the taxpayer or
+their representative. In FY 2007, the IRS will start development and
+implementation of the 1040 on the MeF platform, which is expected to
+take two years.
+ CSP will provide funding for new portals, which are technology
+platforms that meet many IRS business needs through Web-based front-
+ends and provide secure access to data, applications, and services. The
+portals are mission-critical components of the enterprise
+infrastructure required to support key business processes and
+compliance initiatives.
+ The benefits accruing from the delivery and implementation of BSM
+projects not only provide value to taxpayers, the business community,
+and government, but also contribute to operational improvements and
+efficiencies within the IRS.
+ implications for the tax gap
+ On September 27, 2006, the Office of Tax Policy in the Department
+of Treasury forwarded to Congress the outline of a comprehensive
+strategy to reduce the tax gap. It detailed a seven-prong approach
+needed to implement a multi-year strategy to reduce the tax gap. Many
+of the specific elements in our FY 2008 Budget request support this
+approach.
+ Put simply, 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. The tax gap represents, in dollar terms, the
+annual amount of noncompliance with our tax laws. While no tax system
+can ever achieve 100 percent compliance, the IRS is committed to
+finding ways to increase compliance and reduce the tax gap, while
+minimizing the burden on the vast majority of taxpayers who pay their
+taxes accurately and on time.
+ It is important to understand, however, that the complexity of our
+current tax system is a significant reason for the tax gap and that
+fundamental reform and simplification of the tax law is necessary in
+order to achieve significant reductions.
+ distinguishing the tax gap from related concepts
+ The tax gap is not the same as the so-called ``underground
+economy,'' although there is some overlap (particularly in the legal-
+sector cash economy). The tax gap numbers do not reflect taxes owed on
+income generated from illegal activities. This makes up a significant
+portion of the underground economy. However, what we think of as the
+underground economy does not include various forms of tax
+noncompliance, such as overstated deductions or claiming an improper
+filing status or the wrong number of exemptions. These are all included
+in our calculations of the tax gap.
+ Equally important, the tax gap does not arise solely from tax
+evasion or cheating. It includes a significant amount of noncompliance
+due to the complexity of the tax laws that results in errors of
+ignorance, confusion, and carelessness. This distinction is important,
+even though we do not have the ability to distinguish clearly the
+amount of non-compliance that arises from willfulness from the amount
+that arises from unintentional mistakes. We expect future research to
+improve our understanding in this area.
+ If all reporting errors were unintentional, we would expect to see
+a relatively even balance between over reporting and under reporting.
+However, since taxpayer overstatements of tax appear to be much smaller
+than understatements of tax, one can reasonably infer that much of the
+gap is the result of intentional behavior.
+ the most recent estimates
+ The results of the NRP individual income tax reporting compliance
+study were combined with earlier estimates concerning other taxpayer
+segments such as corporate taxpayers resulting in an estimate of the
+overall gross tax gap for Tax Year 2001 of approximately $345 billion.
+The net tax gap, or what will remain after enforcement and other late
+payments, is estimated to be about $290 billion, corresponding to 13.7
+percent of estimated total liabilities.
+ Noncompliance takes three forms: not filing required returns on
+time (nonfiling); not reporting one's full tax liability when the
+return is filed on time (underreporting); and not paying by the due
+date the full amount of tax reported on a timely return (underpayment).
+We have separate estimates for each of these three types of
+noncompliance.
+ Underreporting constitutes over 82 percent of the gross tax gap, up
+slightly from our earlier estimates. Nonfiling constitutes almost 8
+percent and underpayment nearly 10 percent of the gross tax gap.
+ The individual income tax accounted for about half of all tax
+receipts in 2001. However, as shown on the chart below, individual
+income tax underreporting was approximately $197 billion or about 57
+percent of the overall tax gap. The NRP data suggest that well over
+half ($109 billion) of the individual underreporting gap came from
+understated net business income (unreported receipts and overstated
+expenses). Approximately 28 percent ($56 billion) of the underreporting
+gap came from underreported non-business income, such as wages, tips,
+interest, dividends, and capital gains. The remaining $32 billion came
+from overstated subtractions from income (i.e., statutory adjustments,
+non-business deductions, and exemptions) and from overstated tax
+credits.
+
+ FEDERAL GROSS TAX GAP ESTIMATES, TAX YEAR 2001
+------------------------------------------------------------------------
+ Gross Tax
+ Tax Gap Component Gap ($ Share of
+ billions) Total Gap
+------------------------------------------------------------------------
+Individual income tax underreporting gap.... 197 57%
+ Understated non-business income......... 56 16%
+ Understated net business income......... 109 31%
+ Overstated adjustments, deductions, 32 9%
+ exemptions and credits.................
+Self-Employment tax underreporting gap...... 39 11%
+Corporate and Other Underreporting.......... 49 15%
+Non-Filers.................................. 27 8%
+Underpayment................................ 33 10%
+Total Gross Tax Gap......................... 345 100%
+------------------------------------------------------------------------
+Note: Detail does not add due to rounding
+
+ The corresponding estimate of the self-employment tax
+underreporting gap is $39 billion, which accounts for about 11 percent
+of the overall tax gap. Self-employment tax is underreported primarily
+because self-employment income is underreported for income tax
+purposes. Taking individual income tax and self-employment tax
+together, we see that individual underreporting constitutes
+approximately two-thirds of the overall tax gap.
+ The amounts least likely to be misreported on tax returns are
+subject to both third party information reporting and withholding, and
+are, therefore, the most ``visible'' (e.g., wages and salaries). The
+net misreporting percentage for wages and salaries is only 1.2 percent.
+ Amounts subject to third-party information reporting, but not to
+withholding (such as interest and dividend income), exhibit a somewhat
+higher misreporting percentage than wages. For example, there is about
+a 4.5 percent misreporting rate for interest and dividends.
+ Amounts subject to partial reporting by third parties (e.g.,
+capital gains) have a still higher misreporting percentage of 8.6
+percent. As expected, amounts generally not subject to withholding or
+third party information reporting (e.g., sole proprietor income and the
+``other income'' line on form 1040) are the least ``visible'' and,
+therefore, are most likely to be misreported. The net misreporting
+percentage for this group of line items is 53.9 percent.
+ observations on the tax gap
+ In the context of the President's Budget request, I would like to
+make several observations about the tax gap.
+ First, while the most recent NRP study did a good job of updating
+our numbers, we need more research to better identify the sources of
+non-compliance on a timely and continuing basis.
+ Second, I think it is well understood that we will never be able to
+audit our way out of the tax gap. And, while simplification of our tax
+laws will surely help the vast majority of Americans who already
+voluntarily comply with those laws, we will actually have to complicate
+the tax laws to go after the non-compliant taxpayers (e.g., by
+requiring more information reporting).
+ Third, we have already made considerable progress in improving
+compliance as indicated by the steady growth in enforcement revenues in
+recent years.
+ Fourth, to reduce the tax gap dramatically will take some draconian
+steps, ones that will fundamentally change the relationship between
+taxpayers and the IRS, require an unacceptably high commitment of
+enforcement resources, and risk imposing unacceptable burdens on
+compliant taxpayers. Nevertheless, there are reasonable steps, which I
+have outlined in this statement that can be taken to improve
+compliance.
+ summary
+ The FY 2008 Budget request includes significant increases for IRS
+enforcement efforts. Fully funding that request will help us make
+progress in greatly improving compliance.
+ Based on our analysis covering the most recent 11 years of
+collection experience, we estimate that every dollar we have spent on
+enforcement has generated a direct return of an average of four dollars
+in increased revenue to the Federal Treasury. This return can be
+expected to occur when the full productive benefit of the investment is
+realized.
+ This 4:1 return on investment does not consider the indirect effect
+of increased enforcement activities in deterring taxpayers who are
+considering engaging in non-compliant behavior. Econometric estimates
+of the indirect effects indicate a significant impact from increased
+enforcement activities. Stated another way, taxpayers who see us
+enforcing the law against their friends, neighbors or competitors are
+more likely to comply voluntarily and not risk the chance that we might
+audit them. We have no means to measure this indirect impact, but
+research suggests it is at least three times as large as the direct
+impact on revenue.
+ Our role is not unlike that of a highway patrolman. He will never
+be able to ticket every speeder, but he attempts to position himself in
+areas where he knows that his time is more likely to be spent
+productively. He also knows that every time he pulls a speeder over,
+other motorists see that and slow down as well.
+ We also believe that dollars spent on taxpayer service have a
+positive impact on voluntary compliance. The complexity of complying
+with the nation's current tax system is a significant contributor to
+the tax gap, and even sophisticated taxpayers make honest mistakes on
+their tax returns. Accordingly, helping taxpayers understand their
+obligations under the tax law is a critical part of improving voluntary
+compliance. To this end, the IRS remains committed to a balanced
+program assisting taxpayers in both understanding the tax law and
+remitting the proper amount of tax.
+ In addition, the President's FY 2008 Budget contains a number of
+legislative proposals that provide additional tools for the IRS to
+enforce the existing tax law. Perhaps the most critical of these tools
+is greater third party reporting.
+ An analysis of the data from the National Research Program of TY
+2001individual income tax returns leads to one very obvious conclusion.
+Compliance is much higher in those areas where there is third party
+reporting. For example, only 1.2 percent of wages reported on Forms W-2
+are underreported. This compares to a 53.9 percent underreporting rate
+for income subject to little or no third party reporting.
+ The FY 2008 Budget request asks Congress to expand information
+reporting to include additional sources of income and make other
+statutory changes to improve compliance. These legislative proposals
+are intended to improve tax compliance with minimum taxpayer burden.
+When implemented, it is estimated that these proposals will generate
+$29.5 billion over ten years.
+ I anticipate that some of this year's Budget proposals will be
+criticized, perhaps because of concerns about their potential impact on
+small businesses. Our proposals are part of an effort to help small
+businesses and all other taxpayers pay less by collecting more of the
+taxes that are owed. In addition, while the information reporting
+proposals will inevitably impose some burden on compliant taxpayers,
+they are designed to minimize that burden and to help the IRS better
+target its audit resources, thereby reducing the number of burdensome
+audits that result in little or no change to compliant taxpayers'
+reported liability. The challenges that a small business faces are
+difficult enough without having to compete directly with noncompliant
+competitors. We have an obligation to support those compliant small
+businesses by ensuring that their competitors are also paying their
+fair share. This is not only a matter of fairness, but also a way of
+supporting compliant small businesses in their efforts to remain
+compliant.
+ Finally, full funding of the budget request will enable the IRS to
+improve its research with respect to the tax gap. Despite all of our
+progress, there is still much we do not know about the tax gap.
+Although the updated estimates provided by the NRP study are more
+accurate than our previous estimates, and more accurate than the
+estimates made at various times by others using more indirect methods,
+they have many limitations.
+ Tax gap estimates are useful for understanding the general areas
+and levels of noncompliance and the scope of the problem, but they are
+far from exact measurements. With the exception of the individual
+income tax gap, the estimates do not adjust for noncompliance that goes
+undetected during examination, and estimates are not even available for
+certain (minor) components of the tax gap.
+ It is also important to understand that the NRP study looked only
+at TY 2001 individual income tax returns. The study provided no new
+information on anything other than the reporting behavior of individual
+income taxpayers. The data used to estimate corporate compliance and
+other tax gap components are much older. The estimates are based on
+data such as the Taxpayer Compliance Measurement Program (TCMP), which
+we ceased doing in 1988.
+ To collect more data, we are currently doing an NRP study of
+reporting compliance of businesses filing Form 1120S (Subchapter S)
+returns. This involves approximately 5,000 Form 1120S returns from Tax
+Years 2003 and 2004, taken from a nationwide random sample. This is the
+first time the IRS has conducted a reporting compliance study across
+tax years, and it will require that we knit the data together to
+provide a comprehensive picture. We expect the study to continue
+through 2007.
+ Beginning in October 2007, the IRS will begin ongoing annual
+research activities that will ensure we have the most up to date
+compliance data possible to measure portions of the tax gap, focus our
+resources, and improve our audit selection criteria.
+ While I am confident we have made a significant dent in the tax
+gap, the lack of current data makes it difficult to quantify exactly
+how big of a dent has actually been made.
+ I appreciate the opportunity to testify this morning, and I will be
+happy to respond to any questions that Members of the Committee may
+have.
+
+ Chairman Spratt. Would you take a stab at what the size of
+the so-called ``tax gap'' is today?
+ Mr. Everson. Well, let us put up the tax gap map.
+ As you indicated, our research on this was conducted in
+2001. What happened was the last time we had really updated
+this previous to that was in 1988, and then we stood down in
+our research programs for a period of years, largely at the
+behest of the Congress, this feeling that the audits that you
+did to get the numbers were intrusive, and it was a pretty
+tough climb, as was indicated back in the 1990s.
+ What we did in 2001--you can see the areas on this map that
+are sort of the underreporting. The gap has three components.
+There is an underreporting component, and that is the biggest
+piece of it, over 80 percent; then there is a nonfiling
+component, which is about 8 percent of it; and then there is an
+underpayment component. That is where somebody files a return,
+but then they just do not full pay, or they do not pay at all.
+So those are the three pieces of it.
+ What we did in 2001 was we conducted 46,000 audits of
+individuals. We did not look at corporations. We looked at
+individuals. And so these blue lines or blue cones there--
+boxes--under the underreporting, talk about the numbers that we
+estimated for individuals, and of the total gross tax gap in
+2001, which we estimated at $345 billion, the underreporting
+piece was $285 billion, and the individual income tax piece of
+that was almost $200 billion, and if you look over here, we
+draw these two together. That is a self-employment tax. This
+gap is really derivative of this piece, the underreported
+business income from individuals. So, if you link all of those
+together, some two-thirds of the tax gap, we would estimate, is
+tied to the individual income tax reporting.
+ I readily concede that this $30 billion on corporation
+income tax was probably understated. What we did here was we
+simply took our old research, and then we updated it for
+changes and sizes of the economy.
+ The point I always make, though, Mr. Chairman, is that,
+when you look at that, I would not have reallocated or I do not
+think any Commissioner would have reallocated our resources,
+because we were already doing quite a bit on the corporations
+with much higher audit rates.
+ To get to the question about where is it today, there are a
+couple different things. Obviously, if the noncompliance rate,
+which here was estimated at 16 percent, remains steady, and the
+economy grows, the tax gap grows, but there are other things
+that happen. There are mixed changes in the revenue streams.
+There are rate reductions in capital gains and other areas, so
+that all impacts the gap as well.
+ The other thing I would say is, if we go down to the
+enforcement revenue chart, the other thing that has happened
+is, in the 1990s, we drew down our enforcement resources by
+over 25 percent. We stepped back from really doing all that we
+could in enforcement. We, very clearly, had to improve
+services, but we did so at the expense of our enforcement
+activities. We have now brought the enforcement back, as I
+indicated.
+ What this chart does is--the blue lines are the monies that
+we get in on our collection activities. The yellow strip is the
+money that we get in from our document-matching activities, and
+the green lines up top are the monies that come in from our
+audit, our exam activities, and you can see that between 2001
+when those monies totaled about $34 billion--and now this past
+fiscal year they came up to $49 billion--that is an increase of
+some $15 billion because of our enforcement activities. But the
+other point about this is that, when we audit you, Mr.
+Chairman, even if you are as clean as a whistle, if one of your
+colleagues is a little more aggressive and might be inclined to
+overstate the deductions, they hear about that audit--people
+talk--and there is an indirect impact, and those individuals--
+because of the experience that you have had, they are less
+likely to overstate or to cheat, whatever you want to call it.
+It is not unlike the State trooper under the bridge who does
+not just pull over the guy doing 80. Everybody who sees that
+State trooper slows down and does a better job of obeying the
+law.
+ What this chart does is it takes a look at and makes an
+assumption, which we think is pretty conservative, about the
+indirect effects that I am talking about. Very simply it says,
+if there is a 3-to-1 indirect effect, then what you would get
+is--on that $15 billion of extra enforcement effort since 2001,
+maybe you have clawed back something like $60 billion. So that
+is the other thing that is happening in here that I would draw
+your attention to in terms of if you are trying to say, ``What
+will we do? Where are we now?'' you would look at a variety of
+different factors, and I think you would also look at some
+improvement.
+ The last thing I would say, and I am sorry I have gone on
+so long here, is that one of the problems, as I indicated, is
+getting research. The President's budget requests $41 million
+of incremental funding for the IRS, which we will put into the
+base so that now, instead of just having a 2001 update and then
+waiting a whole bunch of years, we will start to work on this
+on a regular basis, and that is--the real key is to get regular
+recurring research on all of the different facets of this and
+to be able to have a more timely conversation.
+ Chairman Spratt. Using the factor you used, that 16
+percent, can you give us an updated current dollar estimate of
+what the tax gap is in 2006-2007?
+ Mr. Everson. I would decline to do that, sir, just because
+there are so many moving parts.
+ What we are going to do now is we are going to start to--we
+are working on updating the research right now on 1120S
+corporations, which we have not done any research on that in a
+long time, and we are going to restart doing the individuals
+shortly, but I think it would really be very difficult because
+of all of the factors I have outlined.
+ Chairman Spratt. Well, you indicated, I believe, that the
+factor in deriving the $345 billion figure represented 16
+percent of the GDP.
+ Mr. Everson. No. No, sir. What I said is it is about a 16.3
+percent noncompliance rate as what we estimated, yes, sir.
+ Chairman Spratt. Do you have any back-of-the-envelope
+calculation for how much additional agents or additional
+audits, how much marginal income and incremental effort brings
+in?
+ Mr. Everson. Yes. What we have said, sir, is with the
+monies we have requested in the President's budget, which, as I
+again indicated, would be about--do you want to bring up the
+budget chart--5 percent, you can see, as I indicated, the first
+thing we are doing is we are asking for money for
+infrastructure. Improving the infrastructure to us is critical
+because it supports not just the enforcement, but also the
+service side, the processing of the returns, the ability to
+communicate with the taxpayers, which is very important. But we
+have a big enforcement increment there, as you can see, almost
+$250 million.
+ What we have done is--we can show a direct impact, we
+believe, or a correlation on things like adding auditors. There
+are some areas where we do not show a number. It would be like
+adding criminal investigators. We do not draw a direct point,
+but what happens here with this basket of proposals is we
+anticipate that after you hire the workforce and then you train
+them, which takes, of course, a couple of years, that you would
+get to a point where on this basket you would get something
+like $700 million of direct incremental revenues.
+ The President's budget, as I mentioned, has 16 legislative
+proposals that run from the reporting of gross receipts for
+small businesses--from credit card issuers--that does get after
+this issue on small businesses that cuts both ways, as Mr. Ryan
+was talking about it. If you look at all of those 16 proposals,
+they have been scored by the Treasury economists as adding
+after, by 2010, about $3.5 billion, and there is no direct
+impact necessarily on that, and the way they have calculated
+it, I think their calculations are pretty conservative.
+ If you think also about the normal growth in productivity
+that the IRS would have and just say that that is 2 percent a
+year, over a 3- or 4-year period that would get you another $4
+billion, let us say, of these enforcement revenues that I am
+talking about.
+ I do not know if everybody can follow that, but, in a
+business, you would expect us to get more productive; and I am
+saying, if you steady state our funding, I would expect the
+organization to do something along that line. If you take that
+productivity increase and you take the incremental enforcement
+increase of $700 million, you would probably get a total of
+about $5 billion of direct impact. Then you could add an
+indirect impact on that.
+ So, all things considered, when I testified Wednesday
+before the Senate, your counterpart committee in the Senate, it
+was that if you compare 2006 and 2010 and if you do all of
+these things--if you fund us at the increment and you adopt the
+legislative proposals--I believe it is fair to say that you
+would probably get another $20 billion pop or more from where
+we are now. But that does not score. I mean, one of the issues
+here, as you know, is that does not score.
+ The only things that you folks score are the legislative
+proposals, none of the impact. We are just a drag. We had $500
+million. That is a $2.5 billion drag on the budget even though
+we make money, which is kind of hard to understand.
+ Chairman Spratt. A couple more questions, and then others
+will have similar questions, I am sure.
+ You have not mentioned havens and shelters; and there are
+certain havens that, to most of us, look like blatant devices
+for evasion, the Cayman Islands with one building having 12,000
+firms domiciled there. Can you tell me what the IRS is doing in
+that regard and what you need to have done legislatively to go
+after some of these cases of blatant evasion?
+ Mr. Everson. Yes, sir. You are addressing what is a very
+important issue and what is a real compliance challenge for the
+IRS, and I would suggest to you that our estimates do not
+include either illegal activity here in the country or--I do
+not think that they have a particularly good--we do not have as
+good an idea as we ought to have about what is going on in some
+of these countries that you are talking about because the whole
+idea is that they are trying to obscure information from us.
+ Now what we have done is we have significantly stepped up
+what we are doing in the corporate arena and in the high-income
+individual arena, and when we do see indications that there may
+be some abuse we will follow that as best we can, including
+criminal. There are criminal matters that we have brought.
+ This is a bigger issue in the international community. The
+OECD established a group of tax administrators some 4 years ago
+in about three dozen countries, and it is sort of unusual to
+have an American-run OECD group, but I actually chair that
+group of tax administrators now. We met in Seoul in September,
+and the statement that we issued talks about tax avoidance as a
+growing international problem. We are looking at it across
+borders.
+ We have commissioned a study of the role of intermediaries,
+because a lot of this is put together by investment banks,
+accounting firms and law firms; and the other thing we have
+done here is the IRS led an effort. We formed a Joint
+International Tax Shelter Information Center here in Washington
+where we have counterparts from the U.K., Canada and Australia,
+and we meet. They work side by side and share information, all
+of them treaty obligations or standards, to try to get some of
+this.
+ But as to what you have just raised, the tax havens are
+amongst the most challenging areas for us to get after.
+ Chairman Spratt. One final question, some years ago, there
+was a move on the part of the IRS to improve and to make a lot
+more rigorous information reporting. For example, there was a
+proposal to require contractors who make payments to vendors,
+suppliers and subcontractors above a certain amount to file
+what amounted to a 1099 or a W-2 or something like that so that
+these could be correlated to that payee's account as gross
+income.
+ I chaired the subcommittee at that time with Chris Cox, and
+we held a hearing on all of these subjects, and the small
+business folks came and testified that, number one, it would be
+unduly onerous, but number two, even if the IRS got that
+information, it would not know what to do with it because it
+did not have anywhere near the equipment--the computers and
+scanners and everything else--that they needed to keep track of
+these payments on a volume basis.
+ Do you have the wherewithal today to have that necessary
+complement to that kind of enforcement effort?
+ Mr. Everson. This gets at the infrastructure question, and
+we do have monies in the budget to address the proposal we have
+made. If you will allow me for just one minute, I do want to
+get to the core of this point.
+ Chairman Spratt. Sure.
+ Mr. Everson. If we go to the tax gap map again just for a
+second, Lenny, if you look at that individual income tax number
+that has the 197 and you drop down there, the biggest piece of
+this is the underreported business income, $109 billion.
+ Let us go to the visibility chart now.
+ As we look across these 46,000 returns, there are some very
+clear conclusions, and these are not going to really surprise
+anybody. Out at the left here, where you have the spreading of
+some of these amounts that we are talking about, that is your
+wage income where you have substantial information reporting
+and withholding. That is to say that, if there is a police
+officer in your district, Mr. Chairman, that individual is not
+cheating on their salary. The noncompliance rate on their
+salary is 1 percent. That is de minimus. That is because we get
+the information.
+ Chairman Spratt. Withholding. How is that?
+ Mr. Everson. The information of withholding.
+ If we have the information reporting, you get to a 4.5-
+percent noncompliance rate. All the way out here at the right,
+though, it indicates that the noncompliance rate is about 50
+percent where there is no reporting.
+ So what we have done is we made some proposals last year to
+try and get after this, and we have added some proposals this
+year, but the centerpiece and the proposal I would particularly
+draw to your attention is we would like to get the reporting of
+the gross receipts by credit card issuers to us, and we want to
+do this. We think that this would--this is not the collection
+of new information that each one of us gets a bill from the
+credit card company issuer. They know how much they have
+reported, and the business gets a summary of what they get as
+well. So you are not capturing new information. What you are
+doing is you are sending the information to the IRS, and it is
+not a small business that has to send that information to the
+IRS. It is a pretty big business. The credit card issuers are
+pretty big.
+ What this would do is, if you had a dry cleaning business,
+for example--and let us assume that the typical breakdown of
+that revenue is 50-percent credit and 50-percent cash--and if
+you were reporting to us $1 million in revenues and then we got
+a notice from a series of credit card issuers that there was
+actually $1 million of credit card revenues from that business,
+that would raise a real red flag and might prompt an audit. It
+would certainly prompt the communication. The other thing it
+would do is it would change behaviors.
+ Let me just draw one simple example about the impact of
+reporting. The last time that Congress really went after the
+Tax Code was in 1986, as you will recall. After 1986, on the
+face of the 1040, taxpayers put down the Social Security
+numbers of their dependents. The next year, even though the IRS
+had not phased in any matching capability yet--it did not have
+the infrastructure to do that--it had to work on this, which
+gets to your question--the next year, 5 million dependents
+vanished, 5 million. So what you really have here is you have
+an interaction in the change in behavior. So you need to do two
+things.
+ You need to build the infrastructure, which we will do. We
+need the money to do that, and we have got some in the request
+to do that, but you will change the behaviors if you do some of
+the third-party reporting.
+ Chairman Spratt. This is clearly an area where we need to
+be working in tandem.
+ We very much appreciate your testimony, and others now have
+questions, Mr. Ryan to begin with.
+ Mr. Ryan. Thank you, Mr. Chairman.
+ I guess I will just pick up where we were leaving off. Let
+me go back to the estimate you just gave us in answering the
+chairman's question. Because, you know, for the Budget
+Committee purposes, we have got to find out how much is this
+and how much is recoverable, then to the question of how do you
+score this stuff.
+ You are telling us that you think, with about $5 billion in
+direct and then maybe another $15 billion indirect, you know,
+having the trooper under the bridge, that it is about $20
+billion additional revenue that can be recovered without
+resorting to sort of draconian things. But that banks all of
+those 16 legislative changes you would make, the additional
+people at the agency? That is about $20 billion you are saying?
+ Mr. Everson. That is by 2010. That is the delta between
+2006 and 2010. That is right. I think that is in the ballpark.
+And, again, this is an area where it is very hard to be precise
+because these things have a--I think they have a reinforcing
+effect throughout the system. If you just do the IRS stuff, the
+budget stuff, but you do not change the Code, that does not get
+to the powerful force that everything is happening.
+ Mr. Ryan. So it will take years to phase in these reforms
+to get to that $20 billion number?
+ Mr. Everson. Absolutely. Let me give you one very clear
+example on this.
+ One of the proposals is basis reporting for securities. The
+way that would work is that you would not put that in going
+back for----
+ Mr. Ryan. You would go prospective.
+ Mr. Everson. You would go prospective.
+ So that would roll in over a period of years, starting with
+purchases down the road; and then each year you would get more
+purchases and you would be capturing more information.
+ Mr. Ryan. Okay. Now on to this credit card idea, because I
+am trying to get a better handle on this. That seems to be sort
+of one of the bigger pieces of your legislative package.
+ Last year, when the administration first proposed requiring
+banks to provide annual information reports to the IRS on total
+payment of credit card reimbursements to merchants, the
+Treasury's estimate was that this would raise $225 million over
+10 years. This year, it seems like the proposal is a little
+narrower than last year's proposal, but Treasury is estimating
+that this will raise $11 billion over that period. What is the
+basis for this tremendous increase in your revenue estimate?
+ Mr. Everson. You will have to, honestly speaking, refer
+that to them, because I do not make those estimates. Those are
+estimates made within tax policy by the economists.
+ Mr. Ryan. Well, give me an idea of last year's proposal
+versus this year's proposal.
+ Mr. Everson. I do not think we are making a substantially
+different proposal. We want the information reporting of gross
+receipts by a credit card issuer to a business, and that is the
+long and the short of the proposal. I actually do think--as a
+whole, I would say I think that the Treasury estimates are on
+the conservative side. Now there is a reason why they do that,
+and it gets back to the chairman's last question.
+ The experience has been that you will put in something new
+and then it will not always be administered effectively by the
+service, so that gets in there, but I think that is a number, I
+believe, that is reasonably conservative, sir.
+ Mr. Ryan. Okay. So I guess that is sort of puzzling to me.
+You know, we do a lot of scoring around here. How you see a
+score go from $225 million to $11 million is interesting.
+ You are talking about not the credit card companies'
+reporting their information to the IRS. You are talking about
+banks' reporting the information to the IRS on behalf of their
+clients, right?
+ Mr. Everson. Yes. There is a difference between, as I
+understand it, the banks and the issuer. It is the issuer of
+the credit card that has all of the information.
+ Mr. Ryan. It is not Visa, MasterCard, Discover. It is every
+bank in America that has a merchant as a customer is reporting
+their merchant data----
+ Mr. Everson. If they are in the credit card business, yes,
+sir.
+ Mr. Ryan. Right. So, if a bank issues a credit card, which
+I think most do, they are the ones who are supposed to report
+this.
+ Now how is this data square with, you know, your typical
+AGI measurement? How do credit card receipts square with
+measuring the profit and, therefore, the taxable income of a
+merchant?
+ Mr. Everson. Well, the merchant--and where a lot of this
+problem is is in the Schedule C filers. That is the biggest
+number that is a part of what I indicated where you are not
+incorporated. You are doing the business, and if you are
+showing your receipts, you have to report your receipts to the
+IRS. You have got a number there. We are going to have a
+different number or we are going to have information reporting
+that is coming in that says what you got in the credit card
+receipts from--it would probably be from a series of issuers
+for just the reason that you indicated. It would not be just--
+people do not just accept the American Express.
+ Mr. Ryan. You will have 1,000 customers in a given year at
+a dry cleaner's. I do not know. I cannot even think of the
+number. But let us say you have 10,000 people who come to your
+dry cleaner's in a given year with all of their different
+credit cards. So for you to audit that dry cleaner, you are
+going to have to have the banks of each of those 10,000
+customers report to you the credit card receipts that go from
+that bank to that dry cleaner, and then you are going to look
+at that data. Is that basically what you would do?
+ Mr. Everson. Well, that would all be electronically
+communicated to us or transmitted to us; and I do not think, as
+I have had conversations with systems people, that this is that
+heavy a lift. If you do something--this is not like we get
+suspicious activity reports----
+ Mr. Ryan. I am just trying to understand the proposal.
+ Mr. Everson. Yes, yes. No, they capture that data. They
+know how much they did over the course of the year with you if
+you are the merchant. They are just giving us that data. They
+have that data. That is different from, say, asking, which we
+do--we have suspicious activity reports you are familiar with
+when you have large cash transactions. That takes the creation
+of a different business process within a bank, say, to look at
+that and then do a special report. Here you are talking about
+the rolling up of the information which they already roll up by
+customer and then give it to us.
+ Mr. Ryan. Okay, and then you are just going to look and see
+if there is something that stands out?
+ Mr. Everson. Yes. And, again, I think this would
+potentially have even a bigger impact than it is scored for,
+because a lot of the indirect, some of that is in there, but
+this would make a big change.
+ Mr. Ryan. One quick last one.
+ Your budget also proposes that all contractors who receive
+payments of $600 or more in a calendar year from a particular
+business would be required to furnish the business with the
+contractor-certified TIN, the Taxpayer Identification Number.
+The business would then be required to verify the contractor's
+TIN with the IRS. If a contractor fails to furnish an accurate
+TIN, the business would be required to withhold the flat
+percentage of gross payments and do withholding.
+ How does this work in practice? I mean, there have got to
+be tens of millions of contractors who would be subject to this
+requirement, and do you have the capability of, on a real-time
+basis, furnishing this TIN to people who call up and request
+it?
+ If you want to give that to me in writing, that would be
+great.
+ Mr. Everson. I will certainly do that, sir.
+ Mr. Ryan. My time is getting short. Thanks.
+ [The information follows:]
+
+ Since October 2003, payers of certain income reported on Forms 1099
+B, DIV, INT, MISC, OID and PATR have had the ability to match their
+payee name and taxpayer identification number with the information
+contained in IRS tax records for that payee. This service is provided
+to payors in an attempt to assist them with perfecting the Form 1099
+prior to filing an information return with the IRS. As the law
+requires, the IRS may impose a penalty to payors who fail to obtain an
+accurate TIN from the payees with whom they conduct business.
+ Current IRS operations provide an on-line interface for registered
+users to submit the name and TIN (Taxpayer Identification Number) of a
+payee to the TIN Matching program and receive a response regarding the
+status of the match request. This process may be accomplished via an
+interactive on-line input, whereby the user receives an on-screen
+instantaneous response or, via a bulk file submission which is
+transmitted to the IRS by a secure mailbox assigned to the user by the
+IRS. The processed file is returned to the requestor anywhere between
+2-24 hours and accommodates requests of up to 100,000 TIN/name
+combinations per file.
+ The budget proposal would increase the overall TIN perfection rate
+for all payors of non-employee compensation reported on Form 1099-MISC,
+not just the payors who voluntarily utilize the TIN Matching program.
+If this proposal were enacted, the expansion of this voluntary program
+to mandatory usage for TIN verification of contractors (1099-MISC non-
+employee service providers) may result in a substantial amount of user
+traffic for both the interactive and bulk features. Any staffing or
+other resource issues related to increased volumes would be addressed
+as part of implementation.
+
+ Chairman Spratt. Mr. Cooper.
+ Mr. Cooper. Thank you, Mr. Chairman; and thank you, Mr.
+Everson, for appearing before us.
+ You noted that this is your first appearance before the
+committee, and you have been on the job for 4 years. I do not
+think it should go unnoticed that this is the Budget Committee.
+I have been on it for 4 years, and it is a shocking dereliction
+of our duty that we did not have the IRS Commissioner here
+before.
+ If we look at the government as an enterprise, to ignore
+the revenue side of the income statement is truly an amazing
+oversight. So I would like to congratulate the current
+management of the committee for conducting things in a
+businesslike fashion. We should have regular visits.
+ We can discuss exactly how big the tax gap is. I think it
+is important to remember the many flaws in our Code, I think,
+going all the way back to Jimmy Carter. I think he called it an
+abomination. So what we are discussing is a gap in complying
+with an abomination. It is our job as lawmakers to try to
+improve that abomination, to make it easier to comply with and
+to cut out some of the loopholes. I worry sometimes that there
+is barely enough law left to hold the loopholes together.
+ We have seen an astonishing increase in so-called ``tax
+expenditures.'' with 17,000 lobbyists in Washington who lobby
+the Ways and Means Committee alone, most of them are seeking
+tax expenditures; and that, of course, does not create a tax
+gap. That creates someone who does not have to pay taxes
+because they were able to be successful in persuading Congress
+that he did not need to pay taxes.
+ According to the GAO testimony that is coming out following
+you, the number of tax expenditures is up to $847 billion a
+year. That is a lot of money, and I am sure many of these are
+quite legitimate, but perhaps some of them are less legitimate,
+and the analytical question I want to focus on is this--and
+this was presented to this committee before by Pam Olson, a
+former Treasury official.
+ She pointed out that, as bad as entitlement programs are--
+and they are burgeoning beyond our ability to pay for them--
+that tax expenditures are even worse because, as she put it,
+these are unmeasured and immeasurable losses in revenue,
+unverified and unverifiable losses in revenue.
+ So while we can conduct estimates of what a tax expenditure
+costs, we do not really know. There is not the methodology in
+place to be accurate in giving us an estimate of foregone
+revenue.
+ So I would suggest that our colleagues on Ways and Means
+need to be particularly careful, now that we are under new and
+improved management, in handing out these things because they
+are so difficult to measure and to verify.
+ Of course, if you cannot succeed in persuading Congress to
+get a tax break, well, then the next best thing is to hope that
+the IRS will be slow in noticing there is a problem; and I
+wonder about your efforts in coordinating--and, of course, you
+do not want to invade client privacy--with the big four or big
+five accounting firms to find out their experience.
+ Because, as a former investment banker and businessman, I
+have worked with probably several hundred small businesses, and
+I have noticed that when they were forced to adopt real
+accounting standards it was amazing how many hunting dogs were
+found on the payroll, how many minor children were hired as
+janitors to take out the garbage and other worse abuses,
+sometimes including an entire industry that had adopted overly
+lenient accounting standards. A lot of these are practices
+known to our brethren in the big four/big five accounting
+firms, and I would suggest that your employees would learn a
+lot if they talked more frequently with those folks.
+ It seems to me that we are in a situation right now where
+the government needs more revenue. We need to arrive at it
+legitimately, and no one wants a tax increase. So I would hope
+that we could encourage more of our taxpayers to remember the
+proper basis for their stocks. I thought when we filled out
+those forms we were supposed to tell the truth, that if you
+bought Intel or GE at XYZ price--and it is pretty easy to look
+up--that that should be reported honestly on the return.
+ As you point out, the large majority of noncompliance is
+underreporting of business income, and I hope our friends in
+the business community would help encourage their members to
+report honestly their true revenues and to be fair about
+claiming these new tax breaks because, as the GAO again will
+point out following you, there is a $32 billion noncompliance
+problem. Because we give someone a tax break and that is not
+good enough, then they exaggerate the tax break; and to have a
+$32 billion problem grow on top of $847 billion in tax
+expenditures is truly an amazing situation.
+ So I appreciate your good work. We look forward to seeing
+more of you before this committee.
+ Mr. Everson. Thank you. I appreciate your comments.
+ If I could just respond very briefly, one of the challenges
+in the system is about visibility. You will write a law, and it
+could take 10 or 20 years before anybody really knows what the
+impact of that is because it takes us sometimes a year or 2 to
+write the regulations that interpret the law.
+ Then in the corporate area, where there is a lot of
+complexity, we may not be auditing those companies for years;
+and then you get into challenges that go into our appeals, our
+administrative system or, ultimately, in the courts. So your
+visibility can be 10 or 20 years down the road before this gets
+resolved. That is not in anybody's interest.
+ Simplifying the Code is clearly something that is very
+important that we have got to get after, but I have to say
+there is a tension there between that and a representative
+democracy because you are paid by your constituents to get the
+best deal for the industries or for the people in your
+districts. That means a different deal all too often. So
+simplification is a very tough thing to get after, but it would
+help a great deal, and we do meet regularly with the accounting
+firms, and we can do more of that.
+ Chairman Spratt. Mr. Garrett.
+ Mr. Garrett. Thank you, Mr. Chairman.
+ Thank you, Mr. Commissioner.
+ Before I begin, I am a little shocked about the 5 million
+dependents who have vanished in 1 year. I am hoping that the
+IRS is looking into it so we can track down those people and
+bring them home.
+ Mr. Everson. That is right.
+ Mr. Garrett. Yes. I appreciate your speaking with us today.
+I am sure members of both sides of the aisle believe that it is
+the obligation of all of us--I am sure we all do--to pay our
+appropriate tax to sustain the country, but when we discuss tax
+avoidance and tax schemes, you know, I thought of the words of
+Judge Learned Hand. He had a comment on this.
+ He said that anyone who may arrange the failures so that
+his taxes shall be as low as possible is not bound to choose a
+pattern which best pays the Treasury. It is not even a
+patriotic duty to increase one's taxes over and over again. The
+courts have said that there is nothing sinister in so arranging
+failures as to keep taxes as low as possible. Everyone does it,
+rich and poor alike, and all do it right for everyone, and no
+one owes any public duty to pay more than the law demands.
+ So here we are just trying to find out those who are paying
+less than what the law demands.
+ Mr. Everson. That is entirely correct, sir.
+ Mr. Garrett. Right. Part of the question goes to the issue
+of the complexity of the Tax Code. The ranking member pointed
+out there are 17,000 pages, 60-some-odd thousand, I guess,
+pages of rules. I would be curious how many members around here
+actually still do their own taxes. I stopped doing my taxes a
+number of years ago because of that complexity; and, as it gets
+more and more complex, I assume that puts a burden on both the
+taxpayer and the IRS and that is, in part, what adds to the tax
+gap--isn't it--the basic complexity of the Code.
+ Mr. Everson. What I say, sir, is that complexity obscures
+understanding.
+ What that means is that the taxpayer who seeks to be
+compliant has difficulty doing so and can ultimately throw up
+his hands and say, ``Why bother?'' Then, on the other hand, the
+taxpayer who seeks to be noncompliant counts on the complexity
+and uses the complexity to obscure things and to avoid
+detection by the IRS. So simplification is something that I
+strongly favor.
+ Mr. Garrett. Yes, and if I go back to my constituents back
+home tomorrow or the next day and I ask them about the idea of
+greater enforcement, the first question or comment that most
+people would say is, ``Well, I pay my legitimate share. I am
+paying what I am supposed to be paying. It is too much,'' they
+will all say, ``but I pay my fair share.''
+ Their first gut reaction is, yes, if there somebody out
+there who is not paying, then the IRS and the government should
+do everything they can do to track them down. But the flip side
+argument of that is, if I explain to them, ``Well, in order for
+us to do that, there may be added complications or added burden
+on you, the honest taxpayer, in additional requirements or in
+additional intrusions by the IRS and forms in addition to what
+you are talking about here as far as the administration's
+recommendations,'' then their response might be a little bit
+different.
+ Mr. Everson. I agree with both of those observations. We
+say that we want--our service obligation is to help taxpayers
+understand their obligation and facilitate their participation
+in the system but that enforcing the law is important because
+average citizens do pay their taxes, and they have every right
+to expect that neighbors and competitors are doing the same.
+ Some have criticized our 16 proposals, legislative
+proposals, as meager, but both the Secretary and I are acutely
+conscious of this second issue you are talking about. We feel
+what we try to do is craft things that are minimally burdensome
+that do not get to be too much, and each extra step you are
+going to take in this arena will get more resistance just for
+the reasons you are getting at, sir. They will touch more
+compliant people, and they will be more burdensome.
+ So what we would like to do is get what we have got here
+now, and then if there is stomach for more, we will continue to
+talk, but we do not want to go too far on this.
+ Mr. Garrett. And I hope either side of the aisle would as
+well, because it does put a burden on the legitimate taxpayer
+as to what the dishonest crook out there is doing. This may be
+beyond your area of comment, but I am just curious.
+ Is there anything either in the proposals that you are
+making here, considering today, as far as the administration's
+proposals or other proposals that have been out there to try to
+get at this tax gap that look at the overall impact that it
+would have on the competitive nature of our whole new global
+economy that you will place on small businesses and mid-sized
+businesses as well?
+ Mr. Everson. Again, I think that we are sensitive to that.
+As I think you know, the Secretary has particularly been clear
+on looking at this whole question of the regulatory
+environment. I think that we are comfortable that what we have
+put in here thus far does not really get to where it is too
+burdensome.
+ Mr. Garrett. Okay. Thank you. I appreciate it.
+ Chairman Spratt. Mr. Becerra of California.
+ Mr. Becerra. Mr. Commissioner, thank you very much for
+being here, and I look forward to working with you on some of
+these matters. I know that when you have been before us in Ways
+and Means we have talked about this, and I know we have tried
+to figure out ways to tackle this in a more efficient way.
+ Give me a quick sense. I know that the IRS underwent an
+automation of its computer systems and so forth and it did not
+work too well at first, but, overall, how much did that cost
+and is it completed yet?
+ Mr. Everson. What happened was there were several sort of
+false starts that took place on this, one in, I guess, the
+early 1990s and then----
+ Mr. Becerra. And I am just trying to find out how much have
+you spent.
+ Mr. Everson. I would have to get you a figure, but we have
+each year now a separate appropriation that, for the last
+couple of years, has been running between $200 million and $400
+million a year. We actually brought it down, and now we are
+bringing it back up.
+ Mr. Becerra. Okay. My point here is that, if we could help
+you get automated in ways that are modern and comprehensive so
+that your system is compatible with systems with other agencies
+and so forth or with other private sector entities, then it is
+probably going to be easier to move towards compliance through
+the Internet system, through the new wireless systems that we
+have in place today around the world.
+ Mr. Everson. You are entirely correct.
+ If you go back to that budget chart, the most important
+number in there for me is this $146 million increment--or,
+pardon me, it is $143 million on the infrastructure
+modernization side. In fact, if you asked our operating people
+right now, somebody running the unit, we can give you $5
+million or we could spend $5 million on getting better systems
+to support your people, they would, to a person, take the
+systems money and the infrastructure money. So you are right.
+ Mr. Becerra. So if you have a $345 billion gap and you know
+that a major portion of that is coming from those who are in
+the small business arena who are not filing all of their
+information and, for example, the proposal that you have in
+your budget that would try to get us towards using the credit
+card of a business or of an enterprise to try to--or credit
+cards that are used to make purchases with that commercial
+enterprise, you could do a better job of tracking what is going
+on. If you could find a system, an IT system, that could help
+make it easier for the banks and commercial enterprises that
+have to report all of that information on credit cards, you
+could then probably do a pretty decent job of collecting far
+more than the cost of that IT system that you acquire to try to
+do a better job of collecting.
+ Mr. Everson. They are collecting this information.
+ What we would have to do is--any time we do new document
+matching, we have to adjust our system and then we have to work
+with them. This last year--at the end of 2004, we mandated
+electronic filing for large corporations. That had never been
+done before, and that information started to come in this past
+year, 2006 for 2005. That required new software and real
+changes for us and for the companies. So systems is important.
+ Mr. Becerra. Is it fair to say that efficient investment in
+IT infrastructure pays off for you?
+ Mr. Everson. It is essential, and it does pay off.
+ Mr. Becerra. Okay. Could you use more than what you have in
+your current budget?
+ Mr. Everson. Now that is dangerous territory here.
+ Mr. Becerra. I did not say ``did you want'' or I am not
+asking----
+ Mr. Everson. No. No. Well, I am going to be very clear
+here, as I was in the Senate.
+ I am asking for every penny of this request but not a penny
+more, and what I said is we have to be extremely careful in
+this area because what happens----
+ Mr. Becerra. You need not go into it, because I am going to
+run out of time, and I know what you are going to have to say.
+Let me move to another question.
+ Given your testimony and the charts that you showed us, if
+I were a wage earner, if I got a check and I had deductions--
+and, by the way, I guess all of us as Members of Congress do.
+We are wage earners, we get a paycheck, and out of that
+paycheck every month is deducted--or every 2 weeks or however
+often you get paid--is deducted the income taxes that we are
+supposed to pay along with the FICA taxes and Social Security
+and so forth. Whereas, if you are an independent
+businessperson, you independently file the paperwork to the IRS
+to document what taxes you should pay.
+ Given your testimony, if I am a wage earner, I think I am
+the knucklehead in this process. Because if I own a business, I
+get to report what I want, but if I work for that business, it
+gets reported automatically, and the charts show it, that wage
+earners are the ones who pay. The honest folks are the folks
+who probably make the least amount of money. The folks who are
+not paying are the folks who can most afford to pay their
+taxes.
+ I hope what we can do is work with you to make sure that we
+get rid of that tax gap of $345 billion when we have a budget
+that exceeds $200 billion and that we do more to make sure that
+the wage earner is not having to compensate for the folks who
+are not paying their taxes by paying more out of their
+paychecks every month or every week and that we do a little
+more. I hope we can work with you because I think it is
+extremely unfair, and it seems to me it is ripe for a revolt by
+those who are getting taxes deducted every month.
+ Mr. Everson. Two points if I could respond briefly.
+ First of all, there is disparate treatment between wage
+earners and others.
+ The second thing I would say is I also view it as a matter
+of fairness in the small business community because--probably
+most of you are homeowners, but we have all been given two
+different quotes for a job at our house, one by somebody who is
+playing all by the rules and another that is a better quote by
+somebody who is not. The person who is not paying the taxes on
+his or her business has an unfair competitive advantage. That
+should be a concern to all of us, too.
+ Chairman Spratt. Mr. Hensarling.
+ Mr. Hensarling. Thank you, Mr. Chairman.
+ Commissioner, welcome, and thank you for your service to
+your Nation. You have a thankless job. You may be the only man
+in America less popular than we are. We thank you for that.
+ Commissioner, according to GAO, apparently since 1970 the
+compliance rate for taxes has been at 86 percent. So through
+roughly 15-20 Congresses--Republican and Democrat--through
+roughly six or seven presidents--Republican and Democrat--
+through I do not know how many different IRS Commissioners,
+apparently this tax gap has remained fairly constant. So I
+think all of us on this committee would certainly share the
+goal of ensuring that every American pays their fair share of
+taxes, not a penny less, not a penny more. I know that we are
+always searching for that elusive pot of free money out there,
+the easy fix, but why should I not be skeptical? If it is such
+an easy fix, why hasn't it been done before now?
+ Mr. Everson. I think that your observations in the broadest
+sense are quite fair, and there are some who say, let us just
+get rid of the tax gap, and then we have taken care of our
+fiscal issues here. It is not that easy, and it is not that
+easy for a variety of reasons.
+ One is it gets into this issue of how much of a presence
+you would want to have for the IRS. The other gets into the
+very real issue we are talking about of burden and adding more
+reporting.
+ So what I think we have done is we believe there is
+opportunity here, sir, and what we have made is what I would
+consider some pretty significant proposals, but it does not say
+you are going to eliminate or hugely reduce that gap just
+because of the difficulty and the many complicated things you
+get into if you try to do it.
+ Mr. Hensarling. Also, Commissioner, is it possible that the
+cure could be worse than the ill?
+ Let me just state the ridiculous. You could corner an IRS
+agent in every small business and home in America. Do you know
+what I mean?
+ Mr. Everson. Yes. Let me say this, and I have not said
+this. We enjoy the best system in the world. Let us all be
+clear on that. Our system is the envy of other countries. I
+meet with a fair number of international counterparts, and we
+have got a great system here, so we want to make it better, but
+we could make some real mistakes here if we overreach.
+ Mr. Hensarling. Well, in speaking of possibly the cure
+being worse than the ill, according to the Tax Foundation, the
+compliance cost has doubled over the last 10 years, and now
+there is a $265 billion drain on our economy. I mean, that is a
+huge figure, a huge transaction cost.
+ Theoretically, might we raise more Fed revenue, say at 90
+percent compliance instead of a hundred? In other words, if we
+could somehow figure out how to take part of that $265 billion
+being devoted to compliance, instead turn it more into economic
+growth, capitalizing more small businesses, increasing revenue
+bases, isn't it at least theoretically possible that we don't
+want a hundred percent compliance because that would create
+less revenue than, say, 90 percent compliance.
+ Mr. Everson. I think what you are saying is common sense,
+that to get after every last nickel here, that causes a whole
+series of costs to get in there, and burden is important. We
+have an Office of Burden Restriction, and we are constantly
+seeking ways to reduce burden and simplify it within our
+purview.
+ Mr. Hensarling. Speaking of simplification, and I know at
+the outset of your testimony you said you weren't here to
+promote a favorable and predictable tax policy over another,
+but would you be in a position to offer an opinion that if our
+sole goal--if our sole goal was to close that tax gap, have you
+run models on either the flat tax or the fair tax and what the
+tax gap might be under one of those two policies? Would we have
+a smaller tax gap if Congress adopted one or the other?
+ Mr. Everson. I have not run those models. People at the
+Treasury may look at this.
+ What I say about legislative proposals of VAT or a flat tax
+is that my observation is that you can't compare a perfect
+theoretical system with an imperfect actual system. So you need
+to make sure you look at these things fairly.
+ As an example, I know from discussions of my colleagues in
+the U.K. There are real compliance issues with the VAT. You
+need to bear that in mind when you have those conversations.
+ Chairman Spratt. Mr. Doggett.
+ Mr. Doggett. Thank you for your service, Commissioner, and
+your testimony. It is a measure of the new direction in which
+this Congress is moving that you are here today.
+ Several of my colleagues have used the term ``shock''; and
+I have to say, frankly and sincerely, that I view your
+responses as shocking. As I understand your testimony as the
+Internal Revenue Service Commissioner, you are unable to tell
+us or the American people--to give us an estimate that you
+believe is reliable, that you can feel comfortable with, of
+what the gap is between taxes owed and taxes collected in
+America today.
+ Mr. Everson. I think that is correct, sir, because we don't
+have the precise numbers.
+ Mr. Doggett. If you put your tax gap map back up, we can
+get a better understanding. Because your tax gap map--as you
+pointed out, the last time that you did any study of this
+matter was tax year 2001, right?
+ Mr. Everson. And it takes several years to complete a
+study.
+ Mr. Doggett. That is a tax year that ends on December 31st
+of 2001, the end of the first year of the Bush administration.
+And in tax year 2002, tax year 2003, tax year 2004, tax year
+2005, you didn't do a study, you said, because you were told to
+stand down at the request----
+ Mr. Everson. No, no, no, sir. What I said was that we had
+done--the last time before 2001 was in 1988 and then nothing
+was done in the intervening years because, during the 1990s,
+the Service was told to stand down.
+ Mr. Doggett. To stand down, and you also had a 25 percent
+reduction in your enforcement resources.
+ Mr. Everson. At the end of the 1990s, in 1996 through about
+2002, and so----
+ Mr. Doggett. And the study that you did in 2001, as I
+understand it, you said there is a $3 billion figure there for
+corporations. You didn't really study that in 2001. You used
+old data. So that has not been studied.
+ Mr. Everson. That has not, and I believe that is
+understated.
+ Mr. Doggett. You indicated that one of the areas that you
+have found most of the greatest challenges is on the tax
+havens, and the biggest chunk you believe from your chart is
+business income. I realize much of that is not related to tax
+savings, but I was concerned that in your legislative
+recommendations you don't really seem to have much of anything
+to deal with that other than the 163(j) provision on related
+party interest deductions which the Ways and Means Committee
+should put a stop to and change but instead asked you to do a
+study. Is the study complete?
+ Mr. Everson. I don't have an answer for that. That is a
+Treasury issue. What you are getting to is more legislative
+policy proposals, sir.
+ Mr. Doggett. And you have input on those, but these are
+really Treasury's recommendations?
+ Mr. Everson. Again, what I am talking about here is more
+tax compliance.
+ Mr. Doggett. Let me turn to an area that is within your
+jurisdiction. I wrote you about this 3 weeks ago, and I know
+that some other colleagues wrote you about it. That was the
+report in the New York Times on January 12th saying that the
+IRS, when it came to large and mid-size business audits,
+basically had a catch-and-release program, that you limit the
+time of your auditors. That if your auditors find other tax
+avoidance schemes, they are only there to go for the tax
+avoidance scheme that they were sent to.
+ Employees were interviewed, auditors were interviewed,
+retired auditors were interviewed in a number of States
+indicating that, though there had been an increase in
+collections, that they said that could be explained by the fact
+there are so many more tax avoidance schemes out there and that
+the IRS limited the access of the auditors to information. You
+set up a way that they would be rewarded on the faster they
+closed the case, not based on how effective they were.
+ I asked you for a report about what I thought were very
+disturbing practices as reported in the Times, as editorialized
+in the times. Are you near----
+ Mr. Everson. I am happy to respond to that, sir.
+ Mr. Doggett. Will you have a more complete report?
+ Mr. Everson. If we haven't responded, I sent a letter
+earlier this week on that issue to, I think, one that came in
+before yours, and I will send you a complete response.
+ But I am glad you raised this because I spoke to this the
+other day in the Senate. If you could go to--yes.
+ First, let me say this: Currency is important. It is
+shameful that things take years and years to get resolved. That
+serves neither the corporation's interest nor the government's
+interest. The compliant taxpayers need to get issues resolved
+because there is a real cost of certainty and the government
+needs to move quicker. In any given examination, decisions are
+going to be taken, and there will be a tension between the
+employee conducting that examination and the manager.
+ I think we get things, by and large, correct; and if
+somebody thinks that something is being left behind and they
+think it is being done intentionally, they may object because
+they could get more. But the manager has to make the decision
+as to whether at a certain point they can be more productively
+used elsewhere. That is a basic question.
+ I wouldn't say to you, sir, that we get it right each and
+every time. But when I look at the big picture--and, yes, we
+are trying to drive down a cycle time--I am reassured by the
+statistics.
+ If I could just show you these. It is a little hard to
+read, but this takes the Es/Ex class of 10 to $250 million per
+corporation and this takes the Es/Ex class of over $250
+million. It says that in 2003 the number of audits that we did
+on the smaller class had declined over a 30-year period, until
+I got here, to 3,800 audits; and I had said for the bigger
+companies, they declined to 3,300 and that the amount of money
+set up was less than a billion here and the amount of money was
+just over $12 billion. Now that has increased in 2006 to 4,300
+audits. We didn't have much coverage here. We want to increase
+it. And the amount of money we set up has grown to $25 billion.
+ You could argue that maybe there is more, and I am sure
+there is more. You got the chart. But I would point out to you
+the other statistics, that the corporate receipts as a
+percentage of GDP have increased during this period, corporate
+profits have increased, but they have gone to their highest
+level as a percentage of the GDP in 18 years. You have to go
+back to 1978 or--pardon me--yeah, I guess it will be 1988. It
+may be 28 years. But, anyway, it is a long time since they got
+up to 2.7 percent or wherever they are now.
+ When I look at the big picture, sir, I think this is all
+working. We are doing more. We are trying to move faster. I
+don't doubt that some people don't like that.
+ The other things we have done is we have changed our
+personnel policies here. We rotate people off the big
+companies. They can get too cozy, frankly, by staying 5 or 6 or
+7 or 10 years; and that is not good. So not everybody is happy.
+ Chairman Spratt. Mr. Campbell of California.
+ Mr. Campbell. Thank you, Mr. Chairman; and thank you,
+Commissioner Everson. I have a series of kind of unrelated
+informational questions.
+ First one is, my understanding is the Senate Finance
+Committee has talked about perhaps having the IRS build online
+tax preparation software through a Web portal as a suggestion
+on the tax gap. Is that something you think will reduce the tax
+gap or not?
+ Mr. Everson. This is a very important issue. It could be
+helpful.
+ I would say to you, as a general matter, right now 80
+percent of the returns right now are prepared with the use of
+some computer software; and returns are so complex or the Code
+is so complex that I am sure people couldn't comply if they
+didn't go through the software.
+ When you get into the issue of should there be a portal
+developed, I am reluctant to embrace that idea at this time,
+first because, going back to the chairman and other comments
+about it, the infrastructure, this is not an easy thing to do
+if you really want to do it, and I don't think we are ready to
+do it.
+ The other thing I would say----
+ Mr. Campbell. Have you ever estimated how much it would
+cost?
+ Mr. Everson. Clearly, it is a hefty price tag.
+ The other point I would make that I think is very pertinent
+here is the acceptance of the IRS, as some have indicated here
+today, is better than it was. There is a big industry out
+there, and they will go to war when this policy is pursued.
+They already did that in California when California tried to
+extend the free file alliance. They had big pictures of, you
+know, dogs eating steaks. There will be a collision here, and I
+don't welcome that as trying to run a system where people have
+trust in the IRS.
+ Mr. Campbell. I am from California and was in the state
+legislature during that whole issue.
+ But I will say there are a lot of privacy concerns having
+to do with this. The California proposal is going to keep track
+of entries and strokes. So if someone put in $300 of charitable
+contributions and erased it and put in $400, they would have
+kept that. There would be a whole lot of privacy----
+ Mr. Everson. There would be a lot of allegations about it.
+ Mr. Campbell. Another issue relating to the tax gap--and I
+am curious how we get to this. Computing the correct tax is an
+art, not a science. And you can put together everyone in this
+room and have them do the best job they can of interpreting the
+laws and regulations to come up with the correct tax, have the
+IRS do the same thing, and there could be a gap between those
+two with completely honest people.
+ If there weren't ambiguity, there wouldn't be Tax Court,
+there wouldn't be revenue rulings, private letter rulings, et
+cetera. It can come all the way from anyone who gives a piece
+of furniture to the Salvation Army, and what is that worth, to
+a major corporate reorganization or something.
+ Mr. Everson. Yes.
+ Mr. Campbell. Is that included in the tax gap or--because
+there is a gap between honest interpretation of the law.
+ Mr. Everson. You are absolutely correct. And the resolution
+of that uncertainty is a very important facet of our system,
+and the fact that it happens fairly, it happens--we have a
+group that is independent within the IRS appeals group that
+takes a real look at this, and then people do go into the
+courts. This is one of the reasons why getting the right number
+on corporations is so difficult, because it takes so many years
+off and to figure out where the courts will land on the
+interpretation of a statute. It is a real challenge. If I had
+one observation, it is the stuff takes too long to resolve,
+frankly.
+ Mr. Campbell. Okay.
+ The $20 billion number you gave as a delta 2010 for your
+ideas for closing, I was unclear if that was the cumulative
+total to that point or if that was the annual total at that
+point.
+ Mr. Everson. It is the second, sir. It is the lift you
+would get between 2006 and 2010.
+ Again, you have to fund the service. We would have to get--
+and that is dependent upon adequate funding in the outyears,
+too, so you get continued productivity lists and all of the
+legislative proposals.
+ Mr. Campbell. On your credit card proposal, one thing I was
+unclear about. If you get from the banks the merchant credit
+information, will it have detail or is it just going to be a
+total single number?
+ Mr. Everson. It would be a total number.
+ Mr. Campbell. Then the last thing is just kind of getting
+back to the preparation and privacy issues, that another thing
+with, frankly, in my view, with either online tax preparation,
+frankly, even e-mail filing and stuff, there is so much--we
+have had problems with the veterans' information with
+information getting out. If everything on an individual's tax
+return, which can include bank account numbers, all kinds of, I
+mean, everything about that individual were present on any
+computer anywhere and the only place it would be is within the
+IRS, shouldn't we have privacy concerns with that?
+ Mr. Everson. This is another reason to support the
+infrastructure request, because we do have money for heightened
+security in there. We work very hard on this issue. It is a
+constant challenge, I have to say; and it is a very important
+issue. So I agree with you.
+ Mr. Campbell. Thank you, Mr. Chairman.
+ Chairman Spratt. Mr. Blumenauer.
+ Mr. Blumenauer. Thank you, Mr. Chairman; and, Mr.
+Commissioner, we appreciate you being here.
+ I don't happen to think you are one of the most unpopular
+people in the country. I get a little embarrassed when people
+joke about it. Because what you said is true. Our tax system is
+the envy of the civilized world.
+ When you don't have a tax system that people can have
+confidence in, then you have bribery, then you have
+underfunding of government services, then you have back-channel
+activities, you have corruption. This is an indice of
+civilization and a democratic function.
+ Mr. Everson. I agree with you entirely, sir.
+ Mr. Blumenauer. I just personally find it offensive that
+people make the IRS sort of a second-class citizen, not just
+casual jokes. But what we saw this Congress do--I saw it when I
+first came here--vilifying the IRS, the people who worked for
+it, exaggerating pretty dramatically some problems and
+resulting in what we saw in terms of severely restricting your
+ability to manage the agency, you and your predecessors,
+resulted in lots of money being lost and corners being cut.
+ There are people who are saying, well, this is confusing,
+and so certainly there is problems. But if it were just a
+matter of confusion, then we would see as many people being
+confused and overpaying as underpaying.
+ It seems there is a pretty systematic problem with a lot of
+people who are confused in ways that cheat the government and
+put their competitors who play by the rules--and most business
+people do--put them at a disadvantage.
+ Mr. Everson. I agree with that as well, sir.
+ Mr. Blumenauer. So the fact that this Congress under
+Republican control, I am sad to say, while you were increasing
+the complexity of the Tax Code, talking about it being too
+complex but adding thousands of pages of regulation and new
+taxes, starve the ability of IRS for compliance.
+ So I am pleased that our leadership is bringing you here
+before the Budget Committee. I hope you will have a better
+reaction from the Ways and Means Committee now so that we don't
+pile on all sorts of things, while claiming we are for
+simplification, making your job more difficult, doing it in the
+back room and the dark of the night at the last minute so that
+it is a nightmare for you to even try to comply with what
+Congress passes.
+ Mr. Everson. The only thing I would say is I have been on
+the job 4 years, and I think I have been treated fairly and the
+service has been treated fairly by both sides of the aisle
+during that period of time.
+ Mr. Blumenauer. I think you are a very generous man. I
+think the record of what happened--and it happened just before
+your watch----
+ Mr. Everson. It happened back in the 1990s.
+ Mr. Blumenauer [continuing]. In terms of dragging people
+in, flogging them, making all sorts of goofy and outrageous
+actions.
+ I recently met with about a dozen tax professionals in my
+community, top-drawer people, some of whom I have known for
+years, some who are new friends, seeking advice and counsel.
+There was one that had had an audit in the last 8 years. They
+were saying, you know, it is fascinating in terms of what
+doesn't happen any more. They had suggestions in terms of our
+having some sense of the positions that are funded, in terms of
+the revenue they generate, that that is what a business would
+do. Because this pattern of mistakes is not random, it is
+purposeful.
+ Mr. Chairman, my question, as much to the committee as to
+the Commissioner, deals with the bizarre notion of scoring.
+What is being suggested to us is that, by giving the resources
+to the IRS to do things like having just gross amounts of money
+reported as a little bit of enforcement action, a little bit of
+infrastructure, is going to produce far more tax revenue than
+it costs; and everybody will agree to that at some level. Yet
+under the way that our budget rules work, that is a cost right
+now. It is a difficulty for our budget--for our appropriators.
+It is difficult for you in terms of crafting the budget, even
+though in the 10-year budget window it will pay for itself
+many, many, many times over.
+ I have talked to the Director of CBO about some of these
+areas where our scoring rules have a perverse effect of
+actually costing money and misstating the economic impact over
+a 5- or 10-year period. I would hope that there would be some
+way working, for example, with the Commissioner of IRS and with
+CBO and with the certified smart people and the staff on both
+sides of the aisle that we could go back and look at some of
+these scoring conventions from a present-value perspective.
+Because I think it is perverse. I think it is costing us money.
+It is preventing investments that make sense.
+ We are starting to do that in some areas of government
+finance, and it is something that I planned on bringing to the
+committee later. I want to bring it up now. It is cheaper for
+the government to spend billions of dollars cleaning up after a
+disaster than spending a couple----
+ Chairman Spratt. Mr. Blumenauer, that is why we are holding
+this hearing, to lay the basis for a lot of things like that.
+ Mr. Blumenauer. It is the scoring, Mr. Chairman, is
+something that I would like to address.
+ Chairman Spratt. I understand, but this is part of the
+exploration of that issue.
+ Mr. Conaway.
+ Mr. Conaway. Thank you, Mr. Chairman; and I would like to,
+curiously, agree with my good colleague, Mr. Blumenauer's rant
+about the Ways and Means Committee. We have got a bill on the
+floor today, 976, that does exactly what he said: It was done
+in the dark of night and done--and I agree with my colleague.
+ Mr. Blumenauer. Will the gentleman yield?
+ Mr. Conaway. No, I won't. You had about 8 minutes on your 5
+minutes. I am using mine.
+ Compliance audits that--in other words, for the research
+that you do--and, again, thank you for being here. I appreciate
+that. John and I are colleagues in another realm. Appreciate
+you being here.
+ Would you describe what a compliance audit looks like? Is
+it unfair to describe it as a colonoscopy?
+ Mr. Everson. I think that was the way the research had been
+done in 1988, and I think that was one of the contributing
+factors that got this to stand down. We worked pretty hard in
+this last cycle to make sure we weren't going to ask for
+information that we already had or that was out of line. So we
+very much revised the procedures, and we didn't get but a
+handful of complaints in terms of those 46,000 reviews that we
+did.
+ Mr. Conaway. We are now 6 years away from that research.
+Tax rates are lower now than they were in 2001, which I believe
+personally contributes to better compliance when the penalty
+for reporting or the result of reporting is not as draconian at
+the rates we currently have applied as the rates before.
+ When do you think you will do your next round.
+ Mr. Everson. Right now, we are working on the 1120-Ses,
+trying to get some better numbers of the corporations. But we
+will start later in the next year on updating some of the work
+on individuals. And what we will do, instead of just doing a
+huge number like that, we are going to try to do a smaller
+sample and try to get different elements on it and get updated
+on a continuing basis.
+ But I am sorry to say it takes several years. Because by
+the time you go through all of the audits and then what you
+have to do is you do the work and then you have got to massage
+the data. Because it is different if you get Bill Gates' return
+rather than mine in your random sample.
+ Mr. Conaway. I would have thought, given your position,
+they would have been about the same.
+ Mr. Everson. I wish it worked that way. It is not a sheriff
+in a county.
+ Mr. Conaway. With respect to this industry that we have
+created in effect as a result of a very complex Internal
+Revenue Code, which the IRS has nothing to do with other than
+just trying to implement it and enforce the rest of us to
+comply with it--and I will leave some of it out--all of the
+various businesses out there that seek to assist us--I use
+ProSeries or not a commercial--but, technically, I could do my
+return without a computer. I would never want to really even
+try it, because it wouldn't be close to being right.
+ Does IRS work with these various preparers to make sure
+that they--the system they put in place in which millions of
+taxpayers seek to honestly comply with, that they are, in fact,
+getting it correct? Is there some sort of exchange with them?
+ Mr. Everson. We work very close with them, and it gets to
+the point of the late action by the Congress on the extenders.
+ One of the issues on this is we have to work and test their
+software and make sure it interacts and everything else. So we
+go through a whole series of routines to make sure that those
+products interact with us correctly.
+ Mr. Conaway. I know that is on the e-filing piece but on
+the way they compute.
+ Mr. Everson. The way they interpret the law? No. I would
+suggest to you that it doesn't matter whether that would be a
+vendor of a computerized product or a big accounting firm.
+Practitioners--we depend on practitioners in this country to
+help taxpayers understand the law, and that gets to the number
+of--this question your colleague asked a few minutes ago. It is
+another point. Some people say, well, if only the IRS was doing
+this, that would be very distasteful. So that is why there is
+some resistance to this idea of getting a portal where the IRS
+interprets the law for you.
+ Mr. Conaway. I want to commend you for your reluctance to
+embrace an IRS-computed tax return, because I do think the
+private sector does it better. It is more nimble.
+ For example, the changes made in December, there are
+certain pieces on that that 1040 itself doesn't provide for and
+you have had to issue some additional instructions. But the
+software providers have had to fold that into their system, and
+I think they are much more nimble as a result.
+ Mr. Everson. They are assuredly more nimble.
+ Mr. Conaway. And that is not to denigrate the IRS, but you
+have just got a different side of the table.
+ In the spirit of keeping within my 5 minutes, I would yield
+back.
+ Chairman Spratt. Mr. Andrews of New Jersey.
+ Mr. Andrews. Thank you very much for your very thorough and
+comprehensive answers this morning. Your daughter should be
+very proud of you. I am glad she is here this morning.
+ Sir, what was the number you gave us as to your forecast of
+revenue gain off this idea of the gross receipts of the credit
+card companies?
+ Mr. Everson. The number that is in the current estimate is
+about 10 or 11 billion over a period of several years and----
+ Mr. Andrews. I wanted to ask you how it is derived. If we
+look at the data from the 2001 study on underreporting and if
+we put aside a State tax, excise tax, and employment tax and
+simply look at corporate returns and individual returns, my
+data indicate that there is a 200--the 2001 study indicated
+$227 billion a year of underreporting. Do you have any estimate
+as to how much of that underreporting might be at least put
+into question or identified if we made this reform with the
+gross receipts of the credit cards being reported to IRS?
+ Mr. Everson. I think that is what we are saying. You would
+recover that. That is a number over a period of years, as
+opposed to an annual number, and I would have to get you what
+the annual number is. It ramps up a little bit. It ramps up
+very quickly. But it goes after this underreported business
+income of a $109 billion and the understatement of the gross
+receipts by largely Schedule C filers.
+ Mr. Andrews. So is it your estimate that the underreporting
+is $109 billion?
+ Mr. Everson. That is on the individual income tax side,
+sir. If you want to--do you have that breakout of the 110?
+ Mr. Andrews. Here is what I am trying to square here. The
+2001 study talked about annual underreporting of $227 billion
+and the two categories that I talked about. And I assume that a
+lot of that is people that are getting cash income and not
+reporting it.
+ Mr. Everson. There is some cash, and what this does here,
+that takes the biggest piece of that chart, the 110, and says
+where it is.
+ Mr. Andrews. And this idea that you have, which I applaud,
+is a way to sort of identify the most likely targets who are
+exploiting that. In other words, if I run a business and you
+know I am reporting that 85 percent of my receipts come from
+credit cards and history tells us in that kind of business is
+really 50-50, to use that example, I am a likely target for an
+audit, as I understand it.
+ Mr. Everson. Obviously, different businesses run at
+different ratios.
+ Mr. Andrews. But there would be profiles. For example, in
+dry cleaning, if the normal is 50-50 credit to cash, and I file
+a return and it shows that 85 percent--if you look at the
+credit card receipts, 85 percent of my receipts are credit card
+and only 15 percent is cash, you are probably going to take a
+look at me--that is the idea--IRS.
+ I guess what you would do, it depends on what information
+we would get coming in, and I think what you are getting at is
+this doesn't get a cash--as an--but what it would do, though,
+it would give you the most prime targets for audits, I would
+think. It is a targeting tool, isn't it?
+ Mr. Everson. It has got two things. One, it would indicate
+problem areas, but, two, this very real change in behaviors
+that would take place, people who know the information is
+coming to us, they respond more honestly.
+ Mr. Andrews. All which makes me think this: You may be
+rather significantly underestimating the value you may get from
+this. Why is the number so low that you would get from this?
+ Mr. Everson. I don't do the estimate, sir; and I do believe
+the estimates are conservative. I wouldn't put a precise number
+on them, but I think what you get is there is an historical
+reluctance to overstate the numbers. And I think JCT would feel
+that way, the joint committee, and part of it is that sometimes
+we will put a provisional law there and the IRS won't follow
+up.
+ Mr. Andrews. I think this is wise to underestimate, but I,
+frankly, believe that those estimates significantly understate
+the value of this idea. Because if you had sufficient
+infrastructure and you had sufficient auditors, this would be a
+very effective targeting system as to who was understating
+income, which would let you chase cash, which would have a
+deterrent effect on people running more of a cash business and
+have the trooper sitting under the bridge.
+ I will close with one other comment. Has the Service looked
+at State governments who have been particularly effective in
+reducing their own tax gaps? Have you looked at States who have
+had success in this area?
+ Mr. Everson. We work very closely with the States. As you
+appreciate, most States, their income tax system thrives off of
+the Federal system. We work with them on a continuing basis
+and, an actual fact, we are in the--particularly in the shelter
+area, we are now leveraging our work with them where States
+like California and New York will--if we can't get after
+something, they will pursue an investigation, and we will ride
+their assessment, instead of the other way around.
+ Mr. Andrews. My time is about up, but I would ask if you
+could submit for the record any best practices that you have
+identified from the States that the committee could take a look
+at.
+ Mr. Everson. Certainly, sir.
+ [The information follows:]
+
+ We have identified the following best practices from the states.
+California
+ The IRS and California Franchise Tax Board (FTB) have a long
+history of working together. Examples include:
+ Compliance detection and enforcement efforts to address
+the tax shelter problem.
+ A Voluntary Compliance Initiative (VCI) in 2004 which
+allowed California taxpayers engaged in potentially abusive tax
+avoidance transactions to correct their state income tax returns. The
+final results of the FTB VCI were 1,202 taxpayers who reported $1.4
+billion in additional tax liabilities by filing 2,289 amended tax
+returns for tax years 1990 though 2002. Results were provided to IRS
+and federal assessments were made based upon the state findings.
+ The State of California Board of Equalization (BOE) started
+publishing a list of the top delinquent taxpayers who owe sales and use
+taxes. The information is published on the agency web site and includes
+the taxpayer's name, address, and lien filing date. Since published,
+one taxpayer has paid in full and several others have come forward to
+request payment arrangements.
+ FTB has adopted the same method for delinquent taxpayers who owe
+personal income taxes. The agency is issuing warning letters to the top
+250 delinquent taxpayers prior to publishing the list on the agency web
+site.
+ The City & County of San Francisco Office of the Assessor-Recorder
+is interested in providing a monthly listing of all taxpayers who
+transferred their real property by recording no consideration or
+quitclaim deed and claiming that it was a gift.
+Virginia
+ The Virginia Department of Taxation sorts information received from
+the IRS on Forms 1099-MISC and W-2 prepared by a business by volume,
+which is then compared to the business return. If the business return
+is not compatible with the IRS documents, an assessment is made.
+ The Department of Taxation also matches real estate property
+transactions received from counties to information received from the
+IRS. High dollar transactions are researched to determine if the Forms
+W-2, 1099 and 1098 information is consistent with the transactions.
+Montana
+ The state of Montana publishes a listing in major city newspapers
+of the top delinquent taxpayers which results in payment of accounts.
+
+ Chairman Spratt. Thank you.
+ Mr. Porter of Nevada.
+ Mr. Porter. Thank you, Mr. Chairman.
+ Please don't take this personal, but I think most Americans
+and most Nevadans would rather have a root canal than a visit
+by the IRS. I appreciate what you are doing. I think things
+have improved significantly. But American people are scared to
+death of having an IRS agent show up at their door, and I know
+they are all hard-working individuals that work for the IRS.
+ Mr. Everson. I still twinge when I get a letter from the
+IRS, and it is usually on my health benefits.
+ Mr. Porter. Well said.
+ Then you take into account small businesses or mom-and-pop
+businesses or the chief cook or bottle washer, they are in at 6
+o'clock and they go home at midnight and they are having
+trouble with paperwork, making sure they stay on top of
+everything. They are afraid they are going to have any wages
+garnished by employees. Tax Code 17,000 pages, Tax Rule 66,000
+pages. The rich seem to benefit from the complexity of the tax
+laws because they can afford to hire people to take care of
+them; and, in the reports for OMB, it is 6.4 billion hours that
+are spent.
+ But I guess my question is, is how has the Tax Code changed
+really fundamentally since the 1980s and do you think it has
+gotten more complex?
+ Mr. Everson. First, I agree with your observation that,
+basically, that we have got to be careful here or the inference
+I think you are making because of a perception about the IRS.
+We are the government to many people and there is a wariness,
+and we don't want to overdo the enforcement, very clearly.
+ The second point, clearly, the Code has gotten more
+complex.
+ I also agree with your point that it is the well-to-do, the
+rich and the big companies that can find ways around this.
+ I tell people--I have told this story so often, and I will
+probably never be invited back. But I gave a speech 2 years ago
+to the New York State Bar Association Taxation Section. There
+were 98 tables of 10 there, and those people are not
+representing EITC taxpayers.
+ Mr. Porter. Wouldn't it just be simpler to make a
+fundamental reform to make it easier so more and more Americans
+can report accurately?
+ Mr. Everson. I certainly am a big advocate of simplifying.
+ Mr. Porter. Out of 10 returns, 10 are going to be
+different. There are 10 different experts;
+ As we talk about a tax gift, I think most Americans would
+pay if it would be much easier.
+ My next question is, part is underreported by undocumented
+and illegals that are in this country? What amount of taxes are
+we losing because they have been undocumented?
+ Mr. Everson. I don't have a number for that, sir; and, in
+some ways, because what we do is our approach is we want your
+money whether you are here legally or not. The way the law
+works, if it provides a protection, we get--we do have several
+million of filers who are filing with an ITIN, and they are
+meeting their obligation. They are filing their taxes even
+though they may not be entitled to be in the country. So they
+are following that obligation.
+ But I don't have a precise number on people who are
+illegally here and who are not meeting that obligation.
+ Mr. Porter. So would you have for a later date any
+estimates on the amount of revenues that are being lost? Is
+there a way you can compile that?
+ Mr. Everson. I don't think we would be able to answer that
+in the short term.
+ Mr. Porter. Thank you, Mr. Chairman.
+ Chairman Spratt. Mr. Etheridge of North Carolina.
+ Mr. Etheridge. Thank you, Mr. Chairman.
+ Thank you, Commissioner, for being here; and let me say as
+a Member of Congress who served at several levels and has been
+in business for 19 years, most businesses don't like to see you
+come, but it makes sure you clean your books up and get them in
+order. Been there, done that.
+ But let me ask you one question: You mentioned the tax gap
+is a difference between taxes owed and taxes paid timely.
+ Mr. Everson. Yes, sir. If you go back to that----
+ Mr. Etheridge. I want to make sure I had the definition
+accurate. Because timely is different than taxes paid.
+ Mr. Everson. That is exactly right, sir.
+ Mr. Etheridge. There is a difference.
+ Mr. Everson. That is when you file a return and you owe us
+$5,000 and you only send us $1,000.
+ Mr. Etheridge. Now, let me ask the question a little
+differently, because it gets to--just some information. You
+said that you would have the 2006 and 2007 update finished.
+When will that be finished and available?
+ Mr. Everson. You mean when we next update our research? It
+would be several years later. We are looking at how long it is
+going to take us to do that now. We will try to speed it up
+compared to what we did in the past, but if we are working on
+2007, it would certainly be several years.
+ Mr. Etheridge. Would you share that with the committee?
+ Mr. Everson. We absolutely will, sir, and we will have new
+numbers on the 1120-Ses. We are finishing up those.
+ Mr. Etheridge. That would be helpful. Thank you.
+ In looking at the data you had talked about earlier, that
+roughly 54, 55 percent of current individuals are filing
+electronically----
+ Mr. Everson. That has increased steadily.
+ Mr. Etheridge [continuing]. Do you have a number of the
+percent of corporate filers who are filing electronically?
+ Mr. Everson. What we did was--I don't have an overall
+number. What we did was we mandated at the end of 2004 that the
+big companies, those that were in a certain asset class and
+filed 250 returns, that includes employment returns they had to
+file electronically, and they all came in this last year, and
+this will have a huge and positive impact on our work because
+we will be able to array the data and only look at things that
+are really out of line.
+ Mr. Etheridge. Let me ask you a question as it relates to--
+you touched on earlier I think, before. Is there a mechanism in
+the Code or in your office--I am a small business person. I
+collect Social Security, FICA taxes on my employees. If I don't
+turn it in, that is not my money. That money belongs to the
+employees who may collect it and then match it.
+ Mr. Everson. Yes.
+ Mr. Porter. Is there a trigger at some point if I don't
+send that money in--if I haven't filed I guess you won't know.
+If I haven't filed, is there a trigger?
+ Mr. Everson. Yes. This is an area in terms of our
+collection workforce we look at the most rigorously. Because
+what happens is this can pyramid and compound very rapidly.
+ What happens is, typically, I would say more often than
+not, a small business gets extended, they get in trouble, and
+they say I am not going to send it in this quarter because
+things are going to get better the next quarter. There are very
+few people who are intentionally using the government as a
+bank, but it compounds quickly, and it is very hard to work
+your way out of it.
+ So our revenue officers, they get right on this to the best
+of their capability, and they work. And what they do, sir--and
+I have been out with a couple of them--they try to make a
+determination of whether the business can pay it off or not.
+ What they say is, first of all, can you make current
+payments. If you are not capable of making the payments from
+now forward, then what they will do is they will basically end
+up shutting the business down itself.
+ Mr. Etheridge. The reason I ask this question is that an
+employee who gets in some trouble but the employees, depending
+on who they are, how many, they have lost their quarters for
+Social Security.
+ Mr. Everson. Yes.
+ Mr. Etheridge. And that is delay. If it is a year, they
+lost a whole year in their retirement earnings towards Social
+Security benefits, correct, because it is not paid?
+ Mr. Everson. If it is not recorded, that would be correct.
+I am not sure exactly how it works on the Social Security end.
+ Mr. Etheridge. Anyway, I think that is correct. The reason
+I ask that question because I think it is important that we
+trigger that.
+ Let me touch one more piece, because my time is running
+out. One of the things I think that bothers taxpayers the
+most--and we just had a case in our State of a person who was
+of some substantial position and an attorney wound up doing
+time for tax evasion using the Tax Code illegally and is going
+to spend some time thinking about it now that they have been
+caught.
+ My point is that every time one of these pops up, it really
+has people losing faith in our system. Because if somebody gets
+away with at least a little, people lose faith.
+ Let me thank you for your paying attention to that. Because
+I think it does help and, by and large, it helps the little guy
+who is paying every month, who has no choice.
+ Mr. Everson. Thank you.
+ Mr. Etheridge. Thank you, Mr. Chairman. I yield back.
+ Chairman Spratt. Thank you.
+ Mr. Bishop.
+ Mr. Bishop. Thank you, Mr. Chairman.
+ Commissioner, it is nice to see you again. Thank you.
+ I have a just a couple of questions. First, an observation.
+I guess I am surprised to hear the question raised, is it worth
+it? I mean, as I understand it, there is $350 billion on the
+table in one form or another. And I mean I am just quite
+surprised to hear that the question raised of is it worth it to
+go after that or some portion of it. I cannot imagine us having
+any other problem of that magnitude either on the revenue side
+or on the expenditure side of our budget where we would ask
+that question. So my own answer is, yes decidedly, it is worth
+going after.
+ Mr. Everson. Yes, sir.
+ Mr. Bishop. The first question I have is, the corporate
+income tax piece of that $350 billion is, if I got your numbers
+correctly, approximately $250 billion in large corporations and
+approximately $5 billion in small corporations. I think that is
+what your chart said.
+ Mr. Everson. That is what I said, sir.
+ I also added the fact that that was not based--as you can
+see, these are older estimates and so I believe that was
+clearly understated.
+ Mr. Bishop. My question is, I know the concern that we have
+is does enhanced enforcement run the risk of impairing the
+dynamic that exists between taxpayers and the IRS and will we
+be creating more problems than we are solving. But isn't going
+after large corporations, doesn't that constitute low-hanging
+fruit? Are we really worried about our relationship with large
+corporations who have the capacity to employ the very best tax
+advice, the very best legal advice and are thriving in our
+economy? I mean, do we really worry about whether or not
+increased enforcement is going to somehow impair their ability
+to do business?
+ Mr. Everson. I think there is a different dynamic between
+the relationship between the IRS and the large corporations
+than there is between the IRS and the individuals.
+ We have very high audit rates, as we talked about before.
+We are doing a lot in that area. We want to do more. There is
+$26 billion in the enforcement moneys that would go towards the
+corporations. We have got a pretty aggressive program on them.
+ Mr. Bishop. If I remember your numbers right now, I think
+we are auditing something like 17 percent of returns of large
+corporations. Is that----
+ Mr. Everson. That is correct, but that is the number which
+has the 10 million up--if we look at the biggest players, that
+number is much higher. It is about double that.
+ Mr. Bishop. And with the increased moneys that you are
+requesting for the fiscal year 2008 budget, how will you be
+able to move that number?
+ Mr. Everson. I don't think the number itself would move as
+a percentage that dramatically. It would be the way we deploy
+that money and the kinds of issues we would be going after. But
+you are not going to see that dramatically ramp up their----
+ Mr. Bishop. One more question. The unreported business
+income, if I remember correctly, was estimated at about $109
+billion; and the credit card reporting proposal that you have,
+would you think it is a conservative effort, but it would pick
+up about 11 percent of that.
+ Mr. Everson. But those are apples and oranges there. The
+109 or 110, that is an annual number, whereas the credit card
+number, that is over the period of the budget.
+ Mr. Bishop. So $11 billion is the cumulative number.
+ Mr. Everson. That is the cumulative number over the 10-year
+life of the projection.
+ Mr. Bishop. So it is only about 1 percent then.
+ Mr. Everson. I would have to look at the individual years.
+We have been talking about 2010. I would have to take a look at
+what we would project for that.
+ Mr. Bishop. I am not trying to be difficult here, but I am
+focusing on a number here. If it is $11 billion cumulative over
+the course of the budget window, that is about a billion a
+year. So that would be about 1 percent of the total problem; is
+that about right?
+ Mr. Everson. I understand your math, yes.
+ Mr. Bishop. One thing I can do--and my question is, can't
+we do better? If we have a $109 billion problem, can't we come
+up with a set of these potential solutions that allow us to
+knock that down by more than 1 percent?
+ Mr. Everson. We haven't gotten into it too much today.
+There are some who have said these are major proposals. The
+Secretary and I have gone over this. We are pretty clear on
+this. We want to get the funding for the IRS and sustain that.
+Then we want to get these proposals. And if these proposals,
+which I think are going to generate, sir, quite a bit of
+controversy, as you have seen here this morning----
+ I was in the Small Business Committee last year, and it
+pretty well shut down because of this credit card proposal. I
+think that we will come back, and we will work with the
+Congress. If we get these through, we will talk about doing
+some more, but I think those are important steps.
+ Mr. Bishop. Thank you.
+ Chairman Spratt. Mr. Boyd.
+ Mr. Boyd. Thank you very much, Mr. Chairman; and,
+Commissioner Everson, thank you for being here.
+ I want to start, Mr. Chairman--I am sorry that Mr. Ryan
+stepped out of the room and also that Mr. Conaway and Mr.
+Blumenauer have left. I wanted to start by correcting the
+record.
+ I was a little bit amazed at the statements or the rancor
+between Mr. Conaway and Mr. Blumenauer. But let the record
+reflect that the vote that we are going to take on the bill,
+the tax bill today, is a bill that was developed and written
+and cosponsored by the Democratic chairman, Charlie Rangel, and
+the Republican Ranking Member, Jim McCrery, and working
+together with each other and passed out of the Ways and Means
+Committee without a dissenting vote. So one of the things, Mr.
+Chairman, that many Members of this Congress have exhorted, you
+and the leadership of this new Congress, is to stop the
+partisan rancor and rhetoric and lower it a little bit; and I
+would challenge all of those in this committee to do that. I am
+sorry, again, that Mr. Ryan is not here, but I am sure we can
+talk about that some other time.
+ Commissioner Everson, I strongly support the statements of
+many, including Mr. Porter from Nevada, who favor
+simplification. You said it best: Simplification is something
+that you strongly favor. You made an argument for that by
+saying that complexity hurts those who wanted to comply and
+helps those who want to cheat.
+ Mr. Everson. Correct, sir.
+ Mr. Boyd. I think that is what you said.
+ Mr. Everson. Yes.
+ Mr. Boyd. Given the tax gap.
+ So as to my question, though, given the tax gap and ways
+that you can solve this, I don't think there has been any
+discussion today about the private collection initiative.
+ Mr. Everson. Yes, that is right.
+ Mr. Boyd. Could you talk a little bit about that and
+address, number one, I know how that is working, what they are
+trying to collect. I know the taxpayer advocate has some
+problems with it, what are his problems and how you are trying
+to address them.
+ Mr. Everson. Certainly, sir. I think you will hear from the
+advocate in the next panel.
+ The simple truth here is that, even because of attrition,
+government attrition is quite high now. It is high within the
+IRS as well. There are only so many people you can bring on and
+hire at any given time, so that even with the increment that we
+have got in the budget proposal, even if we--we are pretty well
+maxed out on what we can bring on, and it would be a period of
+years, a period of years of adding people to the IRS before we
+would get to a capacity where we could work some of these cases
+that we are giving to the private collection agency.
+ This was passed into law--I think it was in the Jobs Act at
+the end of 2004. What we are doing is we are implementing this.
+We have implemented starting in September. Got about $11
+million, came in January. We have a set of standards that we
+hold the contractors to that are comparable to what the IRS has
+held, and I would say to you my assessment is so far so good. I
+know that there are many who want to stop it.
+ I had a conversation with Chairman Rangel on this up in
+Harlem just a week or two ago, but I think--I was with Senator
+Grassley on that--we should give this a chance to work and see
+how it goes. We are working very hard on it. The people I have
+on it meet with me monthly to tell me how it is going, and I
+think we should stick with it for a while and see how it goes.
+ Mr. Boyd. So, to refresh everybody here, that you are only
+going after taxes that people have admitted that they owe,
+return files, file returns but just didn't pay the bill.
+ Mr. Everson. That is absolutely correct.
+ One of the challenges that we have in our collection area
+now that--as we brought up the other enforcement and we are
+doing more audits. You audit somebody and you make an
+assessment and you have to collect that money. So our
+collection people are busier because we brought back the
+enforcement. What the collection agencies are working on is
+really the simplest thing, where somebody has agreed that they
+owe that amount of money.
+ Mr. Boyd. Thank you very much. I yield back.
+ Chairman Spratt. Thank you, Mr. Boyd.
+ Mr. Ryan would like a moment for clarification.
+ Mr. Ryan. I stepped out of the room for a second when you
+mentioned the Ways and Means Committee. I didn't hear what you
+mentioned, but I wanted to just certify and clarify that the
+tax bill we are considering was done in regular order in the
+Ways and Means Committee. It was done in a bipartisan way. I
+serve in Ways and Means. We marked it up in the middle of the
+day in the committee in regular order. Ms. Schwartz was there.
+So that, in fact, was the case. I was going to mention to the
+gentleman who mentioned it that that was, in fact, the case. So
+I want to get that for the record.
+ Mr. Boyd. Thank you very much.
+ Chairman Spratt. Ms. Schwartz from Pennsylvania.
+ Ms. Schwartz. Thank you, Mr. Ryan, for correcting that. You
+may want to mention to Mr. Conaway that--he mentioned it was
+done in the dark of night, and it wasn't. I agree when we can
+work in a bipartisan way. When we agree, why fight about that?
+So thank you.
+ I wanted to follow up on some of Mr. Boyd's comments, and
+nice to meet you, Mr. Commissioner.
+ Mr. Everson. Thank you for waiting.
+ Ms. Schwartz. Thank you.
+ There is a specific issue I wanted to follow up on private
+collections, how that is working. As you may know, I represent
+the 13th Congressional District in Pennsylvania. There is a
+rather large IRS facility in my district, and I visit that
+facility. In spite of some of the negative comments about how
+people might feel about IRS workers, I can tell you that,
+meeting with those workers, they are very proud of the work
+they do. They feel good about it. They would like to continue
+doing it.
+ The fact that there are 2,800 employees that are going to
+be laid off in that one facility in my district is very
+significant; and given these are employees, some of whom, as I
+understand it, would need some retraining to do some of the
+kind of work that is now being contracted out to private
+collection agencies and, actually, we are paying far more for
+those private collection agencies than we do if we are going to
+do it in-house, my staff gave me some information on this.
+ They were talking about a net return when the IRS does it
+itself. So it is a compliment to you, I guess, and to workers.
+About $0.97 cents on the dollar. It costs about $0.03 on the
+dollar when we do it in-house. By contracting it out to these
+private collection agencies, the net return is $0.76 on the
+dollar. So that we are losing $0.21 on the dollar.
+ Now these are taxpayer dollars, also. These cents add up,
+that we are actually spending more to collect these dollars.
+ So my question to you is really two-fold, is that why not
+use the 2,800 people in my district who are going to lose their
+jobs who want to stay, might need some retraining, to do this
+next--this different level of job but would like to do that and
+why not use them? Particularly when we know that two factors,
+one, we are spending more when we use private collection
+agencies, not getting the dollars back that we might, and there
+have been issues raised on the other side that I agree with.
+There are concerns about the potential confidentiality of very
+personal information being out there.
+ You know, one of the things, we actually may not like to
+hear from the IRS, but you kind of trust you keep this
+information to yourself. That is one of the aspects I think
+most Americans do believe in.
+ So if you would address specifically, you know, the
+decision that has been made--it is an option--but the decision
+that has been made to substantially downsize our IRS workers or
+employees who are dedicated and knowledgeable and want to
+continue to do the good work in order to spend more taxpayer
+dollars by using private agencies outside.
+ Mr. Everson. I presume you are in Philadelphia?
+ Ms. Schwartz. Yes.
+ Mr. Everson. I think there are a couple of issues in there
+that are getting a little bit mixed.
+ We have talked this morning about the increase in
+electronic filing, and as the number of returns that are filed
+electronically has increased, that has resulted in a phasing
+down, obviously fewer paper returns and a smaller footprint of
+workforce in our submission processing pipeline. We have
+already--Mr. Bishop's area has a center, and we have worked
+through in Memphis as well, and Philadelphia is in line and,
+ultimately, we will get down to a much smaller footprint.
+ Ms. Schwartz. What percentage of those 2,800 is that? All
+of those people?
+ Mr. Everson. I don't know of exact--that is a new number
+for me. I will certainly take a look at this hearing at
+Philadelphia, but we have had a long-standing plan to phase
+out, to consolidate submission processing of paper returns as
+that grows down.
+ As we have done that, we have tried to make sure that we
+are anchoring as much work in those centers and add work to
+those centers from other areas where we can. And, as you know,
+we are also making an investment in moving into the post office
+there in Philadelphia. The campus right now in Philadelphia is
+probably our worst facility of the big campuses. We want to do
+the same thing there that we have done in Kansas City, where we
+just reopened a much modernized, great facility.
+ Ms. Schwartz. I was not impressed with the facility. I was
+impressed with the workers.
+ Mr. Everson. We are delighted that we are going to be able
+to go down downtown and upgrade the post office.
+ We are working where we can to, obviously, find opportunity
+for those individuals. We are committed to that, and I will
+relook at it since you are raising it in terms of
+opportunities.
+ But, again, as to collection itself, we do have issues as
+to how many people you can bring on and train and get going.
+And I would say to you again, as I just said to your colleague,
+we do--it would be a period of several years before we would be
+able to change our employment profile and get after the same
+kinds of accounts that we are doing now in the private
+collection agency.
+ I don't challenge--I am not the author of that $0.03 cost
+figure, so I am not vouching for that, but I have said readily
+that this could be done more cheaply by our people.
+ Ms. Schwartz. My time is almost up now, but if you had the
+option, which you do not, but if you had the option to do it
+in-house would that--you would be able to do that. You would be
+pleased to do it. I am not sure what we are----
+ Mr. Everson. We happily take on all duties that the
+Congress assigns us.
+ Ms. Schwartz. I do appreciate the opportunity to follow up
+with you about the IRS.
+ Mr. Everson. Maybe we can visit sometime and see how the
+work progresses in the new facility.
+ Ms. Schwartz. Thank you, Mr. Chairman.
+ Chairman Spratt. One housekeeping deal as we wrap up.
+ I ask unanimous consent that any member who did not have
+the opportunity to ask questions today or who would like
+clarification be given authority to submit questions for the
+record. We would appreciate your cooperation in providing us
+answers.
+ Mr. Everson. Certainly, sir.
+ Chairman Spratt. You were an excellent witness. We
+appreciate your forthrightness and your full answers as well as
+your forbearance. Thank you very much for coming, and we look
+forward to working with you on these objectives that are set
+out in the budget this year.
+ Mr. Everson. Thank you, Mr. Chairman. I appreciate the
+opportunity to be here.
+ Chairman Spratt. The next panel will consist of Russell
+George, who is the IG for Tax Administration; Michael Brostek,
+who is the Director of Tax Issues; GAO Nina Olson, the National
+Taxpayer Advocate, IRS; and Chris Edward, who is with the Cato
+Institute.
+ I welcome all of you before our committee, and I will say
+to each one of you that, if you have written testimony, we will
+accept it for the record and make it, in its full, as part of
+the record and allow you to summarize as we go forward. You
+have been patient to wait. You have been good to prepare and to
+come here for this hearing.
+ We are notified that we need to be on the floor at around
+1:00 o'clock, so we are going to try to wrap this up in an hour
+if we can.
+ Mr. George, just for a good starting point, let us start
+with you, if you will.
+
+STATEMENTS OF THE HON. J. RUSSELL GEORGE, INSPECTOR GENERAL FOR
+ TAX ADMINISTRATION, U.S. DEPARTMENT OF THE TREASURY; MICHAEL
+ BROSTEK, DIRECTOR, TAX ISSUES, STRATEGIC ISSUES TEAM, U.S.
+ GOVERNMENT ACCOUNTABILITY OFFICE; NINA E. OLSON, NATIONAL
+TAXPAYER ADVOCATE, INTERNAL REVENUE SERVICE; AND CHRIS EDWARDS,
+ DIRECTOR OF TAX POLICY STUDIES, CATO INSTITUTE
+
+ STATEMENT OF THE HON. J. RUSSELL GEORGE
+
+ Mr. George. Thank you, Mr. Chairman, and at the outset, may
+I say it is an honor to appear before you. As you may recall,
+you and I worked together almost a dozen years ago when I was
+Staff Director of Chairman Stephen Horn's subcommittee and you
+were a member of that committee, and even at that time we
+looked at issues such as the very one that we are discussing
+today.
+ Chairman Spratt, Ranking Member Ryan, members of the
+committee, thank you for the invitation to appear before you
+today to discuss opportunities for closing the tax gap. The tax
+gap is a complicated subject which at times appears simpler
+than it really is. It is generally accepted that, every year,
+the IRS fails to receive roughly $345 billion owed to the
+Federal Government. As has been noted, that figure is
+considered the gross amount not received. The net amount of the
+tax gap is thought to be approximately $290 billion. TIGTA,
+however, has expressed some doubts about the accuracy of these
+figures. We are concerned that the IRS does not have a complete
+picture of the magnitude of the problem, which is an essential
+starting point to addressing the problem. Nonetheless, in 2006,
+the IRS updated its estimate of the tax gap based on data from
+the 2001 tax year.
+ While the updated information on individuals is important
+since they comprise the largest segment of the tax gap, there
+is no new information about employment, corporate and other
+taxpayer segments. The Service does not have firm plans to
+update the information study for these segments, as you heard
+earlier. There are opportunities for the IRS to pursue new
+initiatives related to the tax gap.
+ In our reviews of IRS programs, we have made
+recommendations that would enhance the effectiveness and the
+efficiency of the IRS' tax compliance programs. The IRS has
+appropriately refocused audit attention on high-income
+taxpayers. However, this has been done through an increase in
+correspondence examinations as opposed to face-to-face reviews.
+Correspondence examinations limit the tax issues that can be
+addressed. High-income households typically have a large
+percentage of their income that is not subject to third party
+reporting and withholding. Without additional third-party
+reporting, it is difficult to determine whether these taxpayers
+have reported all of their income.
+ To improve tax compliance and business tax filings, TIGTA
+has recommended that the IRS establish a comprehensive document
+matching program for the various business documents it receives
+similar to its program for verifying individual wage earnings.
+Although implementing such a program among businesses would be
+difficult, it could identify significant pockets of
+noncompliance among business taxpayers.
+ Over the years, the IRS has had several strategies for
+reducing the tax gap attributable to individual nonfilers.
+Unfortunately, the IRS, since it was reorganized in 2002, each
+IRS business division has been responsible for tracking and
+monitoring its own action items. There is no formal system in
+place for coordinating and tracking across all IRS business
+divisions. In response to a 2005 audit report, the IRS took
+some steps to improve efficiency in working nonfiler cases,
+including the development of a nonfiler work plan. However, the
+IRS still does not have a single executive charged with
+overseeing its nonfiler efforts. It needs one.
+ In 1993, the IRS developed a voluntary compliance program
+for the food and beverage industry, which was extended to the
+cosmetology industry. The program has been successful. In tax
+year 1994, $8.52 billion in tip wages were reported. In tax
+year 2004, the amount exceeded $19 billion. Despite this
+success, the IRS has not expanded the program to include other
+industries which I believe will further enhance tax receipts.
+ The IRS needs to focus more attention on its role as a
+collector of Social Security and Medicare taxes. These taxes
+are primarily paid through payroll taxes with help from
+employees, matching amounts paid by employers as well as
+through self-employment taxes. However, the procedures the IRS
+uses to implement this program have flaws. TIGTA recently
+conducted a review of tax returns that were processed in 2005.
+We estimated that the IRS has assessed $20 million in taxes,
+but with changes to the procedures, the IRS could have assessed
+approximately $20 million more. We recommended several changes
+to this process which could result in an additional $108
+million in Social Security and Medicare taxes each year.
+ Finally, to better address a growing number of investments
+made abroad by U.S. residents estimated at $7.2 trillion in
+2003, TIGTA has recommended that the IRS make better use of the
+foreign source information it receives from tax treaty
+countries. We have also recommended that prior to issuing
+refunds to foreign partners, the IRS implement an automated
+cross-check of withholding claims against available credits for
+partnerships with foreign partners.
+ Mr. Chairman, while the IRS clearly needs the resources it
+has requested, it also must use the resources it has more
+efficiently and effectively.
+ Chairman Spratt. Let me just stop you at that point and
+make a point.
+ Has your office submitted any legislation, proposed
+legislation, to reduce these recommendations to recommendations
+that were submitted to Congress or are they simply held
+internally within the Internal Revenue Service?
+ Mr. George. Well, within the budget, the Department in
+conjunction with the IRS submitted legislative proposals that
+we have not had a role in, Mr. Chairman, and we have not
+independently submitted legislation.
+ Chairman Spratt. Are the recommendations you just
+enumerated part of the requests that the administration has
+made to Congress this year----
+ Mr. George. Part of the budget----
+ Chairman Spratt [continuing]. The 15 or 16 different things
+that the Commissioner just----
+ Mr. George. We are in the process of reviewing those, Mr.
+Chairman.
+ Chairman Spratt. Okay. Excuse me. Go ahead.
+ Mr. George. Actually, that concludes my oral testimony,
+sir.
+ [The prepared statement of J. Russell George follows:]
+
+ Prepared Statement of Hon. J. Russell George, Treasury Inspector
+ General for Tax Administration
+
+ introduction
+ Chairman Spratt, Ranking Member Ryan, and Members of the Committee,
+I appreciate the opportunity to appear before you today to discuss the
+tax gap.
+ The objective of our tax system is to fund the cost of government
+operations. The Internal Revenue Service (IRS) attempts to meet this
+objective by administering a tax system that provides adequate funding
+for the Federal Government while ensuring fairness to all taxpayers.
+But, as we know, the system has failed to capture a significant amount
+of the tax revenue that is owed, which we call the tax gap. The IRS
+defines the tax gap as ``the difference between what taxpayers are
+supposed to pay and what is actually paid.'' \1\
+ It is worth noting, that if we were to capture the estimated annual
+tax gap of $345 billion, it would completely offset the projected
+fiscal year (FY) 2007 budget deficit of $172 billion and provide a
+surplus of $173 billion.\2\ Considering it in those terms, the tax gap
+poses a significant threat to the integrity of our voluntary tax
+system. Therefore, one of my top priorities for TIGTA is to identify
+opportunities for improvements to the IRS' administration of our tax
+system. Similar to nearly all other Federal agencies, the IRS has
+limited resources to apply to the objectives it seeks to achieve.
+Nevertheless, the IRS must face the challenge of trying to increase
+voluntary compliance and reduce the tax gap.
+ When I testified on the tax gap last year, I reported that some of
+the most challenging barriers to closing the tax gap are tax law
+complexity, incomplete information on the tax gap and its components,
+and reduced IRS enforcement resources. These same barriers exist today.
+However, while tax law simplification may help close the tax gap, a
+portion of the tax gap may also be closed through more effective tax
+administration and enforcement, as well as a commitment of additional
+resources for those efforts.
+ My remarks will briefly discuss the size and source of the tax gap
+and then present some of TIGTA's significant findings and
+recommendations to improve tax administration and help reduce the tax
+gap.
+ the tax gap: its size and sources
+ The IRS describes the tax gap as having three primary components--
+unfiled tax returns, taxes associated with underreported income on
+filed returns, and underpaid taxes on filed returns.\3\ Within the
+underreported income component, the IRS has further delineated specific
+categories of taxes, such as individual, corporate, employment, estate,
+and excise taxes.\4\
+ In 2006, the IRS updated its estimate of the tax gap, which had
+been based on data for tax year (TY) 1988. The new estimate was based
+on data obtained from the National Research Program (NRP) for TY 2001
+individual income tax returns.\5\ Data from the NRP were used to update
+the 2001 tax gap figures. The IRS' most recent gross tax gap estimate
+is $345 billion with a corresponding voluntary compliance rate (VCR) of
+83.7 percent.
+ In any discussion about whether a specific VCR goal can be met, the
+logical starting point would be an assessment of the reliability of the
+measurement data. In April 2006, my staff reported results of a review
+to determine whether the IRS' compliance efforts and strategies will
+enable it achieve a greater VCR by 2010.\6\ In all three compliance
+areas across the major tax gap segments--nonfiling, underreporting and
+non-payment--TIGTA has concerns about whether the tax gap projections
+are complete and accurate.\7\ While TIGTA has concerns about the
+overall reliability of the tax gap projections, the review of the tax
+gap estimates was not meant to be critical of the efforts the IRS took
+in re-establishing compliance measurement. On the contrary, TIGTA
+commended the IRS for restoring these critical measurements and for
+designing them to be much less burdensome to taxpayers than previous
+efforts. The IRS' updated estimate is based on the best available
+information.
+ When considering the updated tax gap estimate, TIGTA found it
+instructive to analyze what additional amounts the IRS would have had
+to collect to increase voluntary compliance at different estimated
+intervals for TY 2001. Figure 1 shows the range for TY 2001 based upon
+the total tax liability for TY 2001, as estimated in February 2006. The
+IRS has proposed in the FY 2007 budget that the VCR will be raised from
+83.7 percent to 85 percent by 2009. Accordingly, if the total tax
+liability remained constant, the IRS would have to collect, on a
+voluntary and timely basis, $28 billion more in TY 2009, thus reducing
+the gross tax gap to $317 billion. To reach 90 percent voluntary
+compliance by TY 2010,\8\ the amount voluntarily and timely collected
+for TY 2010 would be an additional $134 billion, thus reducing the
+gross tax gap to $211 billion if the total tax liability remained
+constant.
+
+ Figure 1: Additional Voluntary and Timely Payments Required to Reach
+ Specified VCR Levels\9\
+
+
+
+ Source: Treasury Inspector General for Tax Administration
+
+ In summary, TIGTA concluded in its review of the updated tax gap
+estimate that the IRS still does not have sufficient information to
+completely and accurately assess the overall tax gap and the VCR.
+Although having new information about TY 2001 individual taxpayers is
+better when compared to the much older TY 1988 information from the
+last TCMP survey, some important individual compliance information
+remains unknown. Additionally, although individuals comprise the
+largest segment of taxpayers and were justifiably studied first, no new
+information about employment, small corporate, large corporate, and
+other compliance segments is available. With no firm plans for further
+studies or updates in many areas of the tax gap, the current tax gap
+estimate is an unfinished picture of the overall tax gap and
+compliance.
+the irs needs to overcome institutional impediments to more effectively
+ address the tax gap
+ Institutional impediments in this context of tax administration are
+the established policies, practices, technologies, businesses processes
+or requirements that add unintended costs or are no longer optimal
+given changes to strategies, goals, and technologies. The costs of
+these impediments include lost opportunities and the delayed
+development of innovative solutions.
+ Impediments can also be perceived as opportunities. The removal of
+an impediment creates opportunities to achieve increased efficiency and
+effectiveness in tax administration. TIGTA's perspective is that the
+current institutional impediments the IRS faces can give way to
+beneficial opportunities.
+ incomplete compliance research
+ Performing a compliance measurement program is expensive and time
+consuming. The estimated cost for performing the TY 2001 individual
+taxpayer NRP was approximately $150 million. According to IRS
+officials, resource constraints are a major factor in NRP studies and
+affect how often the NRP is updated. Operational priorities must be
+balanced against research needs. From FY 1995 through FY 2004, the
+revenue agent workforce declined by nearly 30 percent while the number
+of returns filed grew by over 9 percent. This shortfall in examiner
+resources makes conducting large-scale research studies problematic.
+ The IRS' budget submission to the Department of the Treasury for FY
+2007 requested funding to support ongoing NRP reporting compliance
+studies. The IRS Oversight Board \10\ supports ongoing dedicated
+funding for compliance research. Unfortunately, funding for those
+resources in previous fiscal years did not materialize. Without a
+resource commitment for continual updating of the studies, the
+information will continue to be stale and less useful in measuring
+voluntary compliance.
+ The IRS' National Research Program (NRP) is designed to measure
+taxpayers' voluntary compliance, better approximate the tax gap, and
+develop updated formulas to select noncompliant returns for
+examination. The first phase of this program addressed reporting
+compliance for individual taxpayers, and data from this phase were used
+to produce the updated estimates of this portion of the tax gap. These
+initial findings should enable the IRS to develop and implement
+strategies to address areas of noncompliance among individual
+taxpayers.
+ The second phase of the NRP, which has begun, focuses on Subchapter
+S corporations (Forms 1120S). TIGTA recently reviewed the on-going NRP
+study of Subchapter S corporations and reported that the study was
+effectively planned.\11\ The NRP study is on target, with just over 17
+percent of the examinations closed as of November 3, 2006. Revenue
+agents conducting the examinations received appropriate and timely
+training. A multi-layered quality review process is in place, and
+feedback is provided when appropriate to resolve any problems
+identified. The study should provide valuable data when completed.
+ While the IRS is actively involved in managing and monitoring the
+NRP study, TIGTA noted some areas in which there can be further
+improvement. Some NRP study results may not be complete, accurate, or
+provide information sufficient to update existing return selection
+formulas.
+ The NRP study instructions contained criteria for line
+items on tax returns that are mandatory to select for examination.
+Eleven of 61 tax returns that TIGTA reviewed contained these line
+items, but the items were not identified for examination.
+ The NRP study process includes capturing demographic
+information about each business examined. This information was
+available in 9 of the 62 cases reviewed (the data were not always
+available because TIGTA reviewed in-process cases). In two of the nine
+cases, some of this information was inaccurate.
+ The Examination function relies in part on selection
+formulas to identify tax returns that have greater potential for tax
+adjustment. An independent review of this NRP study's sampling
+methodology and sample size\12\ expressed concern that the sample size
+may not be large enough to update the current selection formulas, and
+recommended that other techniques be explored to analyze the results.
+ The three concerns TIGTA noted could reduce the reliability of the
+NRP study results. However, the IRS is taking or has planned actions
+that should reduce these risks. Final decisions on how to address these
+concerns cannot be made until more of the examinations are completed.
+As a result, TIGTA did not recommend any additional actions the IRS
+should take. However, TIGTA will monitor the adequacy of the IRS'
+decisions and actions to address the concerns in future reviews.
+ The individual and Subchapter S corporation NRP initiatives allow
+the IRS to update return-selection models for more effective return
+selection for its compliance efforts.
+ In 2005, TIGTA reported that the return-selection formulas,
+developed in the 1980s, only accounted for the selection of 22 percent
+of the corporate returns selected for examination in FY 2004.\13\
+Updated selection models should contribute to more effective use of the
+IRS' compliance resources.
+ In April 2006, TIGTA recommended that the IRS Commissioner continue
+to conduct NRPs on a regular cycle for the major segments of the tax
+gap.\14\ TIGTA also recommended that the IRS augment the direct
+measurement approach, and devise indirect measurement methods to assist
+in quantifying the tax gap. The IRS agreed with these recommendations,
+subject to available resources. In addition, TIGTA recommended that the
+IRS Commissioner consider establishing a tax gap advisory panel that
+includes tax and economic experts to help identify ways to better
+measure voluntary compliance. The IRS agreed to look into establishing
+such an advisory group with the intent of using it to validate and
+improve estimation methods.
+ increase the economy, efficiency and effectiveness of compliance
+ strategies
+ TIGTA has made several recommendations to improve the efficiency
+and effectiveness of IRS operations. These improvements would help the
+IRS address the tax gap. Some of TIGTA's more significant
+recommendations concern:
+ Less Effective Examination Techniques Used for High-Income
+Taxpayers.
+ Incomplete Document Matching.
+ Regulations for Granting Extensions of Time to File Delay
+the Receipt of Taxes Due.
+ Uncoordinated Nonfiler Strategy.
+ Limited Tip Program Expansion.
+ Unclear Offer in Compromise Program Requirements.
+ Incomplete Payroll Tax Assessments.
+ less effective examination techniques used for high-income taxpayers
+ In July 2006, TIGTA reported the results of its review of the IRS'
+increased examination coverage rate\15\ of high-income taxpayers.\16\
+The increased coverage has been due largely to an increase in
+correspondence examinations,\17\ which limit the tax issues the IRS can
+address in comparison with face-to-face examinations. In addition, the
+compliance effect may be limited because over one-half of all high-
+income taxpayer examination assessments are not collected timely.
+ The examination coverage rate of high-income taxpayers increased
+from 0.86 percent in FY 2002 to 1.53 percent in FY 2005. Included in
+this statistic is an increase in the examination coverage rate of high-
+income tax returns, Forms 1040 with a Schedule C. This examination
+coverage rate increased from 1.45 percent in FY 2002 to 3.52 percent in
+FY 2005. However, the increase in examination coverage is due largely
+to an increase in correspondence, rather than face-to-face,
+examinations. While face-to-face examinations increased by 25 percent
+from FY 2002 through FY 2005, correspondence examinations increased by
+170 percent over the same period.
+ As a result, the percentage of all high-income taxpayer
+examinations completed through the Correspondence Examination Program
+grew from 49 percent in FY 2002 to 67 percent in FY 2005. The increase
+in correspondence examinations for high-income taxpayers who filed a
+Schedule C was even larger. Examinations closed by correspondence
+comprised about 30 percent of all high-income taxpayer Schedule C
+examinations from FYs 2002 through 2004. In FY 2005, approximately 54
+percent of all high-income taxpayer Schedule C examinations were
+conducted by correspondence.
+ High-income households typically have a large percentage of their
+income that is not subject to third-party information reporting and
+withholding. The absence of third-party information reporting and
+withholding is associated with a relatively higher rate of
+underreporting of income among business taxpayers. It is difficult to
+determine through correspondence examination techniques whether these
+taxpayers have reported all of their income.
+ In FY 2004, the IRS assessed more than $2.1 billion in additional
+taxes on high-income taxpayers through its Examination program. This
+figure includes assessments of $1.4 billion (66 percent) on taxpayers
+who did not respond to the IRS during correspondence examinations.
+Based on a statistical sample of cases,\18\ TIGTA estimates that
+approximately $1.2 billion (86 percent) \19\ of the $1.4 billion has
+been either abated \20\ or not collected after an average of 608 days--
+nearly two years after the assessment was made. Our conclusion is that
+the Examination and Collection programs for high-income taxpayers may
+not be positively affecting compliance, given the substantial
+assessments that have been abated or not collected.
+ TIGTA recommended that the IRS complete its plan to maximize the
+compliance effect of high-income taxpayer examinations. TIGTA also
+recommended that the plan should include the mixture of examination
+techniques, issues examined, and collection procedures. The IRS agreed
+with our recommendations.
+ incomplete document matching programs
+ TIGTA has also identified improvements that should be made to
+improve compliance in business tax filing.\21\ The GAO has reported
+that more than 60 percent of U.S.-controlled corporations and more than
+70 percent of foreign-controlled corporations did not report tax
+liabilities from 1996 through 2000.\22\ Although individual wage
+earners who receive a Wage and Tax Statement (Form W-2) have their
+wages verified through a matching program, a similar comprehensive
+matching program for business documents received by the IRS does not
+exist. TIGTA has recommended that the IRS evaluate all types of
+business documents it receives to determine whether this information
+can be used to improve business compliance. In its response to our
+recommendations, the IRS wrote that it could not implement this
+recommendation at that time. However, the IRS also shared its belief
+that ongoing efforts would provide the results that our recommendation
+hoped to achieve and asked for the opportunity to continue its efforts.
+ An IRS study, based on TIGTA recommendations, found that in FY
+2000, business information documents\23\ reported $697 billion of
+potential taxable income.\24\ Furthermore, business information
+documents identified 1.2 million unresolved IRS business nonfiler tax
+modules. An IRS tax module contains records of tax liability and
+accounting information pertaining to the tax for one tax period. TIGTA
+has also reported on issues related to the increasing global economy.
+Investments made abroad by U.S. residents have grown in recent years,
+nearly tripling from $2.6 trillion in 1999 to $7.2 trillion in 2003. To
+address the tax compliance challenges presented by foreign investments,
+TIGTA recommended that the IRS make better use of the foreign-source
+income information documents received from tax treaty countries. TIGTA
+also recommended that, prior to issuing refunds to foreign partners,
+the IRS implement an automated crosscheck of withholding claims against
+available credits for partnerships with foreign partners.\25\
+ Implementing a comprehensive matching program to identify
+noncompliance among businesses would be difficult and could require
+some legislative changes, but it could identify significant pockets of
+noncompliance among business taxpayers.
+ regulations for granting extensions of time to file delay the receipt
+ of taxes due
+ Taxpayer payment compliance means that the amounts owed are paid on
+time. However, for decades, the IRS has allowed taxpayers with extended
+return filing due dates to send in late payments and pay only interest
+and small failure-to-pay penalties. Obtaining an extension of time to
+file a tax return does not extend the due date for tax payments, and
+failure-to-pay penalties are typically assessed when payments are made
+late, even if the taxpayer has received an extension.
+ In 1993, IRS management eliminated the requirement to pay all taxes
+by the payment due date in order to qualify for an extension of time to
+file. Once an extension has been granted, the taxpayer is exempt from a
+5 percent per month delinquency penalty\26\ for the period of the
+extension. TIGTA evaluated the impact of these rules on individual and
+corporate taxpayers and found that 88 percent of untimely tax payments
+for returns filed after April 15 were attributable to extended-due-date
+taxpayers.\27\ Corporations are required to pay estimates of their
+unpaid taxes in order to be granted extensions. However, TIGTA found
+corporate estimates to be highly flawed; in calendar year (CY) 1999
+alone, approximately 168,000 corporations received an extension, yet
+failed to pay $1.8 billion in taxes when they were due.
+ TIGTA projected that the tax gap from extension-related individual
+income tax underpayments would amount to approximately $46.3 billion in
+CY 2008, of which approximately $29.8 billion would not be paid until
+after the end of FY 2008. Due to the more complex nature of corporate
+taxes, similar figures were not available for corporations, although
+TIGTA estimated that by TY 2008, approximately $768 million in
+additional corporate taxes would be timely paid if TIGTA's
+recommendations were adopted. The IRS agreed to study TIGTA's
+recommendations.
+ uncoordinated nonfiler strategy
+ According to the IRS' February 2006 tax gap estimate, individual
+and estate tax non-filers accounted for about 8 percent of the total
+tax gap\28\ for TY 2001. Corporate income, estate and excise tax non-
+filing estimates were not available. The IRS study, together with
+previous IRS studies, indicates the tax gap for individual non-filers
+almost tripled from $9.8 billion in TY 1985 to about $27 billion\29\ in
+TY 2001.
+ In the past, the IRS has had several strategies for reducing the
+tax gap attributable to individual non-filers. The most recent National
+Non-filer Strategy, which was developed for FY 2001 through FY 2003,
+was made obsolete in July 2002 when the IRS was reorganized. Since
+then, each IRS business division has been responsible for tracking and
+monitoring completion of its own action items. Consequently, there has
+been no formal system in place for coordinating and tracking all
+actions across all IRS divisions.
+ In November 2005, TIGTA reported that as increasing voluntary
+compliance remains an organization-wide effort, the individual business
+divisions within the IRS have taken steps to improve efficiency in
+working non-filer cases.\30\ The actions taken by business divisions
+included:
+ Consolidation of the Automated Substitute for Return
+Program\31\ into one campus.\32\
+ Computer programming changes to enhance automated
+processing of returns created by the IRS for non-filing businesses, as
+authorized under Section 6020(b) of the Internal Revenue Code.\33\
+ Refinement of the processes for selection and modeling of
+non-filer cases each year through risk-based compliance approaches. The
+intention is to identify and select the most productive non-filer work
+and to apply appropriate compliance treatments to high-priority cases.
+ Increased outreach efforts by the SB/SE Division through
+its Taxpayer Education and Communication function.
+ An increase in the number of cases recommended for
+prosecution by the Criminal Investigation Division from 269 in FY 2001
+to 317 in FY 2004 (an increase of 17.8 percent).
+ However, these were not coordinated activities that were planned
+and controlled within the framework of a comprehensive strategy. Since
+FY 2001, each business division has independently directed its own non-
+filer activities. The IRS did not have a comprehensive, national non-
+filer strategy or an executive charged with overseeing each business
+division's non-filer efforts. TIGTA concluded that the IRS needed
+better coordination among its business divisions to ensure resources
+are being effectively used to bring non-filers into the tax system and
+ensure future compliance. The IRS also needed an organization-wide
+tracking system to monitor the progress of each business division's
+actions.
+ In addition to better coordination and an organization-wide
+tracking system, the IRS also needed measurable program goals. TIGTA
+suggested three measurable goals that could be established:
+ The number of returns secured from non-filers.
+ Total payments received.
+ The recidivism rate.
+ Without such measurable program goals, the IRS is unable to
+determine whether efforts to improve program efficiency and
+effectiveness are achieving desired results. The IRS agreed with all of
+TIGTA's recommendations. For FY 2006, the IRS developed its first
+comprehensive non-filer work plan.
+ limited tip program expansion
+ Historically, the IRS has been concerned about employees not
+reporting tips earned in industries in which tipping is customary. An
+IRS study showed that the amount of tip income reported in CY 1993 was
+less than one-half of the tip income, leaving over $9 billion
+unreported. To address this underreporting, the IRS developed the Tip
+Rate Determination and Education Program (the Tip Program), which is a
+voluntary compliance program originally designed for the food and
+beverage industry. It was modeled after the tip compliance agreement
+used by casinos in the former IRS Nevada District. The Tip Program
+offers employers multiple voluntary agreement options designed to
+provide nonburdensome methods for employers and employees to comply
+with tip reporting laws. The Tip Program was extended to the
+cosmetology industry in 1997 and the barber industry in 2000.
+ Since the Tip Program was introduced, voluntary compliance has
+increased significantly. In TY 1994, tip wages reported were $8.52
+billion. For TY 2004, the amount exceeded $19 billion. To date, over
+16,000 employers, representing over 47,000 individual establishments,
+have entered into tip agreements.
+ TIGTA reviewed the Tip Program and reported that the IRS has not
+consistently monitored the establishments in the food and beverage and
+cosmetology industries that had entered into tip agreements since FY
+2000 to determine if tip agreements secured actually increased tip
+income for these establishments.\34\ Additionally, due to the voluntary
+nature of participation and limited IRS resources, disparity with the
+number of tip agreements secured between various locations across the
+country is an issue.
+ In FY 2006, the IRS did not plan to actively solicit any new tip
+agreements beyond the gaming industry. The majority of FY 2006 Tip
+Program staffing was to be expended on soliciting and monitoring tip
+agreements with the gaming industry and on audits of casino employees.
+ Recognizing that the Tip Program has not reached some small
+businesses in the food and beverage industry, the IRS developed the
+Attributed Tip Income Program (ATIP). The Department of the Treasury
+approved the ATIP Revenue Procedure on July 11, 2006 and the ATIP
+Revenue Procedure was issued on July 28, 2006. The ATIP Revenue
+Procedure aims at increasing tip reporting for small businesses that
+report at least 20 percent of their tip income as charged tips. It
+should provide benefits similar to those of previous tip reporting
+agreements for employers and employees who report tips at or above a
+minimum level of gross receipts.
+ The IRS plans to test the ATIP with the food and beverage industry
+for three years. The ATIP Revenue Procedure was designed as a three-
+year pilot to provide time to assess its impact on tip reporting
+compliance. It will take up to this length of time to assess whether
+the ATIP Revenue Procedure has achieved its goal and to consider
+whether it is appropriate to expand and modify it for other industries.
+ TIGTA recommended several improvements to the IRS' Tip Program,
+including expansion to the cosmetology and taxi/limo industries. The
+Tip Program has not expanded to the taxi/limo industry. TIGTA estimated
+that the IRS could achieve $342 million in additional tax assessments
+over five years if it resumes soliciting new tip agreements with the
+cosmetology industry and expands the agreements to the taxi/limo
+industry.
+ The IRS agreed with TIGTA's recommendations, including
+consideration of expanding the Tip Program after evaluating the results
+of the ATIP with the food and beverage industry. If the ATIP proves
+successful, the IRS should develop similar procedures for specific
+industries, including the cosmetology and tax/limo industries.
+ unclear offer in compromise program requirements
+ The IRS has the authority to settle or compromise Federal tax
+liabilities by accepting less than full payment under certain
+circumstances. This is accomplished through an Offer in Compromise
+(OIC). An OIC is an agreement between a taxpayer and the Federal
+Government that settles a tax liability for payment of less than the
+full amount owed. Improving the methods for identifying candidates for
+the OIC could result in substantial benefits since taxpayers generally
+do remain in compliance when offers are accepted. However, between FYs
+1996 and 2005, only approximately 24 percent of the 1.1 million offers
+received by the IRS were accepted. Over this same 10-year period, 50
+percent either did not meet preconditions of filing an offer or were
+returned to the taxpayer (e.g., for missing information) during the
+offer evaluation.
+ Taxpayers who wish to participate in the program initiate an offer;
+however, this attracts offer applications from taxpayers who do not
+qualify for the program or taxpayers who do not fully understand the
+depth of financial verification the IRS conducts before accepting an
+offer. TIGTA analyzed offer dispositions and reported the following:
+\35\
+ A significant number of offer applications do not meet the
+preconditions of filing an offer. Those offers not meeting the
+preconditions are returned to the taxpayers (as not-processable
+returned offers) without further consideration. However, the IRS must
+evaluate the processability of all offers received except those based
+upon Doubt As to Liability.\36\
+ The IRS returns a substantial number of the offers
+determined to meet the preconditions to taxpayers during the offer
+evaluation process, without having fully evaluated the offers. This
+occurs, for example, when taxpayers no longer meet the preconditions of
+offer filing or did not provide information requested during the course
+of the offer evaluation. The IRS closes these cases as processable
+returns.
+ The high rates of returned offers occurred because requirements of
+the OIC program were not always clear to taxpayers. In addition,
+taxpayers had little to lose; if their offers were not accepted,
+collection of their taxes was, in effect, delayed. The OIC application
+fee implemented by the IRS during FY 2004 was intended to reduce the
+number of frivolous offers; however, this fee is not applicable to
+offers that are considered to be not-processable. Also, in light of the
+potential benefit of a fresh start, the fee may not be significant to
+some taxpayers.
+ The IRS effectively monitors accepted offers to ensure compliance
+with the terms of the offers. TIGTA reviewed a sample of 84 taxpayers
+whose offers were accepted during FY 1999. The IRS had identified
+noncompliance in 33 (39 percent) instances and took appropriate action
+to resolve the noncompliance. At the time of TIGTA's review, 96 percent
+of the 84 taxpayers were in compliance with the OIC payment terms and
+the five-year compliance requirements for filing their returns and
+paying the taxes due.
+ The IRS conducted a more comprehensive analysis\37\ of individual
+taxpayer compliance with filing and paying requirements for offers
+accepted during CYs 1995 through 2001. According to that analysis,
+approximately 80 percent of the individual taxpayers remained in
+compliance. This includes taxpayers who received the first collection
+notice but did not receive any subsequent notices.
+ Also, taxpayers remain in compliance after the five-year monitoring
+period. TIGTA's review of a sample of 245 taxpayers whose offers were
+accepted between October 1, 1994, and December 31, 1998, determined
+that 220 taxpayers (90 percent) were compliant with filing and payment
+requirements on tax periods subsequent to the five-year monitoring
+period.\38\
+ incomplete payroll tax assessments
+ Social Security and Medicare taxes are paid to the Department of
+the Treasury from two primary sources (1) payroll taxes consisting of
+amounts withheld from employees and matching amounts paid by employers
+and (2) self-employment taxes. Employers are generally required by law
+to withhold from their employees' incomes the employees' shares of
+Social Security and Medicare taxes. Included in the employer's
+calculation of these taxes are wages earned by the employees and tips
+received by the employees and reported to the employer. One-half of the
+calculated tax amount is withheld from the employee's wages and the
+employer pays a matching amount. Self-employed taxpayers must pay the
+entire amount of Social Security and Medicare taxes themselves in the
+form of self-employment taxes.
+ Social Security and Medicare Tax on Unreported Tip Income (Form
+4137) was originally designed to calculate only the Social Security and
+Medicare taxes owed on tips not reported to an employer, including any
+allocated tips\39\ shown on the Wage and Tax Statement (Form W-2).
+Forms 4137 are filed as attachments to U.S. Individual Income Tax
+Returns (Form 1040). Form 4137 has the effect of assessing only the
+worker's share of these taxes on the tip income. Although not
+originally developed for this purpose, Form 4137 is also used by
+certain taxpayers to report wages other than tips.\40\ These taxpayers
+include employees whose employers are granted Section 530\41\ relief
+and workers in dispute with their employers as to their employment
+status (employee or self-employed).
+ Because Form 4137 can be used to report wages, it is possible for
+some taxpayers to use the form inappropriately. This occurs when
+taxpayers who are truly independent contractors or self-employed
+individuals use the form to avoid paying their full share of Social
+Security and Medicare taxes. By using the form inappropriately,
+taxpayers reduce their share of these taxes by almost one-half. Self-
+Employment Tax (Schedule SE), not Form 4137, should be used by these
+taxpayers to pay their legitimate share of Social Security and Medicare
+taxes. Even when taxpayers rightfully report wages on Form 4137 because
+their employers have misclassified them as self-employed, Social
+Security and Medicare taxes are underpaid, in this case by the
+employers who failed to pay their share of the taxes.
+ TIGTA reviewed a statistical sample of 350 Forms 1040 with 357
+Forms 4137 attached (each Form 1040 can have up to two Forms 4137
+attached) processed in CY 2005 and determined that:
+ The IRS is not assessing the employer's share of Social
+Security and Medicare taxes on unreported tip income. TIGTA estimated
+$20 million in Social Security and Medicare taxes on tips were
+assessed, and the IRS could have assessed approximately $20 million
+more in Social Security and Medicare taxes on tips reported on Form
+4137.
+ The lack of a specific form or adequate written
+instructions increases the burden on taxpayers trying to report Social
+Security and Medicare taxes on wages. TIGTA estimated this burden
+increase affected about 377,850 taxpayers filing Forms 4137 during CY
+2005.
+ Many taxpayers appear to be reporting self-employment
+income as wages on Form 4137 to pay less Social Security and Medicare
+taxes. TIGTA estimated the IRS could have assessed approximately $88
+million more in Social Security and Medicare taxes on these wages each
+year.\42\
+ TIGTA recommend that the IRS revise Form 4137 to capture the data
+necessary to properly assess the employer's share of Social Security
+and Medicare taxes on unreported tip income, revise instructions
+regarding use of the form, and revise IRS training and procedures to
+reflect the changes. Using the revised Form 4137, the IRS should
+develop a compliance program to assess the employer's share of taxes on
+the unreported tip income. In addition, TIGTA recommended that the IRS
+create a new form to properly assess the worker's share of Social
+Security and Medicare taxes on wage income, provide instructions
+regarding use of the form, create IRS training and procedures regarding
+the form, and develop a compliance program to ensure the form is used
+properly and the appropriate amounts of Social Security and Medicare
+taxes are assessed.
+ As the tax collectors for the Social Security program, the IRS must
+help taxpayers meet their tax responsibilities by assessing and
+collecting the proper amount of employment taxes in this area. By
+making TIGTA's recommended changes, the IRS could assess an additional
+estimated $108 million\43\ in Social Security and Medicare taxes each
+year.
+ increase resources in the irs enforcement functions
+ Increased resources would help the IRS with its efforts to close
+the tax gap. However, in addition to increased resources, the IRS must
+also focus its efforts on ways to increase the economy, efficiency, and
+effectiveness of its operations, which would allow the IRS to devote
+more resources to its efforts to close the tax gap.
+ In September 1979, the GAO testified before Congress that ``The
+staggering amount of income, at least $135 billion, on which taxes are
+not paid is shocking.'' \44\ The GAO's testimony focused on the actions
+the government should take. The recommended actions included ensuring
+that the level of the IRS' audit activity did not decline.
+Unfortunately, while there have been periods of increases in compliance
+staffing, the IRS has also experienced declines over the years.
+ The combined Collection and Examination functions enforcement
+personnel \45\ declined from approximately 22,200 at the beginning of
+FY 1996 to 14,500 at the end of FY 2005, a 35 percent decrease. Even
+though the IRS has started to reverse many of the downward trends in
+compliance activities, the Collection and Examination functions'
+enforcement staffing level is not much higher than the 10-year low
+experienced in FY 2003. The President's FY 2008 proposed budget for
+enforcement is approximately 5.7 percent more than the FY 2007
+Continuing Resolution (CR) and requests an additional $246 million to
+expand enforcement activities. Without this additional funding, the IRS
+will not be positioned to increase enforcement activity above the level
+provided for in the FY 2007 CR. Additionally, the FY 2007 CR amount for
+enforcement is almost $48 million less than the FY 2006 funding.
+
+ Figure 4: Examination Staffing
+
+
+
+ Source: TIGTA analysis of IRS' Audit Information Management System
+Table 37
+
+ The numbers in the preceding chart represent the number of
+Examination function staff conducting examinations of tax returns,
+excluding management and overhead staff. During FY 2005, revenue agent
+and tax compliance officer (formerly referred to as tax auditor)
+staffing decreased, and the combined total is now nearly 35 percent
+lower than it was at the beginning of FY 1996.
+
+ Figure 5: Collection Function Staffing
+
+
+
+ Source: IRS Collection Reports
+
+ The numbers in the preceding chart represent the Collection field
+function staffing at the end of each FY 1995 through 2005. The number
+of revenue officers working assigned delinquent cases, excluding
+management and overhead staff, decreased slightly during FY 2005 and is
+nearly 38 percent fewer than at the start of FY 1996.
+ One effect of the lack of resources in the Collection function is
+that the Queue,\46\ has increased significantly since FY 1996. In FY
+1996, there were over 317,000 balance-due accounts worth $2.96 billion
+in the Queue. In FY 2004, these figures had increased to over 623,000
+balance-due accounts worth $21 billion. Additionally, the number of
+unfiled tax return accounts in the Queue increased from over 326,000 in
+FY 1996 to more than 838,000 in FY 2004.
+ The number of balance-due accounts ``shelved,'' or removed from the
+Queue altogether because of lower priority, has also increased
+significantly. In FY 1996, less than 8,000 of these balance due
+accounts were shelved, but in FY 2004, more than 1 million of these
+accounts were removed from inventory. From FY 2001 to FY 2004,
+approximately 5.4 million accounts with balance-due amounts totaling
+more than $22.9 billion were removed from Collection function inventory
+and shelved. Additionally, in FY 2004 alone, more than 2 million
+accounts with unfiled returns were shelved.
+ If increased funds for enforcement are provided to the IRS in
+upcoming budgets, the resource issues in the Enforcement functions will
+be addressed to some degree. In addition, use of Private Collection
+Agencies is allowing the IRS to collect more outstanding taxes. The IRS
+needs to be vigilant in overseeing these contractors to ensure that
+abuses do not occur. However, past experiences with lockbox thefts and
+insufficient contractor oversight provide valuable lessons toward
+reducing the likelihood of similar issues occurring when contracting
+out collection of tax debt.\47\
+ Overseeing the IRS' private debt-collection initiative is a top
+priority for TIGTA. TIGTA has coordinated with the IRS during the
+initial phases of implementation of this initiative by addressing
+security concerns with the contracts and protection of taxpayer rights
+and privacy, and by developing integrity and fraud awareness training
+for the contract employees. TIGTA has also developed a three-phase
+audit strategy to monitor this initiative and provide independent
+oversight.
+ There are many areas in which increased enforcement could address
+noncompliance. For example, a TIGTA audit found that a significant
+number of single shareholder owners of Subchapter S corporations
+avoided paying themselves salaries to avoid paying employment
+taxes.\48\ We estimated this would cost the Treasury approximately $60
+billion in employment taxes over five years. Under current law, the IRS
+must perform an examination of these taxpayers to determine reasonable
+compensation. To accomplish this on any scale would require significant
+compliance resources.
+ Additional resources might also help the IRS address the growth in
+fraudulent returns filed by incarcerated individuals. On June 29, 2005,
+I testified before the House Committee on Ways and Means' Subcommittee
+on Oversight about this growing problem.\49\ Although prisoner tax
+returns account for only 0.43 percent of all refund returns, they
+account for more than 15 percent of the fraudulent returns identified
+by the IRS. Refund fraud committed by prisoners is growing at an
+alarming rate. The number of fraudulent returns filed by prisoners and
+identified by the IRS' Criminal Investigation function grew from 4,300
+in processing year 2002 to more than 18,000 in processing year 2004 (a
+318 percent increase).\50\ During that same period, all fraudulent
+returns identified grew by just 45 percent.
+ The IRS' Fraud Detection Centers screen tax returns based on
+criteria that identify potentially fraudulent filings. The number of
+returns screened is based on these criteria and the available
+resources. During processing year 2004, Fraud Detection Centers
+screened about 36,000 of the approximately 455,000 refund returns
+identified as filed by prisoners. Resources were not available to
+screen the remaining 419,000 tax returns. Those returns claimed
+approximately $640 million in refunds and approximately $318 million of
+Earned Income Tax Credit (EITC). For those unscreened returns, over
+18,000 prisoners incarcerated during all of CY 2003 filed returns with
+a filing status as ``Single'' or ``Head of Household'' and claimed more
+than $19 million in EITC. Since prisoners were incarcerated for the
+entire year, they would have had neither eligible earned income to
+qualify for the EITC nor a qualified child who lived with them for more
+than six months.
+ The IRS also needs to focus efforts on improving the economy,
+efficiency and effectiveness of its operations. For example, in 2002,
+the IRS decided to reduce the number of its human resource positions
+and to consolidate some of its support operations. The IRS determined
+that 741 Full-Time Equivalents (FTE) \51\ could be eliminated from its
+headquarters and field offices. This was just one part of a series of
+initiatives the IRS intended to use to realign approximately 12,000
+positions to front-line tax professional positions over the following
+two years.
+ Through the use of early retirements, buyouts, normal attrition,
+placements elsewhere, and involuntary separations,\52\ the IRS was able
+to meet its desired reduction of human resource positions. However, the
+IRS does not track vacated and reassigned individual positions. While
+the other IRS initiatives involved in the effort to reassign 12,000
+positions to the front-line were not reviewed, TIGTA determined that
+from FY 2003 to FY 2005, the number of employees in mission critical
+positions\53\ increased by only 1,216, far short of the goal the IRS
+documented in its request to the OPM.\54\ TIGTA did not determine why
+the IRS did not achieve its goal.
+ In a plan submitted to the OPM, the IRS cited specific benefits
+that would be realized if it received authorization to offer early
+retirements and buyouts. The plan indicated that the IRS would save an
+average of $2,746 per employee. However, neither TIGTA nor the IRS
+could determine if savings were realized. The IRS' Human Capital Office
+did not prepare any analysis to determine the total costs of, or any
+savings associated with, offering the early retirements and buyouts.
+After the IRS was granted the early retirement and buyout authorities,
+it did not formally assign responsibility for overseeing the
+reorganization to any single office or individual. As a result, no one
+was responsible for monitoring the reorganization to ensure that the
+benefits outlined in the plan to the OPM, such as the realignment of
+staff to mission critical positions and cost savings, were actually
+achieved.
+ TIGTA recommended that the IRS monitor and report on the progress
+of any IRS reorganization initiative, including how effectively the IRS
+achieves proposed reductions or staffing realignments. TIGTA also
+recommended that the IRS identify and track all costs incurred and any
+savings realized and that the IRS follow all early retirement and
+buyout rules and regulations. The IRS agreed with TIGTA's
+recommendations.
+ The FY 2008 IRS proposed budget shows a net increase of $409.5
+million to enhance the IRS' infrastructure and invest in modernization.
+This increased investment in the IRS infrastructure is necessary to
+ensure the capability to administer the tax laws, collect the revenue
+and to better position the IRS to reduce the tax gap.
+ According to the IRS, the $409.5 million will allow the IRS to
+increase enforcement revenue by $699 million by 2010. The legislative
+proposals contained in the budget are projected to increase revenue by
+approximately $2.9 billion a year. At these levels, the tax gap will
+not be seriously reduced. Even if these initiatives indirectly
+increased compliance 10 fold, the tax gap would still exceed $300
+billion.
+ The budget also contains $41 million for non-NRP research. TIGTA
+believes that by employing enhanced research methods, the IRS will be
+better positioned to develop more effective and efficient solutions to
+non compliance, which should lead to reductions in the tax gap.
+ Although increasing enforcement is important in addressing the tax
+gap, the IRS must exercise great care not to emphasize enforcement at
+the expense of taxpayer rights and customer service. Customer service
+goals must be met and even improved upon, or people will lose
+confidence in the IRS' ability to meet part of its mission to provide
+America's taxpayers with quality service by helping them understand and
+meet their tax responsibilities.
+ conclusions
+ The IRS faces formidable challenges in completely and accurately
+estimating the tax gap and also in finding effective ways to remove
+institutional impediments and optimize its opportunities to increase
+voluntary compliance. Strategies have been identified to decrease the
+tax gap and improvements can be realized; however, sufficient resources
+are needed to ensure compliance with the tax laws.
+ Mr. Chairman and members of the committee, I appreciate the
+opportunity to share my views on the tax gap and the work TIGTA has
+done in this area. I would be happy to answer any questions you may
+have.
+ endnotes
+ \1\ Hearings on Bridging the Tax Gap Before the Senate Committee on
+Finance, 108th Cong. (2004) (statement of Mark Everson, Commissioner of
+Internal Revenue).
+ \2\ In January 2007, the Congressional Budget Office estimated that
+if today's laws and policies did not change, Federal spending would
+total $2.7 trillion in 2007 and revenues would total $2.5 trillion,
+resulting in a budget deficit of $172 billion. The additional funding
+that is likely to be needed to finance military operations in Iraq and
+Afghanistan would put that deficit in the vicinity of $200 billion.
+ \3\ This definition and the associated categories have evolved over
+time. IRS tax gap estimates in 1979 and 1983 included unpaid income
+taxes owed from illegal activities such as drug dealing and
+prostitution. That practice was discontinued in the 1988 estimate.
+Reasons given for excluding this category are: 1) the magnitude of the
+illegal sector is extremely difficult to estimate; and 2) the interest
+of the government is not to derive revenue from these activities, but
+to eliminate the activities altogether. Earlier tax gap figures such as
+those for 1965 and 1976 only included underreporting. While figures for
+more recent years (1992, 1995, 1998 and 2001) are more comparable, they
+are essentially the same estimates adjusted for the growth in the
+economy. Thus, comparing the figures does not show real growth in the
+tax gap. Lastly, comparisons among years are not done in constant
+dollars, so any real growth in the tax gap cannot be determined through
+this IRS data.
+ \4\ This category includes the lesser amounts of overclaimed
+credits and deductions.
+ \5\ Prior to the National Research Program, tax gap estimates were
+based on the results of the IRS Taxpayer Compliance Measurement Program
+(TCMP), which was a systematic program of tax return examinations
+conducted to facilitate the compilation of reliable compliance data.
+The last TCMP process involved TY 1988 individual income tax returns.
+ \6\ Some Concerns Remain About the Overall Confidence That Can Be
+Placed in Internal Revenue Service Tax Gap Projections (TIGTA Reference
+Number 2006-50-077, dated April 2006.
+ \7\ The IRS defines the gross tax gap as the difference between the
+estimated amount taxpayers owe and the amount they voluntarily and
+timely pay for a tax year. The portion of the gross tax gap that is not
+eventually collected is called the net tax gap.
+ \8\ This is the amount previously described in this report that was
+called for by Senator Baucus. See Some Concerns Remain About the
+Overall Confidence That Can Be Placed in Internal Revenue Service Tax
+Gap Projections (TIGTA Reference Number 2006-50-077, dated April 2006.
+ \9\ Payment of the $55 billion estimated by the IRS as late or
+enforced payments does not affect the VCR. However, it does affect the
+total amount collected by the IRS. Therefore, TIGTA developed the
+Eventual Compliance Rate term that shows the effect of these payments
+when coupled with additional voluntary and timely payments that do
+affect the VCR.
+ \10\ According to the IRS Oversight Board Web site
+(irsoversightboard.treas.gov), it is an ``independent body charged to
+oversee the IRS in its administration, management, conduct, direction,
+and supervision of the execution and application of the internal
+revenue laws and to provide experience, independence, and stability to
+the IRS so that it may move forward in a cogent, focused direction.''
+ \11\ The National Research Program Study of S Corporations Has Been
+Effectively Implemented, but Unnecessary Information Was Requested From
+Taxpayers (TIGTA Reference Number 2007-30-027, dated January 30, 2007).
+ \12\ An Evaluation of The Sample Design for The National Research
+Program Study of Subchapter S Corporations (Mathematica Policy Research
+Inc., dated May 12, 2005).
+ \13\ The Small Business/Self-Employed Division Is Beginning to
+Address Challenges That Affect Corporate Return Examination Coverage
+(TIGTA Reference Number 2005-30-130, dated August 2005).
+ \14\ Some Concerns Remain About the Overall Confidence That Can Be
+Placed in Internal Revenue Service Tax Gap Projections (TIGTA Reference
+Number 2006-50-077, dated April 2006).
+ \15\ The examination coverage rate is calculated by dividing the
+number of examined returns in a category by the number of returns in
+the same category filed in the previous year.
+ \16\ While Examinations of High-Income Taxpayers Have Increased,
+the Impact on Compliance May Be Limited (TIGTA Reference Number 2006-
+30-105, dated July 25, 2006).
+ \17\ Correspondence examinations are important compliance
+activities focusing on errors and examination issues that typically can
+be corrected by mail. They are conducted by sending the taxpayer a
+letter requesting verification of certain items on the tax return.
+These examinations are much more limited in scope than office and field
+examinations in which examiners meet face to face with taxpayers to
+verify information.
+ \18\ TIGTA selected the sampled cases from those completed in FY
+2004 to provide sufficient time for collection activities.
+ \19\ Margin of error + 5.05 percent.
+ \20\ Abatement occurs when the IRS reduces an assessment, in this
+case from reversing examination findings that had uncovered apparent
+misreported income, deductions, credits, exemptions, or other tax
+issues.
+ \21\ The IRS Should Evaluate the Feasibility of Using Available
+Documents to Verify Information Reported on Business Tax Returns (TIGTA
+Reference Number 2002-30-185, dated September 2002).
+ \22\ General Accounting Office, Pub. No. GAO-04-358, TAX
+ADMINISTRATION: Comparison of the Reported Tax Liabilities of Foreign-
+and U.S.-Controlled Corporations, 1996-2000 (2004).
+ \23\ The IRS receives over 30 different types of business
+information documents yearly. Most of these forms have a legal
+requirement for issuance to corporations. The three information
+documents most often issued to business nonfilers are Forms 1099-B
+(Proceeds from Broker and Barter Exchange Transactions), 1099-MISC
+(Miscellaneous Income), and 4789 (Currency Transaction Reports).
+ \24\ Internal Revenue Service, Report of BMF IRP Nonfilers for TY
+2000 (Corporations, Partnerships, and Trusts), Research Project
+02.08.003.03, SB/SE Research (July 2004).
+ \25\ Stronger Actions Are Needed to Ensure Partnerships Withhold
+and Pay Millions of Dollars in Taxes on Certain Income of Foreign
+Partners (TIGTA Reference Number 2001-30-084, dated June 2001);
+Compliance Opportunities Exist for the Internal Revenue Service to Use
+Foreign Source Income Data (TIGTA Reference Number 2005-30-101, dated
+July 2005).
+ \26\ The Delinquency Penalty is also known as the Failure-to-File
+Penalty, although it only applies to taxpayers who both file late and
+fail to pay all taxes by the tax payment deadline.
+ \27\ The Regulations for Granting Extensions of Time to File Are
+Delaying the Receipt of Billions of Tax Dollars and Creating
+Substantial Burden for Compliant Taxpayers (TIGTA Reference Number
+2003-30-162, dated August 2003); Changes to the Regulations for
+Granting Extensions of Time to File Corporate Returns Are Needed to
+Alleviate Significant Problems With Administering the Tax Laws (TIGTA
+Reference Number 2004-30-106, dated June 2004).
+ \28\ The non-filer tax gap is the dollar amount of taxes not paid
+timely on delinquent and non-filed returns.
+ \29\ The estimated tax gap of $27 billion in TY 2001 was comprised
+of $25 billion for individual income tax non-filing and $2 billion
+associated with estate and gift tax. The estimate is developed from
+other tax gap data sources and is not derived from direct data sources.
+So, the growth in the dollar amounts in the estimate track the
+increases in other tax gap estimates.
+ \30\ The Internal Revenue Service Needs a Coordinated National
+Strategy to Better Address an Estimated $30 Billion Tax Gap Due to Non-
+filers (TIGTA Reference Number 2006-30-006, dated November 2005).
+ \31\ The Automated Substitute for Return Program focuses on high-
+income taxpayers who have not filed individual income tax returns but
+appear to owe significant income tax liabilities based on available
+Information Reporting Program information.
+ \32\ The campuses are the data processing arm of the IRS. They
+process paper and electronic submissions, correct errors, and forward
+data to the Computing Centers for analysis and posting to taxpayer
+accounts.
+ \33\ Internal Revenue Code Section 6020(b) (2005) provides the IRS
+with the authority to prepare and process certain returns for a non-
+filing business taxpayer if the taxpayer appears to be liable for the
+return, the person required to file the return does not file it, and
+attempts to secure the return have failed.
+ \34\ Additional Enhancements Could Improve Tax Compliance of
+Employees Who Receive Tips (TIGTA Reference Number 2006-30-132, dated
+September 15, 2006).
+ \35\ The Offer in Compromise Program Is Beneficial but Needs to Be
+Used More Efficiently in the Collection of Taxes (TIGTA Reference
+Number 2006-30-100, dated July 2006).
+ \36\ Offers submitted on the basis of Doubt As to Liability
+represent disputes over the existence or amount of the tax liability
+and apply to the specific tax periods that are in question.
+ \37\ IRS Offers in Compromise Program, Analysis of Various Aspects
+of the OIC Program, September 2004.
+ \38\ The number of tax years for which taxpayers were compliant
+after completion of the offer monitoring period varies based on the
+offer acceptance date. At the time of TIGTA's review, taxpayers in the
+sample had been compliant from one to five tax years after the offer
+monitoring period.
+ \39\ When the amount of tips reported by an employee of a large
+food or beverage establishment is less than 8 percent (or an approved
+lower rate) of the gross receipts, other than nonallocable receipts,
+for the given period, the employer is required to allocate tips to the
+employee. If the employee is reporting more than the 8 percent, there
+would be no allocated tip amount.
+ \40\ For tax purposes, tips are generally considered to be wages.
+However, for purposes of this report, wages are defined as compensation
+other than tips paid to an employee.
+ \41\ Revenue Act of 1978, Pub. L. No. 95-600, Section 530, 92 Stat.
+2763, 2885-86 (current version at Internal Revenue Code Section 3401
+note).
+ \42\ Draft Report: Social Security and Medicare Taxes Are Not Being
+Properly Assessed on Some Tips and Certain Types of Wage Income (TIGTA
+Audit Number 200630005, dated February 13, 2007).
+ \43\ This is comprised of approximately $20 million in Social
+Security and Medicare taxes on tips and approximately $88 million in
+Social Security and Medicare taxes on wages.
+ \44\ Statement of Richard L. Fogel, Associate Director, General
+Government Division before the Subcommittee on Commerce, Consumer and
+Monetary Affairs of the House Committee on Government Operations,
+September 6, 1979.
+ \45\ Collection and Examination function staff located in field
+offices, excluding management and overhead staff.
+ \46\ An automated holding file for unassigned inventory of lower
+priority delinquent cases that the Collection function does not have
+enough resources to immediately assign for contact.
+ \47\ Federal Requirements Need Strengthening at Lockbox Banks to
+Better Protect Taxpayer Payments and Safeguard Taxpayer Information
+(TIGTA Reference Number 2002-30-055, dated February 2002); Insufficient
+Contractor Oversight Put Data and Equipment at Risk, (TIGTA Reference
+Number 2004-20-063, dated March 2004).
+ \48\ Actions Are Needed to Eliminate Inequities in the Employment
+Tax Liabilities of Sole Proprietorships and Single-Shareholder S
+Corporations (TIGTA Reference Number 2005-30-080, dated May 2005).
+ \49\ Hearing to Examine Tax Fraud Committed by Prison Inmates,
+109th Cong. (2005) (statement of J. Russell George, Inspector General)
+and The Internal Revenue Service Needs to Do More to Stop the Millions
+of Dollars in Fraudulent Refunds Paid to Prisoners (TIGTA Reference
+Number. 2005-10-164, dated September 2005).
+ \50\ Processing year refers to the year in which taxpayers file
+their returns at the Submission Processing Sites. Generally, returns
+for 2003 were processed during 2004, although returns for older years
+were also processed.
+ \51\ A measure of labor hours in which 1 FTE is equal to 8 hours
+multiplied by the number of compensable days in a particular fiscal
+year. For FY 2005, 1 FTE was equal to 2,088 hours. For purposes of this
+report, we are using the terms FTEs, employees, and positions
+synonymously.
+ \52\ An involuntary separation is any separation against the will
+and without the consent of the employee, other than for misconduct or
+delinquency. The most common cause for an involuntary separation is a
+reduction in force.
+ \53\ The IRS uses the term mission critical occupations to define
+occupations deemed critical to front-line operations as well as those
+occupations that provide direct support to front-line operations.
+Mission critical positions are specific positions within those
+occupations.
+ \54\ Staff Reductions in Support Operations Did Not Result in
+Significant Increases in Mission Critical Positions (TIGTA Reference
+Number 2006-10-175, dated September 28, 2006).
+
+ Chairman Spratt. Thank you very much.
+ Ms. Olson.
+
+ STATEMENT OF NINA E. OLSON
+
+ Ms. Olson. Thank you, Mr. Chairman, Mr. Ryan and members of
+the committee. Thank you for inviting me to testify today about
+the tax gap. I believe there are three principal steps that can
+be taken to address this gap.
+ First, Congress should simplify the Tax Code. Corporate tax
+shelters and abusive schemes pursued by individual taxpayers
+exist solely because there are ambiguities and complex laws
+that they can exploit. At the same time, tax law complexity
+confounds taxpayers and is responsible for the significant
+majority of taxpayer reporting errors.
+ Second, Congress should consider expanding third-party
+information reporting and, in certain situations, withholding
+requirements. IRS data show a direct correlation between third-
+party information reporting by payers of income and tax
+reporting compliance by the recipients of income. Where tax is
+withheld from income, taxpayer reporting compliance is above 99
+percent. Where income is reported to the IRS, such as interest
+on dividends on a Form 1099, taxpayer reporting compliance is
+above 95 percent. Where income is not reported to the IRS,
+taxpayer reporting compliance drops below 50 percent. Expanded
+information reporting would reduce the tax gap significantly,
+and backup withholding can be used where taxpayers repeatedly
+underpay their taxes, but both must be done with care to avoid
+placing undue burdens on the payers of income tax. I discuss
+this issue in more detail in my written statement.
+ I will devote the rest of my testimony today to my third
+point because it falls squarely within your committee's
+jurisdiction.
+ I believe the rules by which the IRS is funded need to be
+fixed so that the IRS receives adequate resources to collect
+taxes. As a starting point, we should keep in mind that the IRS
+functions as the Accounts Receivable Department of the Federal
+Government. On a budget of about $10.6 billion, the IRS
+currently collects about $2.24 trillion a year. That translates
+to an average return on investment, or ROI, of about 210 to 1,
+but the congressional budget rules do not recognize the IRS'
+unique role as the revenue generator for the Federal
+Government. Rather, the budget rules treat spending for the IRS
+exactly the same way they treat spending for all other Federal
+programs. The IRS is placed within a category of spending
+programs that is subject to a spending ceiling, and the
+relevant appropriations subcommittee then allocates dollars
+between the IRS and the other agencies. Thus, the IRS competes
+dollar for dollar against classic spending programs for
+resources, and there is no explicit mechanism in the budget
+process for recognizing the revenue that the IRS collects.
+These procedures make little sense. If the Federal Government
+were a private company, its management clearly would fund the
+Accounts Receivable Department at a level that it believed
+would maximize the company's bottom line.
+ Since the IRS is not a private company, maximizing the
+bottom line is not and in and of itself should not be an
+appropriate goal, but the public sector analogy should be to
+maximize tax compliance, especially voluntary tax compliance,
+with due regard for protecting taxpayer rights and minimizing
+taxpayer burden. No one seems to dispute this premise, but the
+current budget rules treat the IRS as a classic spending
+program, and a change in the rules will be required if the IRS
+is to be treated the way a company would treat its Accounts
+Receivable Department.
+ In the last 3 years, the administration has proposed and
+Congress has considered a mechanism known as ``program
+integrity caps'' to give the IRS additional funding. While
+these cap adjustments are better than nothing, they suffer from
+two flaws. First, they do not address the fundamental problem I
+am raising, which is that decisions about IRS funding levels
+should be made on the basis of maximizing tax compliance, not
+fitting within a cap. Second, the program integrity caps have
+generally been used to provide additional funding for tax law
+enforcement without providing any additional funding for
+taxpayer service. This is happening because the IRS can
+document that it collected $48.7 billion through direct
+enforcement actions last year, and budget crunchers can compare
+this figure with the dollars spent on enforcement to compute a
+positive return on investment.
+ The problem with this approach is that $48.7 billion is
+only 2 percent of the revenue that the IRS collected. The
+remaining 98 percent of revenues were collected through some
+combination of taxpayer service and the indirect or deterrent
+effects of enforcement. The IRS current strategic plan is based
+on the formula of taxpayer service plus enforcement equals
+compliance, but there are no data that show whether there is a
+greater need at this time for service or enforcement. In the
+absence of such data, I think it is misguided to provide
+disproportionate increases to enforcement simply because we
+have measurement tools to compute the ROI with respect to 2
+percent of our collections.
+ In my written statement, I describe some recent and
+expected reductions in taxpayer service and the negative
+effects these reductions could have on compliance.
+ In conclusion, I urge the committee to consider making
+changes to the budget rules to provide funding for the IRS at a
+level designed to maximize tax compliance and that does not
+short-change taxpayer service as taxpayer service may provide
+an equal or greater ROI than enforcement. In focusing on what
+the IRS can do to reduce the tax gap, I suggest that giving the
+IRS the tools to do the job in conjunction with proper
+oversight is the single most helpful step Congress can take.
+ Thank you.
+ [The prepared statement of Nina E. Olson follows:]
+
+ Prepared Statement of Nina E. Olson, National Taxpayer Advocate
+
+ Mr. Chairman, Ranking Member Ryan, and distinguished Members of the
+Committee, thank you for inviting me to testify today about ``The IRS
+and the Tax Gap.''\1\ In the National Taxpayer Advocate's 2006 Annual
+Report to Congress, issued last month, I made a recommendation to
+address the tax gap that falls squarely within the jurisdiction of the
+Budget Committee--namely, to change the budget rules by which IRS
+funding decisions are made to provide funding at whatever level will
+maximize tax compliance, with due regard for protecting taxpayer rights
+and minimizing taxpayer burden. I will describe my proposal in more
+detail below after first summarizing the components of the tax gap and
+describing my perspective on the best strategies to address it.
+
+ I. Why the Tax Gap Matters
+
+ In my 2006 report, I designated the tax gap as the second most
+serious problem facing taxpayers (after the alternative minimum tax).
+From a taxpayer perspective, I am deeply concerned that compliant
+taxpayers are paying a great deal of money to subsidize noncompliance
+by others. Using data from the IRS's 2001 National Research Program
+study, if we divide the estimated 2001 net tax gap of $290 billion\2\
+by the estimated 108,209,000 households that existed in the United
+States in that year\3\ we see that each household was effectively
+assessed an average ``surtax'' of about $2,680 to subsidize
+noncompliance.\4\ That is an extraordinary burden to ask our nation's
+compliant taxpayers to bear every year, and it is imperative that we
+take steps to reduce that burden.\5\
+ Noncompliance has a corrosive effect on tax compliance. If
+compliant taxpayers believe that everyone else is paying his or her
+fair share, they are likely to remain compliant. But no one wants to
+feel like a ``tax chump.'' If compliant taxpayers feel like they are
+overpaying, some will reach a point where they resent it and stop
+complying or comply at a lower level.
+ In other words, there is a degree to which compliance breeds more
+compliance and noncompliance breeds more noncompliance. That is largely
+why each additional dollar the IRS collects is thought to increase
+federal revenue by substantially more than a dollar. Greater
+compliance--whether brought about through taxpayer service or
+enforcement--can pay for itself many times over.
+
+ II. Overview of the Primary Causes of the Tax Gap
+
+ Last year, the IRS substantially updated its tax gap estimates as a
+result of a set of audits it performed on individual income tax returns
+filed for 2001. The results of the audits show that withholding and
+third-party information reporting are the key drivers of tax
+compliance. Reporting compliance rates are about 99 percent on wages
+subject to withholding and third-party information reporting, about 96
+percent on income subject to full third-party information reporting
+(e.g., interest and dividends)--yet less than 50 percent on income not
+subject to third-party information reporting.\6\
+ At the same time, the complexity of the tax code is a driver of
+noncompliance because it creates loopholes that aggressive taxpayers
+can exploit. Corporate tax shelters and abusive schemes pursued by
+individual taxpayers exist largely because of ambiguities in the law.
+Tax-law or procedural complexity is also responsible for the
+significant majority of taxpayer reporting errors.\7\
+ Finally, the lack of funding provided to the IRS to maximize
+taxpayer service (especially outreach and education) and enforcement
+(where the IRS was only able to conduct face-to-face audits of one out
+of every 435 taxpayers last year) prevents the IRS from maximizing tax
+compliance.\8\
+
+ III. Broad Strategies to Address the Tax Gap
+
+ Broadly speaking, I have advocated three strategies for closing the
+tax gap: (1) fundamental tax simplification, with an emphasis on making
+economic transactions more transparent; (2) expanded third-party
+information reporting and, in certain situations, tax withholding on
+non-wage income; and (3) a more robust IRS compliance program that
+appropriately balances taxpayer service and enforcement.
+ a. tax simplification
+ In my annual reports to Congress, I have highlighted numerous
+examples of tax law complexity and described the consequences of that
+complexity for taxpayers and tax administration. For taxpayers seeking
+to comply with the law, complexity presents a huge obstacle. To cite a
+few examples, the alternative minimum tax (AMT) and the earned income
+tax credit (EITC) affect millions of taxpayers yet present substantial
+compliance burdens. The sheer number of alternative incentives that the
+tax code provides for saving for education and retirement baffles many
+taxpayers, including sophisticated taxpayers.
+ For taxpayers seeking to exploit loopholes, complexity presents
+countless opportunities. Many law firms, accounting firms, and
+investment banking firms have made tens of millions of dollars by
+scouring the Code for ambiguities and then advising taxpayers to enter
+into transactions, with differing levels of business purpose or
+economic substance, to take advantage of those ambiguities. The IRS
+devotes significant resources to identifying these transactions and
+challenging them, where appropriate, but many are legitimate under
+existing law and many more fall into a grey area.
+ A simpler tax code could reduce these administrative challenges
+enormously.
+ Moreover, traditional economic analysis focuses on the goals of
+equity and efficiency in writing the tax laws. To those, I would add
+transparency. To the extent we can revise the Code to provide greater
+transparency of payments of income without imposing undue burden on
+taxpayers, the higher compliance rates associated with third-party
+information reporting can be more readily achieved in a broader array
+of transactions.
+ b. expanded third-party information reporting
+ Expanding third-party information reporting would clearly improve
+compliance, but we must be realistic in taking into account the burden
+third-party information reporting imposes on payors of income. If our
+sole objective were to maximize the amount of tax revenue, we could
+simply require that anyone making a taxable payment to another person
+report the payment to the IRS. But requiring everyone making a taxable
+payment to file a report with the government would impose more burden
+than most of us would be willing to bear. No one wants to be obligated
+to file a document with the IRS every time he takes a cab ride, has
+someone mow his lawn, or calls a plumber to fix a broken faucet.
+ To address the tax gap, we should begin by identifying various
+categories of transactions that currently are not subject to
+information reporting and determine, on a case-by-case basis, whether
+the benefits of requiring reporting outweigh the burdens such a
+requirement would impose. In many cases, we will ultimately decide that
+it is inappropriate to impose a reporting requirement. But in some
+cases, we may decide that requiring reporting is appropriate.
+ To cite one example, I recommended in my 2005 Annual Report to
+Congress that Congress consider requiring broker-dealers to track and
+report their customer's cost-basis in stocks and mutual funds when
+sales are made. Under existing rules, brokers are required to file a
+Form 1099-B (Proceeds from Broker and Barter Exchange Transactions)
+with the IRS whenever a customer sells a security. However, the
+reporting rules only require the broker to report the gross proceeds
+the customer receives upon the sale. The broker does not have to report
+the customer's cost basis in the security. That omission is significant
+because a taxpayer's gain or loss on the sale of a security is measured
+by the excess of gross proceeds over cost basis. Thus, the absence of
+cost-basis reporting provides an opportunity for noncompliance that the
+IRS rarely will detect without an audit.
+ The absence of a requirement that brokers track and report
+customers' cost basis in securities has two consequences. First, it
+often imposes significant compliance burdens on taxpayers who may not
+have kept track of their cost basis. To illustrate, a taxpayer who has
+held AT&T stock since the 1980s has received shares in more than a
+dozen companies over the years, and on each such occasion, the
+taxpayer's cost basis had to be split between his existing holding and
+the spun-off company. Similarly, most mutual fund customers elect to
+have dividend and capital gain distributions automatically reinvested,
+and the customer's aggregate basis in a mutual fund holding changes
+upon each such distribution. If taxpayers don't have complete records,
+they will be unable to determine or substantiate their basis in many
+instances. We recommended requiring brokers to track and report cost
+basis primarily because it would make compliance much easier for honest
+taxpayers.
+ But the second consequence of the absence of cost basis reporting
+is that it affords less honest taxpayers with significant opportunities
+to overstate their basis and therefore understate their tax
+liabilities. Reliable estimates of the amount of underreporting in this
+area are difficult to come by, but two professors have sized the
+problem at about $25 billion a year.\9\ IRS officials studying the NRP
+data believe the revenue loss is substantially lower, but they agree
+that the level of underreporting reaches into the billions of
+dollars.\10\ We have spoken with representatives of the brokerage
+industry and believe on balance that the revenue benefits of requiring
+brokers to track and report cost basis exceed the burdens the
+requirement would impose.
+ I am pleased that bills were introduced in both the House and the
+Senate last year to implement our proposal, and I am pleased that the
+Treasury Department has included it among the revenue proposals it sent
+to Congress earlier this month. Bipartisan bills have been introduced
+in the new Congress by Congressmen Rahm Emanuel and Walter Jones in the
+House and by Senators Evan Bayh, Tom Coburn and 11 other original co-
+sponsors in the Senate. I strongly urge Congress to enact this measure.
+ Another example: Under current law, an individual taxpayer can
+escape information reporting by incorporating. This is true even if the
+taxpayer is performing the same services that would be subject to Form
+1099-MISC (Miscellaneous Income) reporting if the taxpayer were
+conducting business as an unincorporated entity.
+ For Form 1099-MISC information reporting purposes, I believe there
+should be no distinction between taxpayers providing the same services
+for compensation merely because one taxpayer has incorporated and
+another has not. There are, of course, many valid reasons for choosing
+to conduct business as a corporation, but information-reporting
+avoidance should not be such a reason. Corporate taxpayers who intend
+to comply with the tax law should have no objections to receiving a
+Form 1099-MISC for compensation for services performed or to IRS
+awareness of this compensation. Thus, we recommend that corporate
+taxpayers (including Subchapter S corporations) be subject to Form
+1099-MISC reporting requirements to the same extent that unincorporated
+businesses are today.
+ We also recommend that Congress consider requiring information
+reporting on gross proceeds from sales conducted on Internet auction
+and sales sites. As with current rules governing Form 1099 reporting,
+such reports could be subject to a de minimis annual exemption (say,
+$600). One recent study found that 700,000 Americans reported that eBay
+sales constitute their primary or secondary source of income.\11\ The
+IRS must have the tools needed to address under-reporting of this
+income.
+ My office has made a number of proposals to reduce the tax gap both
+through more third-party information reporting and through other
+methods. The Exhibits that follow my statement summarize our main
+recommendations.
+ c. a more robust irs compliance program that appropriately balances
+ taxpayer service and enforcement measures
+ The IRS can do more--much more--to improve tax compliance.
+ Despite a finding by a leading IRS researcher that the direct and
+indirect benefits of IRS's preparing tax returns for low income
+taxpayers pays for itself many times over,\12\ the IRS has reduced by
+about half the number of tax returns it helps low-income taxpayers
+prepare in its walk-in sites.\13\ Despite the challenges individuals
+who start small businesses face in learning for the first time about
+the legal requirements they face as employers (including the payroll
+responsibilities of income and employment tax withholding, paying over
+tax to the IRS, reporting to the IRS, and reporting to the employee),
+the IRS has substantially reduced its field outreach operation.\14\
+Despite the number of taxpayers in certain states with taxable income
+from farming activities, the IRS has apparently declared questions
+about farm income and expenses ``out of scope'' for IRS walk-in sites
+in those areas.\15\
+ On the enforcement side, the IRS is currently conducting face-to-
+face audits of only about one out of every 435 tax returns.\16\ It does
+not have the resources to pursue a significant percentage of its
+accounts receivable. And the private debt collection initiative, a
+controversial program that is projected to raise only about $1.4
+billion over the next 10 years,\17\ results from the IRS's lack of
+resources to pursue these cases itself.
+
+IV. A Proposal to Revise the Congressional Budget Rules to Improve IRS
+ Funding Decisions
+
+ a. overview of the problem of irs underfunding
+ The Internal Revenue Service is effectively the Accounts Receivable
+Department of the United States Government. On a budget of about $10.6
+billion,\18\ the IRS currently collects about $2.24 trillion a
+year.\19\ That translates to an average return-on-investment (ROI) of
+about 210:1.\20\
+ Rather than recognizing the IRS's unique role as the revenue
+generator for the federal government, however, the congressional budget
+rules treat spending for the IRS exactly the same way they treat
+spending for all other federal agencies.
+ The current budget procedures work essentially as follows: Early
+each year, a spending ceiling is established for a category of programs
+that in recent years included the Department of Transportation, the
+Department of the Treasury (of which the IRS is a part), the Department
+of Housing and Urban Development, the Judiciary, the District of
+Columbia, and independent federal agencies.\21\ The House and Senate
+Appropriations subcommittees with jurisdiction over this grouping of
+federal programs must apportion the total number of dollars it receives
+among them. If more funding was provided for transportation programs,
+for example, less funding was available for the IRS. Thus, the IRS
+competes dollar-for-dollar against many other federal programs for
+resources.
+ These procedures make little sense. The IRS collects about 96
+percent of all federal revenue.\22\ The more revenue the IRS collects,
+the more revenue Congress may spend on other programs or may use to cut
+taxes or reduce the deficit. The less revenue the IRS collects, the
+less revenue Congress has available for other purposes.
+ If the federal government were a private company, its management
+clearly would fund the Accounts Receivable Department at a level that
+it believed would maximize the company's bottom line.
+ Since the IRS is not a private company, maximizing the bottom line
+is not--in and of itself--an appropriate goal. But the public sector
+analogue should be to maximize tax compliance, especially voluntary
+compliance, with due regard for protecting taxpayer rights and
+minimizing taxpayer burden. If the IRS were given more resources,
+studies show the IRS could collect substantially more revenue.
+ Former IRS Commissioner Charles Rossotti has written:
+ When I talked to business friends about my job at the IRS, they
+were always surprised when I said that the most intractable part of the
+job, by far, was dealing with the IRS budget. The reaction was usually
+``Why should that be a problem? If you need a little money to bring in
+a lot of money, why wouldn't you be able to get it?'' \23\
+ Yet obtaining a little extra money to bring in a lot of extra money
+remains an intractable challenge for the IRS. Over the past few years,
+Congress has focused increasing attention on the ``tax gap''--the
+difference between taxes owed and taxes paid. As part of this
+discussion, it should be recognized that the IRS currently suffers from
+a ``resources gap,'' and the IRS's lack of resources is a significant
+impediment to its ability to help close the tax gap and thereby reduce
+the federal budget deficit.\24\
+ b. the consequences of underfunding the irs
+ The failure to fund the IRS at appropriate levels leads to two sets
+of consequences. First, the IRS lacks the resources to collect a
+significant amount of unpaid tax, resulting in a larger tax gap and a
+larger budget deficit. Second, the lack of resources often leads the
+IRS to take steps that are, in my judgment, unwise from the standpoint
+of tax compliance and taxpayer rights.
+1. Failure to Collect Unpaid Taxes
+ In his final report to the IRS Oversight Board in 2002, former
+Commissioner Rossotti presented a discussion titled ``Winning the
+Battle but Losing the War'' that detailed the consequences of the lack
+of adequate funding for the IRS. He identified 11 specific areas in
+which the IRS lacked resources to do its job, including taxpayer
+service, collection of known tax debts, identification and collection
+of tax from non-filers, identification and collection of tax from
+underreported income, and noncompliance in the tax-exempt sector.
+ Commissioner Rossotti provided estimates of the revenue cost in
+each of the 11 areas based on IRS research data. In the aggregate, the
+data indicated that the IRS lacked the resources to handle cases worth
+about $29.9 billion each year. It placed the additional funding the
+agency would have needed to handle those cases at about $2.2
+billion.\25\
+ Significantly, this estimate reflects only the potential direct
+revenue gains. Economists have estimated that the indirect effects of
+an examination on voluntary compliance provide further revenue gains.
+While the indirect revenue effects cannot be precisely quantified, two
+of the more prominent studies in the area suggest the indirect revenue
+gains are between six and 12 times the amount of the proposed
+adjustment.\26\
+ I want to emphasize that the existing modeling in this area is not
+especially accurate, and estimates of both the direct and indirect
+effects of IRS programs vary considerably. As I will discuss below, the
+IRS needs to develop better modeling to produce more accurate return-
+on-investment estimates. But I also want to emphasize that almost all
+studies show that, within reasonable limits, each additional dollar
+appropriated to the IRS should generate substantially more than an
+additional dollar in additional federal revenue assuming the funding is
+wisely spent.
+2. Bad Results
+ a. Outsourcing Tax Collection
+ In the same report, former Commissioner Rossotti reported the IRS
+was receiving sufficient resources to work only 40 percent of some 4.5
+million accounts receivable cases each year. IRS research estimated
+that with an additional $296.4 million, the agency could collect $9.47
+billion.\27\ That translates to a return on investment of 32:1. Among
+collection cases handled solely through phone calls, the IRS has
+estimated an ROI of about 13:1.\28\
+ Because Congress has not provided IRS with sufficient funding to
+work these accounts, the Administration requested the authority to
+outsource the collection of certain tax debts to private collection
+agencies. Congress granted the requested authority in 2004,\29\ and the
+IRS began to send cases to private debt collectors in September of
+2006.
+ Under the terms of the program, the IRS is paying out commissions
+of up to 25 percent of each dollar collected to the private collection
+agencies. The IRS is also bearing significant additional costs to
+create, maintain, and oversee the program.\30\
+ Internal IRS estimates show that the IRS, if given the funding,
+could generate a substantially higher ROI than private contractors
+receiving commissions of nearly 25 percent can produce. For each dollar
+a PCA collects, the IRS will receive about 75 cents and the PCA will
+keep about 25 cents, resulting in an ROI of, at best, about 3:1. The
+significant administrative costs the IRS is incurring to run the
+program, including the opportunity costs of pulling experienced IRS
+personnel off higher dollar work to assist with this initiative, reduce
+the ROI further. Despite supporting the use of private debt collectors
+because of IRS resource limitations, IRS Commissioner Mark Everson has
+repeatedly acknowledged that IRS employees could collect unpaid taxes
+more cheaply and efficiently.\31\
+ The result of underfunding the IRS in this area is that the
+government is not maximizing its revenue collection and the risk of
+taxpayer rights violations has been heightened due to the use as
+collectors of non-governmental employees who will receive only limited
+taxpayer-rights training.\32\
+ b. Neglect of Important Taxpayer Service Programs
+ The IRS has long acknowledged that taxpayer service plays a
+significant role in promoting tax compliance. In fact, its current
+strategic plan is based on the principle: ``Service + Enforcement =
+Compliance.'' \33\ Yet two examples illustrate the neglect of important
+services that likely is resulting in a higher tax gap.
+ Tax Return Preparation. The IRS historically has prepared tax
+returns for low income taxpayers at its walk-in sites (called
+``Taxpayer Assistance Centers,'' or ``TACs ''). Low income taxpayers
+generally qualify for the earned income tax credit (EITC), which is a
+refundable credit that caps out at $4,536 in 2006. Studies show that
+the average overclaim rate for EITC benefits is between 27 percent and
+32 percent.\34\ IRS personnel who prepare tax returns are trained to
+ask questions that minimize the likelihood of EITC overclaims and thus
+can save the government hundreds of dollars per return. Yet to free up
+resources for other program initiatives, the IRS has substantially
+reduced return preparation at its TACs. The number of tax returns it
+prepared dropped from 665,868 in FY 2003 to a projected 305,000 in FY
+2006.
+ IRS data for tax years 2002 through 2004 suggest that EITC returns
+prepared by IRS TACs may be significantly more compliant than self-
+prepared and commercially prepared returns. Discriminant Function (DIF)
+scores\35\ for self-prepared returns were between 21 and 26 percent
+higher than returns prepared at the TACs and between 25 and 31 percent
+higher than returns prepared by commercial preparers.\36\
+ These findings are corroborated by examination results for EITC
+returns for these tax years. As compared with TAC-prepared returns,
+average audit assessments among EITC returns for tax years 2002--2004
+ranged from about $640 to $1,300 higher for self-prepared returns and
+from about $820 to $1,300 higher for commercially prepared returns.\37\
+Similarly, a study conducted in 1996 that examined the relationship
+between IRS return preparation and compliance over a ten-year period
+showed that an increase in the number of returns prepared by the IRS
+correlates with improvements in compliance among filers of individual
+returns.\38\
+ Small Business Outreach. IRS data show that self-employed taxpayers
+account for the largest chunk of the tax gap and indicate that the tax
+compliance rate for self-employed taxpayers runs at about 43
+percent.\39\ Much of the underreporting is deliberate, but some is not.
+For example, many small businesses are started by individuals who lack
+detailed knowledge of the tax laws and do not have the resources to
+hire tax attorneys or accountants. When they hire a few workers, they
+often do not realize that they are assuming tax reporting, tax
+withholding, and tax payment obligations, and they often do not
+understand enough about the details of complying with the requirements
+to do so with reasonable effort.
+ After the IRS Restructuring and Reform Act of 1998, the IRS
+developed a function known as Taxpayer Education and Communications, or
+``TEC.'' TEC was the IRS's outreach arm to small businesses to try to
+educate them about the complexity of their tax obligations. For 2002,
+TEC was named the Small Business Administration's agency of the year
+for what the SBA called its outstanding progress in creating an
+effective education and compliance assistance program for small
+business and self-employed taxpayers.\40\ Yet in the name of achieving
+``efficiencies,'' TEC was ``realigned'' in February 2005 through a
+merger with other outreach functions and redesignated as ``Stakeholder
+Liaison.'' Prior to the realignment, TEC had 536 employees. After the
+realignment, Stakeholder Liaison staffing included 219 employees.\41\
+In my view, the reduction in TEC staffing will reduce tax compliance
+and place a greater burden on IRS enforcement personnel.
+ I cite these examples to make two points. First, although I
+disagree with certain decisions the IRS has made, the failure to
+provide the IRS with adequate resources to collect taxes has forced the
+IRS to cut corners in places where corners should not have to be cut.
+Second, I cite the examples of tax return preparation and TEC to
+underscore the important role taxpayer service plays in promoting tax
+compliance. As I discuss below, additional funding for the IRS should
+be provided in a balanced manner. The revenue derived from direct
+enforcement actions may be easier to measure, but the effects of
+taxpayer service may be equally significant and perhaps more
+significant.
+ c. recommendations
+1. Congress should consider revising its budget rules in a manner that
+ allows the budget and appropriations committees to make a
+ judgment about the answer to the question: ``What level of
+ funding will maximize tax compliance, particularly voluntary
+ compliance, with our nation's tax laws, with due regard for
+ protecting taxpayer rights and minimizing taxpayer burden?''
+ and then set the IRS funding level accordingly, without regard
+ to spending caps.
+ This recommendation, in my view, boils down to simple common sense.
+Just as a business could not survive if it did not seek to maximize
+revenue collection, the federal government has less revenue to spend
+(or use to reduce the deficit or cut taxes) if it fails to optimize tax
+collection. Taxes are truly the lifeblood of government, for without
+tax revenue, there would be no government programs. As the National
+Taxpayer Advocate, I will be the first to raise objections if the
+pursuit of revenue proceeds without due regard for protecting taxpayer
+rights and minimizing taxpayer burden. But the existing budget rules,
+which pit the revenue center of the government in direct competition
+with cost centers and do not have a mechanism for explicitly taking
+into account the revenue the IRS is likely to generate, are not
+logical. The congressional budget rules are the one piece of the tax
+gap over which your committee has direct control, and I urge you to
+consider improvements to the process.
+ One way to implement the proposal I have outlined would be to keep
+the IRS within its existing appropriation bill but break that bill into
+two parts--one providing a funding cap for the IRS and one providing a
+funding cap for all other programs under that bill. The budget
+committees would set the funding cap for the IRS.\42\ The
+appropriations committees then would retain discretion to appropriate
+funds at the cap or at a lesser level and to provide direction
+concerning how the funds are to be spent. The rules should explicitly
+authorize the committees to set the cap at a level that they believe
+will maximize tax compliance, especially voluntary compliance, with due
+regard for the protection of taxpayer rights and minimization of
+taxpayer burden. In setting the cap and making funding decisions, the
+budget and appropriations committees would consider the President's
+budget request as well as input from the tax-writing committees, the
+Congressional Budget Office, the Joint Committee on Taxation, the
+Government Accountability Office, the Congressional Research Service
+and any other office that they choose to consult to obtain revenue
+estimates and guidance concerning the likely return on IRS spending.
+ We offer this approach only as an illustration of a way to
+implement the general principle we are recommending. We do not have
+sufficient expertise in the congressional budget process to craft a
+comprehensive solution, and we are cognizant of the important roles
+that the budget committees, the appropriations committees, and the tax-
+writing committees play. Our overriding recommendation is simply that
+the committees of jurisdiction collaborate to devise and implement
+procedures that reflect the general principles we have outlined.
+ We note that in each of the past three years, the Administration
+has proposed a contingent budgetary mechanism known as a ``program
+integrity cap'' in an attempt to provide the IRS with additional
+funding. Under this mechanism, additional funding for tax-law
+enforcement would have been provided if, but only if, Congress agreed
+to fund at least the existing base of enforcement activities. The
+Senate has endorsed the concept, but the House did not go along.
+Although there may have been subtle differences in detail, a similar
+approach was used in FY 1995 to give the IRS additional funding.\43\
+Because the Budget and Appropriations committees have become familiar
+with this mechanism, it may be a viable way to channel additional
+funding to the IRS.
+ However, we have two concerns about the use of program integrity
+caps. First, the mechanism operates simply to mitigate the effects of
+what we are arguing is a flawed conceptual approach to funding the IRS.
+It would not alter the existing framework under which the IRS competes
+for funding against other government programs, and it would not peg
+future IRS funding decisions to the goal of maximizing tax compliance.
+I believe a change to the process along the lines of what I am
+recommending would be far preferable in the long run and would be more
+likely to result in a consistent ramp-up in funding year-over-year.
+Second, the mechanism in the past has been proposed solely to boost
+enforcement spending (i.e., the additional funding could be used only
+for tax-law enforcement and would only be provided if Congress agreed
+to fund at least the existing base of enforcement activities). As
+discussed below in more detail, tax compliance is a function not only
+of enforcement but also of taxpayer service, and it is important to
+maintain a balanced approach between the two. If program integrity caps
+are used in the future, we urge that consideration be given to
+providing additional funding for taxpayer service as well as
+enforcement.
+2. In allocating IRS resources, Congress should keep in mind that tax
+ compliance is a function of both high quality taxpayer service
+ and effective tax-law enforcement, and it is essential that the
+ IRS continue to maintain a balanced approach to improving tax
+ compliance.
+ As noted, recent attempts to give the IRS additional funding beyond
+the levels provided under the spending caps have focused exclusively on
+providing additional funding for enforcement activities. That is so
+largely because the direct ROI resulting from enforcement actions is
+somewhat susceptible to measurement, while the deterrent effect of
+enforcement actions and the effect of taxpayer service are too
+amorphous to quantify. However, it is important to emphasize that
+direct enforcement revenue in FY 2006 came to only $48.7 billion, or 2
+percent, of total IRS tax collections of $2.24 trillion.\44\ The
+remaining 98 percent of IRS tax collections resulted from a combination
+of taxpayer service programs and the indirect (i.e., deterrent) effect
+of IRS enforcement actions. To make budgeting decisions by striving to
+maximize the 2 percent of collections without grappling adequately with
+what is required to maximize the remaining 98 percent of collections is
+a bit like letting the tail wag the dog.
+ The Administration's FY 2008 budget request acknowledges this
+dilemma. It states: ``The IRS cannot currently measure either the
+impact of deterrence or service, but they are positive.'' \45\ In fact,
+there are no reliable data that show whether the IRS would achieve a
+greater ROI if it spends additional funds on service or on enforcement.
+In the absence of such data, one might think the government would err
+on the side of assisting taxpayers in complying with the law rather
+than disproportionately ramping up enforcement. If Congress continues
+to provide the IRS with greater increases for enforcement each year
+simply because the ROI of direct enforcement can be quantified, the
+cumulative effect of those increases over time will be to relatively
+shift the IRS away from taxpayer service and toward tougher
+enforcement--with no evidence that such a shift will increase revenues
+and with the possibility that such a shift might decrease revenues.
+ As former Commissioner Rossotti has written:
+ Some critics argue that the IRS should solve its budget problem by
+reallocating resources from customer support to enforcement. In the
+IRS, customer support means answering letters, phone calls, and visits
+from taxpayers who are trying to pay the taxes they owe. Apart from the
+justifiable outrage it causes among honest taxpayers, I have never
+understood why anyone would think it is good business to fail to answer
+a phone call from someone who owed you money.\46\
+ Because of recent budget pressures and additional service
+obligations brought about by the late passage of the tax extenders bill
+and the administration of telephone excise tax refunds, the IRS is
+actually expecting that it will reduce the percentage of phone calls it
+answers from the mid-80s to the mid-70s this year, if not lower. The
+IRS has been working hard on a five-year taxpayer service strategic
+plan, developed in response to a Senate Appropriations directive in FY
+2006. This plan was developed in collaboration with my office and the
+IRS Oversight Board. It is an excellent product, and it describes well
+how the IRS can improve its ability to meet taxpayer service needs.
+ I urge you to keep in mind that taxpayer service provides a
+positive ROI, and the ROI of taxpayer service may even exceed the ROI
+of enforcement. The budget rules should be crafted to ensure that the
+ability to score direct revenue gains resulting from enforcement does
+not drive results that may be counterproductive. Perhaps the
+``scorekeepers'' could use a blended ROI of taxpayer service and
+enforcement actions to support a balanced approach to additional IRS
+funding.
+ Many aspects of taxpayer service are akin to a wholesale operation
+that reaches groups of taxpayers (e.g., outreach and education), while
+IRS audits constitute a far more costly retail operation that requires
+individual taxpayer contact. The IRS should pursue a balanced approach
+to tax compliance that puts priority emphasis on improving IRS outreach
+and education efforts, while reserving targeted enforcement actions to
+combat clear abuses and send a message to all taxpayers that
+noncompliance has consequences.\47\
+3. Congress should provide increases in IRS personnel funding at a
+ steady but gradual pace, perhaps two percent to three percent a
+ year above inflation. We do not think the IRS can ramp up its
+ staffing more quickly without encountering significant
+ transitional difficulties. However, Congress should consider
+ providing more rapid funding increases for technology and
+ research improvements, as the transitional challenges of
+ absorbing additional resources are probably less significant in
+ these areas and the potential exists to generate substantial
+ productivity gains.
+ In former Commissioner Charles Rossotti's final report to the IRS
+Oversight Board in 2002, he described the serious total staffing
+shortages the IRS was facing. He stated that the IRS needed ``steady
+growth in staff in the range of 2 percent per year.''\48\ The context
+shows he was discussing real increases (i.e., increases above those
+required to maintain current services).
+ At first blush, real annual staff growth of two percent might
+appear to be an extremely limited request, but the IRS faces
+significant challenges in adding and training staff. Examination and
+collection procedures, in particular, are complex, as is the underlying
+tax law, and experienced personnel must be pulled off revenue-producing
+priority cases to provide extensive training to new hires. Moreover,
+new hires generally have lower productivity rates and require
+significantly closer supervision than experienced employees to ensure
+they do not take incorrect actions, including actions that impair or
+violate taxpayer rights.
+ However, the IRS probably can absorb more rapid funding increases
+in technology and research, both of which have the potential to
+increase IRS productivity substantially.
+ Better technology would allow the IRS to achieve significant
+efficiencies in a broad range of taxpayer service and enforcement
+areas. For example, it would allow the IRS to offer taxpayers a wider
+range of e-filing options to increase the number of taxpayers who file
+their returns electronically rather than on paper (which would save IRS
+the cost of manually entering data from the roughly 64 million
+individual income tax returns it received on paper in FY 2005),\49\ and
+it would allow the IRS to expand its document-matching capabilities,
+which tend to produce high returns on investment because automated
+processes are relatively inexpensive to operate and maintain.
+ Better research would allow the IRS to assess the most cost
+effective ways of meeting taxpayer service needs and to target its
+limited enforcement resources to maximize its return on investment. We
+discuss the importance of obtaining more accurate ROI estimates for the
+IRS's major categories of work under Recommendation #4 below.
+ In the past, congressional support for additional IRS funding has
+come in fits and starts. It will not be helpful to provide too much
+additional funding immediately. It also will not be helpful to provide
+additional funding for a year or two and then to change direction. To
+maximize the IRS's ability to do its job, the IRS needs to receive
+gradual but steady real increases in its total funding every year for
+at least the next five to ten years.
+4. To assist Congress in performing its oversight responsibilities and
+ determining the appropriate IRS funding level in future years,
+ Congress should require the IRS to provide annual or semiannual
+ reports detailing IRS's progress in handling all significant
+ categories of work, including the known workload, the
+ percentage of the known workload the IRS is able to handle and
+ the percentage of the known workload the IRS is not able to
+ handle, the additional resources the IRS would require to
+ perform the additional work, and the likely return-on-
+ investment of performing that work.\50\
+ In this connection, Congress should consider directing the IRS to
+undertake additional research studies, perhaps utilizing the expertise
+of outside experts, to improve the accuracy of its ROI estimates for
+various categories of work, especially taxpayer service and the
+indirect effect of enforcement actions, including the downstream costs
+of such work. Improved methods should also be developed to verify,
+retrospectively, the marginal ROI that the IRS has achieved for each
+category of work.
+ To provide Congress with meaningful information, the IRS will need
+to conduct more research to improve the accuracy of its ROI
+calculations. As we have noted above, direct enforcement revenue
+constitutes only about two percent of the revenue the IRS collects.
+Ninety-eight percent of the revenue the IRS collects derives from its
+taxpayer service programs and the indirect deterrent effect of its
+enforcement activities. Yet the IRS currently does not have adequate
+data on which to make accurate estimates of the ROI of its various
+categories of work, including taxpayer service programs and the
+indirect effect of its enforcement activities as a whole and broken
+down by their key components. Developing better data should be made a
+priority objective. Moreover, ROI estimates should include costs
+relating to the downstream consequences--such as increased phone calls
+or correspondence, Appeals conferences, and Taxpayer Advocate Service
+cases--of the various categories of IRS work.
+ We acknowledge that developing reasonably accurate modeling is a
+significant challenge and will require a commitment of resources.
+Nonetheless, we have recommended in the past and continue to believe
+that this information will aid the IRS substantially in making resource
+allocation decisions and will provide Members of Congress with
+additional information on which to base future funding decisions.\51\
+
+ V. Conclusion
+
+ The tax gap is a serious problem because it deprives the government
+of revenue it needs and it creates inequities between compliant
+taxpayers and noncompliant taxpayers. There is no silver bullet that
+will eliminate the tax gap. I believe significant progress can be made,
+however, by following an approach that emphasizes fundamental tax
+simplification, expanded third-party information reporting, and a more
+robust IRS compliance program.
+ The Budget Committee has the jurisdiction to change the existing
+budget rules that, in my view, have unreasonably constrained IRS
+funding and limited the agency's ability to maximize tax compliance. I
+urge the Committee to use its jurisdiction to improve the process by
+which IRS funding decisions are made.
+
+ VI. EXHIBIT A: CASH ECONOMY--ADMINISTRATIVE RECOMMENDATIONS
+------------------------------------------------------------------------
+ Recommendation Summary Reason
+------------------------------------------------------------------------
+ 1 Expand use of Send self- Self-employed taxpayers who
+ Electronic employed want to comply with their
+ Federal Tax taxpayers estimated tax payment
+ Payment System a letter obligations sometimes fail
+ (EFTPS) to remind because they have
+ them when difficulty estimating
+ estimated income, remembering oddly
+ tax spaced payment dates (April
+ payments 15, June 15, September 15
+ are due and January 15), and saving
+ and offer enough money each quarter.
+ the When they fail to pay
+ option of enough estimated taxes,
+ paying they are more likely to
+ electroni understate their liability.
+ cally, by
+ phone or
+ via
+ automatic
+ monthly
+ (or
+ biweekly)
+ withdrawa
+ ls from
+ the
+ taxpayer'
+ s bank
+ account
+ free of
+ charge.------------------------------------------------------------------------
+ 2 Revise Form 1040, Include This revision would
+ Schedule C separate encourage taxpayers to
+ lines report income even if it is
+ showing not subject to information
+ (1) the reporting. Taxpayers are
+ amount of more likely to report
+ income income that is reported to
+ reported the IRS by third parties on
+ on Forms information returns, such
+ 1099 and as Forms 1099. Some
+ (2) other taxpayers appear to believe
+ income that income not reported on
+ not information returns is not
+ reported subject to tax or at least
+ on Forms that the IRS will not
+ 1099. notice if they do not
+ report it. Separating out
+ gross receipts on the
+ income tax form as we
+ propose would likely
+ improve compliance by
+ emphasizing to taxpayers
+ that income not reported on
+ information returns is
+ still subject to tax. It
+ may also suggest to them
+ that the IRS will notice if
+ they do not report any
+ other income. Another
+ benefit of such a revision
+ is that it would allow the
+ IRS to match the income
+ reported on Schedule C with
+ income reported on Forms
+ 1099 more easily.------------------------------------------------------------------------
+ 3 Revise business Include These two questions would
+ income tax two encourage taxpayers to
+ return forms questions comply with information
+ : (1) Did reporting requirements.
+ you make They would also suggest to
+ any taxpayers that the IRS is
+ payments looking at information
+ over $600 reporting compliance and
+ in the that there is additional
+ aggregate risk to avoiding the
+ during information reporting
+ the year requirements by paying
+ to any contractors ``under the
+ unincorpo table.'' Payments reported
+ rated to the IRS on information
+ trade or returns are much more
+ business? likely to be reported on
+ (2) If the payee's income tax
+ yes, did return. Thus, increased
+ you file information reporting
+ all compliance would cause
+ required contractors (payees) to
+ Forms report more of their
+ 1099? income.------------------------------------------------------------------------
+ 4 Implement more Encourage Research shows that
+ voluntary taxpayers taxpayers are most
+ withholding to enter compliant in paying taxes
+ agreements into on income subject to
+ voluntary withholding. Unlike
+ withholdi payments to employees,
+ ng payments to independent
+ agreement contractors are generally
+ s by not subject to withholding.
+ agreeing Businesses sometimes have
+ not to difficulty determining
+ challenge whether service providers
+ the should be classified as
+ classific employees or independent
+ ation of contractors and the IRS
+ workers often challenges such
+ who are a determinations. These
+ party to agreements could reduce
+ such an both underreporting by
+ agreement payees and the controversy
+ . associated with worker
+ (Statutor classification.
+ y
+ authority
+ exists
+ under IRC
+ sss
+ 3402(p)(3
+ ), but
+ the IRS
+ may need
+ to work
+ with the
+ Treasury
+ Departmen
+ t to
+ issue
+ regulatio
+ ns before
+ it can
+ use its
+ authority
+ and may
+ prefer
+ additiona
+ l
+ legislati
+ ve
+ authority
+ .)------------------------------------------------------------------------
+ 5 Institute backup Require By the time a payor receives
+ withholding more mandatory a backup withholding notice
+ quickly backup from the IRS, the payee
+ withholdi (service provider) may no
+ ng to longer be receiving
+ begin payments from the service
+ more recipient. Thus, the IRS
+ quickly has lost the opportunity
+ when for backup withholding. For
+ taxpayers additional information see
+ provide National Taxpayer Advocate
+ an 2005 Annual Report to
+ invalid Congress 238-248 (MSP:
+ TIN to Limited Scope of Backup
+ the Withholding Rules).
+ payor.------------------------------------------------------------------------
+ 6 Use more Use more The IRS currently uses
+ available of the information from Forms 8300
+ information informati to identify returns that
+ on may have unreported income.
+ available It also receives and uses
+ from state income tax audit
+ state and reports as well as sales
+ local tax records, which a cross-
+ governmen functional team has
+ ts as concluded could be used
+ well as more consistently and
+ informati effectively. States and
+ on from localities also impose
+ Forms business license taxes or
+ 8300 require different classes
+ (Report of licenses, which are
+ of Cash sometimes based on gross
+ Payments receipts. Such information
+ Over may be useful in detecting
+ $10,000 unreported income. Local
+ Received property taxes are also
+ in a based on the value of real
+ Trade or and personal property.
+ Business) Taxpayers whose property
+ when holdings are
+ selecting disproportionately large in
+ returns comparison to the income
+ for audit reported on their federal
+ and when income tax returns may be
+ auditing underreporting their
+ them. income. The IRS could
+ combine all of this
+ information, perhaps in
+ conjunction with the UI-DIF
+ (or to improve it), for
+ selecting returns for audit
+ and auditing them.------------------------------------------------------------------------
+ 7 Establish local A local Because tax compliance
+ compliance planning trends and norms are
+ planning organizat frequently local, it will
+ organizations ion could be difficult for the IRS to
+ work to effectively address them
+ identify without local feedback
+ local about how its strategies
+ complianc are affecting taxpayers in
+ e a given community. The IRS
+ challenge needs such information and
+ s, direct feedback so that it can
+ the IRS's adjust its strategy to
+ local effectively address local
+ response, compliance issues. If
+ and noncompliance is so
+ measure commonplace in a local
+ its market that the price of a
+ effective good or service does not
+ ness. reflect tax compliance
+ costs, suppliers may be
+ unable to both pay their
+ taxes and compete. However,
+ if the IRS could motivate a
+ critical number of
+ businesses in a given
+ market to report their
+ income, then the market
+ price for their goods or
+ services would increase so
+ that businesses could both
+ compete and pay their
+ taxes. As the IRS's
+ activity starts to affect
+ market prices, research
+ suggests it could produce a
+ dramatic increase in
+ voluntary compliance in the
+ local cash economy as it
+ changes local norms. A
+ national cash economy
+ program office could
+ replicate successful local
+ strategies nationwide.------------------------------------------------------------------------
+ 8 Create a cash The cash The EITC Program Office
+ economy program economy coordinates EITC related
+ office program activities, measures the
+ office results of its initiatives
+ would and takes responsibility
+ coordinat for ensuring that the
+ e program works as intended,
+ research, even though it relies on
+ outreach, many other parts of the IRS
+ and to achieve its goals. As
+ complianc with EITC initiatives,
+ e efforts responsibility for
+ aimed at initiatives that may
+ improving improve income reporting by
+ income cash economy participants
+ reporting is dispersed throughout the
+ complianc IRS. Nobody at the IRS with
+ e among the authority to coordinate
+ cash research, outreach, and
+ economy compliance efforts takes
+ participa primary responsibility for
+ nts, as reducing underreporting
+ the EITC among cash-economy
+ program participants. As a result,
+ office the IRS is not as effective
+ has done as it could be in improving
+ with compliance among cash-
+ respect economy participants. For
+ to EITC example, a cash-economy
+ complianc program office could work
+ e. with IRS Research to
+ measure the impact of
+ initiatives to reduce
+ underreporting by cash-
+ economy participants. TIGTA
+ and GAO generally agree
+ that such measures would
+ help the IRS to reduce the
+ tax gap. A cash-economy
+ program office could also
+ be justified on the basis
+ that the EITC has a program
+ office and the amount of
+ the tax gap attributable to
+ cash-economy participants
+ dwarfs the amount of the
+ tax gap attributable to
+ EITC claimants.------------------------------------------------------------------------
+ 9 Educate cash Educate In addition to the
+ economy cash satisfaction of obeying the
+ participants economy law and avoiding potential
+ participa civil and criminal
+ nts about penalties and interest
+ the charges, such benefits may
+ benefits include, for example, an
+ of increase in retirement
+ reporting benefits; disability
+ their benefits; survivors
+ income benefits; Medicare
+ and study benefits; access to credit;
+ the earned income tax credits;
+ effect of and the ability to gain
+ such admission to the U.S. or a
+ efforts visa-status adjustment for
+ to family members or
+ determine employees. The IRS could
+ whether test this concept by
+ they are educating taxpayers through
+ cost outreach and various media
+ effective targeting cash-economy
+ . participants in communities
+ where compliance is low and
+ such benefits are not well
+ known. Researchers have
+ suggested that publicity
+ about such benefits, when
+ combined with other
+ enforcement initiatives,
+ may significantly improve
+ reporting compliance in a
+ given community.------------------------------------------------------------------------
+ 10 Obtain more and Sponsor IRS researchers have
+ better research research previously estimated that
+ to the indirect effect of an
+ identify average examination on
+ the most voluntary compliance is
+ effective between six and 12 times
+ use of the amount of the proposed
+ IRS adjustment. However, not
+ resources all audits have the same
+ after effect on compliance. A
+ taking dollar spent auditing cash
+ into economy industries with
+ account high rates of noncompliance
+ the may have a very different
+ direct effect than a dollar spent
+ and auditing corporate tax
+ indirect shelters. On the other
+ effects hand, a dollar spent on
+ of IRS making it easier for
+ activitie taxpayers to comply with
+ s on tax their tax obligations, for
+ revenue. example by revising forms,
+ improving EFTPS, and
+ answering tax law
+ questions, has a positive
+ indirect effect on
+ compliance. The IRS does
+ not have current research
+ to show where the next
+ dollar is best spent. We do
+ not even know whether the
+ next dollar is better spent
+ on enforcement or taxpayer
+ service. Thus, in the
+ absence of better research,
+ the IRS cannot make fully
+ informed resource-
+ allocation decisions.
+------------------------------------------------------------------------
+
+
+ VII. EXHIBIT B: CASH ECONOMY--LEGISLATIVE RECOMMENDATIONS
+------------------------------------------------------------------------
+ Recommendation Summary Reason
+------------------------------------------------------------------------
+ 1 Amend IRC sss Amend IRC sss 3406 to Withholding is
+ 3406 to create a three- not required on
+ encourage pronged reporting and payments to non-
+ compliance in payment system that employees, and
+ certain cash- encourages compliance skirting
+ economy by: information
+ transactions Instituting reporting
+ backup withholding on requirements for
+ payments to taxpayers payments to
+ who have demonstrated independent
+ ``substantial contractors is
+ noncompliance''; easy and
+ Releasing relatively
+ backup withholding on painless.
+ payments to taxpayers Payors wishing to
+ who become comply with
+ ``substantially their
+ compliant'' and who information-
+ agree to schedule and reporting
+ make future payments obligations may
+ through the be reporting
+ Electronic Funds payments to
+ Transfer Payment independent
+ System (EFTPS); contractors who
+ Providing have supplied
+ that payors will not invalid TINs.
+ be required to Under existing
+ institute backup provisions,
+ withholding on these payors may
+ taxpayers who present not know that a
+ payors with a valid payee's TIN is
+ IRS ``Compliance invalid until
+ Certificate''.Current several payments
+ withholding and have been made.
+ information-reporting Furthermore, the
+ provisions do not motivation to
+ adequately capture comply with
+ income from current Forms
+ transactions in the 1099-MISC and W-
+ cash economy. 9 requirements
+ Unreported payments is not
+ include: particularly
+ Deliberate compelling. The
+ ``under the table'' toll charge for
+ cash payments. a missing or
+ Payments incorrect Form
+ that are reported 1099-MISC or W-9
+ with an invalid TIN is $50.
+ or payee/TIN
+ mismatch.
+ Payments
+ subject to
+ information reporting
+ that are not
+ reported.------------------------------------------------------------------------
+ 2 Amend IRC sss Current law requires Making estimated
+ 6302(h) to IRS to use EFTPS to tax payments can
+ require IRS to collect at least 94 be cumbersome,
+ promote percent of depository particularly for
+ estimated tax taxes. In contrast, self-employed
+ payments the IRS received less taxpayers. EFTPS
+ through EFTPS. than one percent of has the
+ Amend IRC sss all estimated tax potential to
+ 6302(h) to payments through alleviate some
+ require IRS to EFTPS in tax year estimated tax
+ promote 2004. problems because
+ estimated tax it is convenient
+ payments and relatively
+ through EFTPS easy to use.
+ and establish a Moreover,
+ goal of taxpayers can
+ collecting at use EFTPS to
+ least 75 schedule
+ percent of all automatic
+ estimated tax estimated
+ payment dollars payments.
+ through EFTPS
+ by FY 2012.------------------------------------------------------------------------
+ 3 Amend IRC sss Amend IRC sss Some independent
+ 3402(p)(3) to 3402(p)(3) to contractors may
+ specifically specifically wish to enter
+ authorize authorize voluntary into withholding
+ voluntary withholding between agreements with
+ withholding independent their payors. It
+ between contactors and is currently
+ independent service-recipients unclear,
+ contractors and (as defined in IRC however, whether
+ service- sss 6041A(a)(1)), and statutory
+ recipients. to specify that authority exists
+ independent to enter into
+ contractors who enter such agreements.
+ into voluntary IRC sss
+ withholding 3402(p)(3) is
+ agreements with payor silent on
+ service recipients voluntary
+ will be treated as withholding
+ employees only to the agreements in
+ extent specified in the independent
+ the agreements, and contractor/payor
+ allow such context. Section
+ independent 3402(p)(3) is
+ contractors to the only section
+ continue to deduct under which a
+ ordinary and voluntary
+ necessary business withholding
+ expenses under IRC agreement
+ sss 162(a). between a payor
+ and an
+ independent
+ contractor would
+ be permitted.------------------------------------------------------------------------
+ 4 Amend IRC sss Taxpayers report 96 For Form 1099-
+ 6041A to percent of income MISC information-
+ require third- from transactions reporting
+ party subject to purposes, there
+ information information should be no
+ reporting for reporting. The distinction
+ applicable percentage of between
+ payments to reported income taxpayers who
+ corporations. decreases are incorporated
+ Amend IRC sss significantly, and those who
+ 6041A to however, when are not.
+ require third- transactions are not
+ party subject to
+ information information
+ reporting for reporting. Under
+ applicable current law, an
+ payments to individual taxpayer
+ corporations, can escape Form 1099-
+ as defined in MISC information-
+ IRC sss reporting by
+ 7701(2)(3) incorporating. A
+ (including taxpayer attempting
+ corporations to avoid 1099-MISC
+ electing to be reporting need only
+ taxed under include in its
+ subchapter S of business name an
+ the Internal indication that it is
+ Revenue Code). doing business as a
+ corporation in order
+ to release the
+ service-recipient
+ from the IRC sss
+ 6041A reporting
+ requirements.
+------------------------------------------------------------------------
+
+
+ VIII. EXHIBIT C: REQUIRING BROKERS TO TRACK AND REPORT COST BASIS--
+ LEGISLATIVE RECOMMENDATION
+------------------------------------------------------------------------
+ Recommendation Summary Reason
+------------------------------------------------------------------------
+ 1 Amend IRC sss When This proposal also
+ 6045(a) to transactions helps taxpayers (and
+ authorize the are subject that was our primary
+ Secretary of the to reason for proposing
+ Treasury to information it.) Today, more
+ require brokers to reporting to Americans own stocks
+ track and report the or mutual funds than
+ cost basis in government, ever before. Most
+ connection with tax mutual fund investors
+ the sale of mutual compliance elect to have their
+ funds and stocks. is generally dividend and capital
+ Amend IRC sss very high-- gain distributions
+ 6045(a) to well over 90 automatically
+ authorize the percent. The reinvested in their
+ Secretary of the opportunity funds, causing their
+ Treasury to for aggregate adjusted
+ prescribe noncomplianc bases to change upon
+ regulations that e upon sale each such
+ require brokers to of mutual reinvestment. Many
+ report information funds or mutual fund companies
+ not only regarding stocks is assist their investors
+ gross proceeds but considerable by keeping track of
+ also regarding under adjusted basis, but
+ adjusted basis in current law, some do not. With
+ connection with because the regard to stock
+ the sale of mutual taxpayer's investors, most
+ funds and stocks. basis is not brokers keep track of
+ To facilitate reported to purchases their
+ accurate basis the customers make, but
+ reporting, government. they do not
+ financial necessarily update
+ institutions that their basis records to
+ hold mutual funds reflect stock splits,
+ or stocks for spin-offs, and other
+ customers should, corporate
+ when a customer restructurings. While
+ transfers assets taxpayers are properly
+ to a successor required to keep
+ financial adequate records to
+ institution, be substantiate their tax
+ required to reporting, the reality
+ provide the is that some investors
+ customer's hold stocks or mutual
+ adjusted basis in funds for decades, and
+ the transferred it is simply not
+ mutual fund and realistic to expect
+ stock holdings to that all taxpayers
+ the successor will keep perfect
+ financial records for long
+ institution. periods of time.
+------------------------------------------------------------------------
+
+ endnotes
+ \1\ The views expressed herein are solely those of the National
+Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
+Secretary of the Treasury and reports to the Commissioner of Internal
+Revenue. The statute establishing the position directs the National
+Taxpayer Advocate to present an independent taxpayer perspective that
+does not necessarily reflect the position of the IRS, the Treasury
+Department, or the Office of Management and Budget. Accordingly,
+Congressional testimony requested from the National Taxpayer Advocate
+is not submitted to the IRS, the Treasury Department, or the Office of
+Management and Budget for prior approval. However, we have provided
+courtesy copies of this statement to both the IRS and the Treasury
+Department in advance of this hearing.
+ \2\ See IRS News Release 2006-28, IRS Updates Tax Gap Estimates
+(Feb. 14, 2006) (accompanying charts). The National Research Program
+study estimated that the ``gross tax gap'' was about $345 billion and
+the ``net tax gap'' (i.e., the gross tax gap reduced by late payments
+and amounts collected as a result of IRS enforcement actions) was about
+$290 billion. The IRS's most current estimate of the tax gap is based
+primarily on audits it conducted on tax returns filed for 2001.
+ \3\ U.S. Census Bureau, Population Division (data as of March
+2001).
+ \4\ The IRS's most current estimate of the tax gap is based
+primarily on audits it conducted on tax returns filed for 2001.
+ \5\ Significantly, the IRS Oversight Board reports there is
+substantial public support for an enhanced IRS compliance program
+provided that it is balanced. The Oversight Board conducts an annual
+survey of taxpayer attitudes and found that two-thirds of taxpayers
+support additional funding for both IRS assistance and enforcement. See
+IRS Oversight Board, 2005 Taxpayer Attitude Survey.
+ \6\ See IRS News Release 2006-28, IRS Updates Tax Gap Estimates
+(Feb. 14, 2006) (accompanying charts).
+ \7\ When IRS auditors conducted approximately 46,000 audits of
+individual taxpayers for purposes of the National Research Program, the
+auditors were asked, for each issue they identified, to characterize
+the reason for noncompliance. Among issues that IRS auditors examined
+that resulted in a change in tax liability, the auditors listed 67
+percent as inadvertent mistakes, 27 percent as computational errors or
+errors that flowed automatically, and only 3 percent of errors as
+intentional. Internal Revenue Service (unpublished data from National
+Research Program). The precision of these data may be open to question
+because it is impossible for an auditor to determine the intent of a
+taxpayer at the time the taxpayer prepared a return. In the absence of
+contrary data, however, these data at a minimum should persuade IRS to
+conduct significant new studies on the causes of noncompliance. A
+separate study by the Government Accountability Office analyzed the
+misreporting of capital gains transactions. The study concluded that 33
+percent of taxpayers who misreported their income from securities
+transactions reported more capital gains than they actually realized.
+Where misreporting is inadvertent, from a statistical standpoint, one
+would expect that 50 percent of errors would be on the high side and 50
+percent of errors would be on the low side. Thus, GAO's finding that 33
+percent of all taxpayer errors tended to cause overpayments of tax (and
+thus were clearly inadvertent) implies that an equal percentage of
+inadvertent errors caused taxpayers to underpay their tax--or, put
+differently, that 66 percent of all errors in capital gains
+misreporting were inadvertent and only 34 percent were intentional.
+Government Accountability Office, Ref. No. GAO-06-603, Capital Gains
+Tax Gap: Requiring Brokers to Report Securities Cost Basis Would
+Improve Compliance if Related Challenges Are Addressed at 12 (June
+2006).
+ \8\ Internal Revenue Service, Fiscal Year 2006 Enforcement and
+Service Results (Nov. 20, 2006).
+ \9\ Joseph M. Dodge & Jay A. Soled, Inflated Tax Basis and the
+Quarter-Billion-Dollar Revenue Question, 106 Tax Notes 453 (Jan. 24,
+2005).
+ \10\ See Department of the Treasury, General Explanation of the
+Administration's Fiscal Year 2008 Revenue Proposals 64 (February 2007).
+Treasury provides a 10-year revenue estimate of just $6.7 billion. We
+note, however, that Treasury's proposal would not take effect until
+2009, and it would only require basis reporting with regard to
+securities purchased after that date. In the early years, many
+securities sold would have been purchased prior to the effective date
+of the proposal and thus would be exempt from reporting.
+ \11\ John Cassidy, Going Long, The New Yorker, July 10 & 17, 2006,
+at 99 (citing an AC Nielsen study).
+ \12\ See Alan H. Plumley, Pub. 1916, The Determinants of Individual
+Income Tax Compliance: Estimating the Impacts of Tax Policy,
+Enforcement, and IRS Responsiveness 41 (Oct. 1996).
+ \13\ IRS Wage & Investment Operating Division, Business Performance
+Review, Wage and Investment Operating Division, FY 2006; IRS Wage &
+Investment Operating Division, Business Performance Review, Wage and
+Investment Operating Division, FY 2005; IRS Wage & Investment Operating
+Division, Business Performance Review, Wage and Investment Operating
+Division, FY 2004; IRS Wage & Investment Operating Division, Business
+Performance Review, Wage and Investment Operating Division, FY 2003.
+ \14\ IRS Small Business/Self Employed Operating Division, Response
+to Taxpayer Advocate Information Request (Sept. 5, 2006).
+ \15\ This concern was raised by a taxpayer during a 2006 Town Hall
+meeting with the National Taxpayer Advocate in Fargo, North Dakota.
+ \16\ Internal Revenue Service, Fiscal Year 2006 Enforcement and
+Service Results (Nov. 20, 2006).
+ \17\ See IRS News Release IR-2006-42, IRS Selects Three Firms to
+Take Part In Delinquent Tax Collection Effort (March 9, 2006).
+ \18\ Department of the Treasury, FY 2007 Budget in Brief at 59.
+ \19\ Government Accountability Office, GAO-07-136, Financial Audit:
+IRS's Fiscal Years 2006 and 2005 Financial Statements at 95 (Nov.
+2006). The IRS actually collected $2.51 trillion on a gross basis in FY
+2006, but issued $277 billion in tax refunds.
+ \20\ When collecting tax from the vast majority of taxpayers who
+file returns and pay all or substantially all of the tax they owe
+voluntarily, the cost the IRS incurs per taxpayer is very low. As the
+IRS attempts to collect tax from noncompliant taxpayers through broader
+outreach efforts or through examination and collection actions, the
+cost per taxpayer rises substantially. Therefore, the marginal ROI the
+IRS achieves as it attempts to collect unpaid taxes is likely to be
+considerably lower than the average ROI of 210:1 that the IRS achieves
+on taxes paid voluntarily. But if the IRS were given more resources,
+most data indicate that the IRS could generate a substantially positive
+marginal ROI.
+ \21\ In the current Congress, the Appropriations subcommittees have
+been restructured, and the IRS will be funded through the
+Appropriations Subcommittee on Financial Services and General
+Government.
+ \22\ Government Accountability Office, GAO-07-136, Financial Audit:
+IRS's Fiscal Years 2006 and 2005 Financial Statements 68 (Nov. 2006).
+ \23\ Charles O. Rossotti, Many Unhappy Returns: One Man's Quest to
+Turn Around the Most Unpopular Organization in America 278 (2005). On
+pages 278-286, Mr. Rossotti presents an interesting personal
+perspective on the budget process and the politics behind the chronic
+under-funding of the IRS.
+ \24\ The chairman and ranking member of the Senate Budget Committee
+supported additional funding for the IRS in the FY 2007 budget
+resolution. Senator Judd Gregg acknowledged that the existing budget
+procedures have the effect of shortchanging the IRS. He said: ``We've
+got to talk to the [Congressional Budget Office] about scoring on
+[additional funding provided to IRS]. Clearly there's a return on that
+money.'' Dustin Stamper, Everson Pledges to Narrow Growing Tax Gap, 110
+Tax Notes 807 (Feb. 20, 2006). Similarly, Senator Kent Conrad stated:
+``Rather than a tax increase, I think the first place we ought to look
+. . . is the tax gap. If we could collect this money, we'd virtually
+eliminate the deficit.'' Emily Dagostino, Senate Budget Resolution
+Would Increase IRS Enforcement Funding, 110 Tax Notes 1129 (Mar. 13,
+2006).
+ \25\ Commissioner Charles O. Rossotti, Report to the IRS Oversight
+Board: Assessment of the IRS and the Tax System 16 (Sept. 2002).
+ \26\ Alan H. Plumley, Pub. 1916, The Determinants of Individual
+Income Tax Compliance: Estimating The Impacts of Tax Policy,
+Enforcement, and IRS Responsiveness 35-36 (Oct. 1996); Jeffrey A.
+Dubin, Michael J. Graetz & Louis L. Wilde, The Effect of Audit Rates on
+the Federal Individual Income Tax, 1977-1986, 43 Nat. Tax J. 395, 396,
+405 (1990).
+ \27\ Commissioner Charles O. Rossotti, Report to the IRS Oversight
+Board: Assessment of the IRS and the Tax System 16 (Sept. 2002).
+ \28\ Government Accountability Office, GAO-06-1000T, Tax
+Compliance: Opportunities Exist to Reduce the Tax Gap Using a Variety
+of Approaches, at 17 (July 26, 2006).
+ \29\ Pub. L. No. 108-357, sss 881(a)(1) (enacting IRC sss 6306).
+ \30\ For a detailed discussion of the private debt collection
+program, see National Taxpayer Advocate 2006 Annual Report to Congress
+at 34-61 (Most Serious Problem: True Costs and Benefits of Private Debt
+Collection).
+ \31\ See, e.g., Dustin Stamper, Everson Admits Private Debt
+Collection Costs More, Defends Return Disclosure Regs, 111 Tax Notes 11
+(Apr. 3, 2006).
+ \32\ Senator Max Baucus recently highlighted another example of the
+counterproductive impact of shortchanging IRS funding. In FY 2006,
+Congress imposed a one-percent across-the-board funding rescission on
+domestic discretionary spending, and the IRS absorbed a reduction of
+about $100 million as a consequence. Citing GAO data, Senator Baucus
+estimated that the $100 million in ``savings'' would ultimately cost
+the U.S. Treasury about $1 billion in lost tax collections. He stated:
+``[E]ven small reductions in collection and taxpayer services are
+penny-wise, pound-foolish. Sparing the IRS budget may be the best way
+to bring in more owed revenue and end deficit spending.'' News Release,
+Senator Max Baucus, $100 Million Budget Cut to IRS May Cost $1 Billion
+or More in 2006 Tax Collections (May 22, 2006).
+ \33\ In the preface to the National Taxpayer Advocate 2006 Annual
+Report to Congress, I argue that compliance should be viewed as a third
+category or IRS emphasis rather than as the sum of service and
+enforcement. There are many compliance activities the IRS undertakes,
+such as document matching, that catch errors taxpayers make either
+inadvertently or negligently. In my view, these activities should be
+classified as ``compliance'' activities, and the ``enforcement'' label
+should be reserved for cases of willful violation of the laws. I argue
+that nomenclature matters in this area because if the IRS treats
+willful and inadvertent compliance the same way, IRS personnel will
+treat innocent taxpayers harshly and taxpayers will feel that the IRS
+has dealt with them unfairly, perhaps alienating them from the tax
+system and reducing their future compliance.
+ \34\ Internal Revenue Service, Compliance Estimates for Earned
+Income Tax Credit Claimed on 1999 Returns 3 (Feb. 28, 2002).
+ \35\ The DIF score is an estimate of the likelihood of non-
+compliance on a return. A higher score indicates a higher likelihood of
+non-compliance.
+ \36\ IRS Compliance Data Warehouse, Individual Returns Transaction
+File data for tax years 2002-2004.
+ \37\ IRS Compliance Data Warehouse, Audit Inventory Management
+System data for tax years 2002-2004.
+ \38\ See Alan H. Plumley, Pub. 1916, The Determinants of Individual
+Income Tax Compliance: Estimating The Impacts of Tax Policy,
+Enforcement, and IRS Responsiveness 41 (Oct. 1996).
+ \39\ See IRS News Release, IRS Updates Tax Gap Estimates, IR-2006-
+28 (Feb. 14, 2006) (accompanying charts).
+ \40\ See Closing the Tax Gap and the Impact on Small Business,
+Hearing Before the House Comm. on Small Business, 109th Cong. (Apr. 27,
+2005) (testimony of John Satagaj, President and General Counsel, Small
+Business Legislative Council).
+ \41\ IRS Small Business/Self Employed Division response to Taxpayer
+Advocate Service Information Request (Sept. 5, 2006).
+ \42\ Two caps would have to be established for total
+appropriations--one for the IRS and one for all other discretionary
+spending.
+ \43\ For FY 1995, the congressional budget resolution provided for
+an adjustment of budget resolution spending levels to allow additional
+funding for an ``Internal Revenue Service Compliance Initiative.'' H.
+Con. Res. 218, 103rd Cong. sss 25 (1994). The provision authorized an
+adjustment to reflect amounts of additional new budget authority or
+additional outlays of up to $405 million per year provided certain
+conditions were met. Although there is no indication the initiative
+failed or generated strong opposition, control of Congress changed the
+next year and the provision was subsequently repealed. H. Con. Res. 67,
+104th Cong. sss 209 (1995). The joint explanatory statement
+accompanying the conference report on the FY 1995 budget resolution
+provision (which originated as Section 54 of the Senate amendment to
+the House-passed budget resolution) provided additional information
+about the specifics of the approach:
+ Section 54 of the Senate amendment allows for additional
+appropriations for an Internal Revenue Service Compliance initiative.
+If the Congress appropriates the base amounts requested for the
+Internal Revenue Service in the President's budget for fiscal year 1995
+and a variety of other conditions are met, then Congress can also
+appropriate additional amounts for a compliance initiative without
+triggering points of order that might otherwise lie against such
+legislation.
+ Under sections 54(a) and 54(b) of the Senate amendment, upon the
+reporting of an appropriation bill funding the compliance initiative
+and the satisfaction of the conditions listed, the Chairman of the
+appropriate Budget Committee must file revised appropriations caps,
+allocations to the Appropriations Committee, functional levels, and
+aggregates to clear the way for the incremental spending for the
+initiative. This procedure parallels that used in reserve funds . . . ,
+which allow deficit-neutral legislation to proceed without points of
+order even if that legislation pays for direct spending with revenues.
+Similarly, section 54 of the Senate amendment allows appropriations
+legislation to proceed without points of order if it is demonstrated
+that the revenues raised by those appropriations would offset the costs
+of the appropriations.
+ The first parenthetical language in the matter after subsection
+(a)(3) establishes the first condition precedent, that the Congress
+appropriate the base amounts requested for the Internal Revenue Service
+in the President's Budget for fiscal year 1995. Subsection (d) lists
+the other conditions: enactment of a Taxpayer Bill of Rights 2,
+initiation of an Internal Revenue Service educational program as
+mandated by the Taxpayer Bill of Rights 1 and 2, a finding by the
+Congressional Budget Office that by virtue of revenues raised, the
+appropriations will not increase the deficit, and a restriction of
+funds made available pursuant to this authority to carrying out
+Internal Revenue Service compliance initiative activities.
+ The House resolution contains no such provision.
+ The conference agreement contains as section 25 a provision similar
+to that in Section 54 of the Senate amendment. In particular, section
+25(a)(2) of the conference agreement more explicitly spells out the
+condition precedent that Congress first appropriate the base amounts
+requested for the Internal Revenue Service in the President's Budget
+for fiscal year 1995 before the provisions of this section apply.
+Similarly, the conference agreement revises subsection (d), which sets
+forth the other conditions precedent.
+ H.R. Conf. Rep. No. 103-490 at 58 (1994).
+ \44\ In FY 2006, IRS enforcement activities (collection actions,
+examinations, and document matching) resulted in the direct collection
+of $48.7 billion. Internal Revenue Service, Fiscal Year 2006
+Enforcement and Service Results (Nov. 20, 2006). Total tax collection
+by the IRS, after the issuance of tax refunds, was $2.24 trillion.
+Government Accountability Office, GAO-07-136, Financial Audit: IRS's
+Fiscal Years 2006 and 2005 Financial Statements 95 (Nov. 2006).
+ \45\ Department of the Treasury, FY 2008 Budget-in-Brief at 56.
+ \46\ Charles O. Rossotti, Many Unhappy Returns: One Man's Quest to
+Turn Around the Most Unpopular Organization in America 285 (2005).
+ \47\ For research purposes, we believe it is important to study
+inadvertent errors as well as deliberate misreporting. Knowledge about
+inadvertent errors can be used to clarify ambiguous laws or
+administrative guidance both to help increase future compliance and to
+better apply IRS outreach, education, and other voluntary compliance
+initiatives.
+ \48\ Commissioner Charles O. Rossotti, Report to the IRS Oversight
+Board: Assessment of the IRS and the Tax System 18 (Sept. 2002).
+ \49\ Internal Revenue Service Data Book: 2005, table 3 (showing
+that the total number of individual income tax returns filed in FY 2005
+was 132,844,632) and table 4 (showing that the total number of
+individual income tax returns filed electronically in FY 2005 was
+68,476,328). The total number of individual income tax returns filed on
+paper in FY 2005--64,368,304--is the difference between these numbers.
+ \50\ Much of this information was published in former Commissioner
+Rossotti's final report to the IRS Oversight Board. Commissioner
+Charles O. Rossotti, Report to the IRS Oversight Board: Assessment of
+the IRS and the Tax System 16 (Sept. 2002). However, we have not seen
+updated statistics published in this format since that time.
+ \51\ The congressional budget rules currently prohibit the
+Congressional Budget Office or the Office of Management and Budget from
+treating changes in discretionary appropriations to the IRS as giving
+rise to scorable increases in tax receipts. See H.R. Conf. Rep. No.
+101-964 (1990). See also Office of Management and Budget, OMB Circular
+No. A-11, Part 8, Appendix A, Principle 14 (2006). Since changes to IRS
+funding levels undoubtedly have an impact on tax collections, this
+prohibition seemingly reflects the practical difficulty of devising
+accurate estimates. Yet accurate estimates obviously would be helpful
+to Congress, and we believe the IRS should make developing better
+estimates a priority objective.
+
+ Chairman Spratt. Thank you very much for your excellent
+testimony. Mr. Brostek.
+
+ STATEMENT OF MICHAEL BROSTEK
+
+ Mr. Brostek. Chairman Spratt and members of the committee,
+I am pleased to participate in today's hearing on the tax gap.
+My statement focuses on the multiple approaches that are needed
+to successfully reduce the gap, including the importance of
+quality services to taxpayers. It then covers potential
+reductions in the tax gap that could ensue from simplifying and
+reforming the Tax Code, providing the IRS more tools to deal
+with noncompliance and dedicating more resources to tax
+enforcement.
+ The tax gap is a persistent problem. Although measurement
+methodologies have varied over time, the rate at which
+taxpayers pay their taxes voluntarily and on time has tended to
+range between 81 and 84 percent over the past 3 decades. This
+suggest that materially reducing the tax gap is going to be
+challenging. Because the tax gap has multiple causes and spans
+different types of taxes and taxpayers, no one strategy is
+likely to be fully and cost-effectively efficient at reducing
+the gap. We need to try new approaches and to expand current
+effective approaches. In many cases, Congress will need to
+participate in the solution either through providing IRS new
+tools or additional resources.
+ Providing quality services to taxpayers is a necessary
+foundation for high levels of voluntary compliance. Quality
+services help taxpayers who wish to comply but who do not
+understand their obligations, and such services are needed even
+in pursuing other approaches to reduce the tax gap. For
+instance, even if tax laws are simplified, the IRS needs to
+educate taxpayers and to answer the questions they are likely
+to have. Regarding tax simplification or tax reform, there is
+no reliable estimate of how much simplification could actually
+reduce the tax gap. One indication of the potential is that the
+IRS has estimated a 2001 revenue shortfall of about $32 billion
+due to errors taxpayers made in claiming various credits and
+deductions. Over the decades, more and more special provisions
+have been added to the Tax Code with the number of credits,
+deductions and the like doubling in number between 1974 and
+2005.
+ By making the rules across tax provisions more uniform, by
+merging multiple related provisions and deleting provisions
+that may not be accomplishing their intended purpose at an
+acceptable revenue cost, the Tax Code could be simplified. If
+so, both intentional and unintentional noncompliance should
+decline. Further, the IRS would be able to reallocate its
+resources to other more problematic compliance problems.
+ Tax reform also has the potential to reduce the tax gap,
+but it is most likely to do so if any reform system has few, if
+any, tax preferences or complex provisions and taxable
+transactions are transparent to the tax agency. These
+characteristics are difficult to achieve, and to my knowledge,
+all tax systems have tax gaps.
+ Tax withholding and information reporting are among the
+most powerful tools for promoting compliance. If we can spread
+these tools over more types of income that are major
+contributors to the tax gap, tax reductions might be achieved.
+Our recent work suggests that requiring information reporting
+on the basis for securities sales, like stock transactions, has
+the potential to improve compliance with capital gains
+reporting. Importantly, a key additional benefit would be less
+taxpayer burden to understand and comply with the basis
+reporting rules.
+ Finally, devoting additional resources to enforcement has
+the potential to reduce the tax gap by billions of dollars. In
+part, devoting greater resources to enforcement could reduce
+the tax gap because, every year, the IRS identifies far more
+cases of probable noncompliance than it can address. How much
+the tax gap could be reduced by dedicating more resources to
+enforcement depends critically on how well the IRS can manage
+these resources. Here, information is key.
+ Which taxpayers are noncompliant? Why are they
+noncompliant? What amount of noncompliance can be corrected for
+an additional dollar of investment in IRS?
+ We and others have frequently called for improved
+information like this. In part, this is why we encouraged the
+IRS to undertake compliance studies like the most recent one of
+the tax gap. We are heartened that the President's 2008 budget
+calls for annual tax gap research.
+ As a caution, if additional resources are devoted to
+enforcement, returns on that investment are likely to lag as
+the IRS hires and trains new personnel, and we see that in the
+budget estimates for the President's new budget.
+ Also, several years can elapse between the time the IRS
+actually assesses a tax and when those taxes are collected. For
+instance, in a study we had done earlier, we had found that 5
+years after taxes were assessed against individuals with
+business income only 48 percent of the assessed taxes had been
+collected.
+ This concludes my statement. I would be happy to answer
+questions.
+ [The prepared statement of Michael Brostek follows:]
+
+
+
+
+ Chairman Spratt. Thank you very much.
+ Now Mr. Edwards.
+
+ STATEMENT OF CHRIS EDWARDS
+
+ Mr. Edwards. Thank you, Mr. Chairman and Mr. Cooper, for
+holding these important hearings today on the tax gap, and
+thanks to both of you over the years for your strong support of
+fiscal responsibility.
+ Compliance with our tax system, as we have heard, stands at
+about 86 percent. I think, to most people, that sounds like a
+pretty high number. We rarely get 100 percent compliance with
+any law. I looked up ``compliance'' yesterday on the Internet,
+on the Department of Transportation site, regarding automobile
+seatbelt laws, and the nationwide compliance rate with
+automobile seatbelt laws is only 81 percent, and that is after
+many years of education on that issue.
+ International evidence also suggests that the U.S. tax
+compliant rate is very high. Frederick Snyder, who has
+completed detailed studies for the IMF on the size of
+underground or shadow economies in different countries, finds
+that the U.S. tax compliance rate, or the U.S. shadow economy
+is very low. He finds that the average size of the shadow
+economy in the OECD countries is 16 percent of GDP. The U.S.
+shadow economy, according to his studies, is only 8 percent of
+GDP, the lowest in the OECD. So Americans do seem to be highly
+law-abiding when it comes to reporting government taxes and
+complying with regulations.
+ As we have heard earlier, the size of the U.S. tax gap does
+not seem to have increased over time. The GAO says that the tax
+gap has been about the same rate over the last 3 decades.
+ For these reasons, the current intense focus in Congress
+over the tax gap is perplexing. Americans, of course, should
+pay the taxes that erode, but the tax gap, in my view, is far
+down the list of important tax system issues that we should be
+dealing with.
+ I think Congress should instead focus on issues such as
+America's high corporate tax rate and how uncompetitive it is,
+especially in the globalized economy we live in, and of course
+the enormous complexity of the Tax Code. The number of tax
+expenditures, as I think we had heard earlier, has doubled
+since 1975. This is a huge problem, and I think we need to deal
+with that before we get to the issue of the tax gap.
+ Interestingly, if you compare the FICA or payroll tax
+compliance, according to the IRS numbers we saw earlier, there
+is a very high compliance rate. Of course, we have got
+withholding there, but it is also a flat, simple tax with no
+deductions. Compare that to the very low compliance with the
+Federal estate tax. The Federal estate tax gap is about 28
+percent of the amount of revenue collected by that tax because
+it is a grossly complex, inefficient tax.
+ Americans have a responsibility to pay their taxes, but
+Congress also has a responsibility to make tax laws that are
+simple and easy to comply with. I think Congress is failing in
+that responsibility. I say let us make the Tax Code coherent
+first before we put on more regulations to close the tax gap.
+ There are a few observations on the tax gap estimates from
+the IRS that I think are interesting. The IRS data shows that
+corporations create only 9 percent of the tax gap, and yet we
+constantly hear about supposed rampant corporate tax evasion.
+In recent remarks, Senator Kent Conrad talked about the
+hemorrhaging of tax revenues from cheating by corporations with
+offices in the Cayman Islands, but corporate tax cheating is
+not such a black-and-white affair as many think, and the
+complexity of the Tax Code makes it very difficult to determine
+how much companies should actually be paying.
+ Interestingly, the Joint Committee on Taxation's report on
+Enron a couple years ago, which was over 2,000 pages long,
+found hundreds of Enron subsidiaries in the Cayman Islands, but
+the Joint Committee had a very hard time showing that the
+firm's tax structures were actually illegal. They were abusive,
+but they had a very hard time saying that they were actually
+illegal, and as I think was raised by Mr. Everson earlier,
+corporate tax revenues have soared in recent years. In 2007,
+corporate tax revenues will be $342 billion, up 65 percent from
+the peak reached in 2000. So corporate tax revenues are not
+hemorrhaging. It is the small business sector that would bear
+much of the brunt of the burden of new regulations to reduce
+the tax gap, but studies have found that small businesses
+already pay higher tax compliance costs, much higher compliance
+costs, compared to revenue collected than big businesses, and
+the IRS Taxpayer Advocate in the past has found that the heavy
+compliance burden on small businesses is one of the most
+serious problems with the Tax Code. So it seems to me that
+targeting small businesses with more tax gap regulations seems
+very unfair.
+ To conclude, the great attention being placed on the tax
+gap I think is out of place given that U.S. tax compliance is
+high compared to other countries and it has remained stable
+over time. Federal revenues are above historic norms at 18.5
+percent of GDP this year, and as you may know, data for the
+first 4 months of fiscal 2007 show a 10 percent increase in
+Federal revenues over the same period last year. So the fiscal
+problem in Washington is not a lack of revenue.
+ In his famous book A Wealth of Nations, Adam Smith argued
+that, quote, ``subjecting the people to the frequent visits and
+odious examination of tax gatherers exposes them to much
+unnecessary trouble, vexation and oppression,'' unquote.
+ So, rather than imposing more vexation on the taxpayers, I
+think we should reform the Tax Code to reduce marginal rates
+and special preferences, and I think a positive side effect
+would be to reduce the tax gap.
+ Again, thanks a lot for holding these hearings.
+ [The prepared statement of Chris Edwards follows:]
+
+ Prepared Statement of Chris Edwards, Director of Tax Policy Studies,
+ Cato Institute
+
+ Mr. Chairman and members of the committee, thank you for inviting
+me to testify today regarding the ``tax gap,'' which is the difference
+between the amount of taxes owed and the amount of taxes actually paid.
+ The net tax gap, after enforcement, is $290 billion, or 14 percent
+of what is owed, according to the Internal Revenue Service.\1\ Put
+another way, compliance with the federal tax system stands at 86
+percent. I think to most people, that compliance rate would sound quite
+high. After all, we rarely get 100 percent compliance with any law.
+Consider automobile seatbelt laws. The national compliance rate with
+seatbelt laws was 81 percent in 2006, and that is despite large
+education campaigns on that issue.\2\
+ International evidence also suggests that the federal tax
+compliance rate is high. Friedrich Schneider, a professor of economics
+at Johannes Kepler University in Austria, completed a detailed study
+last year on the size of underground, or shadow, economies in 145
+countries.\3\ He is perhaps the world's top expert on underground
+economies and tax evasion. Schneider defines the shadow economy to
+include legal activities that are not reported to governments in order
+to avoid taxes and regulations. Reviewing the literature, he finds that
+``in almost all studies, it has been found that the tax and social
+security contributions are one of the main causes for the existence of
+the shadow economy.'' \4\
+ Schneider finds that the shadow economies of developing countries
+are much larger than those of the advanced nations of the Organization
+for Economic Cooperation and Development. Looking at 21 OECD nations in
+2002, he found that the average size of shadow economies was 16 percent
+of gross domestic product. The United States had the smallest shadow
+economy at just 8 percent of GDP, according to Schneider's analysis.
+ In a study for the International Monetary Fund in 2000, Schneider
+similarly found that the United States had a smaller shadow economy
+than nearly all other countries.\5\ In sum, Americans seem to be highly
+law-abiding when it comes to government taxes and regulations.
+ Another factor to consider is that the size of the federal tax gap
+does not seem to have increased over the years. The Government
+Accountability Office noted recently that ``the rate at which taxpayers
+voluntarily comply with our tax laws has changed little over the past
+three decades.'' \6\ Thus, to the extent that the tax gap is a problem,
+it is not getting any bigger.
+ For these reasons, the intense focus in Congress on the tax gap in
+recent months is perplexing. Americans should pay the amount of taxes
+that they owe, but the tax gap is far down on a long list of problems
+with the federal tax system. Congress should focus on the following
+items as more pressing problems needing attention: \7\
+ America's high-rate and uncompetitive corporate income
+tax, which is a growing concern in our increasingly globalized economy.
+ The excessive taxation of savings and investment under the
+income tax, which reduces the growth rate of the U.S. economy.
+ High marginal tax rates on individuals and businesses,
+which are a hurdle to productive activities and encourage unproductive
+avoidance activities.
+ The enormous complexity of the tax code. The number of
+pages of federal tax law and regulations increased from 40,500 in 1995
+to 66,498 by 2006.\8\
+ Increasing horizontal inequity in the tax code. The
+plethora of deductions and credits added in recent years creates
+unfairness by imposing different tax burdens on people with similar
+incomes.
+ The alternative minimum tax, which threatens to hit 30
+million taxpayers by the end of the decade if not reformed or repealed.
+ Americans have a responsibility to pay all the taxes that they owe.
+But Congress has a responsibility to make sure that laws are as simple
+as possible and easy to comply with.
+ With the tax code, Congress is utterly failing in its
+responsibility. James Madison noted that ``it will be of little avail
+to the people that the laws are made by men of their own choice, if the
+laws be so voluminous that they cannot be read, or so incoherent that
+they cannot be understood ... or undergo such incessant changes that no
+man who knows what the law is today can guess what it will be
+tomorrow.'' \9\
+ Let's make the tax code coherent first before we consider any
+additional regulatory actions to close the tax gap. Focusing on the tax
+gap first puts the cart before the horse. Let's reform the code to
+increase economic efficiency and fairness, and an important byproduct
+will be to increase tax code compliance.
+ observations on the tax gap estimates
+ Most of the tax gap regards individual taxes, not corporate taxes.
+IRS data shows that the corporate tax gap is only 9 percent of the
+overall gap.\10\ Yet concerns are often expressed about supposed
+rampant corporate tax abuse. In recent remarks about the tax gap,
+Senator Kent Conrad (D-ND) talked about the ``hemorrhaging'' of federal
+tax revenues from cheating by large multinationals with offices in the
+Cayman Islands.\11\
+ However, the problem on the corporate side is legal tax avoidance
+by multinationals due to our high corporate tax rate, not illegal tax
+evasion. Interestingly, the Joint Committee on Taxation report on Enron
+found hundreds of Enron subsidiaries in the Caymans, but the JCT had a
+hard time showing that the firm's tax machinations were actually
+illegal.\12\ The corporate tax code encourages the creation of very
+complex corporate tax structures that are usually legal, but they do
+make tax compliance much more difficult.
+ Note that corporate tax revenues have soared in recent years.
+Corporate tax revenues are expected to be $342 billion in fiscal 2007,
+which is up a remarkable 65 percent over the peak at the end of the
+last boom in fiscal 2000 of $207 billion.\13\ Corporate tax revenues
+are clearly not ``hemorrhaging.''
+ The tax gap related to the estate tax is also worth looking at. At
+$8 billion, the tax gap for the estate tax is a huge 29 percent of the
+$28 billion in estate tax revenues in 2001. This large gap indicates
+the large inefficiency of the estate tax, which probably drives
+relatively more tax avoidance and evasion than any other federal tax.
+This is one reason why many tax experts support repeal of this tax.
+ The federal FICA payroll tax has a very low tax gap of just $14
+billion. Experts note that the FICA tax has a low tax gap because of
+employer withholding. But another factor that promotes high compliance
+is that the payroll tax is the simplest federal tax. It has a low, flat
+rate and no deductions. It is a model to consider for reforms of the
+federal income tax. Indeed, the Hall-Rabushka flat tax for individuals
+would consist simply of a flat-rate payroll tax, and thus would likely
+have a high compliance rate.
+ Major tax reforms would reduce the tax gap by reducing taxpayer
+confusion and aggressive tax planning. Many taxpayers pay the wrong tax
+amount because they are confused about what income is taxable and what
+tax breaks are allowed. And since complex tax rules are subject to
+multiple interpretations, they spur taxpayers to take risks on tax
+strategies in the hope that they are not caught by the IRS. The Joint
+Committee on Taxation noted that ``taxpayers may consciously choose to
+'play the audit lottery' by taking a questionable position on their tax
+returns, in the belief that complexity will shield them from
+discovery.'' \14\ In its report on Enron, the JCT concluded that the
+company ``excelled at making complexity an ally.'' \15\
+ The IRS estimate of the tax gap includes $32 billion related to
+claiming the wrong amounts of credits and deductions. The number of
+such ``tax expenditures'' has soared in recent years. Indeed, the GAO
+found that the number of tax expenditures has more than doubled since
+1975.\16\ Table 1 shows the number of tax expenditures relating to
+energy and education have more than doubled since 1995. The explosion
+of tax credits and deductions has added complexity and increased the
+system's unfairness by promoting horizontal inequities.
+ The largest source of the tax gap is the small business and self-
+employed sector of the economy. It is this sector that would bear the
+burden of many proposed actions to reduce the tax gap, as it would have
+to pay higher taxes and deal with greater paperwork. If Congress and
+the IRS increased reporting requirements and tax regulations to try and
+reduce the tax gap, most of the added compliance burden would fall on
+law-abiding businesses that are already paying their full load of
+taxes.
+ Note that individuals and businesses already spend more than 6
+billion hours--or more than 3 million person-years--complying with
+federal taxes. Many members of Congress, usually around April 15, decry
+that large burden. Yet trying to reduce the tax gap by imposing added
+paperwork on businesses would increase the time spent on unproductive
+compliance activities.
+ Note that small businesses already have a higher ratio of tax
+compliance burdens to taxes collected than do large businesses. For
+small businesses, tax compliance costs can be larger than actual taxes
+paid.\17\ The IRS Taxpayer Advocate has found that the heavy compliance
+burden on small businesses is one of the most serious problems with the
+tax system.\18\ Thus, targeting small businesses with more regulations
+to try and close the tax gap seems especially unfair.
+ Senator Kent Conrad (D-ND) recently stated that ``closing the tax
+gap is not about raising taxes on anyone.'' \19\ But in fact, it is.
+Certainly, some individuals and businesses are currently not paying all
+they owe. But taking actions to increase taxes paid would create all
+the usual ``deadweight losses,'' or inefficiency costs, that any tax
+increase would create. If a small business is required to pay more tax,
+it will have less cash flow available for capital investment and hiring
+workers. There is no free money sitting around for the federal
+government to simply grab without negative side-effects on the economy.
+ conclusion
+ In conclusion, the great attention being placed on the tax gap
+seems out of place given that the problem is not excessive compared to
+other countries, nor is it getting worse over time. Federal revenues
+are up above historical norms at 18.5 percent of GDP in fiscal 2007.
+Indeed, data for the first four months of fiscal 2007 show a 10 percent
+increase over fiscal 2006.\20\
+ The fiscal problem in Washington is not a lack of revenue. Thus
+burdening small businesses and the economy with more tax regulations to
+try and close the tax gap is the wrong way to go. In his classic work,
+The Wealth of Nations, Adam Smith recognized that the total cost of
+taxation is ``a great deal more'' than just the amount of revenue
+collected. For one thing, he argued that ``by subjecting the people to
+the frequent visits and the odious examination of the tax-gatherers, it
+may expose them to much unnecessary trouble, vexation, and
+oppression.''
+ Rather than increase odious tax-gathering activities, we should
+instead reform the tax code to reduce marginal rates and eliminate
+special preferences. That would be beneficial for families and the
+economy, and it would have the side effect of reducing the tax gap.
+ Thank you for holding these important hearings. I look forward to
+working with the committee on tax issues, particularly tax code
+simplification and reform.
+ endnotes
+ \1\ The IRS estimates are discussed in Government Accountability
+Office, ``Tax Compliance,'' GAO-07-391T, January 23, 2007. See also
+U.S. Department of Treasury, ``A Comprehensive Strategy for Reducing
+the Tax Gap,'' September 26, 2006.
+ \2\ National Highway Traffic Safety Administration, ``Seat Belt Use
+in 2006: Overall Results,'' November 2006, www-nrd.nhtsa.dot.gov/pdf/
+nrd-30/NCSA/RNotes/2006/810677.pdf.
+ \3\ ``Shadow Economies of 145 Countries all over the World: What do
+we really know?'' May 2006, www.econ.jku.at/Schneider/
+ShadEconomyWorld145--2006.pdf.
+ \4\ ``Shadow Economies of 145 Countries all over the World: What do
+we really know?'' May 2006, p. 5, www.econ.jku.at/Schneider/
+ShadEconomyWorld145--2006.pdf.
+ \5\ Friedrich Schneider and Dominik Enste, ``Shadow Economies
+Around the World: Size, Causes, and Consequences,'' International
+Monetary Fund, Working Paper 00/26, February 2000.
+ \6\ Government Accountability Office, ``Tax Compliance,'' GAO-06-
+1000T, July 26, 2006, p. 1.
+ \7\ For a discussion of problems with the tax code, see Chris
+Edwards, ``Options for Tax Reform,'' Cato Institute Policy Analysis no.
+536, February 24, 2005, www.cato.org/pub--display.php?pub--id=3681.
+ \8\ Based on the page count of the CCH Standard Federal Tax
+Reporter. See Chris Edwards, ``Income Tax Rife with Complexity and
+Inefficiency,'' Cato Institute Tax & Budget Bulletin no. 33, April
+2006, www.cato.org/pubs/tbb/tbb-0604-33.pdf.
+ \9\ James Madison, The Federalist Papers, No. 62.
+ \10\ For all tax gap figures, see Government Accountability Office,
+``Tax Compliance,'' GAO-07-391T, January 23, 2007. See also U.S.
+Department of Treasury, ``A Comprehensive Strategy for Reducing the Tax
+Gap,'' September 26, 2006.
+ \11\ Senator Kent Conrad (D-ND), Remarks at a Senate Budget
+Committee ``Hearing on President Bush's FY2008 Budget Proposals on Tax
+Compliance,'' February 14, 2007.
+ \12\ In testifying on the Enron activities, then JCT chief of
+staff, Lindy Paull, said, ``I don't know if you could call it
+illegal.'' See Peter Behr, ``Enron Skirted Taxes Via Executive Pay
+Plan,'' Washington Post, February 14, 2003, p. E1.
+ \13\ Budget of the U.S. Government, FY2008, Historical Tables, p.
+30.
+ \14\ Joint Committee on Taxation, ``Study of the Overall State of
+the Federal Tax System,'' JCS-3-01, April 2001, volume 1, p. 102.
+ \15\ Joint Committee on Taxation, ``Report of Investigation of
+Enron Corporation and Related Entities Regarding Federal Tax and
+Compensation Issues, and Policy Recommendations,'' volume 1: Report,
+JCS-3-03, February 2003, p. 16.
+ \16\ Government Accountability Office, ``Tax Compliance,'' GAO-06-
+1000T, July 26, 2006. p. 7.
+ \17\ Art Hall, ``Compliance Costs of Alternative Tax Systems II,''
+Tax Foundation, March 1996.
+ \18\ Internal Revenue Service, National Taxpayer Advocate, Annual
+Report to Congress, FY 1999.
+ \19\ Senator Kent Conrad (D-ND), Remarks at Senate Budget Committee
+``Hearing on President Bush's FY2008 Budget Proposals on Tax
+Compliance,'' February 14, 2007.
+ \20\ Congressional Budget Office, ``Monthly Budget Review,''
+February 6, 2007.
+
+ Chairman Spratt. Did Adam Smith say all of those things?
+Was that a quote or was that a paraphrase?
+ Mr. Edwards. That was a quote, yes.
+ Chairman Spratt. Let me ask each one of you, as a panel
+together, if you have an idea.
+ I was trying to probe the Commissioner earlier for how much
+the tax gap is today, 2006-2007, as opposed to 2001. We had a
+useful clarification in the GAO testimony that it is 345 gross,
+55 late payments, so the net number is 290.
+ Considering the 290 in 2001, what do you think the gap is
+today in 2007? Mr. George.
+ Mr. George. Yes. Mr. Spratt, Mr. Chairman, we are not in a
+position to give a definitive answer there. They do not have--
+--
+ Chairman Spratt. Is the 2001 number scientific or is it
+just a stab itself?
+ Mr. George. No. No. No. They did a detailed study, the
+national review. They did a detailed review of this, but it is
+just incomplete. They only looked at one aspect of the overall
+picture.
+ Chairman Spratt. If we were in earnest about closing this
+gap, wouldn't it be useful to have that number restated every
+year, have some kind of means for at least a summary update?
+ Ms. Olson. Mr. Chairman, what I have advocated is--and the
+IRS is moving in this direction as fast as I think it actually
+can--to have a 5-year cycle of studying different components of
+the tax gap so that--or the tax paying population. One year,
+you would be updating your corporate numbers. One year, you
+would be updating your pass-through numbers. In another year,
+you would be updating some components of the individual income
+tax, and as you went through those 5-year cycles, you would
+also be looking at what services those different populations
+needed since for so much of what we ask taxpayers to do they do
+need assistance from us or others in some way, and I think if
+you got on an ongoing 5-year cycle in that way, you would have
+reasonably good estimates so that if there were something that
+Congress had changed in the laws or had closed a loophole or
+something, you could back out or add to the effect of those
+changes to your bottom line estimate.
+ Right now, we have so many squishy numbers in the tax gap
+chart that the Commissioner uses--you know, there are whole
+colors that are in--these are squishy numbers. That is what I
+think the blue color represents on that tax gap chart.
+ Chairman Spratt. Well, that is another whole problem for
+this committee because we need current and up-to-date numbers,
+and typically the definitive revenue collection for a given
+year may not be available for as much as 12 to 18 months after
+the close of the year, which is a problem for us in knowing if
+there is a revenue spurt or if there was a revenue decline, and
+we are not for sure looking at the numbers we all have.
+ Just one more question from me is a question I asked
+earlier. Mr. George, back in the 1990s when we were looking
+into the possibility or at least exploring this notion of
+having a lot more information filing, the small business
+community came down heavily on the side of saying, if you give
+us all these reams of information to the Internal Revenue
+Service, they do not have the wherewithal, the software or the
+hardware to begin to process it, correlate it and make good use
+of it. Do they now? Is the system there in such a state now
+that if they did indeed have information reporting that
+contractors would have to report certain payments to vendors,
+suppliers and subcontractors above a certain amount? Would the
+IRS have the capacity to process that meaningfully if they got
+the information?
+ Mr. George. They currently do not have the wherewithal to
+do this. There is much needed infrastructure improvements in
+order to adequately address that, Mr. Chairman.
+ Chairman Spratt. And how long would it take to install
+that?
+ Mr. George. That is a great question. I do not have an
+answer to that.
+ Chairman Spratt. Is there a software design?
+ Mr. George. It is still in the process. As you may recall,
+modernization was attempted over 12 years ago. Billions of
+dollars were expended on a program that failed to do anything
+that it was designed to do. It was a complete waste. They have
+learned from that lesson and are now engaged in a business
+systems modernization program which has had some success, is
+being rolled out slowly. It has not yet delivered everything
+promised. It is slightly--it is over budget, and it is not,
+again, delivering everything promised, but they are working at
+it.
+ Chairman Spratt. Other witnesses?
+ Ms. Olson. Mr. Chairman, you know, I have witnessed over
+the last 3 years the IRS ramp-up of the private collection
+agency initiative where they have spent millions and millions
+of dollars both in infrastructure and staff time to bring on a
+whole new program dealing with software, conveying data, data
+security, and what I have seen is that the IRS, when it puts
+its mind to things in a laser-like fashion, can accomplish some
+amazing things. So it seems to me that if the IRS were to be
+given the authority to do these things and the directive that
+it has to focus on it as it focused on the private collection
+agency, it should be able to accomplish that and is probably
+cheaper than the cost of the private collection agency.
+ Mr. Brostek. We have a separate team that looks at the
+business system modernization effort from the team that I am
+in. We have frequently found problems with the management of
+that modernization, and it certainly is behind the schedule it
+was intended to follow, and it has not had as much delivered as
+it was supposed to have delivered.
+ On the other hand, they do have greater capacity now than
+they certainly did back in the period you were talking about
+earlier to do this kind of matching. It would undoubtedly take
+them additional effort to implement any new requirements. They
+would have to do software development, and they may need
+additional----
+ Chairman Spratt. There would be a lag time of several years
+in all probability between the enactment of legislation and
+appropriations and the effective implementation of this; is
+that right?
+ Mr. Brostek. That is certainly true, and it would depend a
+lot on the specific initiative that was implemented and how
+complex, for instance, the rule-making would be to determine
+exactly how the information reporting would be done.
+ Chairman Spratt. Mr. Edwards, any observation?
+ Mr. Edwards. I am happy to make an observation on your
+prior question.
+ You asked about what compliance might be now in 2007. It
+does strike me--looking at the GAO, it shows the overall number
+being fairly stable and compliant over the decades, but there
+are many conflicting forces, of course, going into that that
+are probably balanced out. Tax or marginal tax rates are much
+lower than they were in the 1960s and 1970s and even to an
+extent in the 1980s. So that is good for compliance. The
+capital gains rate was cut from 20 to 15 percent in recent
+years, thus reducing the incentive to evade capital gains taxes
+by 25 percent.
+ On the other hand, you have got this huge increase in tax
+expenditures. Even in the last few years, more tax credits for
+energy and education and all kinds of other things consume the
+IRS' time. They make tax paying very confusing. The globalized
+economy is probably making tax compliance worse. So all of
+these things, it seems, sort of balanced out over time.
+ Chairman Spratt. Mr. Cooper.
+ Mr. Cooper. Thank you, Mr. Chairman.
+ First, I would like to thank the tax advocate for the new
+IRS split refund regulations which enable taxpayers to not
+spend all of their refund at one time and hopefully save a
+portion of it. So thank you for that on behalf of the
+Congressional Savings and Ownership Caucus. That was one of our
+priorities.
+ I would like to focus on tax expenditures again, and as Mr.
+Edwards just noted, Congress has legislated through the Tax
+Code to an amazing degree. If you add up all of the tax
+expenditures, as I mentioned in an earlier question, it is some
+$847 billion a year. That approaches the size of all Federal
+discretionary spending, including all defense spending and all
+domestic discretionary spending, so that is how much we have
+sacrificed in revenue just to serve a remarkably undefined
+constituency here, because as I quoted the other Ms. Olson
+earlier, ``unmeasured and immeasurable, unverified and
+unverifiable.''
+ So it seems to me, if you analyze it, what we have created
+here is a system in which the 17,000 Ways and Means and Finance
+Committees' lobbyists can get a tax break virtually for free
+for their clients, and as Commissioner Everson testified
+earlier, he admitted it takes the IRS some 20 years to catch up
+with law changes and who benefits and who does not and tax gap
+or tax cheating and things like that. That is a pretty scary
+prospect.
+ So I wanted to experiment with you the idea that perhaps we
+should make the tax expenditures more measurable and
+verifiable. For example, if you ask for and receive a tax
+break, wouldn't it be nice if, in succeeding years, you had to
+report who benefited from it and to what degree? That would
+improve accountability, I would think. Whereas, today, we do
+not really know where the money goes, and that is an
+astonishing amount of Federal money to lose.
+ Another approach would be, as Mr. Brostek reported, from
+GAO that there is a definite noncompliance rate associated with
+each tax expenditure. The more breaks you give, the more
+confusion you have in the Code and the more people do not pay
+their taxes. So these breaks create their own tax gap, and from
+Mr. Brostek's numbers, it looks like we lose $32 billion a year
+just in increased noncompliance as a result of these tax
+expenditures. That is about 4 percent of the total tax
+expenditures. So, if the government were really interested in
+collecting that money from the tax gap related to tax breaks,
+we would go ahead and have an upfront fee of about 4 percent,
+anticipating that there would be about 4 percent noncompliance,
+and I am already unpopular with the 17,000 lobbyists for the
+Ways and Means Committee.
+ But if the government, just as a theoretical question, were
+interested in simplifying the Code, improving verifiability and
+measurability, wouldn't it consider undertaking those steps of
+identifying who the beneficiaries are of these breaks and to
+what extent and also going ahead and anticipating a certain
+degree of noncompliance resulting therefrom? Those steps would
+come closer toward improving accountability of government.
+Comments?
+ Mr. Brostek. We did a report on tax expenditures a couple
+of years ago, and we have been updating the figures since. That
+is how we have the figure that is in my testimony today. We
+have felt that these provisions should have the same type of
+scrutiny as an outlay program. Now, there is a wide variety of
+tax expenditures. There are a lot of different purposes for the
+tax expenditures, but many of them are akin to a social program
+that is in the Internal Revenue Code. Yet, from our viewpoint,
+there is really not the same ownership that you would have if
+you had it in a line agency that is responsible for overseeing
+outlays of Federal funds.
+ So we did, in fact, press for more visibility for these in
+the budget process, more research and more data collection so
+that we could determine whether or not the provisions are
+worthwhile, whether they are returning to the taxpayers a
+reasonable ROI for our revenue loss.
+ Mr. Cooper. If I could just interrupt you for a second,
+when you say ``data collection,'' that makes me think that you
+are wanting to put the monkey on the government's back. These
+people are getting a special break. There is no constitutional
+right to a break. Shouldn't the monkey be on their back to
+report?
+ Mr. Brostek. That certainly is a reasonable proposition to
+me. I think that would generally be the case. There would be
+the need to collect data that we do not collect already, and
+one of the things that would be an issue here is we have talked
+some about the IRS having inadequate computer systems, in many
+cases, for administering the complex Tax Code. If they were
+also to collect the use information for these tax expenditures,
+there would be a lot more data that would come into the IRS,
+and so that would increase their need for computer systems, and
+someone would need to analyze that data if it were going to be
+worth collecting.
+ Mr. Cooper. I see that my time has expired.
+ Thank you, Mr. Chairman.
+ Chairman Spratt. You could come back--hold on if you have
+got further questions, but let us recognize Mr. Boyd, and then
+you can come back for additional questions.
+ Mr. Boyd. Thank you, Mr. Chairman, and thank you, panel
+members.
+ Earlier, a number of people on the committee and the
+Commissioner expressed the notion that the complexity of the
+current code does two things. It complicates it for those who
+want to abide by the rules who eventually throw up their hands,
+and the complexity allows those who want to cheat that ability.
+Do any of you disagree with that? Do any of you on the panel
+disagree? I am not asking for an editorial here, but do any of
+you disagree with that theory?
+ Ms. Olson. No.
+ Mr. Boyd. Okay. Thank you.
+ Mr. Edwards, I read a little bit about you, and I know you
+are listed as an expert on Federal tax and budget policy. I
+listened to your statement, and you said that everything seems
+to be going pretty well, that there is nothing wrong with our
+code. If you compare it to other nations, we have got an 86
+percent compliance rate.
+ Mr. Edwards. There is nothing wrong with our compliance
+rate, I think, compared to other countries. There is a lot
+wrong with our code.
+ Mr. Boyd. Okay. There is nothing wrong with our compliance
+rate, but there is something wrong with the Code, but nothing
+that a lowering of the rates and a simplification would not
+fix.
+ Given that and your expertise in tax and budget policy,
+what do we do about the largest deficits in the history of the
+Nation in the last 3 years?
+ Mr. Edwards. Well, I mean I am very concerned about what
+has been going on on the spending side of the budget. I looked
+at the numbers the other day under President Bush from 2001 to
+2007. If you take out interest, which has been pretty stable
+over recent years, Federal outlays have gone up 54 percent just
+over those 6 years. So I think the problem is on the spending
+side of the budget.
+ Mr. Boyd. With the bulk of that coming on the national
+defense side and with the entitlement program?
+ Mr. Edwards. Yes, absolutely, and I think I have a big
+concern with both the defense and nondefense and entitlement
+sides of the budget. I mean all of that spending sucks money
+out of the private sector. Spending on defense is not good for
+the economy just like excess spending in the entitlement
+incentive program.
+ Mr. Boyd. But you would concede, until you attack the
+defense and entitlement sides, you really do not solve that
+problem?
+ Mr. Edwards. Absolutely. I agree with that entirely.
+ Mr. Boyd. Okay. Thank you.
+ Ms. Olson, earlier there was discussion about the Private
+Collection Initiative, and I understand that you have some
+issues with that.
+ Would you care to comment what those are and what you see
+those problems as?
+ Ms. Olson. Well, I have been involved with the Private
+Collection Initiative since its inception for the last 5 years,
+before it even was legislation, when Treasury asked me to
+ensure that taxpayer rights were protected in this initiative,
+and my goal was to make sure that taxpayers were being treated
+in the same manner and under the same rules and under
+essentially the same procedures as they would be treated by the
+IRS employees, and I have had employees detailed to this
+initiative full time to watch it and report back to me, and
+this year----
+ Mr. Boyd. Could I ask you about that?
+ Ms. Olson. Yes.
+ Mr. Boyd. You have 65 Federal employees monitoring 75
+private sector employees? That is the number I have. Is that
+correct?
+ Ms. Olson. That is the IRS' employees. It does not include
+the--I would say we have 3 employees looking at this pretty
+much full time.
+ Mr. Boyd. Okay. The IRS has 65 monitoring 75 private
+employees, and you have 3 monitoring the IRS guys?
+ Ms. Olson. Right, and all of the information in our report,
+that we have reported on, has come from the IRS, so we are
+reliant on the IRS giving us that information. So I do not know
+whether there are more IRS employees, really. I do not know who
+is in that 65 number, except I know mine are not, and it was
+some of those numbers as we looked at the program as it went
+out, as it really started rolling out, and looking at the cases
+that were going on there that led me this year in my December
+31st report to recommend that Congress repeal the authority to
+use the private collection agencies because I believe that the
+business case was not there. It was just costing taxpayers too
+much and that the IRS could do it much cheaper. I believe that
+there is a workforce that could be trained to do that inside
+the IRS that would be much more stable, would protect taxpayers
+better, and some of the very premises that the program was
+based on, such as that there were easy cases that we just were
+not getting to that we could just ship out to the private
+collection agencies and they could just do like that do not
+exist. In fact, the IRS is now having to go to higher dollar
+accounts and small business accounts and accounts where
+taxpayers have not filed other tax returns in order to make up
+the number of cases that they are shipping out.
+ I guess the third concern that I had about it was that if
+you go online to the IRS Web site and you look up our Internal
+Revenue Manual, which is essentially our instructions to staff
+about how they are to treat taxpayers, you can find specific
+instructions to the collection employees about what they are
+supposed to do, and because we are contracting out to these
+employees, to these private parties as a matter of Federal
+procurement law we cannot disclose the instructions that they
+give to their employees. We cannot tell taxpayers how private
+collection agency employees are being told to treat taxpayers.
+That is a matter for the private collection agencies to agree
+because it is considered proprietary information, and I found
+that very disturbing.
+ Mr. Boyd. I do, too.
+ Chairman Spratt. Would the gentleman yield?
+ Do the private contractors have the same authority, for
+example, the extraordinary authority, to administer, I guess, a
+search warrant, an administrative search warrant, to sequester
+the funds in a bank account, for example, without notifying the
+taxpayer?
+ Ms. Olson. No, sir. They are limited under the
+Constitution. You know, it is the Federal Government that has
+the authority to assess and collect taxes, and so the way
+this----
+ Chairman Spratt. And it is nondelegable?
+ Ms. Olson. It is nondelegable, and so these individuals can
+only ask the taxpayer things that do not involve the exercise
+of discretion or judgment, so they can ask them ``Do you owe
+the tax in full or can you pay this in 36 months?'' one of the
+problems is if the taxpayer says, ``Well, I need 60 months'' or
+``I do not think that I should have to pay this penalty. I was
+in a coma during all of these years. I could not pay it while I
+was in a coma,'' then that case has to go back to the IRS to be
+worked. So then we have two people working a case at any given
+time.
+ Mr. George. Mr. Chairman, if I could just briefly address
+this issue, my office is very closely monitoring the
+implementation of this program given the sensitive nature of
+it, and we believe it is just much too early to make an
+assessment as to its success or failure, but we will be
+reporting on this within the year.
+ Chairman Spratt. What about a lien?
+ Ms. Olson. No, they cannot----
+ Chairman Spratt. You have got the most powerful lien known
+to the law if they want to levy a lien against the taxpayer who
+is delinquent.
+ Ms. Olson. It has to go back to the IRS, and the IRS does
+it.
+ Chairman Spratt. Okay.
+ Excuse me, Mr. Boyd. Thank you for yielding.
+ Mr. Cooper.
+ Mr. Cooper. Thank you.
+ Ms. Olson, you mentioned in your testimony that due to the
+special accounts receivable function of the IRS that they
+should have greater budget leeway than some other agencies.
+ What should their current budget be? What would be the
+right amount of money for the IRS?
+ Ms. Olson. Well, I would want to see--I am not subject to
+the same restraints as the Commissioner. You know, I get to
+speak freely in that respect, and my views do not represent the
+views of the administration nor the Commissioner nor the
+Secretary of the Treasury or pretty much anybody else, but I
+believe that the current budget is a good start, and I would
+want to see more funding for taxpayer service. We are ramping
+down some of the walk-in sites and some of the level of service
+on answering the phones, and I think I would take a good look
+at what more we need in the IT Department, and then on a going-
+forward basis, I think that we just need to think that the IRS
+needs for a period of years--and I am not quite sure what that
+period would be but for at least 10--increases, roughly, in the
+2-percent to 3-percent range overall, both enforcement and
+taxpayer service and IT, to get caught up and stay abreast with
+some of the demands that we have.
+ I also think that we have to look at the way the IRS
+calculates return on investment, and one of the things that we
+suggested was that the IRS report annually to Congress about
+its return on investment calculations, both on the service side
+and the enforcement side, and what you are getting for your
+investments.
+ Mr. Cooper. A couple of other questions.
+ There are a number of small but nuisance areas; for
+example, household employee paperwork. It is a nightmare, a
+blizzard of ink and paper.
+ Is it your responsibility or whose is it to come up with
+simpler approaches for that that we can take that
+recommendation and perhaps pass it into law?
+ Ms. Olson. Well, we have looked at that in the past, and we
+will continue to look at that. I agree with you that it is
+very, very complex. We have also looked at just the whole
+Federal employment tax arena because that is where so many
+small businesses get into problems. It is just the complexity
+of the rules, and we have tried to come up with some proposals.
+ Mr. Cooper. Well, since you are the Taxpayer Advocate, I
+look forward to hearing from you on those things.
+ Ms. Olson. Thank you.
+ Mr. Cooper. Another set of questions.
+ So many people just run and hide when they hear the ``T''
+word. They do not want to understand the complexity of the
+Code. Is there a simple breakdown? I thought I remembered from
+law school or someplace that a quarter or a half of the Tax
+Code is consumed with the capital gains distinction and income
+of some amazing portion. It would help if we kind of had some
+idea. I know that these retirement accounts are wonderful, but
+just with the complexity between the IRAs and Roth IRAs and all
+of the other varieties, that is a gigantic section of
+paperwork, and perhaps it is for a good purpose, but sometimes
+we do not realize the extent to which complexity is engendered
+by what seem like relatively simple ideas.
+ Mr. Edwards. Lots of tax experts will say that the capital
+gains is the single most complex part of the Tax Code, and it
+is not just individual capital gains; corporate capital gains
+is very, very complex, and often when you read about the tax
+shelters in the newspaper about some corporation doing some
+sort of machination, it revolves around the treatment of
+corporate capital gains.
+ Mr. Cooper. Well, has some tax wizard made a map of the
+Code and just said, ``Hey, half is here and half is there''?
+Because I think that might help us understand sometimes the
+complexity.
+ A final point. Mr. Brostek mentioned that many of these tax
+expenditures are in fact social programs, and I cannot help but
+note the irony that for discretionary spending here in Congress
+we have some 20 committees, including our friends on the
+Appropriations Committee, to oversee that $800 billion or $900
+billion worth of spending, but on the tax expenditure side we
+barely have any committees looking at how that is understood.
+So perhaps we should double the Appropriations Committee.
+Perhaps we should have another set of committees here in
+Congress to look at how that money is, in fact, being spent
+because today we are largely clueless. It is almost a shadow
+government in place, and there is little or no accountability.
+ Mr. Edwards. Can I make a comment on the tax expenditure?
+There are two aspects of it. One is the complexity, which we
+have discussed. The other is the fairness issue. It seems to
+me, with this explosion in tax expenditures, you create greater
+horizontal inequities in the Code. People earning the same
+amount of money can pay substantially different amounts of tax,
+and even if you look at education tax expenditures they have
+increased from 7 to 16 just in the last 10 years.
+ So what we are doing is we are subsidizing, say, you know,
+young lawyers who are going to law school on the one hand, but
+we are burdening truck drivers and garbage men on the other
+hand because they do not get that sort of tax break. So there
+is a fairness thing here as well.
+ Mr. Cooper. Without data, though, we almost do not know how
+unfair or--you know, it is an amazing netherworld that we have
+entered into due to the multiplication of the size of these tax
+breaks.
+ Mr. Brostek. It is, if I can jump in.
+ There is a variety of levels of data that we have
+available. You know, for instance, on the earned income credit
+we have a pretty good understanding of who is receiving it and
+how much and where they live in the country and all kinds of
+things like that, but on some of the other provisions we have
+virtually nothing at all. If we have a special accelerated
+depreciation provision, that gets reported to the IRS with all
+other depreciation on one line on the tax form, and we do not
+know who is even using that benefit that is in the Tax Code.
+ Mr. Cooper. On the EITC, though, the major abuse there is
+claiming dependents that you are not entitled to claim or
+claiming too many dependents, isn't it? So I cannot understand
+why there is not a matching process there. Commissioner Everson
+mentioned earlier that suddenly 5 million dependents in America
+disappeared once there was better reporting. Surely, there is a
+nonintrusive way of getting at EITC fraud.
+ Ms. Olson. I think that there is a lot actually that the
+IRS is doing on EITC, and we do have a very active matching
+program, and that does stop a fair number of refunds going out.
+I think any time you have something that is in the realm of
+$4,000 on top of--that could be without any withholding and you
+could get a check back of $4,000, that is a great enticement
+for people to find ways to claim it, and with the human mind
+being what it is there are always new ways. Once we find the
+way that they are doing it, they invent a new one. It just
+requires ongoing watching, I think.
+ There is a large amount, though, when we were working on
+trying to quantify this, of taxpayers who are eligible for the
+EITC who are not claiming it. We think that might be with the
+childless worker where it is not involving the children, but it
+is there. I have worked with United Kingdom and studied their
+credit and made some recommendations about how to restructure
+all of our family provisions--the child credit, the dependency
+exemption, the head of household status, and the earned income
+credit--to sort of lessen some of the complexity. It is a very
+complex area of law, not just the EITC.
+ Chairman Spratt. Gentlemen, we have got to be on the floor,
+especially on the floor, at around 1:00 o'clock.
+ Let me thank each one of you for excellent presentations,
+very forthright and forthcoming testimony. We appreciate your
+assistance in helping us better understand the tax gap and what
+we might hope to realize from it.
+ Thank you very much for coming.
+ Mr. Boyd. Mr. Chairman.
+ Chairman Spratt. Mr. Boyd.
+ Mr. Boyd. May I ask one--I have one quick request of Mr.
+George on the Private Collection Initiative.
+ Chairman Spratt. Sure.
+ Mr. Boyd. You said it is too early. How much time do you
+think you will need for your group to make an assessment, an
+evaluation, of whether it working or not?
+ Mr. George. We expect to issue a report in April,
+Congressman Boyd.
+ Mr. Boyd. Can you make sure that we get a copy of that
+report? I would be grateful.
+ Mr. George. Yes. Certainly, sir.
+ Mr. Boyd. Thank you very much.
+ Chairman Spratt. I would, before adjourning, ask unanimous
+consent that members who did not have the opportunity to ask
+questions of the witnesses be given 7 days to submit questions
+for the record. Without objection, so ordered.
+ Thank you very much.
+ [Whereupon, at 12:57 p.m., the committee was adjourned.]
+
+
+
+