how closing the $7-trillion tax gap could impact the tax prep business.
by 卡塔尔世界杯常规比赛时间
president biden is proposing some big – and some would say long overdue – spending on infrastructure and programs to help lift americans out of the pandemic recession. he can’t raise taxes – that’s congress’s purview – but collecting taxes falls within the obligations of the executive branch.
more: wealthiest taxpayers cheat irs out of $400 billion a year | 173% increase in irs correspondence backlog | hunker down: the irs backlog isn’t going away anytime soon | the irs studebaker bomb | imagine irs ‘concierge’ service. just imagine. | irs has recruiting problems, too
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and the executive branch smells potential.
biden is also proposing an increase to the irs budget along with a set of tax compliance measures. the measures aim to increase tax revenue by closing the “tax gap” – the difference between taxes owed and taxes actually paid. the u.s. treasury estimates there was $584 billion in that gap in 2019, and it could add up to a total of $7 trillion over the course of the next decade.
dramatic effect on tax prep
the measures will have a dramatic effect on tax preparation. cpas and tax preparers will have to be aware of several consequences of biden’s proposal.
- the irs will have better resources to pursue sophisticated tax evasion – the dubious loopholes and sneaky shelters used by the wealthy.
- the irs may seek more complete information, especially from third-party payers, mainly employers.
- the irs will finally get an upgrade in outdated technology, including the obscenely antiquated business file system that dates back to the 1960s.
- the irs will have more staff dedicated to audits and enforcement.
- professional tax preparers may require some kind of certification and regulation.
- tax preparers and others may be subject to increased penalties for abetting tax evasion.
whence the gap?
the irs estimates that the annual tax gap amounts to almost 3 percent of gdp. the voluntary compliance rate is figured to be 84 percent. the net compliance rate, which includes compliance accomplished through enforcement and late payments, is around 86 percent.
the tax gap has three distinct elements:
- the “nonfiling” gap left by taxpayers who fail to file returns in a timely manner – 9 percent of the gross gap
- the “underpayment” gap left by those who report all their obligations but don’t pay all of them – 11 percent of the gross gap
- the “underreporting” gap left by those who underreport income or overclaim deductions and credits – 80 percent of the gross gap
phalanxes of top-notch tax preparers
these estimates on the gap are to some extent just guesstimates based on careful audits of individual taxes. audits of incomes and returns based on w-2s and other verifiable information are relatively accurate.
but the irs admits that audits struggle to capture the full extent of evasion by high-income taxpayers backed by phalanxes of attorneys and top-notch tax preparers. these specialists in loopholes and questionably contrived tax shields can make audit detection difficult. the result is an apparent tax gap that seems smaller than it really is. passthrough and offshore evasion, if accurately and thoroughly accounted for, would probably reveal an even wider gap.
if a beefed-up budget allows the irs to hire more agents and deploy better technology, tax dodgers and tax preparers will come under increased scrutiny. this could mean new opportunities for some preparers … and trouble for others.
4 responses to “seven trillion reasons to pay attention”
jaret rice
i would be happy to never hear the term “loophole” ever again. hearing someone on the news call the mortgage interest deduction a “loophole” is infuriating. taking advantage of a write-off that was purposely added to the tax code isn’t a “loophole.”
tim unnerstall
seven trillion dollars is a lot of money. but when you break it down, it only comes out to about $2,000 per year for every man woman and child in america. is there that much cheating going on, or just that much “potential” built into the tax code? how much revenue could your local police department generate by imposing the maximum fine for jaywalking? when you bring grandma a couple of bags of groceries because she watched junior when the regular babysitter was sick, does she pick up the (delivered) value as income and subject it to self-employment tax?
les orr
“the irs will finally get an upgrade in outdated technology, including the obscenely antiquated business file system that dates back to the 1960s.” this seems to be a popular theme song lately. i would like to point out 2 ‘fallacies’: 1) you don’t hear that the irs has been ‘hacked’ very often and 2) it is really difficult to hack punch cards. just saying the obvious …
richard buller
“these specialists in loopholes and questionably contrived tax shields can make audit detection difficult. the result is an apparent tax gap that seems smaller than it really is. ”
or the more likely scenario that the irs’s position on returns is often extreme and they use their power to bully taxpayers implementing perfectly legal tax avoidance, not evasion (!), strategies. the irs knows they will lose many of these cases as the wealthy and their “phalanxes” of high powered and high priced tax professionals plead their cases in court. i bet the $584 bn ends up being less than 10% of that when experts outside the ivory tower of government have at it.
just my two cents worth.