Tax Gap and Small Business Tax Laws Simplification
The IRS announced new tax-gap estimates in February 2006. The updated estimate of the overall gross tax gap -- the difference between what taxpayers should have paid and what they actually paid on a timely basis -- for tax year 2001 is $345 billion. IRS enforcement activities, coupled with other late payments, recover about $55 billion of the tax gap, leaving a net tax gap of $290 billion for tax year 2001.
While no tax system could ever achieve 100 percent compliance, the IRS has indicated it's committed to improved compliance through increased and better-targeted enforcement, increased taxpayer service and outreach efforts, and fundamental tax reform and simplification. In keeping with that commitment, the Department of Treasury has released a strategy to address the tax gap.
According to the IRS' tax gap estimates, $109 billion of the tax gap is attributed to underreported business income, $39 billion of which has been attributed to underreporting of self-employment taxes. This area is where NFIB has focused its resources and has been monitoring the Treasury's activities, as many NFIB members are Schedule C filers. Based on the Treasury's strategy for closing the tax gap, it's likely that the information reported using Form 1099-MISC will be analyzed to determine whether that system should be expanded and improved. If legislative proposals are enacted in this area, it could impose additional burdens on our members.
On Feb. 5, the president released his Fiscal Year 2008 budget to Congress. The budget recommendation included several revenue proposals aimed at closing the tax gap that, as currently written, would negatively impact small businesses. NFIB is concerned about the potential burden that three of these proposals could have on small businesses: to expand information reporting on payments to corporations, to require a certified taxpayer identification number from contractors and to require information reporting on merchant payment card reimbursements.
NFIB will address the president's proposals in several ways. We will continue to work closely with the Treasury, the IRS and Congress to mitigate potentially harmful proposals, as well as survey our members to determine their support of, or opposition to, tax-gap proposals. Finally, we will work with the members of the newly appointed NFIB Tax Advisory Board to develop proposals to simplify the tax code that do not unfairly burden small businesses.
Complex and unclear tax rules cause frequent errors by taxpayers, and they exacerbate opportunities for noncompliance with the law. Even honest and compliant taxpayers make mistakes and errors when filling out their tax forms, and these mistakes add to the billions of dollars lost each year to the U.S. Treasury. Taxpayer mistakes and errors would be substantially mitigated if the tax-code rules were easier to read and follow. NFIB believes that simplifying the tax code will help to reduce the tax gap.
