$3,400: That’s how much the tax gap—the difference between what’s owed and what’s paid—costs every single taxpayer in extra taxes. And the figure is only growing.
Proposals to close the tax gap were raised at a recent hearing before the House Subcommittee on the Government Organization, Efficiency and Financial. Most of the quick fixes involved expanding Payroll’s role in the tax collection system.
Third-party reporting and withholding
According to J. Russell George, the Treasury inspector general for tax administration (TIGTA), taxpayers whose income is subject to income tax withholding and W-2 reporting contribute a meager 1% to the tax gap problem. Who contributes more: Self-employed taxpayers, including S corporation owners, who earn business income that’s not subject to information reporting.
Government tax experts testifying before the House panel then floated these payroll-related solutions to the tax gap problem. Some, such as corporate information reporting, would require congressional action; others could be implemented right away.
James R. White, director of strategic issues for the Government Accountability Office, recommended requiring payers to file Forms 1099-MISC for payments made to corporations. Note: Provisions requiring corporate information reporting were written into the Affordable Care Act, but were repealed before they took effect.
Nina E. Olson, the IRS’ national taxpayer advocate, suggested that independent contractors and payers be allowed to enter into voluntary income tax withholding agreements. The burden on payers would be minimal, she said, since they already withhold taxes from employees’ pay. Voluntary withholding would help contractors pay their quarterly estimated taxes, she added. According to Olson, the IRS could issue regulations, but a question remains about its authority to do so without congressional approval.
George, from TIGTA, proposed that the IRS leverage worker classification audits by sharing audit results among the IRS’ other compliance functions. That would ensure the greatest possible use of agency resources, he said. No congressional approval would be needed for the IRS to take this step.