Plan to reduce tax gap revised, expanded

NEW YORK (CNNMoney.com) -- The Treasury Department and the IRS on Thursday submitted a second report to Senate tax writers detailing how they plan to look under the country's couch cushions and otherwise come up with past taxes owed but not paid.

In April, Senate Finance Committee Chairman Max Baucus (D-Mont.), frustrated with the limited scope of the 16 tax-gap reduction proposals included in President Bush's 2008 budget request, asked Treasury Secretary Henry Paulson to submit more ideas on ways to reduce the gap -- estimated to be roughly $300 billion a year.

Specifically, Baucus wanted to see a plan that would achieve a 90 percent voluntary compliance rate by 2017. Currently, the voluntary compliance rate -- the percent of taxes which are paid voluntarily by taxpayers, without IRS enforcement -- is estimated to be 84 percent.

The report released Thursday didn't clarify whether that could be done. "Implementing efforts to reduce the tax gap will take time; changing taxpayer behavior significantly will also take time. Accordingly, results from these efforts will be realized incrementally over a number of years," the report said.

Baucus expressed disappointment that the Treasury didn't set a specific goal for voluntary compliance but said in a statement that the report is "an important step toward fairer and more efficient tax administration. ... [I]f Treasury sticks to this plan, significant improvements in voluntary compliance can be achieved."

The Treasury and IRS propose to narrow the tax gap using a 7-pronged approach:

• Reducing opportunities for evasion through the 16 proposals in the president's 2008 budget, which include boosting reporting by brokerages and other third parties on individuals' investment. All told, they're estimated to recover $2.9 billion a year over 10 years, or 1 percent of the estimated annual gap.
• Making a long-term commitment to research sources of noncompliance;
• Improving information technologies such as those for electronic filing;
• Improving examination, collection and document-matching activities
• Enhancing taxpayer service, to curb taxpayers' unintentional errors
• Simplifying the tax law, again to reduce unintentional errors
• Coordinating with state and foreign governments as well as bar and accounting associations to share information and compliance strategies.

Many believe the annual tax gap estimate underplays the amount of lost tax revenue in part because it's based on individual taxpayer data from 2001 and corporate tax data from 1991 and because it doesn't include the taxes owed on non-reported income generated by cash businesses, both legal and illegal.