Seed Money for Tax Harvest
The Internal Revenue Service estimates that this year’s “tax gap”--the difference between what taxpayers legally owe the federal government and what they actually pay--will reach $100 billion. If that debt could be turned into revenue, half the current budget deficit would be erased. The tax gap is a growing monster. By 1990, the IRS says, it will likely reach $160 billion. What accounts for soaring non-compliance with the tax laws? One explanation is that cheaters know that their chances of being caught have been steadily declining.
The IRS has been one of the more foolish targets of the Reagan Administration’s non-defense budget reductions. Six years ago, when the IRS handled 143 million returns, it was able to audit 20 out of every 1,000 filed. But now, faced with 185 million returns, it can audit only 12 out of 1,000. Its resources simply haven’t kept up with its responsibilities. The IRS knows that what it spends on enforcement and collection yields a return that is the envy of even the most astute legitimate investor. Every $1 spent to assure compliance gains $6 to $16 in revenue. But when the seed money isn’t there the crop can’t be harvested.
Roscoe L. Egger Jr., the retiring IRS commissioner, notes that 20 years ago the IRS was able to collect about 90% of the taxes due from corporations and individuals. This year’s compliance level will be down to about 81%. Egger says that each percentage point in compliance that is lost costs the government $6 billion in revenue. To help remedy the problem the Administration has asked Congress for a $340-million supplemental appropriation for the IRS. That should be voted, and quickly. But more will be needed in years to come.
Computerization has given the IRS the ability to match income, interest and dividend statements from employers and financial institutions against income reported by taxpayers. But big holes in the system remain when it comes to checking filings by small businessmen and self-employed professionals. This is where a major expansion in audit coverage is needed. The payoff warrants the expenditure. More to the point, honest taxpayers have the right to expect that as they pay their fair share others will too, or at least face stiff odds that they will be caught and punished if they don’t.
