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Sunday, March 17, 2013

Fixing the tax gap as part of tax reform

Source: IRS Tax Gap -
How does the net annual tax gap of $382 billion fit into tax reform?  This is a lot of money that is not collected due to both intentional and unintentional errors. For perspectives on understanding the significance of this amount, consider the following:
  • Per OMB, the deficit for fiscal year 2011 was $1.3 trillion. The net tax gap represented about one-third of that amount (OMB, Table 1.1).
  • Per IRS data, for FY 2011, the net tax gap exceeded net tax collections for the corporate income tax and tax-exempt unrelated business income tax ($175 billion), excise taxes ($47 billion), and estate and gift taxes ($7.3 billion) combined (IRS, Data Book, Table 1).
But, how can this gap be reduced? Much of it is from some businesses not reporting cash revenues. Some suggestions from GAO in a 2007 report include:
  • Have the IRS provide assistance to first time Schedule C filers.
  • Require Schedule C filers to have a separate bank account for business activity versus personal activity.
  • Require consumers to issue 1099s to service providers if they provide a service that will increase the basis of the consumer's property (such as a new roof on your home).
  • Require 1099s for payments under $600.
What about having businesses withhold on payments made to non-corporate businesses?  What about more audits of cash businesses?

For more on the tax gap and tax reform, please see my article - Narrowing the tax gap for tax reform, AICPA Tax Insider, 3/14/13.

What do you think? Will Congress consider tax gap measures as part of tax reform work? What do you think will help reduce the tax gap?

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