2017 Mini-Symposium on “The Future of Tax Administration and Enforcement”

By: Leandra Lederman

On January 7, 2017, I had the pleasure of moderating a Discussion Group I organized for the Association of American Law Schools (AALS) annual meeting. The topic of the discussion was “The Future of Tax Administration and Enforcement.” The topic was prompted by the funding crisis in which the IRS finds itself and the challenges that poses for tax administration, which I wrote about in two articles published last year, “The IRS, Politics, and Income Inequality,” 150 Tax Notes 1329 (Mar. 14, 2016) and “IRS Reform: Politics As Usual?,” 7 Columbia Tax J. 36 (2016) (the latter of which was part of a symposium Kristin Hickman organized on tax administration).

The AALS Discussion Group included experts on tax law, administrative law, and cybersecurity. The discussion spanned topics that included IRS resource and task priority issues, administrative law aspects of tax administration, and cross-border tax administration concerns. In the coming weeks, Surly Subgroup will be hosting a mini-symposium featuring posts by members of the Discussion Group. The first substantive post will be this Friday, January 20, and is by Christopher Walker from The Ohio State University, Michael E. Moritz College of Law, who is a member of the group but was unable to attend the discussion itself due to a flight cancellation. The panel on January 7 was as follows:

Over the next few weeks, watch for more Mini-Symposium posts! They will be categorized under “2017 Mini-Symposium on Tax Enforcement and Administration.”

The new Tax Gap Map: not much has changed

On Thursday, the IRS released new federal tax gap estimates, including a new Tax Gap Map (on page 3 here). It’s been a while; the previous estimates were calculated in December 2011, for tax year 2006. The principal new addition to the Tax Gap Map is that the estimate of the net tax gap (the gross tax gap reduced by enforced and late payments) is now broken down by type of tax. Also, the new release is different in that it doesn’t focus on a single tax year but rather averages for tax years 2008-2010.

The new estimates show an estimated gross tax gap of $458 billion—compared to $450 billion for 2006—and an overall “voluntary compliance rate” of 81.7% of tax liability, compared to 83.1% for 2006. At first glance, these figures suggest that voluntary compliance is declining and that the tax gap is growing. However, the IRS explains on page 2 of its report that these differences “are driven by improvements in the accuracy and comprehensiveness of the estimates through updates in methods and the inclusion of new tax gap components.” In particular, the IRS explained that “[h]ad the improvements not been made, the TY 2008–2010 tax gap estimates would have been slightly lower than the previous TY 2006 estimates.” (Emphasis added.) And although only about half of the decline from the estimated 83.1% rate to the new estimate of 81.7% is due to changes in methodology, the IRS explains the many factors that may change over time, the remaining 0.7% percentage point difference can’t be relied upon to indicate a real decline in voluntary compliance. Jim Alm & Jay Soled have argued that the tax gap may decline over time, for a variety of reasons, including the increasing use of electronic-payment mechanisms, which result in much more visible transactions than cash does, although they acknowledge that there are countervailing trends, as well, including the underfunding gap the IRS has been struggling with.

The single biggest contributor to the federal tax gap, in terms of dollars, according to the IRS’s estimates, remains underreporting by individuals of business income, at $125 billion (very similar to the $122 billion figure for 2006). Think cash transactions. It remains clear that third-party information reporting makes a huge difference. Page 5 of the IRS release shows that in a nice bar graph. While the IRS estimated that wages and salaries, which are subject to both information reporting and withholding, experienced the lowest net misreporting rate, at 1%, income subject to substantial information reporting experiences a fairly low 7% misreporting rate. By contrast, income subject to little or no information reporting has a 63% misreporting rate. That last category includes such things Continue reading “The new Tax Gap Map: not much has changed”