The IRS Promises to Close the Growing Tax Gap by Targeting Tax Cheats

JEFFREY BROWN:

The federal government is expected to collect close to $2 trillion from taxpayers this year. But says the IRS that will be some $300 billion less than it's owed. The agency is calling this the "Tax Gap," the amount that we Americans hide from or don't pay to the IRS, and it's now taking action to close the gap.

Here to tell us about all this is Mark Everson, commissioner of the IRS. And welcome to you.

MARK EVERSON:

Thank you.

JEFFREY BROWN:

The biggest source of illegal non-compliance, as I understand it, is underreporting of income. Tell us what that means.

MARK EVERSON:

That's right. It falls — the tax cap falls into three pieces: About 10 percent of it is non-filing — people who just don't bother to play at all. Then there's underreporting and most of that is underreporting of income, not overstatement of deductions. And another 10 percent of it is non-payment. That's when you file your return, but you're short and you pay over time or not at all.

JEFFREY BROWN:

So when we're talking about underreporting, you're talking about the average person who might take an odd job and just not report the income as well as the wealthy person or corporation?

MARK EVERSON:

It goes across all pieces of the tax-paying public. It includes corporations and it includes individuals. But the bulk of the tax gap relates to individual taxpayers not corporate taxpayers. And it's just as you said, that it's more an understatement of income for individuals than it is an overstatement of deductions.

If you think about it, we get very good information on wages, as an example; there's a low non-compliance rate there, only about 1.5 percent, because if you work for the IRS or the post office or something, we get that information and people don't fudge on that. But if they have a business on the side or even they have a lawn service or something and they have 18 customers and they're paid in cash or in checks, they may not report all that or they may in some instances overstate their costs.

JEFFREY BROWN:

Now give us perspective here. Has the situation gotten worse or are you just better able to track it now?

MARK EVERSON:

The last time this research had been done was in 1988, tax year 1988. And then it wasn't done. People will remember the hearings of the 90s where the IRS was seen as being too tough on people. They didn't want any — Congress didn't want studies on this during that period of time. So now we've come out of that period and for tax year 2001 the research was updated.

And what that indicated was what I would call a modest deterioration in compliance on the part of individuals. We haven't looked at corporations yet. I'm concerned with all the tax shelters and the difficulty attended to internationalization globalization that perhaps that portion of the tax gap that's for corporations is, in fact, understated.

JEFFREY BROWN:

Well, in fact, of course, a lot of people hear about a tax gap and they think about the wealthy person and all the tax shelters that we hear about. And they say "well, if some people have access to the lawyers who can find ways around the system, why can't I fudge it a little bit?"

MARK EVERSON:

That's exactly the problem. And Americans have said repeatedly that it's very important for the IRS to enforce the law, particularly for wealthy individuals and corporations. We've articulated two overall objectives: one is to provide good service to taxpayers, helping them understand their obligation, facilitating their compliance in the system, but the next thing we've said is "we're going to enforce the law as well." And we backed away that the '90s because of this difficult period.

Our work force had gone down. We're bringing that back up and we have now four enforcement priorities that guide our decision making. The first is to provide greater attention to wealthy individuals, high-income individuals, and corporations who are not complying. This is an area that's been a real problem.

JEFFREY BROWN:

What does attention mean in this case?

MARK EVERSON:

Bringing up the audits. We've doubled the number of audits of high-income individuals over the last four years. Doing more in the corporate area in these abusive shelters, which have become so problematical. This has been an area focused just because of that sense of fairness that you mentioned.

Our second objective, which ties to this, is to work with — to make sure that tax practitioners adhere to professional standards and follow the law. Part of this problem, the abuse of shelters that we've seen, it's arisen because of the deterioration of ethics that took place with accountants and big law firms in too many cases where they were not just helping people to pay no more than what they owe, but what they owe, but really just to minimize the tax or eliminate it under any circumstances.

JEFFREY BROWN:

It is possible to stay ahead of that game? Because we've done a lot of reports on this on this show as well, as quickly as you make new laws, people find new tax shelters.

MARK EVERSON:

That is part of the problem, here. There are two issues: We need to do more. The president has asked for money for the IRS to strengthen its enforcement capabilities. We've been given a budget increase in the request. That's unusual far domestic agency. But the other piece of this is about the constant changing of the law, the ever-more complex code. Complexity, it obscures understanding.

It makes it tougher for somebody who wants to comply to comply, but it makes it easier for someone who wants to escape detection by the IRS to do so. So we're strong advocates. The president has done the right thing here. He's advocated more resources for the IRS, but he's also said "let's simplify the tax code." And that's the exercise now with the tax panel that's going to report to Secretary (John) Snow later this summer.

JEFFREY BROWN:

You mentioned higher audits in the last year or so. And I know question that everyone in our audience would want me to ask is: Who should be worried?

MARK EVERSON:

If you're paying honestly and accurately you shouldn't be worried. But what we've done is we've increased the audits for the high-income individuals because we've seen these abusive shelters. We've seen all kinds of problems basically where you have things that have been pedaled to people by these attorneys and accountants.

We had something called the Son of Boss. This was a particularly bad shelter where this group would go to wealthy individuals, someone sell a business, make a $50 million gain and then they wouldn't — they'd be told "you don't have to pay any tax on that gain." Well, this transaction was so bad that when we set up a settlement initiative this year and we told people "you have to come in and pay 100 cents on the dollar plus all the interest and an applicable penalty," we got over — we got $3.5 billion to come in just so people could turn the page. There's been some I think second thoughts on the part of some that this did go too far.

JEFFREY BROWN:

Well, now, how are you going to find the right balance now? You mentioned earlier a few years ago, which we also covered extensively, the — when the IRS was brought up on Capitol Hill, charges of being too extreme and harassing American citizens.

Now you're saying you have to go after — you have to look for a lot of this money. How do you find the balance between enforcement, but not over-enforcement?

MARK EVERSON:

We say that our working equation is service plus enforcement equals compliance, not service or enforcement. And what happened was the IRS wasn't providing service to taxpayers. You couldn't get through on the phone in the 90s. We had to improve that service. We've done that. A lot of work was done that made a big difference to taxpayers.

But at the same time, we drew down that enforcement work force at just the wrong time when corporate governance was coming off the rails and when there was, oh, quite a bit of greed, the professional ethics deteriorated. We're bringing that back now but we have to do it with attention to taxpayer rights, taxpayer privacy and we do have to strike a balance. Now, we get a lot of help. There's a lot of oversight from the Congress, inspectors general and GAO, so I think that we'll hear from folks if this starts to get out of balance.

JEFFREY BROWN:

Let me ask you finally, personally on tax day. You're probably not the most popular man in America today.

MARK EVERSON:

Well, it's funny you say that. I got up yesterday morning, which was a busy day. I had two hearings, and we've got a pug dog. He's always very friendly, and my wife, Annette, we were there and the dog came over and he wouldn't even say hello.

JEFFREY BROWN:

The dog wouldn't?

MARK EVERSON:

The dog wouldn't say hello to me; said hello just to her. And she said "See, this time of year nobody loves you."

JEFFREY BROWN:

All right. Mark Everson, IRS Commissioner, thanks very much.

MARK EVERSON:

Thank you.