Report: Weak IRS Can't Do Its Job

The Office of the Taxpayer Advocate was established in the 1996 by Republicans in Congress who wanted a watchdog within the IRS that would look out for ordinary taxpayers.

So it is interesting to hear what the current Taxpayer Advocate, a woman named Nina Olson, has to say about how today's Congress is treating taxpayers.

Olson just reported her latest annual report, and it has blistering words for the budget problems facing the agency, courtesy of Republicans in Congress. Olson paints a picture of an agency in crisis, with dire consequences for ordinary filers:

The most serious problem facing U.S. taxpayers is the combination of the IRS’s expanding workload and the limited resources available to the IRS to handle it.

Among the consequences:
1. The IRS is unable to adequately meet the service needs of the taxpaying public.
2. The IRS is unable to adequately detect and address noncompliance, requiring honest taxpayers to shoulder a disproportionately large share of the tax burden.
3. The IRS is unable to maximize revenue collection, contributing to the federal budget deficit.

The report offers up lots of details to support these points. For instance, Olson estimates the average honest taxpayer pays a "surtax" of $2,680 to subsidize all the tax cheats -- an estimate made before the release of the IRS latest analysis of how much money the U.S. Treasury loses to tax evasion -- $385 billion in 2006.

Read More

$3 Trillion Lost to Tax Evasion

The new IRS report on the "tax gap" is a good news, bad news story -- although mostly bad news.

The IRS released a shocking study on the tax gap back in the Bush years -- showing that the federal government lost a $290 billion due to tax evasion. That study was based on 2001 data. The IRS has now updated it's findings, using data from 2006.

First the good news: Tax evasion didn't increase between 2001 and 2006 in percentage terms. The IRS collected about 85.5 percent of funds due to the U.S. Treasury in 2001, and 86.3 percent in 2006 -- not much change. So it's good to know that the anti-regulatory zeal of the Bush years didn't serve to push up tax evasion. Spending on enforcement by the IRS didn't increase much during the Bush years in real terms -- and obviously was no match for the problem at hand -- but at least it didn't fall, as this chart shows.

But the bad news is pretty bad. The new study estimates that the net tax gap in 2006 was $385 billion. (Americans underreported $450 billion in taxes, but the IRS recovered $65 billion, hence the "net" figure.)

That is a staggering amount of money to slip through the government's fingers in a single year. The figure was substantially greater than the $248 billion budget deficit in 2006. As we have estimated before, these tax gap numbers are especially alarming when viewed over a period of years. The United States government has lost well over $3 trillion to tax evasion since 2001. That sum is equal to a fifth of the entire current federal debt. The amount of new debt incurred by the federal government during the Bush years is nearly exactly the same as the amount lost to tax evasion.

So who is mainly cheating on their taxes?

Read More

Aiding Tax Cheats by Hobbling the IRS

The Obama Administration has been working hard to stop the epidemic of tax cheating, which is so bad that the IRS fails to bring in 15 percent of all revenue owed to the U.S. Treasury. It has launched a wide ranging crackdown on tax cheats who stash cash in overseas accounts and it has dramatically stepped up audits on wealthy filers, as we wrote about here earlier.

Most importantly, the Obama Administration has sought to bolster the IRS's enforcement capacity, arguing that every dollar spent in this area helps reduce the deficit many times over. The Administration's current budget request would raise the IRS budget from $12.1 billion to $13.3 billion.

But conservative in Congress are pushing in the exact opposite direction. Just yesterday, the House Appropriations Committee cut $600 million from the IRS's current budget. In March testimony, IRS Commissioner Douglas Shulman warned that cuts of this magnitude would mean $4 billion lost to tax cheats.

In other words, for every dollar Republicans want to cut from the IRS budget, the government will lose over six dollars. Why would anyone see this as a good deal? Especially if they purport to be a deficit hawk?

Read More

Tax Evasion: The Staggering Cost

Tax evasion will cost the U.S. government $305 billion in 2010 and has cost $3 trillion over the past decade. It is a major contributor to budget deficits and the accumulation of national debt since 2001. Tax evasion also costs state treasuries billions of dollars. Every tax filer will pay an extra $2,200 in 2010 to make up for the funds lost to tax cheating. Even modest success in reducing tax evasion would free up significant new resources for spending or deficit reduction. Yet last week's budget deal nixed a proposal by the Obama Administration to strengthen the IRS' enforcement capacity. 

In estimating the tax gap, the IRS found that the largest share of tax evasion—over 50 percent—was by individuals with business income. A more detailed breakdown of losses in 2008 by the scholar John Slemrod and IRS analyst Andrew Johns found that the single biggest source of lost revenue was from proprietors of businesses who don't report the full amount of their income. Other big cheaters include professionals whose income comes through S corporations, partnerships, and real estate.

The study by Slemrod and Johns found that misreporting "generally increases with income, although it peaks among taxpayers with adjusted gross income between $500,000 to $1,000,000, and is lower than the peak ratio for individuals with income above $1,000,000."

Read More

Corporations and the Swiss Cheese Tax Code

Many Americans were appalled when it was revealed recently that General Electric would pay no taxes for 2010, despite U.S. profits of over $5 billion.

But I doubt that there is a single top tax attorney or chief financial officer in the country who was all that surprised. You see, these people are denizens of Loophole Land – a very different place than W-2ville where most Americans live.

In Loophole Land, nothing is quite as it seems. Yes, there is a top corporate tax rate of 35 percent, but it is well understood that nobody actually pays that. On the contrary, many companies pay nothing at all.

How can this be?

Read More