Revenooers Weigh In On Reducing The “Tax Gap”

            And hopefully thereby “improving voluntary compliance.”

            Heard that one before?

            So here they came again, last week, with yet another grandiose plan full of platitudes and supposed accomplishments, and plans for the next round of spending your dough in an effort to collect even more of it.

            “This report is intended to provide a comprehensive overview of efforts to close the tax gap,” quoth IRS.  They say that in 2005, the gross tax gap (difference between total collected and total truly ‘due’) was about $345 billion.  And after subtracting revenue obtained through enforcement actions and other late payments, the net tax gap was still about $290 million.

            More than chickenfeed.

            The so-called tax gap consists of these three forms:

  1. Underreporting (not reporting one’s full tax liability on a timely-filed return);
  2. Underpayment (not timely paying the full amount of tax reported on a timely-filed return); and
  3. Nonfiling

Seems that item 1 above (unreported receipts and/or overstated expenses)

accounts for over 82% of the gross tax gap.

            Not surprising.

            So what do they plan to do about it?  Among other things, imposing requirements that credit and debit card companies annually report (via some sort of 1099 form, no doubt) payments to recipient businesses and the IRS.  And cost basis reporting by brokerage firms which process securities sales.  Both of these will commence in 2011.

            And how about this one:  businesses will have to begin filing 1099 forms re payments to corporations for any services–a stark departure from longstanding rules which have exonerated corporate payments from 1099 filing requirements.

            And here’s one which all of you Mom and Pop landlords will like:  get ready to start sending 1099s to all of the vendors to whom you make payments in connection with your rental properties, in order to justify the deductions you take.  Think about it–a 1099 to each gardener, handyman, fixer upper person, contractor.  How much otherwise productive time of yours will that consume?

            Not to mention the usual corollary of not complying with all of these new compliance burdens:  additional penalties.  The FY 2010 budget proposal would increase by 100% the current per-return penalties for failure to file most information returns and would substantially increase the maximum penalties that can be assessed in a calendar year.  Further, the proposal calls for adjusting the penalty amounts for inflation every five years.

            And if you’re one of those true malingerers, out there, be aware that Uncle proposes to create an aggravated failure to file criminal penalty for any person who willfully fails to file tax returns in any three years of five consecutive years if the aggregated tax liability is at least $50,000.  Such failure to file would be classified as a felony with a penalty of a fine of not more than $250,000 ($500,000 for a corporation) or imprisonment of not more than five years, or both.

            We guess that the message from all of this is that if you don’t like the way the revenue enhancement policies are heading, you had better contact your representative promptly.  Otherwise, take whatever Obama and the boys dole out.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

            Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.

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