Today the Senate Budget Committee held a hearing on “the causes of and solutions for addressing the federal tax gap.” Witnesses included IRS Commissioner Mark Everson, Government Accountability Office Comptroller General David Walker, and Nina Olson, National Taxpayer Advocate. The tax gap is the difference between what taxpayers owe and what they pay (or at least, what they pay on a timely basis).

This hearing stems from the release of the President’s FY07 budget (which makes funding recommendations for the IRS and includes other proposals to improve disclosure and tax administration) and the IRS’ announcement yesterday that the 2001 tax gap (the difference between the amount Americans should pay on income from legal activities and the amount they do pay) was $345 billion, a substantial sum that – if collected – might help to pay for a variety of programs and proposals. As such, attacking the tax gap is a politically attractive prospect.

S-CORP Alliance members will recall that both Treasury and the Joint Committee on Taxation have previously identified S corporation payroll tax “avoidance” (the H.I. tax) as being an element of the tax gap. Addressing that problem one way or another (meaning raising payroll taxes on S corporation shareholders) has been cited by both as a way to raise tens of billions of dollars. As today’s hearing demonstrated, S-CORP must stay actively engaged and involved in discussions of how to address the tax gap. Senate Finance Chairman Charles Grassley (R-IA), who also serves on the Budget

Committee and attended the hearing, made specific reference to the S corporation payroll tax proposal today, noting that the Finance Committee had looked at the payroll tax system in a hearing. In a nod to our lobbying efforts last year, Grassley also indicated that addressing S corporation HI taxes would be controversial to fix because they affect small businesses and might be easier to handle in the context of Social Security reform.Yet it’s clear that S corporation payroll taxes are very much on the radar of key policymakers. Indeed, Budget Committee Chairman Judd Gregg (R-NH) noted that Congress must do something on entitlement accounts and has an obligation to do something sooner rather than later. It’s also noteworthy that IRS Commissioner Everson referenced the S corporation audit project the IRS has undertaken and noted the IRS plans to do more on C corporation compliance.

As sizable federal deficits continue into the future, Congress will face increased pressure to narrow the tax gap and find other revenue offsets to pay for tax cuts. Thus, S-CORP must continue its mission to protect small businesses that are in compliance with the law from facing new, unfair tax levies.