The IRS's Fantasy Maybe a Nightmare for Us 
 
I have mention the tax gap several times in the past; now that the President has brought up the subject we should discuss it and what it means to you in more depth. The concept of the "tax gap" was created by the IRS in a failed attempt to get a substantial increase to its budget. The IRS launched a study and determined that there was a difference, a gap, between the amount of taxes it collects and what it should collect if everybody paid the correct amount of tax. The study showed an annual gap of about $300 billion. The IRS took their study to Congress in 2006 to ask for an increase in their budget so they could close this gap. Congress refused the request.
Instead of a budget increase the IRS got a reprimand for not doing its job (collecting taxes)very well. Since then, the IRS has been under tremendous pressure from Congress to close the gap. The IRS' response to this pressure has been to increase the number of audits, become more rigid in waving penalties and to initiate the National Research Program (NRP). In the NRP the IRS performs random audits and uses statistics to project the audit results on to the general public. The NRP audits are the worst possible type of audit a taxpayer can go through. In an NRP audit the IRS looks at every line on the tax return. In a normal audit the IRS questions some of the items on the tax return but it leaves the majority of the return untouched.
In my opinion the tax gap more  a product of fantasy than reality. We all know that some people cheat on their taxes but most of those people seem to be involved with the administration. The Secretary of the Treasury (who is in charge of the IRS) is an example. $300 billion of tax cheating is simply not credible to me.
The IRS Commissioner stated on February 16, 2007, before the House Committee on the Budget:
"...the most recent NRP study did a good job of updating our numbers, but we need more research to better identify the sources of non-compliance on a timely and continuing basis....Despite all of our progress, there is still much we do not know about the tax gap. Although the updated estimates provided by the NRP study are more accurate than our previous estimates, and more accurate than the estimates made at various times by others using more indirect methods, they have many limitations."
According to the commissioner they have no idea where the gap comes from "we need more research to better identify the sources of non-compliance" but they know it exists and about how much it is?
Whether or not the tax gap is real the administration now seems ready to act on closing the gap.  There are three types of proposals to accomplish this:
1.       More extensive reporting to the IRS - many tax gap proposals would boost the reporting that businesses and individuals have to do to unprecedented levels. Here are just some of the ideas
· Force online businesses to report user's online income from auctions and other sources.
· Turn private citizens into IRS informers in the hunt for more information on sales from small businesses. For example, a young college student buying a new car from a family friend could be required to report the transaction to the IRS.
· Require investment brokers to report profits from securities sales, rather than just the sales themselves. This is starting in 2010 and might not be too bad, but we had better make sure our brokers have the correct basis information for our stocks.
2.       Increase Payments Subject to Withholding. For example the IRS could require us to withhold taxes from payments to:
· the plumber or electrician who makes repairs in the home
· the babysitter down the street
· the dry cleaners or hairdressers
3.       Increase the IRS powers
These ideas are nightmarish for the average person not because they will get caught cheating on their taxes but because it would require an enormous amount of additional paperwork and penalties for not completing that reporting correctly and timely.
 At this point we can't say for certain what new steps the Obama Administration and the IRS will take to close the tax gap but we know for sure that we are living in a "Post Kinder and Friendlier IRS World."  Increased scrutiny and enforcement by the IRS ensures that little tax "indiscretions" and "exaggerations" that were not noticed in the past will not be tolerated in the future.

Information Provided by:
Taryle & Associates, CPAs
8687 E. Via De Ventura, Suite 101
Scottsdale, AZ 85258
Ph: (480) 948-9510