Accounting News


Tuesday, July 3, 2012
IRS Targets Tax Gap

The United States has the highest rate of tax compliance in the world. Last year the IRS estimated people voluntarily report 84% of their income. Compare this to Greece who has a problem with collecting half of the taxes the government estimates that its citizens owe.

While being number one may be a good thing if you are the IRS they missing money is still significant. The remaining 16% is estimated to be worth $450 billion. When you are running a deficit of $1.3 trillion then every dollar counts. But the IRS has a shrinking budget as the expectations for tax compliance rise. So what can we expect going forward.

At the AICPA Practitioners Symposium and TECH+ Conference they discussed ways they see the IRS moving over the next few years. This will impact how tax professionals and accountants help their clients stay in compliance with the law.

One thing the IRS can do is increase the use of technology. by using matching software they can easily identify all the income for individuals and businesses. This should help boost the voluntary disclosure rate as filers know they are being automatically audited based on matching.

As part of improving matching is improving reporting to the IRS. So expect more disclosure legislation for businesses. This will also flow to the amount of detail that must be provided in a tax return.

As Willy Sutton said about robbing banks, "that is where the money is." For the IRS the money is in high income returns. So expect the rates of audits for larger incomes to increase. Some targets they are likely to look at are worker classifications, S corp losses, rental property losses, 1099 compliance, international taxes, and small business filings.

The one thing that would increase compliance would be to simplify the code to prevent honest mistakes. But that will happen only after majority of Congress and the Senate is filled with people willing to put their constituents above politics. That doesn't look likely as far as my crystal ball can see.

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