IRS aims for 86 percent voluntary compliance rate in 2009
The U.S. has one of the highest voluntary tax compliance rates in the world. Eighty-four percent of all taxpayers voluntarily comply with the tax laws. However, the $300 billion that the government loses to the "tax gap" is motivating the U.S. Treasury Department and the IRS to boost the voluntary compliance rate to 86 percent this year.
Compliance
In 2008, the IRS collected $2.7 trillion. The vast majority of those revenues come from taxpayers who voluntarily report and pay the taxes that they owe. The IRS has estimated the overall voluntary compliance rate to be approximately 84 percent.
Roughly 15 percent of taxpayers are not complying with the tax laws. Noncompliance takes three forms:
- Underreporting (not reporting one's full tax liability on a timely-filed return);
- Underpayment (not timely paying the full amount of tax reported on a timely-filed return); and
- Non-filing (not filing required returns on time and not paying the full amount of tax that should have been shown on the required return).
Measuring the tax gap
The IRS’ estimate of the tax gap is based on statistics from 2001 and earlier. The agency is updating its research into the tax gap. The IRS is currently completing a compliance study on S corporations and plans to release the results later this year. The IRS is also conducting research on reporting compliance with the individual income tax. In October, the IRS intends to launch a study of employment tax compliance.
These projects will help the IRS update the tax gap. The revised amount could be significantly higher than $300 billion.
Information reporting
One tool that the IRS is using to close the tax gap is information reporting. Compliance is high where there is third party reporting. Most individuals receive W-2 forms at the end of each year. These are the most common type of third party reporting.
New information reporting requirements will kick-in in 2011. Starting in January 2011, organizations that process credit and debit card payments for merchants must annually report the amount of these payments to the recipient businesses and to the IRS. The Treasury Department and the IRS are drafting regulations to implement this new requirement.
Also in January 2011, brokerage firms must annually report cost basis and holding period information to customers and to the IRS in addition to gross proceeds from securities transactions. According to the IRS, information reports will make it easier for taxpayers to compute the net amount of gain or loss and will have a significant effect on reducing misreported capital gains.
Please contact our office if you have any questions about the tax gap, the IRS’ collection activities or the upcoming information reporting requirements.
(Treasury Update on Reducing the Federal Tax Gap and Improving Voluntary Compliance, July 2009)
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