Don’t Raise Taxes. Collect the Billions Not Being Paid.

(Bloomberg Opinion) - As the Covid-19 crisis recedes, the federal government will still have a big canyon ahead of new spending or tax cut programs with annual deficits averaging at least 40% of total tax revenue. Regardless of what else we do about this challenge, now is the time for decisive action to effectively and fairly collect the taxes already on the books.
Last year, the federal government failed to collect statutory taxes of $ 574 billion. This equates to all income taxes paid by 90% of individual taxpayers.
Reducing this tax gap is possible if our executives take two key steps: fill in the gaps in revenue streams reported by third parties to the Internal Revenue Service, and instruct the IRS to take full advantage of newer technology.
Over the past 25 years, presidential administrations and governments of both parties have steadily slashed funding for the IRS and reduced enforcement resources by 28%, even though returns have increased by 31%. Most taxes are collected through the employer's withholding from taxpayers' paychecks, or their incomes are clearly reported. However, a massive amount of income is not reported by taxpayers and therefore is not collected by the IRS.
This widening tax gap only benefits non-compliant taxpayers, and it's unfair to those who pay what they owe. Merely increasing taxes on already compliant taxpayers would only increase this type of injustice.
Most taxpayers receive reports like W-2 from their employers. This information aids taxpayers with accurate filing and enables the IRS to efficiently review compliance. About 95% of income that is fully reported by third parties is submitted correctly by taxpayers, but only 45% of income that is not reported by third party at all, like most business revenue, is submitted by taxpayers.
To account for the 55% lack of reported income, taxpayers with business income in excess of $ 25,000 should be required to declare on their tax returns the bank accounts on which their income is deposited. Banks would then have to report these deposits to the IRS, just as employers report wages for their employees. This provision would be part of a larger legislative initiative to improve compliance.
Past experience shows that taxpayers improve their reporting when additional specific data is required. For example, in 1988, when taxpayers were first asked to list the social security numbers of relatives claimed as exceptions, 42 million fewer relatives were claimed than in 1986. Where did they go They never existed.
In and of itself, however, more coverage of more complex forms of income would be impractical, as IRS technology cannot use all of the information already received, and significant areas of non-compliance are barely addressed. Using newer technology would allow the IRS to quickly evaluate all tax returns to identify deficiencies with much greater accuracy.
The IRS makes limited use of already updated technology. The Government Accountability Office reported that a modernized IRS fraudulent refund termination program saved $ 6.5 billion in three years on a $ 419 million investment - a return 15 times its investment amounts.
These reforms will, over time, bring unreported income closer to third-party reported income and generate approximately $ 1.6 trillion in revenue for the first 10 years. It also improves the way all taxpayers interact with the IRS. The revenue generated would be 12-25 times the cost.
Far from weeding a group of taxpayers for the undue attention of the IRS, doing so would put all taxpayers on an equal footing. Low business income taxpayers - 70% of businesses - would be exempt from additional reporting. The improved technology would allow the IRS to focus enforcement on tax returns known to be flawed.
This proposal is not a tax elixir, but it would represent serious progress. For example, without an increase in taxes on compliant taxpayers, that would generate almost as much revenue over a 10-year period as the individual income and social security tax increases proposed by presidential candidate Joe Biden.
Before we start collecting taxes on any person or company, it is only fair that we collect the taxes we already owe. It's time for the IRS to narrow the tax gap.
This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Charles O. Rossotti was Internal Revenue Commissioner from 1997 to 2002.
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