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Thursday, September 23, 2010

Employment Tax Problems + Need for Effectve Tax Administration

In addition to the decades old problem of distinguishing an independent contractor from an employee, is the problem of uncollected payroll trust fund taxes. That is, when some employers pay their employees and withhold employment taxes, not all of those taxes get remitted to the government as required.

The Treasury Inspector General for Tax Administration (TIGTA) released a report yesterday (9/22) - The IRS Should Improve Collection Actions For In-Business Trust Fund Accounts Closed As Currently Not Collectible. TIGTA reports that in their sample review, the IRS did not adequately review whether taxpayers were current in filing obligations in 33% of cases.

"TIGTA estimates that improving controls to ensure required collection actions are pursued could potentially prevent approximately $84 million in liabilities from accruing per year, which is approximately $420 million over the next 5 years."

TIGTA reminds readers that "Taxpayers who do not voluntarily pay their share of taxes create unfair burden on honest taxpayers and diminish the public’s respect for the tax system."

A reminder that an effective tax system needs an adequate administrative structure to ensure that taxes owed are collected. This also requires an appropriate infrastructure with the revenue agency (such as IRS) - training, information technology, public education, etc.

This reminds me of some claims I've heard regarding the fair tax (national sales tax) that the tax will allow for elimination of the IRS (although states would take over collection). The uncollected payroll tax situation should also be a reminder that with a sales tax, not all of that gets paid over to the government either.

So, just an observation and reminder that tax system design also needs to consider the appropriate administrative structure.

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