Budget gap can shrink with stepped up tax collection

Here's one suggestion for getting rid of that pesky $450 billion federal budget deficit: Collect all the taxes that Americans owe.

"If we had 100 percent compliance with the tax laws, we would probably be operating at break-even," says Donald Alexander, a former Internal Revenue Service commissioner.

Mr. Alexander concedes that 100 percent compliance is impossible to attain. Also, his estimate of noncompliance may be too high. The IRS itself estimated that $232 billion in taxes were due in 1998 but never collected.

No one knows a really accurate sum. Congress, led by Republican legislators, stopped the IRS from systematically measuring tax compliance for all but working poor people after 1988.

Prior to then, thousands of representative taxpayers were put through what one expert called "an audit from hell" to determine if they had hidden income and had not paid their legal share of taxes. The findings were used by the IRS to direct its compliance efforts more efficiently.

Whatever the actual number, uncollected tax revenues are huge. Leonard Burman, a former Treasury official now at the Urban Institute, told the House Ways and Means Committee July 17 that if half of due taxes were collected over the next decade, Uncle Sam would have an extra $1.7 trillion.

That sum would cover the entire cost of the 2001 and 2003 Bush tax cuts, he figures. Or the money could eliminate more than two-thirds of federal debt owed to the public. Or it could cover a cut in all personal income-tax rates of more than 10 percent.

Tax evasion "undermines" the tax system, Mr. Burman testified. "It is unfair.... And it feeds on itself, reducing respect for the integrity of the tax system and leading to more cheating.... The lost tax revenue inevitably means higher taxes on law-abiding citizens."

What could be significant is that deeper concern with uncollected tax revenue and the related budget shortfall shows signs of becoming more bipartisan.

"Maybe it is dawning on the Republicans that people have to pay their taxes," Burman says.

Some Republicans - not all - have seemed to argue that tax evasion may be OK because it lowers tax burdens and trims revenues for bloated federal programs.

Burman noticed a shift in congressional sentiment between his testimony before the House Budget Committee July 9 and the House Ways and Means Committee a week later. Talk of IRS harassment of taxpayers had turned to concern over lost tax revenues.

In that week, the White House's Office of Management and Budget had boosted its budget-deficit estimate for fiscal 2003 to $455 billion from $304 billion estimated last February. That increase meant one out of every three dollars Washington spends outside of the self-funded Social Security system will be paid for by borrowing - the highest share of on-budget spending financed by deficits since World War II.

"The [Republican-controlled] House is beginning to be concerned about it," says Alexander, who now works for a Washington law firm.

Burman's basic complaint is that Congress has not given the IRS enough money to chase down tax evaders.

President Bush did request 5 percent more for the IRS in fiscal year 2004. It could be money well spent. In general, the IRS collects about $20 of due taxes for every dollar it spends on compliance, Alexander says.

Former IRS Commissioner Charles Rossotti estimated last year that the IRS assesses almost $30 billion of taxes each year that it will never collect. It would cost about $2 billion to chase down that money.

"The IRS could net almost $28 billion from tax fraud and errors that are identified and ripe for collection," Burman notes.

Some of these tax debts are owed by people too poor to pay. But some 56 percent of noncompliant taxpayers have incomes of more than $100,000 and yet are getting off scot-free.

Taxpayer audits are at historic low rates. But starting with Mr. Rossotti a year or so ago, and continuing with Mark Everson, a new commissioner named earlier this year, the IRS has been cracking down on tax dodges - that is, within its limited resources.

Priorities include the promoters of abusive tax schemes of all sorts, misuse of trusts and offshore accounts to hide or improperly reduce income, abusive corporate tax shelters, and underreporting of income or nonfiling by higher-income individuals.

Cleverly, for instance, the IRS has been hitting the flourishing tax-shelter business by going after its promoters, including major accounting firms and law firms. It is suing in court to get the names of their clients.

The IRS won an important victory July 23 when a federal appeals court ruled that BDO Seidman, an accounting firm, would have to turn its client's names over to the IRS, opening them up to tough audits.

In this area, the IRS is "doing a good job," says Alexander. "Most of them [shelters] are phony. The promoters are making millions of dollars selling this shabby merchandise to the sheep buying this stuff." Some "sheep" - corporate or individual - are now suing the promoters for giving "bad advice," he says.

Advocates for the poor dislike one IRS priority that has been mandated by Congress: fraud or mistakes in the Earned Income Tax Credit (EITC) program. It benefits millions of low-income workers, lifting nearly 4 million people out of poverty. But the "error rate" is between 27 and 32 percent.

This area, though, is not where big bucks of extra tax revenue lie. The IRS estimates EITC avoidance costs about $7.8 billion, or some 2.8 percent of the total tax compliance gap. Yet the IRS has requested a 68.5 percent jump in its EITC enforcement budget.

A "misallocation" of funds says Burman.

Last week the IRS delayed and scaled back its tax-credit fraud plan somewhat.

As it is, the IRS is often blasted for pursuing poor tax cheats more than rich cheats.