Every large or
knows that collecting revenue from recalcitrant clients can be a
trying task. How much more difficult a chore, then, must the
Internal Revenue Service face when its client base effectively
includes every company and employed individual in the United
data from the IRS
show that the quantity of unpaid
, also known as the
'Tax Gap,' increased from $290 billion in 2001 to $385
billion in 2006. The IRS stated that the broadening gap mostly came
from "the underreporting and underpayment forms of
noncompliance." Underpayment rose by 38 percent, while
underreporting increased by 32 percent.
The IRS data also illustrate that underreporting increased
more in the corporate
than for individuals - either because corporate finances are more
complex or because it's easier to use tricky accounting for a
company than for a single person. By contrast, underpayment is
almost entirely an individual behavior.
In 2006, individuals underreported about 16 percent more than they
had in 2001, while corporations underreported at more than twice
their 2001 rate. For small corporations with assets of less than
$10 million, the rate was nearly 4 times higher.
Bruce Bartlett - an advisor to Reagan and a Treasury official in
Bush Sr.'s presidency, as well as an advocate of tax reform -
writes in the
that staff cuts at the IRS represent a more likely culprit
behind the rising levels of underreporting and
underpayment than tax rates. After all, marginal tax rates
decreased from 2001 to 2006 as a result of the Bush tax cuts, which
would generally reduce incentives to cut corners on filing.
However, over the last two decades the the IRS has lost more than a
quarter of its employees, Bartlett points out, even as the
population rose by 53 million.
In total, the IRS employs about 22,000 employees in enforcement, or
25 percent of its workforce. Last year the agency audited 1 in
every 8 millionaires, according to
. The data suggest, however, that it may begin to focus on small
and large corporations, especially as deficits continue to rise.
Increased complexity - every year, Congress seems to increase
rather than decrease the tax code's complexity - represents another
problem. As the
set in, freelance work
became more prevalent
. Individuals scrambled to find work where they can find it and
companies took advantage of these more pliable, 'flexible'
workforces. Filing with the IRS as an independent contractor,
though, is a notoriously tricky and complicated task - practically
everybody knows someone who's been tripped up by the increased FICA
contributions or the quarterly schedule.
While tax collection shouldn't be a political issue - the U.S.
isn't Greece - it's tough to imagine much muscle being
behind collection efforts in an election year, though the president
could probably score some points by pushing for increased efforts
to audit financial institutions. Congress, however, remains
. It's unlikely that Democrats and Republicans will find compromise
over the issue of helping the IRS collect the last 15 percent of
what it's owed.