The Wall Street Journal-20080206-Tax Report- IRS Is Likely to Get More Resources To Combat Cheating on Tax Returns
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Tax Report: IRS Is Likely to Get More Resources To Combat Cheating on Tax Returns
Full Text (1005 words)The Internal Revenue Service appears likely to get more money and new weapons to combat tax cheating.
Although Democrats quickly blasted President Bush's overall budget plan this week, lawmakers in both parties sound eager to give the IRS more tools to improve tax compliance and boost revenue.
The IRS faces congressional pressure to narrow the nation's $290 billion-a-year "tax gap," the difference between what the IRS collects and what it should be collecting. Squeezing money out of those who owe taxes is seen as a smarter move politically than raising taxes, especially in an election year.
Among the president's proposals with bipartisan support is one that would require many brokerage houses, mutual funds and other institutions to report to the IRS what investors pay for stocks and other securities. While many companies already keep track of such data for customers, they aren't required to do so, or to report it to the IRS.
Advocates of the proposal say the idea, known as cost-basis reporting, would improve compliance on capital-gains taxes. The Treasury Department estimates this proposal, if enacted, would raise an estimated $7.5 billion over 10 years.
"Congress is highly likely to pass a basis-reporting bill this year," said Clint Stretch, managing principal for tax policy at Deloitte Tax LLP in Washington. "All of the IRS studies of compliance suggest that improved reporting leads to improved compliance."
In addition, Congress is expected to increase the IRS's budget, especially for enforcement activities, such as audits. President Bush asked Congress to appropriate a record $11.36 billion for the IRS for the year starting Oct. 1, according to a Treasury Department publication. That would be an increase of 4.3% from the amount enacted for fiscal 2008; spending on enforcement would rise more than 7%, the publication says.
IRS officials say they plan to increase audits, especially of high- income taxpayers and self-employed workers. IRS agents have been focusing on people who make $100,000 or more, and especially those making $1 million or more. The number of audits among the million- dollar-and-up group rose 84% in fiscal 2007 from the prior year.
The nation's overall tax-compliance rate in 2001 was estimated at more than 86%, after including late payments and recoveries from IRS enforcement activities. Lawmakers are pressing the IRS to increase that.
One way to improve compliance is to require cost-basis reporting, Treasury officials say. Advocates say requiring this information to be reported directly to the IRS would make investors more honest in what they report as their cost when they sell securities. Officials long have suspected some investors of overstating their costs and thus underpaying taxes.
"Generally, compliance increases significantly for payments that a third party reports to the IRS," a Treasury publication says in listing reasons for the change. "The potential for non-compliance on sales of securities is considerable under current law, because the taxpayer's basis is not reported" to the IRS.
Officials hope the plan also would make it easier for law-abiding investors to keep track of their costs. Such a requirement "would provide significant simplification benefits by relieving taxpayers from the often complicated task of calculating adjusted basis" to figure out gains or losses when they sell securities, the Treasury said.
Since the idea enjoys White House support and is viewed as likely to raise billions of dollars, "I think it is extremely likely to be included in some tax bill this year," said Tim Hanford, a tax-policy consultant and a former House Ways and Means Committee staffer. "While there will clearly be some administrative hiccups in getting the basis-reporting rules implemented, I think it will provide the IRS a good enforcement tool to collect tax due on securities sales."
The White House proposed the idea last year, and the House approved a bill late in the year. The Treasury proposal would apply to securities acquired after the end of 2009.
Among supporters of the idea is Sen. Chuck Grassley of Iowa, the ranking Republican on the Senate Finance Committee. Cost-basis reporting is "a common-sense tax-gap measure whose time has come," he said. "I've been working with Chairman [Sen. Max] Baucus and Treasury on a workable cost-basis reporting proposal."
The Bush budget includes other compliance ideas that may gain traction. Among them is the president's call for increased criminal penalties for "willful" failures to file tax returns. The president proposes elevating this offense to a felony from a misdemeanor. This proposal would be effective for returns required to be filed on or after Jan. 1, 2009. Thus, it wouldn't have any impact on the case of Wesley Snipes, the actor who recently was convicted on three misdemeanor counts of failing to file returns.
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BUSH PROPOSES reviving a law allowing tax-free transfers from IRAs to charity.
The budget calls for making permanent a provision that expired at the end of 2007. Under the old law, someone who was age 70 1/2 or older could transfer directly as much as $100,000 a year from an IRA to a qualified charity without getting hit by income taxes on the transfer. That transfer also counted toward the taxpayer's minimum required distribution for the year.
Making this permanent would cost the government an estimated $3.3 billion over 10 years, the Treasury estimates.
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DON'T EXPECT many major tax changes this year.
That conclusion emerges from a recent survey of 165 tax and finance executives by Miller & Chevalier, a Washington law firm. According to the survey, the most likely tax legislation to be enacted this year is a stopgap measure to prevent millions of people from being ensnared by the alternative minimum tax for 2008, according to the survey. But a permanent solution to the problem of the AMT, which hasn't been indexed to inflation, is likely to be pushed out to at least 2009, when there will be a new administration. Many influential groups have called for complete elimination of the AMT.
Many respondents also think Congress will approve short-term extensions of popular laws that expired last year, the Miller & Chevalier survey indicated.
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