Here is a great piece by Alison Acosta Fraser of the Thomas A. Roe Institute for Economic Policy Studies on what to expect as politicians and the IRS aim to close the “tax gap.”

The tax gap is really a compliance gap, arising when taxpayers do not pay the correct amount of taxes they owe. The gap is not large in relative terms—the IRS estimates about an 84 percent compliance rate.

According to the IRS, of those who underpay, 82 percent underreport their tax liability, 8 percent fail to file returns, and 10 percent underpay known tax debts.

Most of the compliance problem comes from honest taxpayers who try to comply with the tax code but are tripped up by its increasing complexity and unwieldiness. The remainder is due to tax evasion by those who knowingly break the law.

…

All taxpayers, not just small businesses, face rising compliance costs. Americans spent billions of hours and an estimated $279 billion filling out their federal income taxes last year alone.

This cost is nearly as much as the tax gap itself. Still, lawmakers maintain a misplaced focus on “free” revenues from closing the tax gap. Taxpayers should be aware of what this would entail.

The column includes some possible scenarios for reducing the tax gap that are scary to say the least.  And of course, most of them result in more power for the IRS, an agency not known for high ethics.

Investigations into abuses by the IRS a decade ago revealed an overzealous agency with staff, from agents to executives, free to gratuitously impose highly punitive measures on taxpayers. IRS agents anonymously testified that they had repeatedly seen senior IRS staff and executives “violate or ignore Internal Revenues Manual procedures and Treasury regulations simply because they wanted to punish a taxpayer.”

The conclusion:

Legislators who view the tax gap as a pot of gold to pay for their spending agendas have misplaced faith in the IRS. Taxpayers should know what increased IRS enforcement would mean to them, from burdensome reporting to a loss of personal privacy. Efforts to raise compliance would have a negative impact on economic growth, individual freedom, and the burden of tax compliance. The best mechanism to reduce the tax gap is to reform the current overcomplicated tax system.

Amen.

Related content:

This entry was posted by Brian on Tuesday, April 17th, 2007 at 8:08 pm and is filed under Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Please note the copyright policy.