The Senate Finance Subcommittee hearing on the U.S. "Tax Gap" may have been more than a week ago, but U.S. tax experts and others are continuing to peruse the testimony of the lawmakers and others who spoke, looking for, among other things, clues as to how Congress, the U.S. Treasury and Biden administration are likely to go about narrowing the difference between what they think U.S. taxpayers should be paying, and actually are paying...
For such Tax Gap aficionados, the written testimonies of the five main witnesses, which may be downloaded from the same page on the Finance Committee's website, where a recording of last Tuesday's two-hour hearing also may be viewed, are proving invaluable – if lengthy.
(Former IRS commissioner Charles O. Rossotti's written testimony runs to 59 pages, although the other four documents are between 13 and 24 pages.)
For this reason, we're sharing some excerpts we thought were of particular interest from the actual spoken testimonies of some of the five witnesses who participated.
One point many of the commentators who've examined the testimony documents have highlighted, for example, is the huge range in estimates of the size of the tax gap, and similar key numbers – an observation some of the witnesses also made note of.
Opening Statement, Subcommittee Chairman Sen. Sheldon Whitehouse (R., R.I.)
"This is, I think, an important and timely hearing on the Tax Gap, and the related role of offshore tax evasion.
"My Republican colleagues and I may disagree on what makes a fair tax code? But we very much agree that everyone should pay what they owe. And that principle is what today's hearing is about.
"The IRS conservatively estimates the Tax Gap – the difference between taxes that are owed, and the taxes that are collected – to be US$441 billion per year.
"Commissioner Rettig recently testified that the Tax Gap may have grown as high as US$1 trillion in recent years – trillion with a 'T'.
"One reason for the gulf between the official estimate and Commissioner Rettig's, is the bad job the official estimate does in incorporating the so-called 'International Tax Gap – what is hidden by wealthy individuals and large corporations overseas.
"Tracking this offshore money is difficult. But we know there's lots of it. Research suggests the Treasury may lose anywhere from US$40 billion to US$123 billion every year from offshore tax evasion.
"Of course, typical American taxpayers don't have the option to hide money abroad.
"So, the wealthy who cheat on their taxes through off-shoring, also worsen income and wealth inequality.
"One study estimates the highest earning 1% of taxpayers hide 20% of their income, and account for 36% of unpaid taxes.
"One percent of the taxpayers – 36% of the unpaid taxes.
"Most Americans pay what they owe, meaning that they cover for the tax cheats – through higher taxes, fewer public services, or a larger federal debt.
"For large, multi-national corporations, that stretch loopholes beyond recognition to book income to offshore tax havens, the line between legal avoidance and evasion may be paper-thin, and may turn on whether and out-gunned IRS can defend against the armies of lawyers, hell bent on burying the IRS in litigation.
"An outsider looking at these numbers may ask how the most wealthy powerful country in the world could let this happen.
"The answer is, we made it happen.
"Over a decade, Republicans cut the IRS budget by 20%, with enforcement hit especially hard.
"There are 30% fewer enforcement staffers than a decade ago? And the number of highly trained revenue agents, who tackle complex audits of the wealthy and large corporations, is down nearly 40%.
"The result? Millionaire and billionaire audits dropped over 72%. And audits of the largest corporations – those with US$20 billion in assets – declined by half.
"As former IRS commissioner [John] Koskinen once said, 'cutting the IRS budget gives a tax cut to tax cheats.'
"As the IRS budget fell, audit rates for the rich and poor in America converged. A worker receiving the Earned Income Tax Credit is nearly as likely to be audited as a seven-figure earner.
"What do we do? Well, we should start with a multi-pronged approach of the Biden administration.
"First, ensure that the IRS has the resources to collect what taxpayers owe. It needs a larger staff, with the knowledge and experience to untangle the networks of shell companies the ultra-rich and large corporations can use to hide their income, often in offshore tax havens.
"I'd like to explore mandatory funding for the IRS, so the agency has sustained and predictable support.
"Two: require more reporting of the type of income the super-rich tend to hide.
"Regular taxpayers can't hide their wages from the IRS, they're reported by the employer. The super-rich shouldn't be able to hide them either.
"Three: support a technological reboot at the IRS. The agency still relies on some systems from the 1960s. Modern tools and technology could help root out offshore and other types of tax evasion.
"The investment will pay off. Treasury estimates that US$80 billion spent to revitalize the IRS will yield US$700 billion in revenues – funding that we could invest in working families.
"I'll note that budget-scoring rules block Congress from using that high return investment as a pay-for. That needs to change.
"Ramped up enforcement is essential, but it's no substitute for addressing the fundamental injustice in the Tax Code, particularly the tax breaks for the ultra-rich, and large corporations.
"For example, my No Tax Breaks For Outsourcing Act would end the incentive for multinational corporations to shift profits offshore."
Witness: The Hon. J. Russell George, TIGTA, Treasury Dept.
(Written testimony may be downloaded by clicking here.)
"Chairman Whitehouse, Senator Grassley, members of the subcommittee once they arrive, thank you for the opportunity to provide information on the IRS’s efforts to address the Tax Gap.
"The Tax Gap is a long-standing issue, that has been a substantial challenge for the IRS. Finding effective solutions to this challenge would yield substantial additional tax revenue.
"As you noted, Mr. Chairman, the Tax Gap estimates currently in use are outdated, and the Tax Gap is likely much higher at this point in time.
"IRS studies have shown that audits have the largest impact on tax compliance. The IRS lost 15,000 enforcement employees between 2010 and 2018, which led to a significant reduction in the number of audits (also referred to as examinations).
"Over that period, the number of examinations dropped by about 40%, even as the number of returns filed grew by 5%.
"Since 2010, the IRS has conducted fewer examinations.
"Between 2010 and 2018, the share of individual income tax returns examined fell by 46%, and the share of corporate income tax returns examined fell by 37%.
"The percentage decline and the examination rate was larger for higher income returns. For returns with more than US$1 million in total income, the examination rate dropped from 8% in 2010 to 3% in 2018 – a 63% decline.
"In March 2021, TIGTA reported that the IRS could more effectively prioritize high income taxpayers who owe delinquent taxes, but do not pay.
"In addition, we have also raised concerns that in 2015, the Small Business/Self-Employed Division of the IRS (SB/SE Division) terminated its High-Income/High Wealth strategy (HIHW), which was designed to address high-income taxpayers, who had not reported all of their earned income.
"Tax Gap studies have found that self-employed individuals under-reported their net income by 64%, which is up from the 2001 estimate of 57%.
"With the growth of online platform companies, it is likely that income and self-employment tax under-reporting will continue to be a growing problem.
"TIGTA issued an order report on the gig economy’s impact on tax compliance, and the lack of an IRS strategy to address this challenge.
"We reported that the IRS is not working cases with billions of dollars of potential tax discrepancies, involving taxpayers who earn income in the gig economy.
"Many cases were not selected to be worked by the IRS, due to resource constraints, and the large volume of discrepancies that were identified.
"The use of virtual currency – also called cryptocurrency – is emerging as an alternative asset to U.S. and other currencies. However, we found that it is difficult for the IRS to identify taxpayers with virtual currency transactions, because of the lack of third-party information reporting.
"Non-payment of taxes owed as a smaller proportion of the Tax Gap, estimated to be US$39 billion annually.
"Reductions and resources have also impacted payment compliance.
"From fiscal year 2015 to fiscal year 2019, field revenue officers have decreased by approximately 14%, from 2,612 to 2,239.
"Improving international tax compliance remains a challenge for the IRS.
"The IRS has not developed a reliable estimate of the International Tax Gap. Non-IRS estimates of the International Tax Gaps vary widely. Previous estimates range from US$40 billion to US$123 billion annually.
"Congress gave the IRS important tools to help stem international tax evasion, with the passage of the Foreign Account Tax Compliance Act.
TIGTA reported that after eight years of spending at least US$380 million on IRS systems and efforts to establish international agreements across the globe, the IRS has not taken the compliance actions needed to meaningfully enforce it.
"In conclusion, the IRS can more effectively reduce the tax gap by developing compliance strategies for the changing domestic and global economies, and [by] using its resources and information reporting more effectively."
Witness: Nina Olson, Executive Director,
Center for Taxpayer Rights, and former
U.S. National Taxpayer Advocate
(Written testimony may be downloaded by clicking here.)
"To address the Tax Gap, the IRS needs transformational change, and that change must occur in the context of minimizing undue taxpayer burden, and protecting taxpayer rights.
"That change also will require significant investment in new technology, leadership, employees, training and procurement skills.
"It requires a massive redesign of IRS systems, so that they update quickly and can process information and talk to one another in real time.
"All of this is not going to happen overnight, but it must occur.
"If we do not make these investments in the IRS, we will not only not address the upper reaches of the Tax Gap, but we will actually risk increasing the Tax Gap, by failing to meet the needs of taxpayers who are, in good faith, trying to comply with the law.
"There are a few things we should remember as we tried to narrow the Tax Gap. First, we will never close it, we will only narrow it.
"Second, the drive to enforce the tax laws cannot come at the expense of taxpayer service.
"Approximately 2% of the US$3.6 trillion the IRS collects each year comes from direct enforcement actions.
“The remaining 98% comes from the indirect effect of a mix of people's fear of the IRS, and their desire to be compliant with the tax laws.
“When these taxpayers have problems, they call the IRS, because dealing with the IRS has consequences that don't accrue to a bad online Amazon or airline transaction.
“Yet the IRS routinely answers less than 50% of calls, and this year at times answered only 2% of calls to its main 1040 number.
The Iris does not have a 360 degree view of taxpayers accounts because there is no database in which all taxpayer information is stored or linked.
"So assisters can't provide issue resolution to callers.
"This lack of a full picture of the taxpayer’s tax life has significant consequences, not only for taxpayer assistance, but also for audit selection, collection prioritization and protection of taxpayer rights.
"Taxpayer service, which is so important to achieving the level of compliance we have today, must be funded to maintain that level.
"Third, the Tax Gap does not equal tax evasion.
"Framing non-compliance as tax evasion not only undermines compliance among the currently compliant, who begin to feel naive for complying, but it creates an environment in which IRS staff can feel justified in undermining, if not outright ignoring, taxpayer rights and protections."
Witness: Barry Johnson, Acting Chief
of Research and Analytics for the IRS
(Witness testimony, which is the same written testimony may be downloaded by clicking here.)
"My name is Barry Johnson, and I’m the IRS’s acting Chief of Research and Analytics Officer. I appreciate the opportunity to testify today to discuss my office's work on the Tax Gap. I direct the Office of Research, Analytics and Statistics for the IRS.
"We support effective and efficient tax administration, by providing research, analytics statistics and insight to the IRS, to inform the decision making, and increase innovation across the agency.
"One of the functions of the IRS is to oversee data collection, and the methodology used to measure the Tax Gap.
"As you’ve heard already, the most recent IRS study of the Tax Gap was released in 2019."It covered covered tax years 2011 to 2013, and included methodological improvements that resulted in updates to earlier estimates.
"The study estimated the average annual gross tax gap for that period was US$441 billion, and that the voluntary compliance rate was 83.6%.
"We’re in the process of preparing a new study on the Tax Gap, covering the tax years 2014 to 2016, it will also include projections up to tax year 2019, the last full year for which we have data.
"We expect to release this report early next year.
"The gross Tax Gap estimate report of US$441 billion does not account for the revenue brought in through enforcement activities, but just audits and document-matching, as well as late payments.
"After factoring in these efforts, the average net Tax Gap for 2013 is estimated at US$381 million.
"When looked at by mode of non-compliance, the tax gap can generally be divided into three components:
• Non-filing, or not filing required returns on time;
• Under-reporting, or not reporting one’s full tax liability when the return is filed on time; and
• Under-payment, or not paying by the due date the full amount of tax reported on a timely-filed return.
"By far the largest component of the tax gap is under-reporting, representing US$352 billion of the US$441 million total.
"Individual under-reporting comprises US $245 million, while employment tax represents US$60 billion; corporate taxes, US$37 billion; and excise taxes, US$1 billion.
"The report confirms an important point about the tax gap: That the compliance rate is very high for income that is subject to third-party information reporting; and higher still when you count withholding.
"The net misreporting percentage (NMP) was just 1% for amounts subject to substantial information reporting and withholding, and it was 5% for amounts subject to information reporting without withholding.
"The misreporting percentage jumped to 55% for income not subject to information reporting, or withholding.
"While the IRS’s Tax Gap methodology has been deemed the gold standard by other tax administrators around the world, we recognize there's a lag between the focus years...
"We're developing improved methodology that we believe will produce more timely estimates, and the release of the estimates.
"Preliminary research, using this methodology and [applying it to] the 2011 - 2013 estimates, suggested the gross Tax Gap for 2019 would be approximately US$600 billion..."
To read the American Expat Financial News Journal's coverage of last week's hearing, click here.
To view the hearing in full on the Senate Finance Commitee's website, click here.
Also at that address is information detailing how any "individual or organization wanting to present their views for inclusion in the hearing record" might be able to share them by submitting them "in a Word document... single-spaced... not exceeding 10 pages in length." No other file type would be accepted, the subcommittee says.
Senate Committee on Finance
Attn. Editorial and Document Section
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
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