IRS is beginning to pick up the slack in tax-law enforcement
In the near future the Internal Revenue Service expects to halt the steady erosion in citizens' obedience to federal tax laws. By 1984 or 1985, enforcement-related provisions of the 1982 tax law ''will have a positive impact, and you are going to see a dip with respect to the long-term trend of noncompliance,'' says Philip E. Coates, associate commissioner of IRS for operations.
Although the Tax Equity and Fiscal Responsibility Act (TEFRA) was passed in 1982, many provisions will have their first impact on the 1983 returns which will be filed in the coming months.
The IRS clearly needs help in boosting obedience to the tax laws. Between 1973 and 1981 the percentage of their income which Americans voluntarily reported to the taxman dipped from 91.2 percent to 89.3 percent, a decline of about two-tenths of a percent per year.
Given the massive dollar amounts involved, underreporting of income alone cheated the government out of $52.2 billion in 1981, the latest year for which data is available. Underreporting of income is the biggest single cause of the $ 68.5 billion gap between the tax individual Americans owe and what they actually pay. Overstated personal deductions, which cost the government $6.6 billion in 1981, are the next biggest item.
Better tax-law compliance will not be the result of increasing the portion of returns subjected to IRS audits, Mr. Coates admits. In fact, in fiscal 1984 only an estimated 1.29 percent of individual returns will be audited vs. the 1.5 percent checked in 1982.
''Unfortunately the coverage we are targeting is getting smaller and smaller, '' Mr. Coates says. One reason is that the number of taxpayers is growing faster than IRS examination resources.
To maintain what Mr. Coates calls ''a presence'' with taxpayers, the IRS is being more aggressive in matching information returns -forms submitted by employers, banks, and brokers - with what an individual reports on his return. The IRS is sending out more computer- gener-ated letters identifying potential discrepencies between the income a taxpayer reported and the income the IRS thinks he received.
''We are doing more matching than we ever did, and TEFRA gave us more information reporting than we have ever had before.'' For example, the law requires additional information be filed by brokers and barter clubs about client transactions, mandates restaurant reporting of tip income, and requires that state and local governments report income tax refunds of more than $10.
In fiscal year 1982 alone the IRS notified 2.9 million taxpayers that it had found discrepancies between what the taxpayer reported and what the IRS learned from other information it received. And another 2.1 million taxpayers were sent notices for apparently failing to file a tax return at all.
So while a given taxpayer's chance of being audited is somewhat lower in 1984 than in previous years, the IRS still has a number of new or updated weapons on its side.
Later this year the service will begin comparing its information on who files tax returns with lists of names, addresses, and estimated incomes obtained from direct-mail marketing companies. The controversial plan ''is a test to determine if this is an effective way to determine nonfilers,'' Mr. Coates says. Taxpayers will not be contacted as a result of this test until the middle of 1984, he says.
In addition to using new computer techniques to find nonfilers, the IRS now can impose a penalty provided by TEFRA for substantial underpayment of taxes. In the past some taxpayers played what Mr. Coates calls a ''tax lottery.'' They would understate their income and bet that the IRS would not catch them. In the absence of the IRS proving negligence or fraud, the worst that could happen was that the taxpayer would pay the back tax with interest.
Under TEFRA, substantial underpayment now involves a penalty of 10 percent of the amount the IRS was shortchanged. To collect, the IRS only has to show that the understatement exceeded 10 percent of the tax due, or $5,000. ''Now there is a downside risk when you file a tax return and play the audit lottery,'' Mr. Coates notes.
The IRS also is stepping up its effort to collect on overdue taxes by installing automatic collection equipment in four citiies. The computerized devices store information on overdue accounts; all an IRS employee does is hit a button, and informaton on the next overdue account appears on a TV screen. Hitting another button prompts the machine to automatically dial the taxpayer. The device also will automatically make follow-up calls if the taxpayer fails to send his payment on the date promised.
''We are far outstripping the performance of prior years,'' Mr. Coates says.
By June the IRS will have automatic collection machines in use in 21 locations.
The IRS also is taking a harder line aganst promoters of what it considers abusive tax shelters. Such a shelter involves a false statement about the tax-saving consequences of the deal or grossly overstates the value of a deduction.
Under the provisions of TEFRA, the IRS now can impose a fine on a promoter of abusive tax shelters. The fine is the greater of $1,000 or 10 percent of the gross income to be derived from the activity.
And starting last October the IRS began notifying taxpayers in advance if the tax deductions or credits associated with a shelter appeared not to be allowable. Further, the IRS tells taxpayers that ''returns would be audited if the said deductions and/or credits were claimed,'' the IRS commissioner recently said in a speech to accountants.
The program is having a significant impact on abusive shelter activity, the IRS says. In the first three months after Mr. Egger's speech, field office referrals of shelter cases to IRS headquarters topped the number received in the previous 10 months, Mr. Coates says.
LOST: $68.5 BILLION IN TAXES Major sources of the individual tax gap* For those who file: Underreported Income $52.2 billion Overstated Personal Deduction4h$6.6 billion Overstated Business Expenses $6.3 billion Math Errors $0.5 billion For those who do not file: Nonfilers' tax liability (net of prepayments and credits): $2.9 billion TOTAL INDIVIDUAL TAX GAP: $68.5 billion *Tax gap: difference between the amount of tax which is voluntarily paid and the correct tax liability.