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TAX FACTS: US Treasury To Ask Congress To Help Close Tax Gap February 2, 2007

Posted by notapundit in Congress, Economic News, Politics, US News.

WASHINGTON (Dow Jones)–The U.S. Treasury Department plans to ask Congress for tax law changes aimed at closing the $290 billion tax gap, including a plan to require some taxpayers to provide detailed income reporting to the Internal Revenue Service.

Eric Solomon, assistant Treasury Secretary for tax policy, told a conference Thursday the White House’s 2008 fiscal year budget will contain legislative recommendations for Congress to close the tax gap, a measure of uncollected taxes.

“We are focusing on realistic, achievable steps to improve compliance,” Solomon told the Tax Council Policy Institute.

The tax gap is the difference between what taxpayers voluntarily pay and what they should pay under the law. The IRS estimates the net tax gap is $290 billion, and cites underpayment by small businesses and individuals as a leading cause for the shortfall.

Solomon didn’t provide specifics about Treasury’s upcoming recommendations. He said one top proposal will deal with the shortfall from taxpayers whose incomes aren’t subject to income tax withholding, where income taxes are taken out of workers’ paychecks.

“Because noncompliance is highest among taxpayers whose income is not subject to information reporting, some of our more significant legislative proposals will involve enhanced third-party information reporting,” Solomon said.

In February 2006, the IRS said more than 80% of the tax gap results from underreported taxes. Of that, underreported business income represented $109 billion of the tax gap.

The IRS said small businesses, independent contractors and sole proprietors remain a large component of the problem because their income taxes aren’t automatically withheld from their paychecks. Solomon’s remarks didn’t specify what sorts of taxpayers or types of income would be subject to the Treasury’s recommendations for additional reporting. He didn’t respond to reporters inquiries afterwards to clarify his comments.

Solomon’s speech, however, did emphasize that Treasury recognizes a multi-pronged approach to solving the tax gap issue.

“There is no silver bullet solution to this problem,” he said. “It is necessary to have an integrated, multiyear strategy.”

“It is very important in deciding on legislative proposals that it is necessary to maintain the appropriate balance between enforcement activity and imposition of taxpayer burden,” Solomon said.

Resolving the tax gap is a priority for Senate Finance Chairman Max Baucus, D-Mont. Solomon well knows Baucus’ interest in the matter, since the senator delayed Solomon’s confirmation to assistant Treasury Secretary because he said the agency wasn’t sufficiently committed to the issue.

On Sept. 26, Treasury issued an 18-page “Comprehensive Strategy for Reducing the Tax Gap,” which spelled out seven elements of a strategy to close the tax gap.

They include reducing opportunities for tax evasion, making a multiyear commitment to research on tax evasion and cheating; continued improvements on IRS computer technology; better enforcement and taxpayer service. It also called for reform and simplification of tax laws and closer coordination with business groups and international tax officials.

By Rob Wells, Dow Jones Newswires


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