[26] Internal Revenue Service, “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013,” op. cit. Cit. The EITC`s contribution to the gross tax gap in 2011–13 was $27 billion per year, representing 6% of the $441 billion gross tax gap and 8% of the $352 billion tax gap (the latter figure is most comparable to the richest 1% share, which is calculated as the share of the under-reported tax gap). That is undoubtedly one of the most important areas of planning that we can have under the new legislation. For this reason, they should have renamed the [Tax Act, 2017] largely to the Job Security for Tax Professionals, Lawyers and Financial Advisors Act, 2017. Promisingly, there is bipartisan recognition that more funding for the IRS application is needed, that this should include a multi-year commitment, and that a dedicated budget mechanism could help provide both. Last year, both the Trump administration and the House of Representatives proposed a multi-year increase in funding for IRS enforcement under a special budget mechanism that would have helped shield funding from competition with other discretionary funding priorities. [43] The final budget agreement did not include these proposals, but legislators can still build on them and pursue other budget mechanisms that recognize the special nature of IRS enforcement funding (i.e., the fact that it generates budget savings). In addition, the president and Congress came together across party lines last year to enact the Taxpayer First Act of 2019, which aimed to modernize and improve the IRS, which could boost lawmakers` confidence in funding the IRS rebuild. However, there is a promising bipartisan conclusion that IRS enforcement funding is too low and that revenue from additional enforcement funds would more than offset the costs. Legislators can build on this to restore adequate funding for the government`s primary function of collecting taxes owed by law.
Lawmakers should also pursue meaningful tax reform that strengthens the integrity of tax laws, increases revenues, and increases incomes for workers and families. The increasing use of tax avoidance in the U.S. tax code has made it one of the most complex tax laws in the world. Taxpayers spend billions of hours filing taxes each year, much of it looking for ways to avoid higher taxes. Under-reporting of income and self-employment taxes accounts for 44% of the gross tax gap attributable to under-reporting, more than any other source. [19] (See Figure 2.) Although this income appears on individual owners` tax returns, a study using IRS data found that:[20][41] This should only be an initial goal. Since 2010, the number of tax filings has increased by 9% and the IRS has been asked to implement and enforce new regulations, including the Foreign Account Tax Compliance Act, the Affordable Care Act and the Tax Act of 2017. The best-equipped tax filers can afford creative accountants, litigators and lobbyists to aggressively change the line between legal tax avoidance and illegal tax evasion, even when under scrutiny, as recent reports make clear. [11] An IRS that does not have the resources to defend this limit may have to give in, forfeit income that should be owed according to the best interpretation of tax law, and set a precedent for other claimants.
Tax evasion, on the other hand, is illegal. This happens when people do not report or report income or gains to a tax authority. Some practice tax evasion by paying no tax. [33] Emily Horton, “Tax Planner: Drive Wealthy Clients Through `Gaping Hole` in Tax Code,” Center on Budget and Policy Priorities, May 31, 2018, www.cbpp.org/blog/tax-planner-drive-wealthy-clients-through-gaping-hole-in-tax-code. My testimony will explain how the underfunding of enforcement by the Internal Revenue Service (IRS) empowers tax evaders and tax evaders, including some large corporations and corporations, while harming honest tax filers. This injustice reflects the 2017 Income Tax Act and many of its regulations. The law has given profitable corporations and wealthy households big tax cuts and new ways to cheat the tax code, while leaving low- and middle-income Americans largely behind. Funding cuts that impede IRS enforcement and allow well-equipped individuals to play the tax code not only reduce federal revenues, but also undermine honest filers` confidence in the integrity of the tax system. This is a serious threat to a system that relies on voluntary compliance. Due to the sharp decline in audit rates for high-income earners, households claiming the EITC for low- and middle-income workers and their families are now audited at about the same rate as applicants in the richest 1% (see Figure 4), even though under-reporting in the EITC accounts for less than 10% of the gross tax gap[26], while candidates in the top 1% may be responsible for 70%. Audits of high-income individuals and businesses also result in higher average recoveries than audits of low-income taxpayers.
[27] EITC audits accounted for 39% of audits in 2018.
