The sweeping tax revision bill Congress is expected to pass next month should have a major impact in curbing tax evasion and ultimately could result in the government collecting billions of dollars in additional revenue, according to tax experts.
In addition to enhancing public respect for the income tax system and spurring voluntary compliance with the law, Internal Revenue Service officials say, the bill eventually will free many revenue agents now committed to tax-shelter cases, making them available to resume traditional auditing of individual income tax returns. That should mean a substantial increase in the number of audits that the IRS conducts of individual tax returns.
A widespread public perception that the present tax system is unfair is believed to be a major factor in tax evasion and, therefore, partly to blame for the $103-billion “tax gap"--the difference between taxes owed and taxes voluntarily paid--that the Internal Revenue Service has projected for 1986.
By removing 6 million poor people from the tax rolls and coming down heaviest against corporations and the tax-sheltered rich, the tax bill addresses two of the main complaints of Americans who criticize the present system as unfair.
And, by lowering the individual tax rates to only two brackets of 15% and 28% from a multibracket system ranging from 11% to 50%, the bill addresses another major complaint by lower- and middle-income taxpayers: that inflation has forced them into higher brackets requiring them to pay taxes at unfairly high rates.
IRS Commissioner Lawrence Gibbs, in an interview with The Times, said that if Congress passes the bill endorsed by the Senate-House conference committee, “it will have a substantial impact on narrowing the tax gap.”
Labeling the present tax law as “basically unfair,” Gibbs said that during the last 10 to 20 years, “lower- and middle-income people have had a perception that businesses and higher-income people have their own loopholes and are able to pay less than their fair share of taxes--and they are right.”
‘Made People Mad’
Meanwhile, he said, the inflation of the 1970s began to raise the salaries of lower- and middle-income taxpayers and make them pay higher marginal tax rates. “That made a lot of people mad because they found they were paying a greater rate of tax and having less after-tax income to show for it,” he said.
The bill before Congress, he said, “takes care of those problems by bringing the rates down and closing the loopholes so that there should be a perception of fairness.”
For years, polls have shown most Americans believe that the present system is unfair and invites cheating. An extensive survey conducted for the IRS by the polling firm of Yankelovich, Skelly & White during May-July, 1984, showed that four out of five taxpayers believe that the system benefits the rich and is unfair to the ordinary working person.
In addition, the poll showed that about three out of four taxpayers believe that their income taxes are much too high for what they get in return; that about three in five taxpayers believe that federal income tax laws are unfair in their particular income situation; that 51% of the public believes that cheating is becoming more prevalent; and that one in five taxpayers admitted to cheating on their own taxes, most of them through under-reporting of income.
Believe Own Taxes Too High
A more recent survey, conducted for H & R Block by the Roper Organization and released last June, showed that almost eight out of 10 Americans believe that the rich and big corporations pay too little in taxes and that 63% believe that their own taxes are too high.
The Fair Tax Foundation, whose council of advisers includes former IRS commissioners Mortimer Caplin and Jerome Kurtz, declared that the tax bill now before Congress “dismantles a tax system of favors and privileges that benefit some taxpayers at the expense of others” and is “a triumph of the general interest over the special interests--and the special interests hate it.”
Despite such optimism by tax experts, a poll published last Sunday by Newsweek magazine found that only one-fourth of Americans believe that the bill will lower their taxes, while more than one-third predict it will increase their taxes.
However, former IRS Commissioner Roscoe L. Egger Jr. said the public’s attitude will change once the bill has passed and the law becomes fully effective.
“And I’m convinced that once people are satisfied that everybody else is paying income tax, they won’t so quickly rationalize that it’s OK to cheat because everybody else is doing it,” said Egger, now a Washington tax consultant.
‘If Tax Bill Seen Fairer’
Dennis Cox, chief of the IRS Compliance Estimates Group, says that “while it’s undoubtedly true that there will be greater compliance if the tax bill is perceived as fairer than the present system, there’s no way to measure how much difference that will make in the amount of revenue collected.”
However, he said, two aspects of the bill involving the tax rates “almost certainly will have the effect of narrowing the tax gap, maybe by billions of dollars.”
Because individual income taxes are going to be lower than corporation taxes and because corporations have a better record of compliance, Cox said, the aggregate amount of taxes collected would probably increase. Also, he pointed out, the government would stand to lose less money from wealthy taxpayers who under-report their income because the bill lowers the top individual rate from 50% to 28%.
Gibbs, an IRS official here during 1972-75 and a Dallas tax attorney for 10 years before succeeding Egger as commissioner four months ago, said the IRS “is delighted with the bill,” which he said “is the most exciting thing to happen in 32 years” in the field of taxation. Titled the “IRS Code of 1986,” it would supplant the IRS Code of 1954.
The IRS, Gibbs said, has set up a task force representing all functions of the service to study the bill and its ramifications and to work with other affected agencies, taxpayer groups and industry groups to “determine what should be done about notifying the public about its obligations under the bill’s provisions.”
The IRS projected that the total income tax liability for 1986 would be $556 billion, of which $453 billion was expected to be voluntarily paid, with a $103-billon tax gap. Because $453 billion is 81.5% of $556 billion, the projected compliance rate is 81.5%.
The tax gap has increased sharply since the IRS began measuring it in 1973. That year, it was $29 billion, but it shot up to $84 billion by 1982 and to $92 billion in 1985.
Although the figures were not adjusted for inflation, the bulk of the differences can be attributed to the compliance factor.
Because the current bill would have no effect on this year’s gap, Gibbs said the IRS will be closely monitoring the gap in future years to determine what effect the new legislation has on it.
He stressed that, despite the fact the elimination of most tax shelters eventually will make more agents available to conduct traditional audits of individual taxpayers, the IRS still needs the 7,500 additional agents its budget provides for the next three years.
Revenue agents, he noted, will still be auditing 1984, 1985 and 1986 returns with tax shelters “in the late 1980s and even into the early 1990s.”
Shelter Reports Increased
The IRS reported a steady growth in the number of tax returns involving shelters pulled for audits since 1981, when there were 248,000. The IRS pulled 284,000 tax-shelter returns for audit in 1982, 311,000 for 1983, 338,000 for 1984 and 377,000 for 1985.
Gibbs said another reason for needing additional revenue agents involves “what I call the ‘cop on the highway syndrome.’ When you’re driving along the highway and see a patrol car, you stay within the speed limit. It helps with compliance if you have auditors out there to pay people a visit occasionally.”
In fact, the IRS’ own 1984 poll showed that fear of apprehension was perceived by a majority of Americans as the major deterrent to cheating.
Another deterrent during recent years, Gibbs said, has been tax legislation that increased penalties and interest for under-reporting of income, especially if it is intentional.
“The cost of playing games with Uncle Sam is going up,” he said, “and this bill says the rewards are going down. No longer will a high-income taxpayer be able to save 50 cents on a dollar by evading taxes--the savings will be only 28 cents, and people will begin to focus on that.”