income tax gap overview
DESCRIPTION
Income Tax Gap Overview. FTB/CSEA Liaison Meeting September 17, 2004. What’s the Problem?. One in five taxpayers think it’s OK to cheat on their taxes. Over the last four years, those saying it’s OK to cheat rose from 11 to 17 percent. - PowerPoint PPT PresentationTRANSCRIPT
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Income Tax GapIncome Tax Gap Overview Overview
FTB/CSEA Liaison MeetingFTB/CSEA Liaison MeetingSeptember 17, 2004September 17, 2004
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What’s the Problem?What’s the Problem?• One in five taxpayers think it’s OK to
cheat on their taxes.
• Over the last four years, those saying it’s OK to cheat rose from 11 to 17 percent.
• 60 percent of Americans believe that people are likely to cheat and take a chance on being audited.
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TY2001*
Total Tax Liability (Legal Sector) $2,078 billion
— Tax Paid Voluntarily & Timely - 1,767 billion
Gross Tax Gap $ 311 billion
— Late & Enforced Payments - 56 billion
Net Tax Gap$255 billion
Federal Tax Gap Federal Tax Gap
* IRS Office of Research estimates for all tax types
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CA CA NetNet Tax Gap Estimates Tax Gap Estimates
1985 estimate $2.0 billion
mid-1990 estimate $4ish ?
2004 estimate $6.5 billion
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Nonfilers10%
Underpayment 10%
Underreporting or
Overdeducting80%
Tax Gap SegmentsTax Gap Segments
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Focus: Nonfiling Gap Focus: Nonfiling Gap
• Individuals– 14 million individuals file voluntarily each year– 700 – 800,000 nonfilers contacted each year– $350 - 450 million in revenue
• Corporations– 500k corporations file voluntarily each year– 30,000 nonfilers contacted each year– $30 million in revenue
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• 43% Wage earners• 39% Self-employed• 10% Filed federal return • 4% Mortgage interest• 3% Real estate sales• 1% Partnership income
PIT Nonfiler Sub-GroupsPIT Nonfiler Sub-Groups
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Business NonfilersBusiness Nonfilers
Top 5 Industries for Nonfilers % of Nonfilers
Health Services 10.4% Business Services 9.6% Personal Services 9.6% Real Estate 7.6% Engineering/Accounting 7.4%
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Focus: Nonpayment GapFocus: Nonpayment Gap
• A/R revenue = $1.6 billion FY 02/03 * The 10% of the pie chart shown for underpayment is based on the
federal percentage and may not accurately reflect California’s
underpayment gap.
Underreporting or
Overdeducting80%
Underpayment10%
Nonfilers10%
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• Many taxpayers involved
• Not like abusive tax shelters (few taxpayers with much revenue)
• Some practitioners involved
Underreporting / overdeducting:Underreporting / overdeducting:The 80% challenge The 80% challenge
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Call to Action Call to Action
• “Structural” budget deficits aren’t going away
• Entitlement programs aren’t going away
• Income tax gap is growing over time
• Economic conditions and societal behavior are changing
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FY 04-05 Tax Gap InitiativesFY 04-05 Tax Gap Initiatives
• Amnesty– $10.2 million included in FTB’s budget – 72 temporary positions – Estimated $200M in new net revenue
($555M gross revenue - $355M in “normal” collections)
• Abusive Tax Shelter Task Force– $4.3 million included in FTB’s budget– 42 positions – $28 million estimated revenue
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FY 05/06 ProposalsFY 05/06 Proposals
1. Enhanced detection of tax preparers - Assess preparer penalties $250 - $1,000 per return
2. Additional audit staff augmentation
3. New information sources to identify nonfilers:- Department of Social Services- Motor fuel information- Alcohol Beverage Control information- Check cashing transaction reports- 1099 information reports on real estate commissions- City business tax information
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05/06 Proposals, continued05/06 Proposals, continued
4. Informant reward program - Tips regarding tax issues that are relevant to California
law only or high dollar.
5. Questionable wage withholding detection
6. Underground economy criminal investigations
7. Misdemeanor Prosecution Program- Targets nonfilers, underreporters, and business entities.
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• Independent contractor withholding study• Practitioner suggestions
• Focused enforcement (occupations, industries)
• Make better use of information on hand
• Better information return enforcement
• Increased publicity and education
Other proposals in playOther proposals in play::
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Effective Compliance MethodsEffective Compliance MethodsObservations based on “real world” FTBObservations based on “real world” FTB operationsoperations
• Withholding – Voluntary compliance rate of 95-99%
• Estimate Payments – Voluntary compliance rate of 95-98%
• Third party information reporting –Voluntary compliance rate of 90-94%
• Combination of customer service and enforcement measures works best
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Tax Gap Education Plan:Tax Gap Education Plan:A Balanced ApproachA Balanced Approach
Messages will:
• Show consequences of noncompliance
• Reinforce the civic duty message of paying your taxes for the services we all enjoy.
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