AARP Hearing Center
Background
Tax compliance means that individuals and businesses make every effort to correctly pay and report their tax liability as required by the Internal Revenue Service (IRS).
Often this is a burdensome and difficult process. For instance, some individuals do not owe taxes but need to file a tax return to recover the amount of taxes that had been withheld from their paycheck over the course of a year. Others, including older adults, may need assistance to understand complicated tax forms.
The IRS offers assistance for filing returns by phone, online, and in-person at Taxpayer Assistance Centers. They also provide grants to nonprofit organizations to offer free tax preparation services to eligible taxpayers through the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs. A majority of the Tax Counseling for the Elderly sites are operated by the AARP Foundation’s Tax-Aide Program. Tax-Aide also provides tax assistance to anyone, free of charge, with a focus on taxpayers who are over 50 and have low to moderate income. In addition, in 2024 the IRS piloted Direct File, a free online tax filing option for eligible taxpayers. The IRS plans to make it a permanent option in 2025.
Some individuals and businesses attempt to reduce their tax liability by deceit or concealment. For instance, they may not report all of their income. This is called tax evasion, and it is a crime. The IRS conducts audits to uncover such illegal practices. However, these in-depth assessments of taxpayers can be costly. This is why it is more cost effective for the IRS to focus audits on earners with high incomes and large corporations.
After a period of deep budget cuts, in 2022 Congress authorized an additional $80 billion investment in the IRS to address concerns with declining customer service and enforcement capacities. Specifically, the goals of this significant ten-year infusion of funding were to improve customer service, increase audits of taxpayers with high incomes and businesses, and modernize the agency's technology and facilities. However, Congress revoked $20 billion of the funding in early 2024 and another $20 billion in late 2024 as part of budget negotiations. There have also been other legislative attempts to dramatically reduce this additional funding, as well as the IRS’ regular budget.
TAX COMPLIANCE, TAXPAYER ASSISTANCE, AND THE INTERNAL REVENUE SERVICE: Policy
TAX COMPLIANCE, TAXPAYER ASSISTANCE, AND THE INTERNAL REVENUE SERVICE: Policy
General taxpayer assistance
The Internal Revenue Service (IRS) and the states should increase support for taxpayer assistance programs, such as the Tax Counseling for the Elderly and the Volunteer Income Tax Assistance programs. This should include their counselor training components.
Access to forms
The IRS and state revenue departments should increase their efforts to make tax forms—including electronic forms, publications, and correspondence—more accessible and understandable.
Tax forms should be written in a manner taxpayers will understand, should be available in a variety of accessible formats, and should be free of charge.
Reducing the need to file
The government should simplify the recovery of money withheld each year and reduce the need for older individuals who do not owe income tax to file tax returns.
Electronic filing
The IRS should continue encouraging taxpayers to file electronically but maintain the option of paper filing without penalty.
Compliance and curbing tax shelters
Enforcement measures should be applied equitably across income classes and types of taxpayers.
The IRS should increase its audit rate and raise penalties for noncompliance.
Individual privacy must be preserved in audits. The IRS must scrupulously protect the rights of taxpayers.
Policymakers should adopt measures that would curb the use of corporate tax shelters and tax havens. Such provisions can include:
- requiring increased disclosure of corporate tax shelter activity,
- increasing the penalties related to understatements of income attributable to undisclosed transactions,
- imposing penalties on all parties associated with an illegal corporate tax shelter, and
- disallowing the use of tax benefits generated by a corporate tax shelter.