ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – GAO OFFERS RECOMMENDATIONS TO REDUCE THE TAX GAP
By Robert S. Schriebman
The tax gap is the difference between tax amounts that taxpayers should have paid and what they actually pay voluntarily and on time. The IRS has estimated that this gap is almost $500 billion per year! The latest figures go back to only 2014 – 2016. Taxpayers owed about $3.3 trillion per year in federal taxes from individual income taxes, corporate income taxes, and employment taxes. However, they actually paid only about $2.8 trillion per year.
It is a complex problem. Estimates can have measurement and sampling errors and can vary in the quality of information available. Further, these estimates do not fully reflect all the areas of the tax system. For example, there are excise taxes, estate and gift taxes, as well as foreign or illegal activities, and digital assets. The IRS has found that underreporting of tax liabilities makes up 80% of a gross gap. Individual underreporting alone represents about 60% of the gross gap. The individual underreporting includes estimates relating to income from sole proprietorships, partnerships, S Corporations, estates and trusts among others.
Reasons for Tax Gap
The GAO shows that there are 5 primary reasons for the continuing tax gap:
- Limited third-party information reporting. Individual taxpayer reporting constitutes the largest component of the tax gap. The primary culprits are sole proprietorships. In my law practice, I have observed that more Schedule C audits occur than audits of small corporations.
- Declines in audit rates. We all know that the percentage of audits has declined sharply over the last decade. The IRS hopes that with new funding there will be more audits occurring. IRS audits have decreased among all income levels.
- Poor IRS customer service. The GAO believes that good customer service can help make it easier for taxpayers to comply with their tax responsibilities. These days it is difficult to reach the IRS by phone and there are long waiting periods.
- Tax code complexity. We hear politicians talk about simplifying the tax code. When I started practicing tax law, the IRS code was only one volume. Now it is two very large volumes containing pages of very thin paper. No one knows totally what is in those volumes.
- Abusive tax shelters. Tax shelters have been a problem since the 1980s. Shelters have gotten very sophisticated, and many are offshore insurance products designed to hide taxpayers’ assets or falsely claimed federal income tax benefits. Promoters can also market abusive tax schemes which are designed to circumvent and evade taxes. One must know the difference between legal tax avoidance and illegal tax evasion.
The GAO has recommended the following solutions:
- Establish realistic goals within the IRS to reduce the tax gap.
- Research, evaluate and develop recommendations to expand third-party information reporting.
- Digitize taxpayer-provided paper return information, making it more available for IRS enforcement.
- Establish professional requirements for paid tax return preparers.
- Expand third-party information reporting for certain payments that rental real estate owners make to contractors.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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