Cart before the horse? TEI takes on tax gap: FIN 48, liaison meetings, Canadian issues also focus of advocacy activities.

In early March, Tax Executives Institute testified before the presidentially appointed IRS Oversight Board on ways to close the tax gap. A key component of the Institute's March 7 testimony was a call for the government to do a better job of defining and measuring the tax gap.

In inviting TEI to testify, the Oversight Board observed that "[r]educing the tax gap is not just the responsibility of the IRS, but of all organizations that are engaged in tax administration. The tax gap affects us all as taxpayers and citizens, and we cannot expect the IRS to bear the burden of reducing the tax gap on its own." The Institute's testimony--delivered by Executive Director Timothy McCormally--acknowledged that all stakeholders have an interest in closing the tax gap. It noted, however, that the government has already conscripted employers and the business community into the service of tax administration, requiring them to withhold and file Forms W-2 and 1099, as well as other information returns without providing compensation. Hence, TEI's written statement concluded, "calls for a shared approach to addressing the tax gap must constitute more than the shift of responsibility for improving compliance from the government to the private sector." Indeed, TEI said the IRS must assume responsibility for accurately measuring the tax gap and implementing strategies to address it. Moreover, Congress should not sidestep the overriding need for tax simplification.

The Institute's testimony explained that "addressing the tax gap requires three things accomplished sequentially--a common definition; accurate and up-to-date quantification; and balanced remedial measures."

In respect of measures of the tax gap, the Institute noted that "[o]ne of the curious aspects of the current tax gap focus is the absence of hard evidence documenting that the problem is any larger, or for the matter smaller, than in the past." Based on available data, the Institute said, "the compliance rate appears to be between 80 and 85 percent--just about what it was 10 years ago and 20 years ago." Thus, the Institute cautioned against "taking precipitous action based on dated projections and estimates." That, TEI noted "is a recipe not for success but for finding ourselves in precisely the same situation in another decade."

The largest part of the tax gap problem originates in the individual and small business segments of taxpayers, TEI noted, with Treasury Department data suggesting that more than 90 percent of the gross tax gap is attributable to these sources. The IRS, TEI said, needs to focus its compliance activities there. "Proposals to expand information reporting requirements would impose significant costs on the payer community--payers that are themselves compliant." To mitigate those burdens, the Institute recommended compensating the payer community, citing as an example the vendor allowance many...