Government Estimates $290 Billion in Missing Tax Revenue
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GWEN IFILL: How much should Americans pay in taxes? How much do they actually pay? According to the IRS, there is a $290 billion gap between those two numbers. What causes it? And can the government get the money back?
For that, we turn to Nina Olson. She’s the national taxpayer advocate at the Internal Revenue Service. And Giovanni Coratolo, he’s executive director of the Council on Small Business at the U.S. Chamber of Commerce.
Why does this gap exist and what causes it, Nina Olson?
NINA OLSON, National Taxpayer Advocate: Well, there are lots of different causes of it. It could be that the taxpayers don’t understand the tax laws, they’re so complex. It could be that the procedures that we ask taxpayers to follow are too complex. It could also be just out-and-out tax evasion. And it could simply be the result of taxpayers not being able to save money in order to pay their taxes timely.
GWEN IFILL: So this is people who are setting out to defraud the government or people who just accidentally have somehow not paid everything that they owe?
NINA OLSON: Well, nobody really knows what the breakdown is between inadvertent non-compliance and intentional, evasive-type non-compliance. That’s one of the things that my office has really encouraged the IRS to do the kind of research on, because if you don’t know that, you won’t know how to correct that problem. You won’t know the right touch, if you will, to the taxpayer to get them to become compliant.
GWEN IFILL: Is this a problem for individuals or a problem for business mostly, the bulk of this number?
NINA OLSON: Well, for individuals, particularly wage-earning individuals, people who get W-2s at the end of the year and are subject to withholding, we see about 99 percent of the taxes and reported — we see 99 percent of the income that is reported on those W-2s that is reported on those W-2s that is also reported on their income tax returns.
But once you get into small business, and particularly sole proprietorships, where they may not be subject to income reporting even, you will find that there’s a greater non-compliance rate. So, in fact, the unincorporated businesses are a very large portion of the tax gap.
Small businesses at fault?
GWEN IFILL: Well, let's talk to Mr. Coratolo about that, these small businesses who are sometimes sole proprietors and maybe are not keeping their books straight? What is it? Why are small businesses a part of this problem?
GIOVANNI CORATOLO, U.S. Chamber of Commerce: Well, Gwen, first, I must say that, for the majority of small businesses, they are compliant. There is a minority of businesses that do try to game the system.
Now, we don't know whether that is unintentional, or we don't know whether that is just because of the complexities of the tax law. Based on that information, we would be able to map out some sort of a strategy on how to close the tax gap.
GWEN IFILL: What is that strategy? And what is the responsibility of those businesses to try to take the initiative and close that gap?
GIOVANNI CORATOLO: Well, we see a tax code that is extremely complex. Right now, small businesses are a burden by the regulatory regime. Eighty percent of the tax and paperwork burdens that are imposed on small businesses comes from the IRS. And at $75, $80 an hour for tax preparers and accountants at the low end, it's a very big burden on the backs of small businesses.
GWEN IFILL: What do you say about that, Nina Olson? Even the treasury secretary has said most of this money is not getable because he's not willing to force the kind of requirements fixing it or closing the gap would require.
NINA OLSON: Well, I think that it gets to the tradeoffs that you have to deal with in trying to get the perfect compliance, as opposed to getting good enough compliance. And in any one of these decisions, you have to decide whether the benefits of getting all of the correct amount of taxes in is worth the kind of burdens that you're putting on people.
And, certainly, in withholding the fact that so much of our compliance is driven by the fact that people have money taken out of their checks as they go along, the paychecks as they go along, the burden for that is on business. They are the ones that are withholding the taxes and paying them over to the IRS. They're doing the collecting for us.
And we had that discussion in the '40s and said, it's worth it to us in this system to impose that. And as you go further and ask for additional reporting or withholding, you've got to really be careful about imposing burdens.
Solutions to narrowing the gap
GWEN IFILL: Well, and what about the point about the complexity of the tax code? A lot of people just can't figure it out.
NINA OLSON: Well, I think that's true. I mean, there's a lot that you can do about simplification. One example is we had six different definitions of what a child was in the Internal Revenue Code before Congress, in 2004, enacted a uniform definition of "child." And you would think that would be very simple, but look what we had for years.
GWEN IFILL: And once they did that, all of a sudden a lot of the numbers dropped.
NINA OLSON: Well, that was in 1996, when we required people to have Social Security numbers for their children. We lost a lot of children that year.
GWEN IFILL: Funny how that works. Now, let's talk about what business can do to help. There is one proposal that, perhaps, credit card sales can be reported to the IRS or could be made available in a way that would allow them, in the same way that the government is forced to provide income statements, be able to match that up. What's wrong with that idea?
GIOVANNI CORATOLO: Well, you know, at first it sounds like a good idea, but if you drive down deeper, we just don't have the data to show that that's going to -- what results that's going to implement.
And that's the problem with all the proposals. If you drive down deep into the data, we don't know whether it's -- what type of business activity is driving the tax gap? Is it business-to-business transactions? Is it consumer transactions? We don't know the size. Is it small transactions over a large number of taxpayers or is it large transactions over a small number? We can't implement one-size-fits-all policies to solve the tax gap.
GWEN IFILL: You served on a panel that looked at these issues for the IRS. Is this something that business can do something, there's some way that you can step up and do your part to help get some of that data?
GIOVANNI CORATOLO: Oh, I agree. You know, any non-compliant taxpayer puts us compliant taxpayers at a disadvantage. I think more education is important. Certainly, the first time a business fills out a Schedule C form, it's a daunting task. You're faced with a complexity you never had before, more education. If the problem is with taxpayers that are making inadvertent errors, then education will be a key issue.
GWEN IFILL: Do you think the ultimate solution is business stepping up and trying to find some way to collect that data and improve enforcement or would you prefer the government did that?
GIOVANNI CORATOLO: Well, business doesn't have the data. The government has the data or should be able to get the data in order to underline good policies, to have narrow tax gap initiatives that will nibble away at the tax gap.
Legislation to fix the problem
GWEN IFILL: Nina Olson, in the end, who is paying for all of this?
NINA OLSON: Well, other taxpayers. We calculate that individual households pay $2,700 more than they should each year because of the tax gap, the amount of taxes that we know about that go unpaid each year.
GWEN IFILL: Is there legislation that can address that?
NINA OLSON: Well, there are things that can go about complexity. And I certainly believe that more information reporting is called for, at least in some areas.
I think that, in a way, we really have to think about the tax gap going to: What does it take to increase voluntary compliance? Because, in the long run, enforcement is the most expensive approach, and it doesn't change behavior. It really is voluntary compliance and people changing their behavior that makes a difference.
I think that people -- one thing we can do, without legislation, just simply do -- is talk about how paying taxes really is -- as Justice Holmes said -- the price for a civilized society and that it's almost a civic duty to pay taxes. And you may not like the amount of taxes you pay, you may think that the government is too large and you don't want to fund it, but that's what you say at the ballot box. When you're 1040, you pay your taxes.
GWEN IFILL: Nina Olson, national taxpayer advocate, and Giovanni Coratolo from the U.S. Chamber of Commerce, thank you both very much.
GIOVANNI CORATOLO: Thank you.