Taxpayer Assistance, Compliance, and Internal Revenue Service

Background

Taxes can be complicated. And they can pose compliance issues. Sometimes noncompliance is unintentional, but other times it is intentional.

Older adults sometimes need assistance to understand complicated tax laws. Through the Tax Counseling for the Elderly program, the Internal Revenue Service (IRS) provides grants to nonprofit organizations whose volunteers offer free tax counseling income tax preparation to older people. In addition, the IRS offers publications, forms, and instructions in a variety of formats that provide information relevant to seniors and that accommodate assistive-technology users.

The administrative burden on taxpayers can be substantial. Some people need to file tax returns even though they do not owe taxes and simply need to recover the amount of taxes that had been withheld from their paycheck over the course of a year.

The tax gap refers to the amount of taxes owed but not paid. The most recent estimate from the IRS showed an average annual tax gap of $441 billion for tax years 2011–2013. According to the agency, about $60 billion of that amount was eventually recovered. The largest source of the tax gap is the underreporting of income by individuals for whom there is no third-party verification of income. This includes those paid in cash or self-employed.

At times, there are purposeful efforts made to avoid paying taxes due. For example, 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

TAXPAYER ASSISTANCE, COMPLIANCE, AND INTERNAL REVENUE SERVICE ADMINISTRATION: 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 and should be available in a variety of accessible formats. They should also 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.