Tax News

CCH (cch.taxgroup.com) reports:

Senate Finance Committee (SFC) Chairman Max Baucus, D-Mont., said on August 2 that he is encouraged by an updated strategy from the Treasury Department to reduce the $345-billion annual tax gap. Key principles of the plan include reducing opportunities for tax evasion, a multi-year commitment to research, improvements in information technology, improved compliance activities, enhanced taxpayer service, reforming and simplifying tax laws, and coordinating with partners and stakeholders.
In April 2007 Baucus informed the Treasury and the IRS that he would expect the agency to achieve a 90% rate of voluntary compliance by 2017 (TAXDAY, 2007/04/19, C.1). The strategy delivered August 2 substantially expands upon a September 2006 Treasury effort, according to Baucus, and contains specific action items, benchmarks and timelines to achieve more effective and efficient tax administration.
A 4.7-percent IRS budget increase for Fiscal Year (FY) 2008 would give the IRS an additional $410 million for new enforcement initiatives as part of a strategy to improve compliance. The Service plans to devote those funds to increasing front-line enforcement resources; increasing voluntary compliance through improved taxpayer service options and enhanced research; investing in technology to reverse infrastructure deterioration, accelerating modernization, and improving the productivity of existing resources; and implementing legislative and regulatory changes.
According to the report, the Treasury Department developed a four-point comprehensive strategy for reducing the tax gap that directs the IRS to improve compliance by addressing both unintentional taxpayer errors and intentional taxpayer evasion, targeting specific sources of noncompliance, combining enforcement activities with a commitment to taxpayer service, and developing policy positions and compliance proposals with sensitivity to taxpayer rights by maintaining an appropriate balance between enforcement activity and taxpayer burden.
The Treasury and the IRS have pledged to increase audits, especially for Schedule C filers, develop more regulations and guidance, pursue tax shelter investors, and expand international cooperation. Most importantly, Treasury and the IRS intend to update their six-year-old estimate of the size of the tax gap to learn how large or small the gap really is. The 100-page report was greeted with guarded optimism by lawmakers.
"I am very encouraged by today's report and I believe it is an important step toward fairer and more efficient tax administration, "said Baucus in a prepared statement. "I am disappointed that Treasury chose not to set a specific goal for the rate of voluntary compliance, but if Treasury sticks to this plan, significant improvements in voluntary compliance can be achieved."
The report highlights more than 100 specific initiatives. The majority of the initiatives are scheduled to be launched in FY 2008 and FY 2009. However, many appear dependent on increased funding of IRS operations for FY 2008 and beyond.
CCH Comment. The Treasury and the IRS did not say how much revenue their initiatives would recover. The Bush administration has proposed 16 tax-gap measures that it estimates would collect nearly $30 billion over 10 years. At the heart of the administration's proposals are expanded information reporting requirements, such as requiring reporting of payments to corporations aggregating to $600 or more in a calendar year and reporting merchant credit card reimbursements.
The leaders of the SFC, who have long been vocal critics of lax IRS enforcement, greeted the report with cautious optimism. SFC ranking Republican Charles Grassley (R-Iowa) called the plan a "good beginning." He added, "Now begins the hard work of making it all happen. Too often, I've seen the best of intentions run into the brick wall of reality."
Treasury Secretary Henry M. Paulson had promised in July to deliver to the SFC a comprehensive strategy to reduce the tax gap (TAXDAY, 2007/07/19, C.4). Baucus had rejected an earlier strategy as lacking specific benchmarks and targets.
Schedule C Filers
Nonfarm proprietor income is underreported by an estimated $68 billion, according to Treasury and the IRS. In response, Schedule C filers can expect more audits. By September 30, 2008, the IRS plans to increase the number of Schedule C audits by seven percent. Schedule C audits will grow by an additional five percent by September 30, 2009.
International Activities
In 2004, Australia, Canada, the U.K., and the U.S. launched the Joint International Tax Shelter Information Centre (JITSIC). The four countries use JITSIC as a clearinghouse for information about abusive cross-boarder transactions ( TAXDAY, 2006/12/15, I.6). Japan has accepted an invitation to joint JITSIC in the near future. Treasury and the IRS also reported that JITSIC will open an office in London in the fall of 2007 in addition to its office in Washington, D.C.
The U.S. also plans to expand the use of the Organisation for Economic Co-operation and Development (OECD) to identify emerging abusive transactions and trends. The OECD has been in the forefront of persuading so-called tax haven countries to increase their oversight of transactions.
Taxpayers can expect more regulations on transfer pricing, the foreign tax credit, foreign trusts and cross border restructurings in FY 2008 and FY 2009. The IRS intends to hire more international examiners in 2007 and 2008.
Quicker Guidance
Treasury and the IRS also promised to increase the flow of regulations and published guidance in FY 2008 and FY 2009. By September 30, 2008, 80 percent of the items on the 2007-2008 Priority Guidance Plan will be released. The percentage will increase to 85 percent by September 30, 2009 for items on the 2008-2009 Priority Guidance Plan.
CCH Comment. "There were 264 items on last year's Priority Guidance Plan," Thomas Ochsenschalger, AICPA Vice President --Taxation, told CCH. "I wouldn't be surprised if there are 300 on the FY 2007-2008 plan."
Tax Shelter Investors
In 2004, the IRS offered a one-time settlement initiative to investors in the so-called Son of BOSS tax shelter (Announcement 2004-46). The IRS warned that taxpayers not participating in the settlement would risk criminal prosecution. Treasury and the IRS indicated that they will litigate unresolved Son of BOSS cases in FY 2008 and FY 2009. They also promised higher conviction rates for abusive tax schemes, corporate fraud and egregious nonfilers.
Nonprofits
On July 24, a government investigator told the House Ways and Means Committee that charitable organizations were responsible for nearly $1 billion in unpaid federal payroll taxes in 2006 (TAXDAY, 2007/07/25, C.1). Treasury and the IRS intend to implement a new electronic examination system for the Tax-Exempt/Government Entities Division, as well as initiating a new project to identify nonprofits that are not reporting and paying federal employment taxes.
By Jeff Carlson and George L. Yaksick, Jr., CCH News Staff
IR-2007-137, 2007FED ¶46,570
Treasury Department News Release, TDNR HP-524
Reducing the Federal Tax Gap --A Report on Improving Voluntary Compliance
SFC Release: Treasury Delivers Tax Gap Plan to Baucus
Other References:
Code Sec. 7804
CCH Reference - 2007FED ¶43,266.112
Tax Research Consultant
CCH Reference - TRC IRS: 15,054