tv [untitled] April 20, 2012 9:30am-10:00am EDT
master file. second, i'm aware that some state and local law enforcement agency would like access to taxpayer return informing to help combat identity theft. have i significant concerns about loosening taxpayer privacy protections and believe this is an area where we need to tread carefully. but as i describe in my written statement, the irs is developing a procedure that would enable taxpayers to consent to the release of their returns in appropriate circumstances. in my view, giving taxpayers a choice strikes the appropriate balance. lastly, i note that even as the irs is being urged to do much more to combat identity theft, taxpayers are clamoring for the irs to process returns and issue refunds more quickly. while there is still room for the irs to make improvements in both area, the whole goals are fundamentally at odds. if our overriding goal is to process tax returns and deliver tax refunds as quickly as possible for the vast majority
of persons who file legitimate tax returns, it's inevitable that some identity thieves will get away with refund fraud and some honest taxpayers will be harmed. on the other hand, if we decide to place a greater value on protecting taxpayers on identity theft and the treasury against fraudulent refun claims, the irs will need more times to review returns and the taxpayers who receive refunds will have to way considerably longer to get them. the irs will require a considerably larger staff to enable it process returns more quickly. there is no way around the trade-offs. i appreciate the opportunity to testify today and will be happy to answer questions. >> thank you. >> general inspector george? >> thank you for the opportunity to testify on the tax gap and the efforts by the internal revenue service to enforce
compliance with the tax code. my comments will also address the growing risk of identity theft and talks fraud. >> january 2012 the irs released estimates of the gap for 2006 which indicated the nation's 83% voluntary compliance was was essentially unchanged from prior estimates. the grossed tax increased from $345 billion to 450 billion as was indicated by mr. miller. my written statement include as table that shows a comparison between the prior and current tax gap estimates. the irs reports that the gross tax gap is comprised of three primary components, again, $376 billion in underreporting of tax liabilities, $28 billion due to nonfiling of tax turns and $46 billion in underpayment of tax
liabilities. the tax year 2001 to 2006 was concentrated in the underreporting and underpayment forms of noncompliance, which jointly account for more than nine out of ten tax gap dollars. the irs also reported the tax gap is caused by both unintentional taxpayer errors, whether due to tax law complexity, confusion or carelessness and willful tax evasion or cheating. the irs needs to overcome institutional impediments to more effectively address the tax gap. these refer to established policies, practices, technologies or business requirements that add unintended costs or are no longer optimal given today's society. we tend to believe the current institutional impediments the irs faces can point the way to improved opportunities, namely address incomplete compliance
research, reassess efficient compliance strategies, determine how best to fix incomplete document matching programs and find a way to handle the insufficient enforcement resources. every year more than one half of all taxpayers pay someone else to prepare their federal tax returns. third-party reporting and transparency is crucial to high compliance among individual taxpayers. basis reporting associated with the buying and selling of securities was an area that need needed third party reporting based on previous levels that show low level compliance. in 2011 third party business receipts for the first time making it easier for the irs to identify businesses underreporting receipts or not reporting at all. globalization of the u.s.
economy has been a major trend for many years the scope and complexity commits significant challenges for the irs. the irs continues to be challenged by a lack of information on transborder transactions. the classification of many employees as independent contracts continues to grow and contributes to $72 billion employment tax gap. 72,000 taxpayers may have avoided paying $26 million in social security and medicare taxes in 2008. we have continued to assess the irs's efforts to identify and prevent identity theft. unscrupulous individuals are stealing identities as an alarming rate for use in submitting tax returns with false income and withholding documents. for processing year 2011 the irs reported that it detected 940,000 tax returns involving
identity theft and prevented the issuance of fraudulent tax refunds totaling $6.5 billion. the amount of fraudulent tax refunds the irs detects and prevents is substantial. the irs does not know how many identity thieves are filing fictitious tax returns and how much revenue is being lost from the issuance of fraudulent tax refunds. we have found the issuance of fraudulent tax refunds -- at the time tax returns are processed is the single most important tool the irs could have to identify and prevent tax fraud. thank you for the opportunity to share my views. >> thank you, inspector general george.
mr. white? >> i'm pleased to be here to discuss the tax gap, id theft based fraud and how to produce them. the gross tax summarized in my statement was recently estimated to be $450 billion for tax year 2006. this is the amount taxpayer should have paid and did not pay on time. this is the amount unpaid for just one year. of this the irs estimate it will ultimately collect $65 billion from enforcement actions and late payments leaving a net gam of $385 billion. the tax gap has persisted at about the same level as a percent of total tax liability for decades, this despite a myriad of congressional and irs efforts to reduce it. key for thinking about how to
reduce the tax gap is understanding its nature. the tax gap is spread across various types of taxes, taxpayers and taxpayer behavior. most of the tax gap is for the individual income tax but the corporate income tax and employment tax are also significant contributors. much is due to misreporting a business income, even for individual income tax but nonbusiness income also contributes. even for a certain category of taxpayer there is a variety of misreporting behavior. for example, on a recent report we founded sole proprietors misrepo misreport both their receipts and expense, while some of each is intentional as well as unintentional. income subject to with holding and/or information reporting to irs by third parties such as employers or banks has low misreporting. only about 1% of wage income with withholding is misreported. on the other hand, 56% of rent,
royalty or sole proprietor income is misreported. there are opportunities to reduce the tax gap because because of the variety of noncompliance, multiple approaches will be needed. no single approach is likely to fully and cost effectively address the tax gap. opportunities include more third-party information reporting. third-party reports about a taxpayer's income allow irs to easily verify through computer matching and without an audit that the taxpayers' return is accurate. as i noted, compliance is high when income is reported by third parties such as employers or banks. the challenge with increasing third party reporting is identifying new third parties. they must have knowledge of taxpayers' income and expenses have have tolerable reporting costs. the irs must be able to enforce reporting requirements so, for example, a small number of reporting entities like banks
can be an advantage. the problem is that most third parties that meet these requirements are already required to report. another opportunity is improving service to taxpayers. services declined. for example, wait time to get through to an irs telephone assister has been around 16 minutes this year. the model of human assisters responding to taxpayers may not be sustainable given its high cost. different strategies for answering taxpayer questions sauchs on the irs web site or through paid tax preparers or tax preparation software will be needed. another opportunity is additional resources. with tight budgets, if irs's efforts to innovate don't keep up with work load growth, then the risk is that enforcement and with it voluntary compliance will go down. that could snowball. if taxpayers lose faith in the fairness of the system, they could become less willing to
comply themselves. another opportunity is increasing prerefund compliance checks, doing more checks before reeveneds are issues could reduce improper payments. leveraging external resources. such resources include paid preparers, tax software companies and whistle blowers. we have made recommendations to help irs leverage all three to reduce the tax gap. modernized information systems. such systems can route phone calls to help taxpayers get the answers they need and support irs' enforcement staff with timely access to data. simplifying the tax code, which has also been discussed. simplification can make it easier for taxpayers who want to comply, do so successfully and make it harder for those trying to evade their tax obligations to hide from irs. in closing i want to high lligh
the value of research. such research is costly but without it congress and the irs is left struggling to understand the problem without a fact based model of its causes. >> thank all four of you. perfect timing, clock is at zero on the floor. i'm going to run over and we will return very quickly, as soon as the vote is concluded and then we'll get into questions with you and appreciate your testimony. so this hearing stands in recess to call the chair.
the hearing will come to order. i appreciate everyone's patience while we concluded floor votes and we'll move right into questions and i'll yield myself five minutes to begin. certainly the numbers are pretty staggering when you think of a tax cap of almost $400 billion, even after netting some recovery of taxes that were not properly paid when we talk about taxpayer identity theft, fraud, the fact that we have hundreds of thousands of americans being victimized and, again, billions of dollars at risk. so the issues that we're trying
to address today are real issues that are about real money for the american people and about trying to protect american people as well. either they're not paying 3,400 of somebody else's tax bill or they're not being victimized by criminal. starting with the area of the tax gap and commissioner miller, i guess just kind of a structural question or framework. is the data we're looking at is '06 data. we're in '12. i think prior to that it was '01, five years back before we had similar data. one, is there a plan that, you know, this year you're going to update it again, five years, now six years to update the data about the tax gap? and what is the difficulty in having it be more current? because having six-year-old data certainly is helpful but it wouldn't as helpful as if it was
one-year-old or two-year-old data. >> i think that's right, mr. chairman. the process has been to do examinations. so, for example, if we were to do a 2011 years, those returns are now coming in. it would be a while before we would do our statistically -- statistical sample. and using 1040s as an example, we're doing 14,000 sort of research audits per year to try to update this. it's a continuing path we're on. it will be a while -- it will be a few years before we complete those audits before we're able to roll up the information with respect to those audits. 2006 is a long time ago but i'm not sure how much better we would be able to get. i think we'll have an easier time going forward than we had in 2001, we did a better job in 2006 with better data, better
estimating models and we'll get more current. but i don't think we're ever going to be -- it will never be -- the 2011 gap as we sit in 2012. >> and i certainly don't expect the year 2012 we could look and say in 2011 this is what the tax gap was. but it is the fact that it's six years old data that we're still using, especially with technology and i guess what concerns me a little bit is that we're still doing audits and having really compiled and completed and compiled the information from audits from '06, you know. '07 or '08, four years back, five years back, that we still have that. i think that's one of the issues the inspector general raises in the ability to use the data we have, whether it deals with identity theft or the tax gap is that we -- i understand that it costs money but if we do it well
and act on what you learn, it will save money in the long run by hoping to us close that tax gap in this case. so that's a concern that jumps out is that we're relying on six-year-old data and the need to make that more current so we can go more effective in how we respond to whatever that data tells us. >> mr. chairman, if i may jump in here, i do think the irs is doing a rolling research study. so they're going to be doing three years rolled up at a time. so you would be able, even though you may be a bit behind, you would -- when 2006 is done, you would do 2007, 2008, 2009 rolled together and then you just move one year on as you go along. to the point about how long it really does take, if you have even 2006, some people are filing in october 15 9/and you may want those people in your random sample because there may be some complex returns. soap you're waiting for those to
go through the processing. and then taxpayers have rights. so even those 14,000 audits that we have, they may want to go tie paels before they go to tax court. if they go to tax court, it may take a year and a half before they're out of tax court. we have to wait until we're final on the whole issue. we don't know what's going to be in that 14,000 case sample, whether there are going to be some tax court ones or not. so much it's not an easy thing. i do think that the irs' proposal about the rolling sample really will work. that will give us, even though we'll have some years of lag, it will give us good data going forward. >> i certainly appreciate that some of these cases are going to be very complex, especially those that go into tax court. but, again, we don't need the data from all 14,000 to be able to assess, you know, the -- >> the risk. >> what's working or not. if we lost 4,000, we had 10,000 to look at, you know, but it's
three-year-old data instead of six-year-old data, that would be more beneficial. inspector george? >> there are certain segments of the tax gap the irs hasn't adequately addressed. that's in hundreds of billionsyear due to the american taxpayer, the treasury isn't being paid on time, if at all. and so, again, it is an enormous task, as was pointed out, they do need additional resources but it's something that needs to be addressed. >> commissioner, do you want to comment on that? that's the area where we have, my understanding, the most limited information regarding and what efforts are -- i realize this is an issue of resources. i'm not an appropriator, though i want to look how we can make the case. if we invest in taxpayer services and what a dramatic
return on investment that is compared to enforcement and how we can help promote what your needs are. but when we hear hundreds of billions of dollars that maybe we're not getting in that one category, how can we do better? >> so on the international tax cap, i'm not familiar with the inspector general's numbers, to be honest with you. so i'm not going to speak directly on that. on international, you're not looking at a single number. you're looking at different components. you're looking at okay, what's cross border activity of large corporations and that's one set of documentation that we would look at, and we are doing operational audits there and we do look at that. that's our window into that world. the other world is offshore accounts which has you may be aware, we've done a remarkably good job in. we have 33,000 people that have come into us in the last three, four years with over $4.47
billion of money coming into the treasury as we attack bank secrecy jurisdictions. do we know the total number, the full pie in either case? probably not but we're on our way doing good things in both areas. >> yeah, and i don't want to suggest that we're not moving in the right direction. but you know, i think to the american people that are paying their taxes and doing their best to you know, pay whether it's $5,000 or $3,000 or $10,000 and then when we see numbers that are -- if it was even tens of billions but it's hundreds of billions not being paid that we need to do a better job to out of fairness to those who are complying with the law and you know, paying their fair share. let me -- one other question before going to the yielding to the ranking member.
one of the issues, miss olson, you talked about is in the current system, we use electronic system of collection, especially for with the hold of income taxes, employment taxes and we have a mandatory 94% requirement for irs. using electronic collection. can you expound the way i understood is your suggestion and recommendation is if we applied that same approach to estimated tax payments, it would not just help the taxpayer be more compliant but ultimately generate more collection if we took that approach? >> with estimated, we were very successful once the irs was given sort of a little nudge to say achieve this goal in employment taxes and getting electronic payments which saves the whole government money obviously because you're not processing checks but it you makes it easier for the taxpayer after they get used to it that we should apply that to estimated taxes. i think that in some areas it's very hard for taxpayers to save
up money to pay estimated taxes quarterly. if we can pay it monthly like they pay other bills and they pay lots of bills through their banks, bank accounts just setting up payments. we don't have a good interface. sophie think that if we could get some kind of a nudge from congress that sets a goal, the irs has always responded rel with that and developed a strategy and then we would get the different parts of treasury together to make it a really good user interface for the taxpayer. >> is it kind of the same argument on making it clear that voluntary withholding agreements would achieve in essence that is same goal? >> yes, and that proposal actually came from some trade associations that met with me that said, for example, the hair salons, you know, they do have an employee like the receptionist. so they're already in the payroll tax system. and the people who cut hair are independent contractors rending booths from them but they get in trouble and move on because they
don't pay their estimated taxes. the salon was saying if we could get into the an agreement where these are not our employees, we'll withhold a percentage and keep them in compliance. we'll have these people stay with us and we won't have so much upheaval. counsel have said we don't have the legal authority to enter into those agreements the way that particular code section is written. >> the irs general counsel. >> >> yes, the ir st. counsel. they need additional statue rit authority. so this really was a user friendly taxpayer friendly proposal. >> something that we're glad to look at as a committee and trying to see if we can work to be allow that because i think it sounds like a win-win. >> right. >> for the person who has those independen independent contractors working in their facility. >> it's not mandatory, it's totally voluntary. >> and ultimately the taxes owed
are better collected. >> right. >> yield to the ranking member mr. towns for the purpose of questions. >> thank you very much mr. chairman. let me begin with you, general george, your testimony indicates that the irs has institutional impediments that prevents them from effectively addressing the tax gap and, of course, you mentioned specifically that even when the irs examines a tax return that needs improvement, often there's no change made to the return and this many increases the burden on compliant taxpayers. you know, could you just elaborate on this just a little bit more? >> certainly, mr. towns. the ir subpoena, the bottom line is the irs has incomplete compliance research and specifically, the irs does not know all the sources of noncompliance, so the irs's
resources cannot be targeted appropriately. the research which is needed is on the relationship between the taxpayer's burden and compliance. and on the impact on customer service on voluntary compliance. these res various studies that they may have engaged in in the past but we don't believe they've done so adequately. additional research is also needed to have measure how establishing bench marks and other measures to assess the effectiveness of some of the efforts that the irs has engaged in in the past whether something is working or isn't working. so for example, we know for a fact that when they reach out to a taxpayer by letter, the initial contact normally results in a relatively high response from the taxpayer. that is the taxpayer already either acknowledge that he or she owes the tax and pay it. and yet, if the irs delays
reaching out to the taxpayer by -- i don't have the exact numbers yet, whether the number of weeks or number of days, we know that the response rate declines. and so, in our p a recent report, we encouraged the irs toern increase the frequency in which they communicate with tax pacers and the irs to my understanding has declined to do so, again, citing resources but that's just one example. of incomplete compliance strategies, the irs has systems that identify returns for examination need improvement to identify potentially noncompliant returns. the collection activity that extends for years has a lower rate of collection for delinquent liabilities. the irs has something called the queue which is a database in
which tax returns for people who owe taxes which aren't handled by ir subpoena revenue officers or any other method within the irs literally are put in line. and that line contains millions of tax returns. and keep in mind, there is a statute of limitations on when someone has to comply with their tax obligation. so millions of dollars are potentially in reality being lost because the irs has not simply addressed these returns, had someone assigned to them to look at them. but one of the most disconcerting aspects of all of this is that the irs has an incomplete document matching program so the irs does not have reliable third party data for taxpayers for all taxpayer sectors at least and for all types of tax returns. and most notably income earned
by the self-employed. i carry this card with me and i cite this at every opportunity that i can because this is information that comes from the irs that is just very compelling. there's -- you heard earlier today there's a very high correlation between tax compliant and third party reporting. the irs estimates individuals with whose wages are subject to withholding report 99% of their wages for tax purposes. self-employed individuals who operate nonfarm businesses are estimated to report only 68% of their income for tax purposes. but the most striking number is self-employed individuals who operate businesses on a cash basis are estimated to report only 19% of their income. so there's no question that if the irs and again, it would have to have authority from congress in some of these instances were able to mand