Congress, Bush call for crackdown on tax scofflaws

Congress is pressuring the Internal Revenue Service to do a better job of finding those who should be filing tax returns but haven't done so, while President Bush wants to impose stiffer penalties, says The Wall Street Journal (April 25, 2007. Subscription required.)

"Those who owe the IRS a tax return but fail to file are doing more than just breaking the law," said Senate Finance Committee Chairman Max Baucus, a Montana Democrat. "They're draining our economy of vital resources that we need to pay for health care, education and even tax relief."

Under the president's plan proposed earlier this year, an individual who willfully fails to file tax returns in any three years within a five consecutive year period would be subject to a new criminal penalty if the total tax liability is at least $50,000. The president's proposal would classify such a failure as a felony. If convicted, an individual could face a fine of as much as $250,000, imprisonment for as much as five years -- or both.

If this proposal becomes law, "it will raise the stakes considerably for those charged with failure to file, particularly for professionals, such as lawyers and accountants, who have their licenses at stake," Mark Matthews, a former deputy IRS commissioner, told the Journal .

Treasury Secretary says closing tax gap difficult

Treasury Secretary Henry Paulson said trying to close the "tax gap" -- the difference between taxes owed and taxes paid -- can't be done without "Draconian and painful requirements on all taxpayers." Paulson testified before the Senate Finance Committee on April 18, 2007. His dim view cannot have cheered lawmakers who want to collect these unpaid taxes (estimated by the IRS at $345 billion a year) as a way of finding additional revenue without raising taxes.

Assistant Secretary For Tax Policy Eric Solomon also testified before the Committee. He said that tax gap results from a variety of errors, including non-filing, underreporting of taxes, or underpayment of taxes. He estimated that over 80 percent of the gross tax gap is attributable to underreporting of tax (including underreported income or overstated deductions and credits). Over 40 percent of the gross tax gap is attributable to underreporting of net business income by individuals (affecting both individual income and self-employment taxes).

A Wall St. Journal (subscription required) article published on April 19, 2007 says that Finance Committee members expressed frustration with the Bush administration for failing to push aggressively for better tax compliance with federal tax laws.