Taxpayer-friendly IRS can't track billions in missing taxes

<br>WASHINGTON (AP) _ The government is losing billions of dollars in unpaid income taxes each year. It doesn't really know how much, and it can't figure a way to find out without riling Congress

Wednesday, March 7th 2001, 12:00 am

By: News On 6

WASHINGTON (AP) _ The government is losing billions of dollars in unpaid income taxes each year. It doesn't really know how much, and it can't figure a way to find out without riling Congress and the taxpayers.

Loathe to return to much-criticized random audits, the Internal Revenue Service hasn't had a reliable way to measure the ``tax compliance gap'' since the 1980s.

That's particularly troublesome for an agency whose new strategic plan declares that the tax system ``depends on each person who is voluntarily meeting his or her obligations having confidence that his or her neighbor or competitor is also complying.''

The last time the IRS ventured even a guess at the size of the tax gap was in 1998, when the agency told Congress that $195 billion in individual and corporate income taxes went uncollected in fiscal 1997. That's an average of $1,625 for each of the 120 million income tax returns filed that year.

David Mader, the IRS's assistant deputy commissioner, said that number is simply an update of estimates made in the early 1980s and assumes that the rate of tax compliance has not changed in the past two decades.

Still, he said, ``There is no other data. ... It is imperative that we come up with a set of compliance measures around reporting, filing and paying.''

Those are the three sources of the tax compliance gap:

_Tax due on income that's underreported on tax returns.

_Tax liability on income earned by taxpayers who fail to file returns.

_Taxes due on income reported on returns, but not paid.

The IRS used to estimate the tax gap every few years by using a system that combined random audits of income tax returns with an examination of the finances of a sample of nonfilers. Tax experts both inside and outside the IRS agree that's the most accurate way to measure the tax gap.

But that system, known as the Taxpayer Compliance Measurement Program, was last used in 1988. Opposition from Congress and taxpayers upset at the prospect of random audits led to cancellation of the program planned for 1995. The IRS has been searching ever since for a politically acceptable way to measure compliance.

``Too many people in Congress just demagogued this issue so much that everybody's afraid of it,'' said Robert McIntyre of Citizens for Tax Justice, a tax research group. ``That campaign against random audits made them sound so evil.''

Former IRS Commissioner Donald Alexander, who headed the agency under three presidents, from 1973 through 1977, said not having a reliable way to measure tax compliance almost guarantees an increase in noncompliance.

``The more IRS fails to enforce the law the more people take advantage of that failure,'' he said. ``People drive 100 miles an hour when they're sure they can get away with it, and the tax laws and the traffic laws are not that different.''

Mader, the IRS's assistant deputy commissioner, said income tax withholding and IRS document-matching programs ensure ``a relatively high level of filing, reporting and paying compliance'' among wage earners.

What the agency is trying to do now, he said, is figure out how to use data collected from tax returns better each year to improve compliance among other groups of taxpayers. The focus is on two specific areas: abusive tax shelters and trusts and the earned income tax credit.

``We need to know where groups of taxpayers are having difficulty in complying with the tax law,'' Mader said. ``That would allow us to more effectively deploy resources to help them understand.''

Mader's choice of words reflects the new, taxpayer-friendly image the IRS has adopted since Congress enacted legislation in 1998 restructuring the agency by de-emphasizing enforcement actions while increasing taxpayer education initiatives.

``The IRS is now warm and fuzzy,'' said Alexander, who argued unsuccessfully during the 1998 debate for stepped up IRS enforcement efforts.

``But there is a great big missing link in our knowledge about what we ought to be doing to make our tax laws work effectively in this country,'' he said. ``We don't know if compliance is at that mythical 80 percent level that Internal Revenue claims or whether it's closer to 60 percent.''

In a 1996 study, the IRS estimated that it collected 82 percent of all taxes owed through voluntary compliance and an additional 4 percent through enforcement.

If the remaining 14 percent noncompliance rate held steady through the economic boom of the 1990s, the $2 trillion in tax collections in fiscal 2000 would translate into $325 billion in uncollected income taxes that year.

McIntyre, whose labor-financed group advocates for fair taxes for low and middle income families, said efforts by Congress to turn the IRS into a taxpayer friendly agency ultimately may end up hurting average taxpayers.

``It's not friendly to honest people if they're paying more because the IRS isn't auditing people,'' he said. ``Who's the taxpayer's friend in that case?''