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Income Tax Gap Overview

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.

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Income Tax Gap Overview

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  1. Income Tax Gap Overview FTB/CSEA Liaison Meeting September 17, 2004

  2. 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.

  3. 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

  4. CA Net Tax Gap Estimates • 1985 estimate $2.0 billion • mid-1990 estimate $4ish ? • 2004 estimate $6.5 billion

  5. Tax Gap Segments

  6. 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

  7. PIT Nonfiler Sub-Groups • 43% Wage earners • 39% Self-employed • 10% Filed federal return • 4% Mortgage interest • 3% Real estate sales • 1% Partnership income

  8. 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%

  9. Focus: Nonpayment Gap Nonfilers 10% • 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.

  10. Underreporting / overdeducting: The 80% challenge • Many taxpayers involved • Not like abusive tax shelters (few taxpayers with much revenue) • Some practitioners involved

  11. 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

  12. 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

  13. FY 05/06 Proposals • Enhanced detection of tax preparers - Assess preparer penalties $250 - $1,000 per return • Additional audit staff augmentation • 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

  14. 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 • Underground economy criminal investigations • Misdemeanor Prosecution Program • - Targets nonfilers, underreporters, and business entities.

  15. 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

  16. Effective Compliance MethodsObservations based on “real world” FTBoperations • 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

  17. 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.

  18. End

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