Taxpayer Assistance, Compliance, and Internal Revenue Service Administration

Background

Through the Tax Counseling for the Elderly program, the Internal Revenue Service (IRS) provides grants to nonprofit organizations whose volunteers offer free tax counseling to older people and help them prepare income tax returns. The IRS offers publications, forms, and instructions in a variety of formats to provide information relevant to seniors and to accommodate assistive-technology users.

The tax gap refers to the amount of taxes owed but not paid; it results from both intentional and unintentional noncompliance with the tax code. The most recent estimate from the IRS showed an average annual tax gap of $458 billion for tax years 2008–2010. According to the agency, about $52 billion of that amount eventually was recovered through compliance activities. The largest source of the tax gap is the underreporting of income by individuals for whom there is no third-party verification of income (such as those paid in cash or self-employed). 

Some individuals and corporations continue to engage in sheltering income from taxation. Tax shelters result from complex and aggressive transactions that have little or no economic purpose other than to reduce tax liability.

TAXPAYER ASSISTANCE, COMPLIANCE, AND INTERNAL REVENUE SERVICE ADMINISTRATION: Policy

General taxpayer assistance

In this policy: FederalState

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, including their counselor training components.

Access to forms

In this policy: FederalState

The IRS and state revenue departments should increase their efforts to make tax forms—including electronic forms, publications, and correspondence—more accessible and understandable. The forms should be written in a manner taxpayers will understand. Forms should be available in a variety of accessible formats and should be free of charge.

Reducing the need to file

In this policy: Federal

The government should explore ways to 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

In this policy: Federal

The IRS should continue encouraging taxpayers to file electronically but maintain the option of paper filing without penalty.

Compliance and curbing tax shelters

In this policy: FederalState

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 yet preserve individual privacy and 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.