This morning, the Treasury and the IRS released the new “tax gap” report. This report is in response to a request from Senate Finance Committee Chairman Max Baucus that the Treasury produce a plan to reduce the “tax gap” to 10 percent by the year 2017. The most recent estimate of the tax gap, for tax year 2001, was 16 percent. Or, if you prefer the glass to be half full, the U.S has a compliance rate of 84 percent, one of the highest in the world.
The real news here is the lack of new proposals for addressing the tax gap. Treasury has been under considerable pressure to produce additional ideas, but appears to be standing pat with the proposals it offered as part of the 2008 budget. As the report notes, closing the tax gap in a meaningful way is not going to be easy:
“Based on the limited information available, compliance rates appear to have remained relatively stable at around 85 percent for decades. To make a meaningful improvement in this number without a fundamental change in the relationship between taxpayers and the government will require a long-term, focused effort.”
And the report goes on to say;
“…while it may be possible to take action to reduce the tax gap, it is not possible to implement a policy that eliminates the tax gap without an unacceptable change in the fundamental nature of the current tax compliance system.”
The report does, however, continue the focus on small business owners and pass-through entities like S corporations and partnerships as the tax gap’s primary source. Nearly three-fourths of the total tax gap is attributed to self-employed and small business owners. In a PAYGO world with lots of spending and tax items on the to-do list, that’s not a good thing.