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Income Tax Gap Overview - PowerPoint PPT Presentation

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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