The primary goal of the Internal Revenue Service is to collect the taxes that are owed to the federal government under current tax law. Reducing the difference between taxes legally owed and taxes actually paid in a timely manner– referred to as the “tax gap”–is a key objective of the IRS’s collection and examination efforts. A recent Tax Talk Today Webcast featured an expert panel of tax practitioners and IRS officials discussing the IRS’s efforts to encourage voluntary compliance with tax law.
The IRS estimates that, for tax year 2001, the gross tax gap had reached $345 billion. Three categories of non-compliant taxpayers make up the tax gap:
- Non-filing–the taxpayer files returns late, or not at all;
- Underpayment–the taxpayer files on time, but does not pay the full tax liability;
- Underreporting–the taxpayer files on time, but does not report her correct tax liability, often by overstating exemptions and deductions, or understating income.
How does the IRS propose to close the tax gap? Among other moves, it is stepping up activities in examination and collection, as well as proposing new federal legislation. The latest numbers on federal tax enforcement illustrate the IRS’s commitment to improve in this area (see sidebar). Kevin Brown, deputy commissioner for services and enforcement and the acting IRS commissioner, said that overall revenues are up, and the IRS is “quite pleased” with the level of service provided to taxpayers in a time when enforcement activities are increasingly successful.
“We need a balance between service and enforcement,” said Brown. “We can’t neglect one at the expense of the other, and we’re constantly seeking to improve in both areas.”
Brown and other IRS officials list these areas slated for change.
1) Examination. The IRS plans to improve its examination processes with a focus on two broad categories: balanced audit coverage, based on patterns of noncompliance; and egregious noncompliance, which would include abusive transactions. Expect to see an emphasis on examinations of high-risk taxpayers– including small businesses, self-employed individuals, and high-income individuals –that often have more complex returns and have exhibited a noticeable degree of noncompliance in the past.
“All of these are again designed around the tax gap…where examination appears to be the best way in closing the tax gap,” said Steve Burgess, director of examination in the small business/self-employed division of the IRS.
2) Collection. Taxpayers of all kinds tend to ignore or deny initial collection notices from the IRS, but waiting doesn’t change anything except the total amount of interest and penalties.
“The same ways to resolve a case are available at any point in collection,” said David Alito, director of collection in the small business/self-employed division.
The IRS currently uses two private debt collection agencies to assist with collection activities, although there have been several hearings on the program. While collection activities appear to be in a positive trend right now, the IRS is constantly looking for ways to improve its processes.