tax professionals should brace for a new wave of information reporting.
by 卡塔尔世界杯常规比赛时间 research
here’s something the irs has discovered and many tax preparers can probably confirm: while roughly 99 percent of taxes due on wages are paid to the irs, compliance on less visible sources of income is estimated to be just 45 percent.
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yes, it seems that americans are more willing to pay what they owe when the irs knows they owe it.
ironically, the burden of voluntary compliance falls more heavily on those who labor for others – employees who take home salaries or wages and, at the end of the year, a 1099. these tend to be people at the lower end of the income spectrum.
at the upper end, where high earners accrue more of their income from non-labor sources, misreporting is easier and – surprise, surprise – more common.
the difference between taxes owed and tax actually paid is known as the tax gap. the tax gap itself is only part of the problem. one painful offshoot is the fact that those with income to hide often channel their funds into economic activities with little purpose other than avoiding taxation.
how much tax gets dodged?
it’s pretty easy to calculate the tax gap created by wage- and salary-earners. the 1099 supposedly reports all income, and the common deductions are pretty easy to verify with an audit. an under-the-table side hustle might go unreported, but it usually doesn’t amount to much. if it does, inordinate spending can reveal the problem.
auditing the wealthy, on the other hand, is so difficult that the irs really has little idea how much tax gets dodged. random audit data fails to capture the full extent of evasion. between convoluted shelters, offshore banking, complex partnership structures, cryptocurrencies and hotshot tax preparers – options unavailable to those of lesser means – only a sophisticated audit by specialized auditors can come close to finding out what’s truly owed.
high-income non-filers rising
the treasury inspector general figures that since 2010, the number of high-income non-filers has risen by nearly 50 percent. between 2014 and 2016, out of 900,000 high-income non-filers, 400,000 cases were never investigated. of those 400,000, just 300 cost the government some $10 billion in that two-year period.
the probable cause of such widespread evasion success was a resource-constrained irs that has been unable to pursue all cases.
if the extent of third-party information reporting is the crucial difference, then the solution, or part of the solution, is obvious: more third-party reporting on income beyond the basic 1099.
the irs and the government accountability office agree that bolstering information reporting is one of the best ways to increase the overall compliance rate.
leveraging information
financial institutions could be a significant part of that reporting. the information could be collected without burdening taxpayers with new reporting requirements. according to the treasury report on the families plan agenda, “leveraging information that financial institutions already collect (could) shed light on those taxpayers who misreport income derived from opaque categories.”
the report also says: “the president’s proposal requires information reporting on financial accounts to increase the visibility of gross receipts and expenses to the irs. today, business income is subject to limited information reporting. current reporting of gross receipts exists for only certain types of revenue, and there is no information reporting on deductible expenses. this is why the tax gap for partnership, s-corporation and proprietorship income is estimated at around $200 billion annually with the net misreporting percentage for certain income categories exceeding 50 percent.”
a new reporting regime
president biden is suggesting a new reporting regime built from the framework of form 1099-nt that taxpayers receive on interest earned from a financial institution. the bolstered report would report gross inflows and outflows on all business and personal accounts, with exceptions for accounts below a low de minimus gross flow threshold.
other reports could include requiring payment settlement entities to report gross receipts and purchases. the regime could also apply to foreign institutions and crypto-asset exchanges and custodians.
the additional information would effectively relieve many honest taxpayers. no new reconciliations would be required, and the irs could avoid unnecessary audits while better targeting probable transgressors.
if the plan survives senatorial resistance and becomes law, tax preparers will be back on the learning curve – the curve that never ends – but will also be more confident that their clients are providing honest, accurate information.
3 responses to “closing the tax gap: more data, more compliance?”
sneed hearn
the irs always goes after the wrong people.
jaret rice
i believe the government is in denial about how much tax is avoided by people at the “lower end of the spectrum.” between the under the table jobs and other unreported cash payments (such as hair stylists and waiters), there is a massive amount of tax not being paid. also, these people are ignorant to the fact that they are shorting themselves on social security benefits one day.
mary scribner
more of big brother watching us. sounds fun.