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Reducing the FederalTax Gap
A Report on Improving VoluntaryCompliance
Internal Revenue ServiceU.S. Department of the TreasuryAugust 2, 2007
 
 
 
Reducing the FederalTax Gap
A Report on ImprovingVoluntary Compliance
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EXECUTIVESUMMARY1UNDERSTANDINGTHETAXGAP6VOLUNTARYCOMPLIANCE17COMPONENTS19SUMMARY57APPENDIX
InitiativeTimeframes
 
58
 
GLOSSARY97
 
1
INTRODUCTION
InFiscalYear(FY)2006,federalreceiptstotaledover$2.4trillion.Morethan95percentofthenetreceiptswerecollectedbytheInternalRevenueService(IRS)throughitsadministrationoftheincome,employment,transfer,andexcisetaxprovisionsoftheInternalRevenueCode.Virtuallyallofthesereceiptswerecollectedthroughataxsystemunderwhichtaxpayersvoluntarilyreportandpaytheirtaxeswithnodirectenforcementandminimalinteractionwiththegovernment.TheoverallcompliancerateachievedundertheUnitedStatesrevenuesystemisquitehigh.Forthe2001taxyear,theIRSestimatesthat,afterfactoringinlatepaymentsandrecoveriesfromIRSenforcementactivities,over86percentoftaxliabilitieswerecollected.Nevertheless,anunacceptablylargeamountofthetaxthatshouldbepaideveryyearisnot,suchthatcomplianttaxpayersbearadisproportionateshareoftherevenueburden,andgivingrisetothe“taxgap.”Thegrosstaxgapwasestimatedtobe$345billionin2001.Afterenforcementeffortsandlatepayments,thisamountwasreducedtoanettaxgapofapproximately$290billion.TheTreasuryDepartmentandIRSarecommittedtoimprovingcurrentcompliancelevelsandcontinuingtoaddressallformsofnoncompliance.TheIRSOversightBoardhasadoptedan86percentvoluntarycompliancegoalby2009andSenateFinanceCommitteeChairmanMaxBaucushasaskedfora90percentvoluntarycompliancegoalby2017.ThisreportsetsforthstepsthatwillbetakentoimprovecomplianceandenhancetheIRS’abilitytomeasurecompliance.Onceimplemented,thesestepswillimprovetheIRS’abilitytogaugeprogressinachievingspecificlong-termcomplianceobjectives.ThisreportoutlinestepsthattheIRSwilltaketoincreasevoluntarycomplianceandreducethetaxgap.ItbuildsontheComprehensiveStrategyforReducingtheTaxGap(theTreasuryStrategy)thatwasreleasedinSeptember2006bytheTreasuryDepartment’sOfficeofTaxPolicyandprovidesmoredetailforthatstrategy.TheIRSregularlyaddressescomplianceimprovementmeasuresinitsplanningandbudgetingprocesses.TheAdministration’sannualbudgetrequestidentifiestheresourcestheIRSwillneedtomeetspecificperformancegoalstoachieveitsstrategicpriorities.Thisdocumentcombinesandaddressescurrenttaxgapefforts.Inaddition,theIRShaslongbeenconductingresearchincomplianceandthetaxgap,andresultingdataisincorporatedthroughoutthisdocument.Thestepsoutlinedinthisreportare,inmanyrespects,onlyinitialstepstowardimprovingcompliance.Asdescribedbelow,oneoftheprimarychallengesthattheIRSfacesinimprovingcomplianceistogetabetterunderstandingofthecurrentsourcesofnoncompliancebyimprovingresearchinthisarea.Untilthatunderstandingisclarified,effortstoimprovecompliancemaybemisdirectedandprogressmaynotbemeasurable.TheIRShastakensignificantstepsinthisdirection,mostimportantlythroughtheNationalResearchProgram(NRP),whichisthesourceofupdatedestimatesofcomplianceamongindividualtaxpayersfor2001.TheIRSiscommittedtofurtheringitsworkinthisareathroughupdatedindividualtaxpayerNRPexaminationsandacurrentstudyfocusingoncomplianceamongSubchapterScorporations(Scorporations).
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