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Federal Tax Amnesty

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					 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.

•   60 percent of Americans believe that
    people are likely to cheat and take a
    chance on being audited.
               Federal Tax Gap
   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


                 * IRS Office of Research estimates for all tax types
CA Net Tax Gap Estimates


   1985 estimate       $2.0 billion

   mid-1990 estimate   $4ish ?

   2004 estimate       $6.5 billion
           Tax Gap Segments

        Underpayment
Nonfilers   10%
 10%




                              Underreporting
                                   or
                              Overdeducting
                                  80%
            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
   PIT Nonfiler Sub-Groups
• 43% Wage earners
• 39% Self-employed
• 10% Filed federal return
• 4% Mortgage interest
• 3% Real estate sales
• 1% Partnership income
                 Business 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%
               Focus: Nonpayment Gap
               Underpayment
                   10%

   Nonfilers
    10%



                                                  Underreporting
                                                       or
                                                  Overdeducting
                                                      80%


• 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 / overdeducting:
      The 80% challenge
• Many taxpayers involved

• Not like abusive tax shelters (few
  taxpayers with much revenue)
• Some practitioners involved
             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
     FY 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
             FY 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
          05/06 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.
        Other proposals in play:

• 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
 Effective Compliance Methods
    Observations based on ―real world‖ FTB operations


• 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
      Tax Gap Education Plan:
       A Balanced Approach
Messages will:
• Show consequences of noncompliance
• Reinforce the civic duty message of paying your
  taxes for the services we all enjoy.
End

				
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