NASE Blogs

It’s Back To Tax Gap Narrowing As Revenue Raiser

Apr 03, 2009

Posted by Kristin Oberlander - The Obama Administration recently announced its plans to step up the search for noncompliant taxpayers as one method for offsetting a massive budget deficit and to help shore up economic losses for the nation. A newly formed Task Force on Tax Reform will concentrate on the tax gap – a $300 billion difference between what the Internal Revenue Service is owed and what it collects.

In the past, lawmakers have pointed to underreporting by the self-employed as a significant contributor to the tax gap, a claim the NASE has worked hard to refute. The association has countered that an effective strategy to increase tax compliance should include overall simplification of the tax code, the elimination of issues that are inequitable to entrepreneurs, and greater access to reliable taxpayer education and outreach, not just an increase in enforcement activities.

Under the Bush Administration and the previous Congress, tax gap proposals placed an undue burden on micro-businesses. Those included imposing withholding on non-employee payments, specifically payments made to independent contractors; requiring information reporting on all payments of $600 or more to corporations; and demanding businesses that utilize contractors to obtain and verify an accurate Taxpayer Identification Number (TIN) for those contractors receiving payments of $600 or more.

Kristie Arslan, Executive Director of the NASE’s Legislative Offices, testified before the House Committee on Small Business last year against the annual reporting of electronic payment transactions to the IRS. Although some have supported this measure as a solution to the tax gap, the NASE is opposed to this legislation because of the increased tax regulation it places on small businesses and because it likely would not boost tax compliance.

While the NASE believes the IRS should be able to collect all the money it is owed, increasing the burden on micro-businesses is not the most effective way to increase compliance. A strategy to increase tax compliance should include overall simplification of tax code, the elimination of issues that are inequitable to entrepreneurs, and greater access to reliable taxpayer education and outreach.