President Obama wants to make it harder to cheat on your taxes.
In his recently proposed budget, the president asked Congress to give the Internal Revenue Service an increase of about 4 percent for the fiscal year that begins Oct. 1. That includes greater funding for enforcement activities such as audits, criminal investigations, collection activities and crackdowns on offshore tax evasion.
The president also asked Congress to give the IRS more money to modernize its antiquated computer systems — and he proposed legislation to expand information-reporting requirements.
Nobody knows precisely how much money is lost each year due to cheating, or even from unintentional errors stemming from tax law complexity. But IRS researchers have estimated the nation's "tax gap," or the difference between what the government actually collects each year and what officials think they should be collecting, at around $290 billion, even after what is eventually recovered through late payments and IRS enforcement actions.
The president’s proposals may be welcomed by Congress, where they can be packaged and sold as long-overdue ways to collect more money from lawbreakers, thus reducing the burden on honest taxpayers. Also, the additional billions of dollars in revenue could help trim the nation's record budget deficits.
But even if Congress gives the president everything he wants, the IRS still faces an uphill battle in its long-running war on tax evasion.
"I doubt that the increased funding will make a big dent in the tax gap,” says Joel Slemrod, professor of economics and director of the Office of Tax Policy Research at the University of Michigan. "But it is probably a good idea anyway, as increased enforcement not only brings in revenue but also improves the equity with which the tax burden is borne." Also, Slemrod says, expanding requirements for what must be reported to the IRS "is a smart way to go."
A recently published survey underscores the difficulties faced by the IRS in slashing the tax gap. According to the survey, most Americans agree it’s wrong to cheat on their taxes. But a growing number think it is okay to fudge a bit.
For example, taxpayers were asked: “How much, if any, do you think is an acceptable amount to cheat on your income taxes?” In response, 9 percent replied: “A little here and there.” That was up from 6 percent the previous year — and the highest since 2003. Another 4 percent replied: “As much as possible.” That was up from 3 percent the previous year. Still, 84 percent said “not at all,” although that was down from 89 percent the previous year.
The survey of about 1,000 taxpayers was taken last summer by a polling firm working for the IRS Oversight Board, a committee that oversees the IRS.
The Bigger IRS budget
The president asked Congress to appropriate more than $12.6 billion for fiscal 2011, a record. The IRS says it plans to continue "a robust international enforcement initiative to address offshore tax evasion." The "additional enforcement resources" will focus not only on "underreporting of income associated with international activities" but also will "expand enforcement efforts on noncompliance among corporate and high-wealth taxpayers."
The IRS expects the new enforcement personnel to generate more than $1.9 billion in additional enforcement revenue "once the new hires reach full potential" in fiscal 2013. The IRS says its enforcement activities brought in nearly $49 billion in fiscal 2009.
The IRS audited about 1.43 million individual income tax returns last year, up just slightly from about 1.39 million the prior year — but far above the 617,765 returns audited in fiscal 2000. The latest year's "audit coverage" was only about 1.03 percent of all returns filed, up from 1.01 percent the prior year and the same as the 1.03 percent ratio in 2007. But the audit coverage ratio was 0.49 percent in 2000.
The IRS is training its audit guns on the big money. Late last year, the IRS launched a special effort to "centralize and focus IRS compliance expertise involving high-wealth individuals and their related entities," IRS Commissioner Doug Shulman said in late January. "This is a game-changing strategy for the IRS," Shulman said. "Initially, we will be focusing on individuals with tens of millions of dollars of assets or income. Going forward, we will take a unified look at the entire complex web of business entities controlled by a high wealth individual.”
Auditors also are expected to focus, as they have in the past, on self-employed workers and small businesses who deal in large amounts of cash and whose payments aren't reported independently to the IRS. Officials also plan to increase scrutiny of corporations and other businesses.
For a full list of the Obama proposals, see a Treasury Department publication, dated February 2010, called "General Explanations of the Administration's Fiscal Year 2011 Revenue Proposals," known for short as the "Green Book" because of the color of its cover.
Tom Herman is a former reporter for The Wall Street Journal.